GameStop Used Sales to Limit Damage from Industry Decline

The latest NPD sales data for June revealed a fourth consecutive month of decline and an even bigger decrease than expected. There's no doubt that the economy is finally taking its toll on the video game market in the U.S. and retailers will feel the pinch. Luckily for GameStop, the video game giant can still rely on its near-monopoly of used titles.

Wedbush Morgan Securities today lowered its Q2 (ending July) estimates for revenue from $1.82 billion to $1.64 billion and earnings per share from $0.34 to $0.26. For the full year, Wedbush now forecasts GameStop to produce revenue of $9.22 billion and earnings per share of $2.85. FY:10 estimates were also lowered (revenue to $9.64 billion, and earnings per share to $3.24).

"Company guidance called for same store sales of -8% to -11%, and it is clear that the company is tracking well below this level. We do not expect a dramatic improvement in July sales, leading us to expect that GameStop will report Q2 (ending July) results well below guidance and consensus estimates. As we believe that the company was able to drive increases in same store sales from its used games business, we now expect it to deliver comps of -19%," said analyst Michael Pachter.

He added, "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. With higher pricing comes disproportionate growth, higher gross profits, and higher EPS. We think that there is great potential to increase used game sales in Europe dramatically, while growth will be more modest in the U.S. While rumors of GameStop’s imminent demise are premature, competition in the video game category is increasing. Several retailers are vying for used game market share, and a transition away from packaged game sales has begun. These factors could limit GameStop’s EPS growth after 2012, limiting the stock’s multiple to high single digits."