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Varchild2008 (85.05)

Is Gamestop Brand A or Brand X?



August 05, 2011 – Comments (0) | RELATED TICKERS: GME

Bearish Argument #1:   Preowned Physical Gross Margins are greater than Digital Gross Margins and Preowned Physical is going to be cut in half and eventually gone.

Response:   1)  Go find me a copy of DIN's Curse, Mactabilis, Popcap's Games, etc. Preowned Physical in any Gamestop Store.

What's wrong can't find em?  That's because its offered DIGITAL only through Gamestop Impulse.

The point?  Gamestop going digital retail does not mean everything it already offers physical preowned is all that it offers digitally.  There are brand new offerings that Gamestop would otherwise not have in stock to sell to anyone.  Meanwhile, all console systems today and in the next generation are physical copy gaming the notion that we are headed to a ZERO preowned physical universe or even a 50% cut is an over exaggeration beyond common sense.

2)  Well the Gross Margins for a Preowned Physical is still 45% and for Digital is 25% for same title.  That's a huge hit to earnings growth!

Response:  How many copies of that title can you really sell physically preowned?  On one hand you are dependant upon video gamers at some point in time trading that game into your store.  Then you have to devote the shelf space for that title.  When you run out of stock on that title, you again wait days/weeks/months to get another copy from another gamer to sell.

That same title sold digitally can be sold an infinite number of times and you will absolutely never run out of stock.  You'll have the digital game for sale the very day the physical game is available for sale in-store.  You can even sell digital on a pre-order basis. 

You can not sell Pre-Orders of Physical Preowned games can you?

So all of this adds up to a simple fact.... You can sell MORE COPIES of the same game DIGITALLY than you will ever sell physical preowned.  

Now... Everyone that despises Gamestop over future Gross Margins are the exact same people that say they do not care that (AMZN) carries 2% Gross Margins and they have been declining in recent years as expenses have outpaced sales.

So let me get this straight.... It is ok for AMAZON to carry a ridiculously high P/E ratio because of sales increases.... let the Gross Margins and rapidly expanding expenditures be danged?

Yet the outcry of Gamestop's Gross Margins shrinking as it shifts to Digital ....completely ignores the potential to sell far more copies of any particular game, not to mention pre-order deals?

(GME) gets the single digit P/E?

Quantity of Sale is extremely important in a true analysis of Gamestop's future earnings as it promotes IMPULSE and KONGREGATE and other properties in-store and online.

3)  But Gamestop doesn't have digital!

Response:  Gamestop has plenty of digital properties.  Please look at Impulse for a change.
When a game is sold 70% of the sale goes to the Developer/Publisher while 30% goes to Gamestop Impulse.

4)  But Teenagers are addicted to Smart Phones and Tablets....Doesn't this hurt Gamestop?

Response:   Gamestop refurbishes tablets and with JOLT + Kongregate they are starting to build some exposure to smart phones and tablets.  With well over $100 million in cash and over $400 million in cash flow and around 20% of their shares bought back, the company has plenty of resources to continue to expand into the Cell Phone & Tablet market.

And while Teenagers are addicted to Smart Phones and Tablets and some believe Console Systems are obsolete.....Nonetheless, the bright, positive story going on in 2011 is that XBOX 360 and PLAYSTATION 3 sales have been increasing year over year by double digits!

Check the NPD Reports for Video Game Hardware Sales...  They are up solidly.  The weakness has been Video Game Software...  But, a big build up of Console System Sales will eventually translate to a big rebound in Software Sales once more new video games are released and the economy starts generating more jobs. 

July's jobs number was bad but at least it was a big improvement over June.  So, we are not experiencing a Video Game Sector MELTDOWN.   We aren't.   We are just in a deep recessionary period of lower consumer spending along with a dry period in number of titles released per month.

Gears of War 3
Battlefield 3
Call of Duty 3

Look for these titles to help rebound software sales in Q3/Q4.

And look for Gamestop to offer DIGITAL versions to push more copies of these games than they were ever capable of selling before.

So....Have defended Gamestop as Brand A..... or is it still Brand X?


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