GameStop to grow, in the face of slumping industry
After a new report from the NPD Group finds that the video game industry has suffered its biggest single-month loss since 2000, Wedbush Morgan Securities predicts GameStop will continue to grow in spite of lowering their second quarter estimates.
According to the report, which was released last Thursday, total industry sales for June fell by 31 percent to $1.17 billion in a year-over-year comparison.
This represents the largest single month loss since September 2000 when the industry dropped by 41 percent.
Hardware sales suffered the sharpest decline, falling 38 percent to $382.62 million, while software shrunk by 29 percent to $625.79 million for the month.
Also adding to the anxiety around this sobering report is the fact that this is the fourth consecutive month in which sales have contracted, further dispelling any lingering myths that the video game industry has remained "recession proof."
There were a few bright spots in the write-up, particularly for the Xbox 360, which was the only current platform to see an increase in sales from last year.
Anita Frazier, NPD Group analyst, also noted a recent segmentation study from her company, which indicates "that more than 4 million new "players" have entered the games market since last year."
This falls in line with another recent study that found larger amounts of people are spending more time playing video games.
So certainly, there is more than enough demand to fuel the industry.
The problem however, is that with the rise in the purchase of used software as well as the proliferation of free games, consumers are diverting their money away from traditional sources causing the industry as a whole to suffer.
Fortunately for GameStop, these funds are heading their way, as Wedbush analyst Michael Pachter anticipates the sale of used video games to continue to be the company's ultimate saving grace.
Pachter said, "This year, GameStop will likely grow earnings through used game growth. As a quasi-monopoly, the company is well positioned to compress the time between new game releases and trade-ins, driving used game pricing higher."
He said that this growth is likely to continue until 2012.
However, with entries in this segment by retailers such as WalMart, further expansion could be limited afterwards.
Unfortunately in spite of these factors, Wedbush still lowered its second quarter estimates for GameStop from $1.82 billion to $1.64 billion. Earnings per share were also dropped to 26 cents from 34 cents.
As Pachter explained, "We do not expect a dramatic improvement in July sales, leading us to expect that GameStop will report second quarter results well below guidance and consensus estimates."
