The video-game world continues to heat up. Industry leader Gamestop (NYSE:GME) reported sizzling sales in its first-quarter earnings release today. Motley Fool Stock Advisor pick Electronics Boutique (NASDAQ:ELBO), a former rival GameStop is now poised to acquire, is expected to report similarly strong sales on Thursday. Overall, it's shaping up to be a long, hot summer for game sellers.
Gamestop's total revenues increased 27.7%, including a whopping 12% increase in comparable-store sales. Video-game software sales were the standout, growing more than 20%. The company also enjoyed brisk hardware sales from the March launch of Sony's (NYSE:SNE) PlayStation Portable. According to Sony's sales figures, this new handheld console sold 500,000 units in North America within two days of its debut.
The lower markup on those hardware sales drove gross profit down by 160 basis points. But leverage on Gamestop's SG&A (selling, general, and administrative) expenses powered a 23% earnings increase on an apples-to-apples basis, excluding a $1.7 million litigation settlement in the year-ago first quarter. The quarter's 95 new store openings put the company on track to 400 new outlets this year-- overall, a superb start to the year.
Gaming aficionados will recall that Gamestop was spun off by Barnes & Noble (NYSE:BKS) last November in a deal that distributed the Class B shares to the Class A stockholders. Since then, Gamestop shares have risen from around $20 to $30 in early trading today. Not a bad run.
The upcoming merger with Electronics Boutique, announced in April, has largely fueled the past month's increase as investors anticipate the deal's synergies. Although Electronics Boutique's $55.18-per-share purchase price is a premium of nearly 30% over its trading value, there's a lot to like about this deal. The combined company will have worldwide revenues close to $4 billion and more than 3,800 stores. The merger also gives Gamestop a strong foothold in Canada, Europe, and Australia. This is even juicier given Electronics Boutique's acquisition of Spanish electronics retailer Jump Ordenadores, announced yesterday.
I also like the increased clout this video-game giant will command with the game-system manufacturers; its size could prove helpful should supplies the most popular systems get scarce, as happened a few months ago. The combined Gamestop/Electronics Boutique will command more than 20% of North America's video-game market share. The company will have a stronger competitive presence against stores such as Wal-Mart (NYSE:WMT) and Best Buy (NYSE:BBY), which are major sellers of video-game hardware and software but not destinations for true gamers.
Global game spending may rise 20% each year through 2008, according to a 2004 forecast by PricewaterhouseCoopers LLP. Microsoft (NASDAQ:MSFT) expects to release of the next-generation Xbox later this year. For Gamespot, these factors may prove to be a winning combination.
Know the score in the world of video games:
- Are the game makers getting desperate?
- Where's the power in this segment?
- Dave Marino-Nachison digs into Gamestop.
Both Electronics Boutique and Best Buy are Motley Fool Stock Advisor recommendations. To find out which other companies make the list, subscribe today risk-free for six months.
Fool contributor Timothy M. Otte considers meeting John Madden a few years ago to be the highlight of his otherwise boring life. He welcomes comments on his articles and owns stock in Wal-Mart, but not in any of the other companies mentioned in this article.
