How Well Will GameStop Adapt To The Digital Age?

GameStop’s (NYSE:GME) stock has been on an uptrend since the beginning of February as investors put the disappointing video game sales of the holiday season behind them. ^[1] Strong releases like Dead Space 3 helped sales during the month. Our $33 price estimate for GameStop’s stock is at a premium of 20% to the current market price. In this article, we discuss some trends that could move that support our constructive view of the company’s prospects.

See our complete analysis of GameStop

Digital Sales

Despite a lackluster performance during the holiday season, GameStop continued to build on its digital sales platform. The retailer reported a 40% year-on-year increase in digital sales through the nine weeks ending December 29. The digitally distributed video game market has grown by over 200% since 2010. ^[2] This growth has come primarily on downloadable content (DLC) released by publishers to complement physical sales of their video game titles. Activision Blizzard (NASDAQ:ATVI), for example, launched DLC after the launch of its flagship franchise: Call of Duty. Electronic Arts (NASDAQ:EA) also launches DLC for most of its video games including its soccer based franchise, FIFA. EA has been cutting back on the number of titles it releases per year and is instead focusing on earning more than just $60 per unit sold. The company launched 36 titles in fiscal 2011, 22 titles in 2012, and plans to release just 14 titles in 2013.

How Can GameStop Capitalize?

While publishers are able to distribute their own DLC (Electronic Arts uses its online portals, Origin and Play4Free, to earn digital revenues), some customers still prefer GameStop for digital sales. This is primarily because GameStop provides a one-stop platform for customers who wish to purchase DLC from various publishers. The company provides in-store service with associates to inform customers what is available and what is coming up.

GameStop is more than just a retailer; it has become a swap shop where customers can trade in their games and use this money to buy other games. This same business model applies to the digital domain. Customers can earn PowerUp points by purchasing games from GameStop and also trade in credits to purchase DLC for their video games. We believe that GameStop will be able to capitalize on the digital trend in the coming years.

Closing Stores

In a recent presentation at the Goldman Sachs Technology & Internet Conference, GameStop stated that it will close 250 stores in 2013 and open around 60 to 70 new stores in select strategic locations to extend its reach. Of the 250 stores being closed, 200 are expected to be in the U.S. The company is also looking to take over 40 GAME stores in France.

Used Game Sales

There has been a lot of speculation regarding declining used game sales. Game trades are an integral part of GameStop’s business, accounting for nearly half of the cash profits. Sales dropped 16% during the holiday season, but we believe that this is just a temporary lull as the inventory has been declining. This decline might be because publishers are playing a waiting game with the imminent launch of Microsoft’s (NASDAQ:MSFT) X-Box 720 and Sony’s Playstation 4. The number of titles released per year has been declining. We expect that used game sales will pick up in the coming years once the next generation consoles are released. We will analyze this aspect further in an upcoming article.

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1. GameStop slashes same-store sales forecast; shares skid, Reuters, 8^th January, 2013 [↩]
2. Market Shares of Digital Distribution Platforms in 2010-2011, Deals4downloads [↩]