Why GameStop Will Never Be Great Again

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Why GameStop Will Never Be Great AgainDie-hard gamers know their local GameStop (GME) stores well.

The small-box retailer is the place to go to trade in used games and gear for new things to play. The prices aren't the best, but the stores are convenient and the folks manning the registers are knowledgeable.

For years, this model has worked flawlessly. GameStop is there for every new generation of consoles or handheld systems. All of the hottest PC games are also there. The attractive store economics have made expansion a breeze. There's always cheap rent to be had at a strip mall in the suburbs.

However, the model is starting to come undone, and it may not be long before it's "Game Over" for GameStop.

The Halo Effect

GameStop's latest quarter was a mess. Total sales fell 3% to $1.74 billion, and that was with expansion, a 12% increase in pre-owned sales, and a 69% spike in its nascent digital sales.

How can this be? Well, comparable-store sales fell a mind-boggling 9.1% during the period. GameStop's chunkiest margins have historically been had in secondhand sales of used games and gear, but strength there wasn't enough to stop earnings from tumbling 23% for the quarter.

It's Starting

What's starting? The beginning of the end.

The industry's been in a bind for years. Video game product sales declined 6% last month according to industry tracker NPD Group, and that's the way it's been for most of the months since 2009. GameStop has been able to grow through the downtrend. Cheap expansion and its healthy resale business have kept the retailer growing. Even now, analysts still see the specialty retailer pushing its financial results higher.

GameStop is now trading for a mere nine times this year's projected earnings, and just eight times next year's profit target. This would be a ridiculous bargain if there was any hope that GameStop would be more relevant in five years than it is right now.

Spoiler alert: There isn't.

Brushing Up on Game Theory

Everyone knows why video game sales have been languishing. Die-hard gamers are still buying the latest Call of Duty releases, but casual gamers have moved on. Tending to a virtual farm on Facebook or spending weeks playing a 99-cent smartphone app will do the trick.

GameStop is no dummy. It has made several digital gaming acquisitions. It's too little, too late.

There was a time -- just a couple of years ago -- when GameStop was riding the Guitar Hero and Rock Band crazes. It was exploring opening larger stores to showcase the growing number of instrument controllers that just didn't fit in its small-box scheme. This would have been a costly mistake.

However, now it just can't get any smaller. Everywhere you turn, GameStop's mortality is being questioned. Apple (AAPL) is the new king of casual gaming. Microsoft (MSFT) continues to push its Xbox Live digital marketplace.

Will we still need GameStop in this age of consumer-direct game downloads?

More important to GameStop's model, what will happen to its resale business when we're no longer buying physical games that we can trade in?

Endgame

GameStop is getting desperate. Earlier this year it hinted that it may launch its own gaming tablet, something that would seemingly anger all of its hardware partners. It's now accepting iPod, iPhone, and iPad devices as trade-ins.

The rub is that even as the resale market is dying, Toys "R" Us, Amazon.com (AMZN), and Best Buy (BBY) are copying the model by accepting trade-ins, too. In other words, this is going to be a brutal fight to the end of this shrinking pie.

If anyone thinks that we'll still be buying game cartridges and discs in a few years, they probably missed the memo. The digital revolution is here, and GameStop may have some skin in that game, but it will never be the neighborhood force that it used to be.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Microsoft, GameStop, Apple, and Best Buy. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Amazon.com. Motley Fool newsletter services have recommended creating a bull call spread position in Apple and Microsoft. Motley Fool newsletter services have recommended writing covered calls in GameStop.




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8 Comments

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Ghastper

I'm pretty sure the whole "iPod, iPhone, and iPad devices as trade-ins." is to compete with not only those other stores, but mainly CEX, which has been accepting in all devices like these (games as well), and at better deals.

November 06 2012 at 4:07 AM Report abuse rate up rate down Reply
tr

The truth is no one wants to pay $60 for a game.Lower the prices and maybe they will sell more.

October 26 2011 at 8:16 PM Report abuse rate up rate down Reply
Mom

Why do people choose games like farmville over Zelda? Seriously who in their right mind would do that?!

October 24 2011 at 8:13 PM Report abuse +1 rate up rate down Reply
1 reply to Mom's comment
Ghastper

Casual gamers and housewives

November 06 2012 at 4:07 AM Report abuse rate up rate down Reply
evonie55

since when does playing a game on a small ass screen better. Watching movies?, surfing the net? BULL
In the next 10 years we are going to have a society that's blind and deaf. Doing everything on a phone screen is crazy
I'd rather take care of the one thing you can't replace....your eyes!!!!

October 24 2011 at 7:13 PM Report abuse rate up rate down Reply
1 reply to evonie55's comment
Forte

I'd wager in the next 10 years we'll be surfing the net and watching movies WITH our eyes using Picture in Picture implants.

OK, maybe the next 50 years. But the human augmentation Singularity is the next logical step, computers are getting so small they can't even be properly manipulated physically.

October 24 2011 at 7:39 PM Report abuse rate up rate down Reply
northsailor11

This article is financially accurate when regarding Gamestop's income statement. The Motley Fool however only hints at one of Gamestop's biggest flaws, the pricing structure. A majority of Gamestop's customers are simply fed up with returning games and receiving a fraction of their value in store credit or cash. Another drawback to the company's pricing is having to pay full price for a game when the market value (months later) is significantly less. Because of these problems, consumers have turned to buying gaming products online and at other retailers. For the most part it seems to me that Gamestop, not the financial market, has dug its grave.

October 24 2011 at 12:40 PM Report abuse rate up rate down Reply
1 reply to northsailor11's comment
Forte

A combination of this and the emergent digital markets which are presently, untrackable - Steam is a juggernaut in digital retail and doesn't release it's sales figures, several F2P ('Free to Play') games such as league of legends or the facebook giants do direct business with the consumer, etc.

I find it amusing they cite Microsofts digital servics when XBLA (Xbox Live Arcade) and GFWL (Games for Windows Live) are abysmal services, universally reviled by the PC digital crowd and only used when required by bundling or hardware (such as playing on the 360 console).

October 24 2011 at 7:37 PM Report abuse rate up rate down Reply