Let me establish my gamer cred right up front. I played games on a Timex Sinclair 1000 computer. I played games on an Apple IIc computer, including the first iteration of Electronic Arts' (NASDAQ:ERTS) Madden football franchise. I even have fond memories of various Atari 2600 games.
So I've got experience on my side when I say that GameStop (NYSE:GME) is a strong company that should only get stronger.
Second-quarter results looked solid to me. Total sales were up more than 20% as same-store sales rose 6.2%. While hardware sales rose more than 40%, gross margins stayed solid. Video game sales also rose 16% in the quarter, composing about two-thirds of the total. Although both operating and net earnings were pretty much flat for the quarter, those results do include a $1.1 million write-off related to the problem with Take-Two Interactive's (NASDAQ:TTWO) Grand Theft Auto: San Andreas title.
There are certainly challenges afoot for GameStop. New hardware introductions (such as Microsoft's (NASDAQ:MSFT) new Xbox 360) can stir up havoc. The company also faces incredibly difficult year-ago comparisons for the third quarter -- last year's Q3 may have been the strongest quarter in industry history. Top that off with the integration of Electronics Boutique and ever-present competition from the likes of Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT), and you see that management won't have the luxury of putting up their feet and sipping mai-tai's anytime soon.
Nevertheless, I'm not worried. Few retailers can match the roughly 20% market share of the combined GameStop/Electronics Boutique, and the company has some distinct advantages over larger competitors. Big-box retailers have to appeal to everybody; GameStop can exclusively target free-spending gamers. In addition, while GameStop's guidance didn't sound especially strong, it didn't include any potential benefits from the acquisition.
Valuation is always a legitimate concern, and I can understand if some investors are put off by GameStop's price tag. All the same, it's expected to grow earnings more than 50% faster than the S&P over the next five years. If the company can pull that off, current valuations won't look out of line in retrospect.
For more takes on the serious business of games:
- EA's Madden Blows Away Competition
- Games Retailers Play
- Playing With Video Game Stats
- Activision Takes Gaming Seriously
Electronic Arts, Electronics Boutique, and Best Buy are Motley Fool Stock Advisor recommendations. See how the Brothers Gardner are trouncing the market with a 30-day free trial.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). He still fondly remembers games such as M.U.L.E., Bard's Tale, and Legacy of the Ancients.
