I think I may have the easier side of this duel. Being bullish on GameStop (NYSE:GME) is a piece of cake.
That sounds cocky, sure. Yet it just might be accurate. Let me show Chuck Saletta, my sparring partner, why he should change his tune and join me in celebrating this investing idea.
Great brand in a great industry
You've heard the news -- video games are hot. It's simple, really; Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT), and Nintendo are pushing their new consoles. They have one goal in mind: Increase the installed user base as quickly and efficiently as possible. When consumers buy another system (or two), they buy a bunch of higher-margin software and accessories to go with it. GameStop, without a doubt, benefits. To a lot of folks -- including me -- the perception is that the easiest way to pick up the latest Madden entry is to walk into the local GameStop. It's right there in the name. Talk about branding.
GameStop differs from many other retailers that sell video games. Besides focusing on the sale of software, the company also promotes a used-game marketplace. Players who want to part with some of their games can trade them in, applying the value received to new merchandise. This differentiating element is without a doubt attractive to active gamers. It entices them to come in again and again. This has helped GameStop's branding strategy tremendously.
The key acquisition
A couple of years ago, GameStop decided to pursue acquisitions. There was only one logical target: Electronics Boutique. Talk about smart thinking. Why should both companies compete with each other when they essentially are serving the same demographic? Indeed, joining forces created a retail juggernaut in the video-gaming world.
The buyout meant that GameStop didn't have to worry about one-upping its rival. There's enough competition out there with the software departments in places such as Circuit City (NYSE:CC) and other electronics retailers; a unified, game-focused chain is able to concentrate on building customer loyalty, distributing a wide array of titles for both mainstream and hardcore users, and expanding comparable sales growth. When you think about this sensible merger, you can't help approving of the thought process behind it. And you can't help gleefully marveling at the long-term shareholder value that it implies.
The numbers don't lie
GameStop is as happy right now as Leon Kennedy was when he finally dispatched the Lord Sadler thing in Resident Evil 4. Seriously, the numbers aren't lying. The fourth-quarter stats show double-digit gains in sales, net profit, and earnings per share to the tune of 38%, 53%, and 47%, respectively. Same-store sales jumped an impressive 26.5%. And how about that balance sheet? Accounts receivables were down and cash plus investments were up.
A check of the financial statements from the latest 10-K document shows that GameStop is doing superbly. Feast your eyes on this table (numbers in millions).
|
2007 |
2006 |
2005 | |
|---|---|---|---|
|
Net revenues |
$5,319 |
$3,092 |
$1,843 |
|
Net income |
$158.3 |
$100.8 |
$60.9 |
|
Free cash flow |
$289.6 |
$180.7 |
$47.7 |
That's a pretty convincing collection of data. I'm sure by now my friend Chuck is questioning his bearish take on GameStop. I should note that the acquisition of Electronics Boutique was recorded in 2006 in the cash-flow statement, and that it did cost more than $886 million. Again, though, I feel this was a worthwhile merger.
Software is getting better
Publishers are pulling out all the stops in an effort to design great software. Games these days are like interactive movies, little epics that take multiple hours to play from start to finish.
This means that GameStop is benefiting from a desire on the part of Electronic Arts (NASDAQ:ERTS), THQ (NASDAQ:THQI), and others to top themselves and each other. Every time a new killer app arrives in stores -- such as Gears of War for the 360 -- GameStop makes out. Guitar Hero is gaining in popularity, so much so that Electronic Arts is looking to join a band as well. Nintendo, meanwhile, is having a field day with its new Pokemon games -- while kids are trying to catch the latest creatures on the DS, GameStop is capturing a heck of a lot of bucks at its points of sale.
There's no doubt about it: People love their systems because they can play a lot of great software. Once they finish one title, it's on to the next. The play experience of games has come a long way since the days of Atari 2600 and Intellivision -- it has become more intense and is fully ingrained into the culture's consciousness. GameStop is happy to profit from this phenomenal trend.
The Foolish final word
There you have it, Chuck. GameStop is only going higher. The company has it all -- brand equity, exposure to a hot industry, the benefit of an intelligent merger, and a consuming base that is just wild over 3-D interactive entertainment. The technology has only gotten better, and people are willing to spend discretionary cash to get their game on.
GameStop: Count me bullish.
Go back and read the rest of the arguments. Then vote for the winner.
GameStop, Nintendo, and Electronic Arts are all Motley Fool Stock Advisor selections. For more about these and other recommendations that are helping the newsletter outperform the market, sign up today for your free 30-day trial. Microsoft is an Inside Value recommendation.
Fool contributor Steven Mallas does not shares of any of the companies mentioned. As of this writing, he was placing 13,952 out of 27,270 ranked investors in the Motley Fool CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.
