The U.S. video game market picked up in August after more than a year of declining sales. Retail sales of console and PC games increased 21% in August, the first positive change in sales since November 2011.  According to research group NPD, video games launched in August accounted for half of the month’s sales, compared with just 24% in 2012. Electronic Arts’ (NASDAQ:EA) Madden NFL 25, which was launched on August 27, was the highest selling console game. Saints Row IV and Disney Infinity were the second and third highest selling games through the month.
Despite the August increase, the video game industry will still be looking at the next generation Microsoft (NASDAQ:MSFT) X-Box One and Sony Playstation 4 consoles, which are expected to be released in November, to revive long-term sales. GameStop (NYSE:GME), which accounts for close to 30% of the U.S. games market, is expected to gain from increased sales that the launch of the consoles will bring. The retailer’s stock has gained nearly 90% since the turn of the year and is now in line with our $48 price estimate.
New video game software accounts for 40% of GameStop’s revenue and 30% of its gross profit. The company has stayed well ahead of the industry through the decline. GameStop reported a 9.3% year-on-year decline in new software sales for the second quarter of 2013 while software sales in the U.S. fell 19.4%. Despite the decline, we believe that gamers are still interested in console gaming and the release of new consoles will revive the market. Sales of popular titles has remained strong, both EA and Activision Blizzard (NASDAQ:ATVI), which accounts for around 17% of the global game sales,  have reported strong sales for their flagship titles like FIFA, Madden, Call of Duty and Skylanders. Sales of the top five titles increased 7% through the first six months of 2013 even as total retail sales dropped.  The August revival has reaffirmed our expectation.
Video game hardware and software sales grew by 60% during the Xbox 360’s first full year in the market while PS3 sales grew by 30%.  We expect a long-term increase in GameStop’s new software sales, starting from 2014. However, the advent of mobile and casual gaming might lead to slower growth in sales than what was observed at the start of the last console cycle.
New Games Will Revive GameStop’s Trading Business
Pre-owned game sales are a big business for GameStop, accounting for nearly 30% of sales and half of the gross profit. Used game sales are highly correlated with new game sales as the sale of new games replenishes GameStop’s inventory. Pre-owned game sales have consistently been around 65% of new software sales for the last four years, and we expect this trend to continue through the next console cycle.Notes: