Retail gaming giant GameStop
GameStop is one of the most heavily shorted stocks in the market, and the announcement was good enough for a fairly significant short squeeze, but can the share price continue to appreciate with the headwinds facing the gaming industry, and more specifically a brick-and-mortar retailer?
The next Blockbuster?
Many investors and analysts like to compare GameStop to Blockbuster, predicting doom for the game retailer. Just as Netflix
However, there are some important differences between the two companies. Most importantly, Blockbuster rarely produced profitable years. The company was poorly run, and even during its glory years from 1996-2000 when the economy was booming, the company still lost more than $700 million. Obviously, things only got worse for the company from that point on.
GameStop has a creative management team that has targeted a niche that the big-box retailers like Best Buy
Picking up the scraps
Speaking of Blockbuster comparisons, the video chain's store closings have opened up many desirable real estate locations where GameStop can look to expand. On the most recent quarterly conference call, Chairman Dan Dematteo stated:
"I would think that as they continue to close stores, again, it gives us opportunities, especially into highly dense urban areas. If you take like the LA area, for example, which is a very difficult real estate market, it gives us opportunities to get into centers that we've not gotten into. And oftentimes what's happening is that we're actually taking a piece of the Blockbuster store as the landlords break up those stores into two or three smaller stores. It's a positive for us to get in to grow market share in markets that we heretofore couldn't get into."
The digital world
While GameStop has created a profitable niche as the leader in used games, that won't matter if gamers continue to shun buying physical games and consoles, and completely move to online delivery.
GameStop's management understands the threat and in July purchased online game distributor Kongregate. While management believes the company will be able to grow revenue from this acquisition, the site is a "free" gaming spot. So they certainly aren't looking to increase revenue from the actual selling of games.
Additionally, top video games made by heavyweights such as Electronic Arts
The Foolish bottom line
While GameStop faces significant headwinds in updating its business model to be able to compete in the online gaming space, it is way too early count this company out. The savvy management team has had to be creative before in warding off the big-box retailers. By successfully creating a used game program, the company has successfully developed a niche that these large retailers have not been able to match. While the task at hand looms large, I think management deserves the benefit of the doubt in proving they are up to the challenge.
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