1 More Reason to Short GameStop

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It's starting to sound like a broken record, but video game sales continue to plunge.

Industry tracker NPD Group is reporting that domestic retail sales of new video game products tanked 25% last month. Game sales were off 25%, and hardware plummeted a brutal 37%. There was a 5% uptick in accessories, but the sum of the damage is fierce.

As GameStop (NYSE: GME  ) investors brace for next week's quarterly report, it's easy to dismiss the gloomy numbers. For starters, GameStop's report next Thursday covers the three months ending in September. The October data may be reflected in the chain's outlook, but it's the kind of stuff that can be overcome with a strong finish to the holiday quarter.

GameStop has also historically held up far better than the NPD Group data, even though the retail-centric nature of the numbers would seem to hit GameStop in the gut.

One thing that GameStop has going for it is that it also sells used games and gear at healthier margins than its new merchandise. This aspect of GameStop's model helped shield the retailer's performance from the industry's initial decline. Sure, folks weren't buying new titles, but there was always a healthy flow of customers looking to trade in older games and systems for store credit.

However, GameStop's struggling there. It posted a surprising 11% slide in pre-owned merchandise sales three months ago.

We knew this moment would happen. As digital delivery becomes more popular with system makers and software publishers reaching out directly to gamers, there will be no trade-ins or secondhand software to buy.

GameStop is now simply at the mercy of the release slate, and it wasn't too encouraging in October. You know it's a bad month when Take-Two Interactive's (Nasdaq: TTWO  ) NBA 2K13 was the top seller. Electronic Arts (Nasdaq: EA  ) was supposed to hold up well with Medal of Honor: Warfighter, but we already knew it wasn't selling well when the company lowered its guidance for the holiday quarter last month.

Will November be better for the industry in general and GameStop in particular? It's easy to get excited. Activision Blizzard (Nasdaq: ATVI  ) rolls out Call of Duty: Black Ops II next week, and Nintendo (NASDAQOTH: NTDOY  ) introduces its Wii U console on Nov. 18.

However, neither even will be more than a short-term fix to GameStop's model's inevitable slide. Analysts see revenue and earnings falling 8% and 15%, respectively, in Thursday's report. If it's worse -- and if GameStop once again hoses down its store-level sales guidance -- no one should be surprised.

Digital future
How will Electronic Arts hold up in the battle to hold on to gamers? Check out our new premium report on the company, including research on whether EA is a buy or a sell. To get your copy today, click here.

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  • Report this Comment On November 12, 2012, at 8:57 AM, toddjohann wrote:

    I wish I could get paid to write the same article every couple months for 5 years. You sir, have a pretty sweet job.

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