GameStop Isn't DOA Despite the Threat of Wal-Mart

Wal-Mart has everything to gain and GameStop has everything to lose. Customer loyalty may be GameStop's ace in the hole.

Apr 15, 2014 at 7:00AM

You don't have to be a parent to know if you ask pretty much any kid to choose between a pit stop at Wal-Mart Stores (NYSE:WMT) or GameStop (NYSE:GME), he or she is going to choose the latter. Now that Wal-Mart has become synonymous with frozen peas (in light of its grocery push), it doesn't evoke the same kind of anticipation that a visit to a store with game in the name might. And this stands to work in the favor of GameStop now that its much larger peer has entered its turf.

Wal-Mart last month revealed it would be entering the used video game market, facilitating trade-ins and selling used games at its famously low prices. While the move might have blindsided the competition, in hindsight the development really isn't that shocking.

Wal-Mart's sales at its supercenters have been slumping amid an evolving consumer and heightened competition from the likes of dollar stores. The giant retailer is fighting back. In addition to investing more heavily in e-commerce and opening a wave of smaller-format stores, it has set its sights on the $2 billion market for used video games. 

GameStop execs are playing it cool, but they've got everything to lose if Wal-Mart succeeds. Used games and trade-ins are Grapevine, Texas-based GameStop's bread and butter, with margins from pre-owned video games historically in the 46% to 49% range. Plus GameStop has been fighting its own battle to remain relevant amid a shift toward mobile gaming and digital gaming software.

Elephant in the room
On GameStop's March 27 earnings call, even company officials couldn't ignore Wal-Mart. Company execs remain sanguine, offering a backhanded compliment to the elephant in the room. is a great sign for the category that large competitors return after previous attempts as they see that the pre-owned video game business has a lot of growth ahead.-Paul Raines, GameStop CEO on the March 27 earnings conference call

GameStop isn't in denial, it's just got what could prove to be an ace up its sleeve. 

[More than] 75% of all trades made at GameStop stores are immediately used to buy new products, a business model that last year
added [more than] $1 billion of sales to the new software and hardware industry. Our publishers know that trades made at GameStop stay in the gaming ecosystem.

Not so at Wal-Mart, where customers can apply store credit toward any one of a number of product categories at the company's namesake stores or Sam's Club. If it came down to it, video game suppliers might be inclined to offer more favorable terms to GameStop over Wal-Mart in an attempt to keep the store credit contained to the industry. 

Nevertheless, Wal-Mart doesn't have too much to lose by entering the used video game market. While current investments into the e-commerce channel and smaller-format stores will weigh on financial results in the short term, its used video game initiative is an extension of its existing shelf space and isn't capital intensive; Wal-Mart isn't investing heavily in new infrastructure or manpower to provide the trade-in service. Unlike GameStop, which has a game-refurbishment center on the premises in Grapevine, Texas, the Arkansas-based retailer will be outsourcing the game-refurbishment process; it has everything to gain as an industry disrupter and little to lose. 

But GameStop has 25 million strong loyalty members, from whom the company generates three-quarters of its sales. Many customers aren't going to pick up and go to Wal-Mart just because they can. GameStop has a reputation as a small business that families can visit and be greeted on a first-name basis. GameStop seems to take pride in that, and it's going to be difficult if not impossible for Wal-Mart to replicate that experience. 

On a valuation basis, GameStop and Wal-Mart have competitive trailing earnings multiples at around 15 and 16, respectively. To evaluate the companies based on sales just isn't an apples-to-apples comparison, as Wal-Mart generated nearly $500 billion in sales last year to GameStop's $9 billion in fiscal 2013.

But where they're comparable is the fact that both have something to prove. Wal-Mart's experiment to enter the used video game market is one of several initiatives to remain relevant and it doesn't have to disrupt GameStop. If anything, it's put a fire under the feet of GameStop management to fight for a greater stake in a market they already dominate.

Foolish conclusion
Brand loyalty begins at a young age, and GameStop since the turn of the century has established trust with its consumer base. GameStop might not be able to replicate Wal-Mart's size and scale, but Wal-Mart can't compete with GameStop's small town feel, the very characteristics that stand to work in the Texas-based retailer's favor. As such, I wouldn't give up on GameStop just yet.  

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


Gerelyn Terzo has no position in any stocks mentioned. The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers