On the surface, it appeared that the video-game industry got a double dose of good news last week. Retailer GameStop
The reports offered a welcome break from the industry's recent funk. Video-game hardware and software sales have fallen during seven of the previous eight months.
Not so fast, though. Dig deeper into both of last week's events, and the end result isn't all that inspiring.
Let's start with Activision Blizzard. The latest Call of Duty installment is clearly a winner, but what about the rest of the company? Analysts see revenue falling by 4% when stacked up against last year's holiday quarter. Earnings should improve substantially during the quarter, but it's hard to get excited about improving margins when the world's biggest video-game company breaks a sales record yet is still expected to fall short on the top line.
At GameStop, sales rose 8%, to $1.83 billion. Earnings before debt-retirement costs checked in at $0.32 a share -- better than last year's profit before merger-related costs, but just ahead of analyst expectations of $0.30 a share. The 8% top-line boost was the product of a 2% dip in hardware sales, a 9% improvement in new software sales, and a healthy 19% spike in used-software sales.
However, your average store didn't see any of these gains. GameStop's aggressive expansion over the past year propped up all of those figures. On a comps basis, GameStop's sales fell by 7.8%.
That's in the past, of course. Lower console prices and hot titles should make this a turnaround holiday season for GameStop, right? Well, it turns out the small-box retailer is projecting negative comps (between -1% and -7%) for the current quarter.
Optimists will point out that GameStop is doing just fine. Sluggish hardware sales are a blessing in disguise, since hardware is a low-margin affair for GameStop anyway. Used games, on the other hand, are big business. They account for nearly half of the company's gross profit. Even Toys "R" Us and Amazon.com
However, isn't hardware the leading indicator here? If folks aren't spending money on new systems, how will software sales grow down the line? Well, maybe those gamers are just buying more software titles for the hardware they already own.
Maybe. But the trend I really worry about when it comes to GameStop is that Microsoft's
I'm just not that impressed by growing a concept when comps are slipping, since doing so only creates a bigger mess to clean up down the road.
I would love to eat my words, but until GameStop's comps bounce back, it's hard to argue against a sector that may have peaked in its present form.
Rick knows that plenty of diehard gamers disagree with his bearish interpretation. If you do, let him have it in the comment box below.
Amazon.com, Activision Blizzard, and GameStop are Motley Fool Stock Advisor selections. Take-Two Interactive Software is a Rule Breakers recommendation. Microsoft is an Inside Value pick. Motley Fool Options has recommended a diagonal call on Microsoft. Try any of our Foolish newsletter services free for 30 days.
Longtime Fool contributor Rick Munarriz admits to still playing video games, when he can find the time. He owns no shares in any of the companies in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.