GameStop’s Focuses On Technology Brands For Top-Line Growth

The Texas-based American video game, electronics and wireless services retailer GameStop (NYSE:GME) reported strong first fiscal quarter results, with excellent performances in all segments of the company. The success of next generation consoles, growth in digital segment and the exponentially increasing technology brands segment were responsible for the strong financial and operational results in Q1. Gross margins widened by 40 basis points to 31.4% year-over-year due to expansion in the pre-owned product segment’s margin rate and higher margins in technology brands businesses as a result of strong wireless promotions. ^[1]

GameStop has recently shifted focus to the technology brands due to the scope of expansion and growth opportunities in the technology sector.  This segment was first introduced in the fourth fiscal quarter of 2013 and deals with consumer electronics, mobile products and wireless services primarily through Simply Mac, Spring Mobile and Aio Wireless stores. At the end of Q1, the company had a total of 6,680 stores including 270 technology brands stores.

Our price estimate for the company’s stock is $47, implying a premium of 15% to the current market price.

See our complete analysis of GameStop

The company projects capital expenditures of approximately $160 million in 2014 with $35 -$40 million for the technology brands stores and infrastructure. During Q1, the segment reported sales of $60.2 million and operating profit of $6 million, representing 6% of total operating profit. ^[2] A total of 52 technology brands stores were added (36 acquired and 16 opened) during the first quarter and the company plans to acquire or build 300-400 stores in 2014.

The company witnessed higher gross margins in the technology brands segment in comparison to the margins in Video Game Brands segment, as a result of acquisition activity in the former over the last two fiscal quarters, offsetting potential margin erosion associated with the lagging new video game software sales. Moreover, the segment’s contribution to revenue growth might play a vital role in the company’s overall market growth.

Simply Mac Stores

GameStop owns and operates a certified Apple reseller selling Apple products in the U.S. under the name Simply Mac. ^[3] Founded in 2006, Simply Mac is the largest Apple products specialist in North America and is a rapidly expanding entity. With over 23 retail locations in 10 U.S. states, it has around 240 employees and has AT&T, the multinational telecommunication brand, as an authorized partner for its iPhones. The Apple products available at the stores include Apple Mac, iPad, iPhone and iPad with warranty services available for each product, unlike other national retail stores that does not provide this additional service.

With its success as an Apple retail specialist, strong employee culture, focus on customer experience and potential growth opportunities in tier 2 & 3 markets, Simply Mac is turning out to be a great investment for GameStop. The video game retailer expects this technology brand to play a significant role in the company’s revenue growth and plans to open 20-25 more stores by the end of 2014 and 50 stores in 2015. Moreover, the company projects around $2-$3 million annual sales per store from this entity with average capital expenditure of $175K per store.  ((GameStop’s Investor Day, April 22, 2014))

Spring Mobile

Spring Communications, Inc. or Spring Mobile is an authorized AT&T wireless retail stores with its headquarters in Utah, U.S. Founded in 2001, the entity currently operating in around 20 U.S. states has more than 800 employees. GameStop acquired Spring Mobile for a purchase price of $62.6 million in November, 2013. During the first quarter of fiscal 2014, Spring Mobile acquired five AT&T resellers for a total consideration of $29.8 million.

The primary reason for GameStop’s interest in Spring Mobile was its partnership with AT&T, which has the second largest customer base in the U.S. Moreover, Spring Mobile is a successful entity, evident by its organic growth both in high and low market share areas.

By the end of 2013, Spring Mobile had 164 stores in the U.S and GameStop plans to open 200 to 250 more stores in 2014. The company projects around $0.8-$1.3 million annual sales per store from this entity with average capital expenditure of $60K per store.

Aio Wireless Stores (Cricket)

The technology brand, Aio Wireless is an AT&T brand providing pre-paid wireless services, devices and related accessories. GameStop acquired this brand as part of its expanding relationship with AT&T and opened 31 Aio Wireless stores recently in selective markets throughout the United States. AT&T recently acquired Leap Wireless, the operator of Cricket, the branded pre-paid wireless stores. This deal indicates the merger of Aio wireless and Cricket.

For the fiscal year 2014, GameStop plans to open 100-150 more Cricket stores with projected annual sales per store of $0.4 to $0.7 million with an average capital expenditure of $60K per store.

The company believes that Cricket wireless entity, together with Simply Mac and Spring Mobile, provides avenues for diversification to the company’s core business.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)

Get Trefis Technology

1. GameStop 8-K SEC filing, Q1 May 2014 [↩]
2. GameStop Q1 earnings call transcript, May 2014 [↩]
3. GameStop 10-Q Report [↩]