5 Things GameStop’s Management Wants You to Know

A closer look into the video game retailer's latest earnings results.

Aug 26, 2014 at 4:30PM

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GameStop's (NYSE:GME) business is on the upswing thanks to the surging popularity of next-generation video game consoles. After suffering through two straight years of declining revenue, GameStop just posted its fourth-straight quarter of sales growth.

But there's a lot more to those results than just a cyclical rebound in the video game industry. Here are a few key takeaways for investors from management's quarterly conference call with analysts. 

GameStop is a strong competitor on digital

"We are pleased with our digital market share, which we estimate is in line with our overall market share." -- GameStop President Tony Bartel.

GameStop dominates the market for next-generation gaming titles, alone responsible for just over half of all sales. And that market share figure has been growing since the prior generation of video games consoles, reaching another all-time high in the quarter. But what about digital content, which threatens to cut the retailer out of the sales process? 

GameStop leads in that category as well. Most downloadable content, particularly for blockbuster launches like Watchdogs this past quarter, is actually sold at retail locations. And GameStop is having no problem competing there, as digital receipts grew 13% year over year.

The pre-owned video game business is healthy

"We continue to see little if any impact from other big-box competition in the pre-owned game business." -- Tony Bartel.

GameStop's pre-owned video game business is growing strong, even with new competition from the likes of Wal-Mart (NYSE:WMT). Pre-owned sales were up 6% in the quarter. Just as important, profit margin on those products remained steady at almost 50%. That's obviously good news for GameStop from an earnings perspective, but it also shows just how hard it is for competitors to poach any business from the company.

Diversification is going well

GameStop doesn't expect to rely on video game retailing forever. The company has been on a shopping spree, expanding its consumer electronics and wireless services presence in a new segment of the business called technology brands. Here's Bartel on why that segment's 19% contribution to GameStop's overall earnings for the quarter matters:

This highlights the importance of evolving our business into mobile and consumer technology by leveraging the core strength of our vibrant PowerUp rewards community, our unique buy-sell-trade model, our real estate expertise, and our human and capital strength. We are aggressively expanding this part of our business as we added 49 stores during the quarter through acquisition and development, bringing our total store count to 319, a 46% increase since the beginning of the year.

While technology brands' profit contribution will be small this year, probably a lot less than last quarter's 19%, it's still a major growth area that investors will want to watch.

Don't expect big sales growth next quarter

"We face a challenging third quarter as we roll over the Grand Theft Auto V launch." -- Tony Bartel.

Management provided a fairly weak forecast for the second half of the year, particularly in light of the second quarter's 22% comparable-store sales jump. GameStop sees comps improving by just 3% next quarter and by 9% for the full year. So investors who were hoping for a raised outlook were disappointed.

Year-over-year growth will be tough to come by in the third quarter thanks to last year's GTA V release. After all, GameStop sold over 6 million copies of that title in the prior-year period, which will be hard to top. Still, presumably blockbuster hits such as Activision Blizzard's Destiny should help the retailer climb that hurdle and post solid growth for the quarter. 

Winning the holiday season with affordability

The holiday quarter was responsible for almost two-thirds of GameStop's profits last year, which shows how critical those months are for the company. The good news for investors is that this year's new game lineup is strong, with 24 major titles including three big launches from Activision that should drive customer traffic.

The bad news is that many retailers will be fighting for a piece of the industry's growth. But GameStop's management believes the company is positioned to win a disproportionate share of the video game market while also benefiting from an uptick in consumer device demand. As Bartel noted:

The key that we're focused on is affordability. ... We are going to run buy-sell-trade so that we can allow people to bring in their trades as additional currency toward the great games they want. So we think a holiday like this is right within GameStop's wheelhouse. That, coupled with the fact that any launches that do happen to come out with an Apple announcement are obviously going to helpful to us as we expand our technology brands.

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Demitrios Kalogeropoulos owns shares of Activision Blizzard and Apple. The Motley Fool recommends Activision Blizzard and Apple. The Motley Fool owns shares of Activision Blizzard, Apple, and 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.

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