After last weekend's highly publicized and anticipated launch of Microsoft's (NASDAQ:MSFT) Xbox 360, investors will be seeking companies that could benefit from the latest revolution in electronic gaming. ATI Technologies (NASDAQ:ATYT) supplies the console's graphic processing cards. Big-box retailers such as Best Buy (NYSE:BBY) are also likely to see an extra boost in Christmas sales as parents scramble to find the machine. And GameStop (NYSE:GME), a smaller electronics boutique, should see a nice fourth quarter -- if Microsoft's manufacturers can crank out enough 360s.
In its latest third-quarter press report, GameStop announced that it sold through all its Xbox 360 consoles in record time. This should come as no surprise to anyone who watched the news over the holiday, with reports of shoppers resorting to extreme measures to snatch one up.
The good news is that the demand for the new unit is very high, perhaps even unprecedented. GameStop went on to mention that its "attach ratio," used to measure the demand of a product release by the sales of accompanying games and accessories, has never been higher in the company's history.
The bad news? GameStop is forecasting limited supplies of the Xbox 360 over the next several weeks. As a result, it is tempering its enthusiasm, estimating fourth-quarter same-store sales growth between nothing and 2%. Unprecedented demand for critically important product, yet the company only expects 2% comps growth at best? That doesn't sound promising for GameStop.
Shareholder enthusiasm was further deflated when the company reported a loss of $0.04 per share, compared with its $0.21 earnings in the year-ago period. Analysts estimated a gain of $0.14 per share in the latest quarter. The loss was primarily attributed to merger costs associated with the Electronics Boutique acquisition. Excluding merger costs and hurricane-related losses, the company would have had earnings of $0.16 per diluted share.
However, GameStop did manage to improve gross margins in the latest quarter to 33.1%, up from 28.6% in the same period a year ago. This increased profitability is due to an escalating trend: value-conscious shoppers buying more used games. According to GameStop's latest 10-K filing, there are currently around 185 million video game consoles plugged into American homes, and more than 700 million games currently installed. Even though the average new game costs around $35 compared to $13 for a used game, the latter offers higher profit margins for the company. GameStop expects this trend to continue into the holiday season, even with the release of Xbox 360; this will hopefully mitigate some of the company's dependence on Xbox sales.
In the wake of the news, GameStop's stock declined just slightly. Given the massive Xbox 360 release, it's a good bet that shareholders aren't about to pull the plug on GameStop, even with supply shortages. With 2006 expected to be a banner year for electronic gaming, Foolish investors might want to look closely at the leaders in the industry.
More electronic gaming Foolishness:
- Electronic Arts (NASDAQ:ERTS) is launching a digital distribution service.
- Microsoft won't be the only beneficiary of the Xbox 360 launch.
- And Sony (NYSE:SNE) will include parental controls in its new system.
GameStop , Best Buy, and Electronic Arts are all Motley Fool Stock Advisor picks. To power up your portfolio, check out Tom and David Gardner's list of high-scoring stocks with a free trial subscription.
Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
