Like competitor GameStop (NYSE:GME) earlier this week, video game retailer Electronics Boutique (NASDAQ:ELBO) reported strong second-quarter results. But a much healthier than expected third-quarter forecast launched Electronics Boutique shares up 11.5% to $31 per share in midday trading Friday.
For the second quarter, revenues climbed 19.8% to $362 million. Meanwhile, net income more than doubled to $3.9 million, or $0.16 per share -- also merely doubling analyst expectations. On its conference call (transcript provided by CCBN; registration required), Electronics Boutique attributed a 29% increase in video game software sales to the popularity of games such as Electronic Arts' (NASDAQ:ERTS) NCAA Football 2005, Activision's (NASDAQ:ATVI) Spider-Man 2, Sega's and Take-Two Interactive's (NASDAQ:TTWO) ESPN NFL 2K5, and THQ's (NASDAQ:THQI) Full Spectrum Warrior.
Gross margins climbed to 29.5% from 27%, primarily because of growth in the company's higher-margin pre-played business, which outpaced overall sales growth.
I find that facet of the business interesting. In our discussion regarding GameStop earlier this week (see Can GameStop Be Stopped?), I questioned whether or not having a used-game trading business gave either GameStop or Electronics Boutique a real competitive advantage and whether that lack of a competitive advantage might stunt their furious expansion pace.
But upon further review, I am warming up to it.
Gamers can walk into any Electronics Boutique store and trade in their old games for credit toward brand new games. In fact, you can even trade in used DVDs and CDs as well. Each trade generates value because the store is essentially buying for cheap and selling for more. What's more is that because the trade is local, the store doesn't have to deal with shipping costs.
And the ability for a value-based gamer to make these trades gives Electronics Boutique and GameStop a competitive advantage over a Best Buy or a Target.
My gut reaction, however, to the popularity of this is befuddlement, because a gamer can both sell his used games for more and buy used games for less on eBay (NASDAQ:EBAY). As a gamer with Internet access and a PayPal account, I've never really benefited from the pre-played section at Electronics Boutique. Yet every time I walk into one of these stores, there's always someone trading in used games to make up the latest Madden or some other new hit.
The obvious benefit for a trader is not having to deal with the hassle of selling over the Internet and then having to make a trip to the post office, which carries a cost. For buyers, there are inherent benefits in having the product in front of you, as well as worries about product quality or getting scammed over the Internet, or both.
Plus, not every gamer has an Internet connection.
And this business is only getting bigger. Electronics Boutique added 117 new stores in the quarter, bringing the total to 1,733. Of those, 425 stores are located outside of the U.S., 178 of which are in Canada. All of these stores look to further develop the brand and expand on pre-played business.
Electronics Boutique forecast third-quarter earnings of $0.15 to $0.19 per share -- well ahead of the $0.09-per-share analyst estimate. Same-store sales are also expected to climb by 4% to 6%, with sales being driven by hits such as EA's Madden NFL 2005, Activision's Doom 3, and Take-Two's Grand Theft Auto: San Andreas.
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Fool contributor Jeff Hwang owns shares of Electronic Arts and eBay.
