Even though GameStop
A look inside
GameStop has grown its top and bottom lines, helped out by the new generation of game systems. For the first quarter, sales increased 23%, to $1.28 billion, and earnings per diluted share more than doubled, to $0.15 a share. Gross margins did decline by 170 basis points, to 27.3%, but management explained that the drop was caused by the new game systems, which made up a larger share of sales and have lower margins. This problem should therefore abate going forward, as GameStop sells more games.
Cash flow for the quarter came in at negative $288.8 million. This is a typical showing for the first quarter, though, when items such as accounts payable decrease as the company pays off purchases from the previous holiday selling season. GameStop also built up its inventory of new video-game system hardware and related software.
Last year, the company generated $423.5 million in cash flow from operations, and it used some of that amount to repay debt. As a result, in the past year, the long-term debt on its balance sheet has gone from nearly $1 billion to about $737 million, and I expect to see further debt reduction. Consider that despite the negative cash flow in the current quarter, the company still repaid more than $100 million of its debt.
GameStop's recent results have been benefiting from the next-generation systems -- the Sony
Speaking of older merchandise, used games and products accounted for 25% of GameStop's top line last year, but generated almost 50% of the company's gross profit. For its latest quarter, used games made up a similar 25.5% of sales but were hugely profitable. It generated gross margins of more than 50% and accounted for more than 51% of gross profits. And that's despite offering the merchandise at a discount to other outlets, such as Blockbuster
GameStop publishes also its own magazine, Game Informer, which is immensely popular and profitable. It's the largest multiplatform video-game magazine in the United States, based on circulation. Lumped with other software and accessories, as well as character-related merchandise, this group generated 16.5% of GameStop's top line in the latest quarter, but it accounted for one-third of the gross profit and carried a gross margin of 33.8%.
What makes it work
After joining forces with Electronics Boutique in 2005, GameStop is now the largest retailer of video games and entertainment software in the world. Its retail stores, operating under the GameStop and EB Games banners, offer new and used video games, as well as hardware and accessories for next-generation video game systems from Sony, Nintendo, and Microsoft
The company has advantages over other retailers such as Blockbuster and Best Buy
Last week may have presented a buying opportunity. GameStop's shares declined by as much as 7% one day, after Take-Two Interactive Software
Now that the shares have recovered some of their value, the stock is not cheap. It trades at a trailing price-to-earnings ratio of 38. Even taking its performance and popularity into consideration, the stock looks pricey, so I'd advise investors to wait for dips before grabbing a controller in this particular game.
Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at firstname.lastname@example.org. He doesn't have any positions in the companies mentioned. The Fool's disclosure policy does not require a strategy guide.