Those still waiting at the graveyard for GameStop (NYSE: GME) to finally succumb to the horrifying threat of online gaming are going to have to wait a little longer after the hated gaming retailer posted another solid fourth quarter. While many pundits have been proclaiming that digital would lead to GameStop's demise, the retailer has adapted with its own digital growth and even stronger sales at its bricks-and-mortar locations.
For a company that is going to go away soon, 2010 was a pretty strong year. GameStop rewarded shareholders with $380 million in share repurchases. It also generated cash flow in excess of $590 million and lowered its debt burden by $200 million as the company continues to transform a once-scary balance sheet.
GameStop continued to see strong demand for gaming hardware in the quarter, and its game re-selling business had its best quarter in the company's history, growing sales 5% in the United States and 3.7% total, to more than $800 million. Used games generate close to 22% of the company's revenue, but 44% of its gross profits.
Sales of hardware also increased during the quarter. The company said Microsoft's (Nasdaq: MSFT) Kinect gaming system and hit games like Activision Blizzard's (Nasdaq: ATVI) Call of Duty: Black Ops were the catalysts for this growth. Hardware generated 7.2% of GameStop's gross profit compared to only 5.5% last year during the same period.
GameStop also announced that it would focus on streamlining operations in the upcoming year by opening 200 stores in underserved areas, while closing 200 stores in underperforming or overlapping areas that came about mainly because of acquisitions.
For investors who aren't impressed by GameStop's traditional business, it is also growing substantially in the much-heralded digital domain. In 2010, total revenue in this space reached $290 million, which is still only 3% of total revenue, but is a 61% increase over the previous year. More importantly, company executives believe this growth is going to continue to accelerate significantly, and the company expects to sell more digital games in the current quarter than it did all of last year. They also believe the company's growth will continue to far outpace the industry average.
GameStop continues to become more efficient with regard to its bricks-and-mortar operations, while diversifying its business to manage the changing gaming environment. Management has made some shareholder-friendly moves, and growth continues at GameStop whether the haters like it or not.
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