GameStop (NYSE:GME) probably doesn't see Toys "R" Us as much of a competitor in video game retailing, but that is about to change.
Toys "R" Us is starting to buy and resell used games in a few test stores, according to Forbes. If the program rolls out nationally, it would eat into GameStop's sweet spot as the definitive hub for swapping old games and gear for in-store credit.
Unlike most retailers, GameStop was rocking this past quarter. The company posted an impressive 10.2% gain in comps during the holidays. GameStop's success is the result of not only a healthy video game market but also the company's vibrant resale business.
Margins on new hardware are lousy. Margins on new software are better. However, GameStop's thickest margins come from buying back old titles and selling them again at roughly twice the price. It's a great model for GameStop, especially since it cuts out the developers and the royalties that developers have to pay out to Nintendo (OTC BB: NTDOY.PK), Microsoft (NASDAQ:MSFT), and Sony (NYSE:SNE).
GameStop's resale business also coated the company in recession-resistant Teflon. It can be seen as a pawnshop for teens, when you think about it.
Obviously, Toys "R" Us draws a much different audience than GameStop. Having spent more than enough time at both stores, I realize that diehard teen gamers at GameStop wouldn't be caught dead among the mothers with young children walking the video game aisles at Toys "R" Us. However, I trust that Toys "R" Us isn't stupid. If it either offers sellers better resale prices or marks down its used titles more aggressively, the same fickle teens that buy used games at GameStop because it's a better deal than shrink-wrapped titles will gravitate to where the deals are. One way or another, GameStop is going to have to keep its markups in check.
This comes at a tough time for GameStop, as retailers like Amazon.com (NASDAQ:AMZN) are selling game downloads, and software companies like Take-Two Interactive (NASDAQ:TTWO) are delivering games directly into consoles.
Given GameStop's trend-bucking health lately, shareholders may feel confident in ignoring the assaults coming from all sides. However, as a diehard gamer will tell you, overconfidence can be a game-ender.
Shall we play a game, Fool?
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