GameStop's (NYSE: GME ) performance in the last six months has been pathetic. The video game retailer has lost around 25% of its market capitalization in the last half year as the launch of new consoles from Microsoft (NASDAQ: MSFT ) and Sony (NYSE: SNE ) hurt its pre-owned game sales. Meanwhile, big-box retailers such as Wal-Mart Stores (NYSE: WMT ) are entering the pre-owned gaming space, thereby giving rise to stiff competition. But there's more to this than meets the eye.
Down but not out
In the fourth quarter of fiscal 2013, GameStop delivered a weak performance, with net profit falling to $220.5 million from last year's $261.1 million. GameStop saw a decline in store traffic due to a lower number of game releases. However, the company's revenue grew slightly year over year on account of hardware sales.
GameStop expects some improvements in its business this year. As a result, it is adding some hit titles in partnership with its publishers to the pre-owned game portfolio. This should help GameStop strengthen its product line up and to offer a diverse selection to customers.
In fact, GameStop expects its revenue to grow by 7% to 10% in 2014 on the back of its strategic moves. It is focusing on the expansion of its technology brands. It will also add 300 to 400 new stores among its three technology brands this year, either through new store openings or acquisitions. Moreover, GameStop expects to benefit from the console cycle as it matures.
Console cycle could drive growth
While the company is expecting a decline in demand for PlayStation 3 and Xbox 360 in 2014, sales of PlayStation 4 and Xbox One, along with related software, are expected to remain strong. This year, it is expected that Sony will sell around 12 million PlayStation 4 consoles. On the other hand, Microsoft's Xbox One sales are expected to come in at 9 million units, according to Wedbush Securities. GameStop is partnering closely with both Sony and Microsoft to push sales of both new consoles.
As a result, it wasn't surprising to see that the retailer's hardware sales in the new console cycle were three times higher versus the last cycle. GameStop has already sold more PlayStation 4 and Xbox One devices just six months since the product launches than what it sold in the first 15 months of the previous cycle. As more and more gamers buy the new consoles, GameStop should see an increase in the sales of new games and other related software.
GameStop is also making good progress in its digital initiatives. It is seeing solid sales of PlayStation Plus and expects the momentum to continue into the future as well. PlayStation Plus is a membership service from Sony that gives gamers access to online services and downloadable content. Driven by the launch of PlayStation 4, GameStop sold 3.4 times more PlayStation Plus dollars than what it had sold before the console arrived. This is a sign of even better things to come in the future as more and more consoles are sold.
In addition, GameStop's web-in-store facility has been a key growth driver for the business. If a product is not in stock or is not available at a given store, GameStop provides free home delivery to consumers who purchase the product via gamestop.com.
The threat of Wal-Mart
While the digitalization of games is already a threat for GameStop, the entry of a big-box retailer such as Wal-Mart can hurt its prospects. In a novel move, Wal-Mart is now allowing shoppers to trade in used video games for anything from groceries to gadgets. Wal-Mart will accept PlayStation 3 and Xbox 360 games; in exchange, customers can purchase anything from either Wal-Mart or Sam's Club.
This will lead to price competition between GameStop and Wal-Mart. Moreover, considering the fact that getting groceries in return for used games sounds like a good idea in times of economic uncertainty, consumers might be tempted to go to Wal-Mart rather than GameStop to trade in their old games.
GameStop is seeing some headwinds in its business. However, there are some areas where the company is seeing growth, and this fact should not be ignored. Moreover, GameStop is cheap at a trailing P/E of just 13, and a dividend yield of 3.2% is another enticing reason why investors should consider an investment in the company.
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