Earlier today, leading video games retailer GameStop revealed that its holiday sales were actually flat. We'd become so accustomed to reporting "record" sales for GameStop that when the news arrived we were somewhat surprised. So what happened? While GameStop was quick to blame the economy and shortages of PS3 and Wii, Wedbush Morgan Securities analyst Michael Pachter believes that the company was avoiding talking about the effect its competitors had on holiday business.
"There is a lot to hate about GameStop right now, considering that just four weeks ago, the company issued a bullish press release highlighting its strong November sales. More importantly, the press release was issued 11 days into December, implying that the strong sales trends from November persisted into December. Today, we learned that the sales trend reversed dramatically, resulting in a holiday comp slightly below the low end of guidance, and a likely earnings shortfall far below street consensus," Pachter began.
He continued, "We think it is likely that sales from December 12 through the rest of the month dropped off dramatically, and estimate that the comp for the last three weeks of the month was closer to -15%. While it is possible that the industry suffered a drop off in sales during this period, we do not think that is the case. Rather, we think that GameStop lost market share in the last three weeks of the month."
"Coinciding with the drop off in sales in our conjecture scenario were very aggressive price promotions from Wal-Mart and Amazon. Wal-Mart, in particular, offered huge discounts on Wii hardware (an effective price of $149) all month, and as December wore on, it is clear that the impact of this price reduction drove traffic there," Pachter noted. "Nintendo announced this week that it had sold 3 million Wii units in the U.S. in December (vs. 2.2 million last year), and Sony announced yesterday that its global PS3 sales were up 76% in December, implying strong year-over-year hardware growth. While some of the unit growth was offset by price declines, and there was a likely decline in PSP and Nintendo DS sales, we estimate that hardware sales in December declined overall only modestly. GameStop’s hardware sales, in contrast, dropped 10% in absolute terms, and likely high teens on a comp basis. Thus, it is clear that the company lost market share to its competitors."
"It is somewhat disappointing that the company blamed its poor performance, in part, to the weather and to product shortages, when its competitors were able to deal with the weather and with product supply during December. We think it is likely that Wal-Mart received preferential allocations of Wii and PS3 hardware, but this raises the question of whether we should expect this to happen every year going forward. We think that, in reality, the core purchaser of video games during the last three weeks in December was the gift giver, and we think that customer (who is targeted by big box retailers) was lured by the aggressive promotions offered at Wal-Mart and Amazon. We expect Wal-Mart and Amazon to repeat this aggressive promotional activity at holiday in 2010, and expect GameStop to suffer a similar decline in market share during the latter part of the holidays."
As we stated in the news story earlier, despite the disappointing holiday performance, GameStop is still in good shape. Pachter agrees. He added, "...we think that GameStop is exceedingly well-positioned to maintain or grow its share among hard core gamers, and will remain the destination of choice for the hard core whenever hot new games are released. The quantity of hot games in 2010 is staggering, and their release is skewed toward the first half of the year, suggesting that GameStop will once again gain share during the first two quarters of FY:10. We expect the company to comp positively all year, particularly as it anniversaries easy comparisons from 2009, and think that GameStop will be in a position to guide to a positive comp and solid earnings growth for 2010 when it reports results in mid-March."
