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You wouldn't know it from seeing GameStop (NYSE: GME ) shares near a four-year high, but these aren't the best of times to be a video-game retailer. NPD Group put out another bleak read of the video-game industry this week. Hardware and software sales plummeted 31% in May.
GameStop longs are cool with that. They'll say gamers are merely saving money as they wait out the new Xbox One and PS4 consoles. It doesn't seem to matter that in-store sales of video games and gear have been posting double-digit percentage declines for most of the past three years.
However, an alarming trend is that software sales continue to migrate to digital delivery. NPD points out that if you factor in $91 million in used and rental sales and another $339 million in digital format sales, the decline to $787 million in May isn't as bad as it seems on the sale of new hardware and software.
That may come as welcome news to console makers and software developers, but seeing digital sales balloon to 43% of industry sales has to be alarming for GameStop and, to a lesser extent, Best Buy (NYSE: BBY ) .
Best Buy has already suffered as CDs, DVDs, and books get replaced by digital platforms. Now it will see its video-game department shrink, and this comes as Best Buy is aggressively following GameStop into the resale market.
We already know that the resale market is going to take a hit when the new consoles come out. The PS4 and Xbox One aren't compatible with older games, and the Xbox One gives publishers the ability to be more restrictive with the resale process.
GameStop lives and dies by video games, so naturally it will be the one taking the biggest hit as the high-margin resale market continues to slip and more gamers download their games directly. However, Best Buy will also suffer. The release of new video games was always a great way to get shoppers into its stores. Someone buying a copy of Call of Duty isn't going to walk away with a refrigerator, but every person entering the store is certainly an opportunity to sell more than the item he or she came in to get.
It seems odd to see GameStop within pennies of a new four-year high today -- and Best Buy within pocket change of its highest price in nearly two years -- as the fundamentals continue to work against them.
GameStop has made a couple of acquisitions to sustain its relevance in the digital age, but for now it just isn't enough. Analysts already see sales and earnings falling for both retailers this year, and the new gaming console introductions that bulls seem to think will breathe new life into the stores may be what accelerates their demise.
Retail gets rocked
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