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GameStop's $1.5 Billion Secret

By Demitri Kalogeropoulos - Apr 1, 2013 at 5:30PM

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The game retailer's sales are falling -- in every category except this one.

GameStop (GME 20.49%) isn't done shrinking. After booking two years of falling comparable sales, the company has yet to engineer a stop to the slide in any of its core businesses.

Last quarter was no exception. Revenue from new gaming hardware fell again, to $616 million. That number was closer to $800 million at the beginning of 2011. And the same goes for software titles. GameStop saw a 3% sales decline in that category. Even the company's pre-owned gaming products -- where it gets the biggest chunk of its profits -- fell by more than 7%.

But there is one area where the gaming retailer's sales are actually spiking. It's a category that GameStop just calls "other," and it grew by a scorching 22% last quarter -- passing $1.5 billion in revenue for the full year.

Since the name of the category doesn't tell us much about its composition, let's take a closer look at what's included in it.

Mobile business: Sales of pre-owned consumer electronics like smartphones and tablets, which GameStop allows customers to trade in for cash or store credit, make up the biggest piece. The company says the market for these used devices is about $1.6 billion, and it expects to grow its sales by between 30% and 40% this year. The mobile business generated a 28.8% profit margin rate last quarter and added $100 million in revenue just on its own.

Digital sales: Despite being built for traditional retailing, GameStop hasn't completely missed the boat on downloadable content. The company's sales of digital content and subscriptions are accounted for as "other" sales, and they grew by 71% last quarter. These sales are also very profitable for GameStop. They generated a 58% margin in the fourth quarter.

Toys: Thanks to the runaway success of Activision Blizzard's (NASDAQ: ATVI) Skylanders console game, which requires action figures that work with the game, GameStop is selling a lot more toys lately. The Skylanders franchise has quickly grown to over $1 billion of sales for Activision. And with a major sequel coming out soon, combined with Disney's (DIS 1.34%) own entry in the category, toy sales should only increase for GameStop as these two giants duke it out.

Foolish bottom line
In fact, each of these three components has a bright future ahead. So it isn't hard to see how GameStop's "other" category could grow from its current perch at just under 25% of the company's gross profit to become an even bigger earnings driver. Let's just hope that GameStop will have picked a more descriptive name for it by then.

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GameStop Corp. Stock Quote
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