This Winter Can Bring Cheerful Times For GameStop

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Winter is coming! And so is the busiest period for all of the video game retail stores. The American video-game retailer GameStop (NYSE:GME) should be going into the holiday season with high confidence, as the gaming industry seems to have improved in terms of software sales. However, the point of concern is whether the decline in hardware sales would affect the anticipated increase in software sales. The other question that comes to mind is “What can GameStop gain from this period?”

Our price estimate for the company’s stock is $41, which is roughly same as the current market price.

See our complete analysis of GameStop

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Strengthening What Actually Matters

GameStop reported low single-digit revenue growth in its last two quarters, with 1.8% and 3.2% year-over-year (y-o-y) growth in Q2 and Q1 2015, respectively. [1]((GameStop 8-K SEC filing, Q1 2015)) However, in the third quarter of the fiscal 2014, the company witnessed 1% y-o-y decline in net revenues, as the company’s comparable store sales declined 2.3%. [2] The decline was primarily due to a 34.4% decline in the software sales, which was significant enough to more than offset the 147.4% increase in the new hardware sales.

The important point to notice is that the revenue contribution of the software segment was 33% of the total revenues, whereas that of the hardware segment was 22% in 2014.

rev gme

On the other hand, the contribution of the software segment to the net profit was 26.3%, whereas that of the hardware segment was just 7.2%.

pro gme

As a result, the strong performance of the video-game hardware segment last year was not that significant for the company’s net bottom-line performance. The sluggishness in the industry-wide video-game software demand was enough to put the company in a tough position in Q3 last year.

  • Software Sales Expected To Pick Up Pace

According to the NPD sales report, unlike last year, video game software sales for the first 8 months are keeping in pace with its year-over-year comparison, despite any big title names in the industry. [3] This indicates that unit sales per title has increased compared to last year’s figure, as more gamers have now made a shift to new generation console platforms and the transition seems to be almost over. Moreover, the hardware sales for the first 8 months of 2015 has declined 6.5% compared to the same period last year. As a result, the market is speculating that the holiday season 2015 is to be better than last year, considering that more gamers will be eager this season to buy games to try out on the new systems.

softwares sales august

  • Powerful Game Line-up For Holiday Season

Furthermore, top game developers such as Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ: ATVI) are all set to release their core franchises before the holiday season, with some of them anticipated to be even more successful than ever. Activision’s Call of Duty is coming up with the third edition of its most successful storyline: Black Ops. Additionally, Destiny’s third expansion pack is considered to be a mega expansion DLC pack. Electronic Arts’ all-time famous racing franchise Need For Speed is making a return this year, further strengthening up the line-up for this year.  Tom Clancy’s Rainbow Six: Siege is also set to release in December.

Looking at this strong line-up and anticipated improvement in software sales, it would not be a big surprise if GameStop reports a strong double-digit growth in the segment. On the other hand, the declining demand for previous generation consoles will certainly take a toll on the hardware sales. This brings us back to the point that the video-game software segment is a more valuable and significant segment than the video-game hardware segment for the company. As a result, the growth in software sales will benefit the company in the coming few quarters, and the slowing hardware sales will hardly affect the company’s top-line performance.

Trefis estimates the contribution of the software segment to the net profit to improve from 26.3% in 2014 to 26.7% in 2015, whereas the contribution of the hardware segment to net profits is expected to decline 10 basis points.

 Used Video-Game Product Segment To Benefit 

The used video-game product segment works on a buy-sell-trade model, and its sales are highly correlated to the video-game software sales segment. In 2014, the used video-game sales as a percentage of new software sales rose from 67% in 2013, to 77% in 2014. The increase in software sales will boost the sales for this segment as well, further driving the revenue growth for the company.

In conclusion , we can say that GameStop has a lot to look forward to this winter, with Technology Brands and the digital segment proving to be another key driver.

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Notes:
  1. GameStop 8-K SEC filing, Q2 2015 []
  2. GameStop Q3 2014, earnings call transcript []
  3. August NPD 2015 []