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GameStop's $1.5 Billion Secret

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GameStop (NYSE: GME  ) isn't done shrinking. After booking two years of falling comparable sales, the company has yet to engineer a stop to the slide in any of its core businesses.

Last quarter was no exception. Revenue from new gaming hardware fell again, to $616 million. That number was closer to $800 million at the beginning of 2011. And the same goes for software titles. GameStop saw a 3% sales decline in that category. Even the company's pre-owned gaming products -- where it gets the biggest chunk of its profits -- fell by more than 7%.

But there is one area where the gaming retailer's sales are actually spiking. It's a category that GameStop just calls "other," and it grew by a scorching 22% last quarter -- passing $1.5 billion in revenue for the full year.

Since the name of the category doesn't tell us much about its composition, let's take a closer look at what's included in it.

Mobile business: Sales of pre-owned consumer electronics like smartphones and tablets, which GameStop allows customers to trade in for cash or store credit, make up the biggest piece. The company says the market for these used devices is about $1.6 billion, and it expects to grow its sales by between 30% and 40% this year. The mobile business generated a 28.8% profit margin rate last quarter and added $100 million in revenue just on its own.

Digital sales: Despite being built for traditional retailing, GameStop hasn't completely missed the boat on downloadable content. The company's sales of digital content and subscriptions are accounted for as "other" sales, and they grew by 71% last quarter. These sales are also very profitable for GameStop. They generated a 58% margin in the fourth quarter.

Toys: Thanks to the runaway success of Activision Blizzard's (NASDAQ: ATVI  ) Skylanders console game, which requires action figures that work with the game, GameStop is selling a lot more toys lately. The Skylanders franchise has quickly grown to over $1 billion of sales for Activision. And with a major sequel coming out soon, combined with Disney's (NYSE: DIS  ) own entry in the category, toy sales should only increase for GameStop as these two giants duke it out.

Foolish bottom line
In fact, each of these three components has a bright future ahead. So it isn't hard to see how GameStop's "other" category could grow from its current perch at just under 25% of the company's gross profit to become an even bigger earnings driver. Let's just hope that GameStop will have picked a more descriptive name for it by then.

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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2013, at 10:25 PM, Dvoraak wrote:

    I don't think Gamestop is suffering any more than the rest of the gaming industry is at the moment. As long as the next gens don't have foolish drm Gamestop will revitalize as much as the rest of the industry will.

  • Report this Comment On April 01, 2013, at 11:57 PM, zman4money wrote:

    It makes sense that new hardware sales fell because the Xbox and ps3 are 7-8 years old. When the next generation of consoles come and they still show a decline, then there is a problem.

  • Report this Comment On April 02, 2013, at 8:12 AM, TMFSigma wrote:

    @dvoraak - strict DRM would definitely hurt GameStop, but I don't see it happening. It would be too risky for Microsoft and Sony to upset their customers like that.

    @zman4money - I agree. If GameStop is still shrinking core sales next year, it has some serious issues.


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