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GameStop's Perilous Rise

By Andrew Marder - Apr 20, 2013 at 9:30PM

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The company has increased its share price to a multiyear high, but there's still a long way to go.

Despite worries about sales in the first half of the year, GameStop (GME 0.49%) hit new three-year highs this week. The stock is now trading at levels not seen since 2008, but investors continue to be cautious. The company announced new phone trade-in programs earlier this month and has continued to ride the momentum it generated after its last earnings statement.

While the gains have been steady, the company still trades at a discount to other companies in its sector. That means that investors are still cautious about the future growth of the company. So with things seemingly going its way, what is it that investors and consumers need to be concerned about?

Backloaded year
GameStop's biggest concern this year is that new consoles are coming out around the holidays. That may seem like a great sales opportunity, but now consumers are holding off on new purchases. As the current generation of consoles slowly fades out, customers are waiting to purchase consoles and developers are working on games for the new generation. That means GameStop is looking at a weak first half of the year -- at least in new sales.

The company said that it expects total first-quarter sales to fall, with comparable-store sales down between 5.5% and 8%. It will also be running on a tighter margin, which anticipates more discounting to keep sales even at those lower levels.

For the full year, things look a little brighter. Comparable-store sales may even rise by 1.5%, with operating margin expanding in the second half of the year as new merchandise results in an increase of foot traffic.

Concerns for GameStop
There are still a lot of things that can go wrong for the company. First of all, consumers may continue to move away from the physical store model, which would drive revenue away from GameStop and over to companies such as Amazon.com. Even if consumers stay in the stores, GameStop will have to compete with the likes of Best Buy (BBY 0.32%) and other traditional retailers for those customers.

Best Buy has been suffering in its entertainment category -- which covers video games -- with comparable store sales down 19% last quarter. While the company is shifting much of its focus to its stronger mobile division, you can bet that when the new consoles hit the markets, Best Buy is going to be fighting for a big share of the sales.

Overall, investors are right to be cautious. GameStop has a lot of potential this year, as it gets the new consoles and trims its footprint. But while the opportunity is huge, the competition is going to be fierce. GameStop is going to have to keep itself relevant through the slower parts of the year if it wants to be in the front of customers' minds when the holidays roll around.

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Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
GME
$96.13 (0.49%) $0.47
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$72.59 (0.32%) $0.23

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