It May Be "Game Over" For GameStop Soon

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Gamestop
It may not be long before GameStop (GME) becomes more Stop than Game.

The video game retailer is coming off another disappointing quarter. Sales plunged 11% to $1.55 billion, well short of the $1.61 billion that Wall Street was expecting. Same-store sales fell by a problematic 9.3%.

It gets worse.

Even the thrifty die-hard gamers are now staying away.


I'll Give You $7 for That Old Super Mario Game

Video game sales have been sluggish for three years, but GameStop has survived on the strength of its resale business. The chain's thousands of small-box stores will gladly take in your pre-owned games and gear in exchange for store credit or a little bit of cash.

GameStop then refurbishes the consoles, cleans the discs and cartridges, and sells them as discounted pre-owned items.

Gamers complain that the chain is ripping them off, and they're probably right. GameStop offers so little in credit that even at marked-down resale price it's where the chain scores its thickest profit margins.

Well, either consumers have caught on or they're no longer interested in playing older games. Pre-owned sales fell by a whopping 11% in GameStop's latest quarter.

There Isn't Always an Option to Continue

This was supposed to be the last line of defense at GameStop. As software publishers and players embrace digital delivery, there isn't necessarily a need for a physical retailer as a middleman.

Software companies won't shed a tear for the demise of GameStop. Keep in mind that they only get paid on new releases. And developers and royalty-collecting console makers don't collect any money on pre-owned sales.

Gaming websites reported last year that Microsoft (MSFT) and Sony (SNE) were even considering either going all digital or incorporating features that would prevent secondhand games from playing on the new consoles that should hit the market within the next two years.

However, pre-owned sales were supposed to be resilient. Older games were supposed to have long shelf lives if the discounts were ample, and this business was supposed to continue thriving as penny-pinching gamers wax nostalgic.

Well, those days are apparently over.


It's a Model in Flux

It was just three years ago that Activision Blizzard (ATVI) raised the bar -- or at least the bar chord -- with the release of Guitar Hero.

GameStop executives were even exploring ways to grow their store space to accommodate the plastic guitars and Rock Band drum kits that were all the rage.

Well, that rhythmic music craze died quickly. Activision Blizzard went on to ax the fake guitars, and GameStop went back to gamers who were starting to turn to smartphones and tablets as outlets for cheap casual and social games.

Obviously there's no comparison between a $60 copy of Skyrim and a $0.99 Angry Birds app, but for mainstream audiences it's been more than enough. There's a reason that physical hardware and software sales in the video game industry have been freefalling since 2009.

Where does that leave GameStop?

With its high-margin resale business teetering, net income plunged 32% in its latest quarter. GameStop may point to its digital and mobile sales as growth markets, but those two categories added up to just 11% of GameStop's sales this past quarter.

Things seem to get worse with every passing quarter.

The Ever-Shrinking Small-Box Retailer

Back in March, GameStop was targeting positive comps of 1% to 5% for the entire fiscal year. Two months later the outlook for same-store sales was down to between flat and off by 5%. In last week's report, GameStop's eyeing comps to fall by as much as 10% this year.


GameStop has a clean balance sheet. The stores are still profitable. It's been buying back shares – sadly, at higher prices -- to keep earnings on a per-share basis respectable.

However, this story doesn't end well.

It's been 10 months since my original "Why GameStop Will Never Be Great Again" article, and the stock has shed a quarter of its value. Even with a beefy dividend that was hiked last week, investors know that GameStop's relevance is on a downward spiral.

It was a good run, but the market's ready to play a different game now.



Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Activision Blizzard, Microsoft, and GameStop. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and Microsoft, creating a synthetic covered call position in Microsoft, creating a synthetic long position in Activision Blizzard, and creating a modified stock repair position in GameStop.

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110 Comments

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Bobby H.

Jesus Christ people. GameStop sells their games, consoles & accessories at list price. Granted you may be able to find them cheaper somewhere else. But just because GameStop sells them at list price "they're ripping people" off? LMAO!!!!

Me personally, I prefer going to an actual and buying games & stuff than buying it online. Granted if I find it on Amazon 10-15 bucks cheaper I'll pick it up there. To me there is nothing better than going to store & just browsing the shelves and see if anything interests you.

April 18 2013 at 3:27 AM Report abuse rate up rate down Reply
David Scott Hanes Jr

As an ex manager from gamestop I saw this coming back in 2010. Filling out paper work at night & seeing the numbers explained it all. Early morning conference calls with DM's freaking out, telling us to push more preorders & to sell more power reward cards. Back in 2011 they were pushing preorders so hard but acted like we weren't in a recession. So they acted shocked when preorders weren't picked up & people asking for their 5 bucks back. People may not realize this, but canceled preorders get the employees in trouble, which hints to why when you cancel a preorder they try to get you to preorder something else instead.

Towards the beginning of 2012 things were shaking up. Never did business during the weekdays, people getting fired left & right, write ups for not meeting preorder goals and even a mandatory percent of pick ups for preordered games within 4 to 5 days or the manager gets in trouble.

Did you know most of the people selling you games there actually don't even play games? They just read internet blogs or listen to game savvy employees & customers to explain the games.

After I left in April of 2012, I went digital everything. Steam is awesome & you get much better deals. Plus buying used doesn't make the creators of your favorite games any money what so ever unless you need to buy an online pass which gamestop is more than happy to help you with. Gamestop will be around for a few more years though. I say within the next 5 years they will fade away.

January 20 2013 at 2:12 PM Report abuse rate up rate down Reply
Eric

The reason gamestop is falling short is that people are tierd of getting ripped off.I have bought 4 systems in the past 5 yrs that were broke .Yes 4 times two 360s a ps3 and a DS that were one of their lovely refurbished machines.I always told myself that I was done with them but always find myself going back because they were the only store around.Now today I go in to trade in 4 games 2 were good games that were both over 20 bucks on their used shelves.They offered me 8 bucks ummmm I dont think so! I kept my games I have found a new store that has lots of the old classic stuff and good trade in prices......goodbye gamestop im done giving you my money.With all the trips ive made to take bad discs and systems back you owe me enough gas money to pay for a new 360 and ps3.I will go to Video Wizards where they give you a good deal and fix your discs if their scratched plus I can find the old stuff that I still love to play from time to time.

November 14 2012 at 10:22 PM Report abuse -1 rate up rate down Reply
Ghastper

"Gaming websites reported last year that Microsoft (MSFT) and Sony (SNE) were even considering either going all digital"

that is an absolutely terrible idea! I'm pretty sure it will sell well, but to make it go all digital is giving too much power for hackers to just give the game out for free! that is just one reason why such a thing will fail, not only will it make collectors mad, it will render consoles somewhat useless without an upgrade, like the need to download more memory. the PSPGo may have been a somewhat success, but many fanboys (including myself) hated it for the sole fact it couldn't read UMD's, making our games useless! the safest thing to do if you go all "digital" is to somehow make it an online gaming service,(which i'm pretty sure hasn't been thought up yet) to save hardware space, but even then many people will probably hate the idea, as not everyone cares to go online just to play a game, and (believe it or not), not everyone has internet.

One final thing, i may be over-stepping my boundaries here, but the whole part about making games useless to consumers who like to buy used games can easily be overpassed with a hacker's tools and knowledge. Maybe if this is such an issue, Microsoft and Sony can combat this by selling their own "data erasers" or lowering shelf life. Sure, these companies will end up looking like the greedy pigs of the gaming industry, and people will have to stock up on their favorite titles, but the only viable solution in site is to make the life-span of these games short, or encrypting them to a single console.
And anyone reading this last paragraph can see all the flaws in my statement, but it really is the only way, pending on how cold these people are willing to get for a few more million/billion dollars.

November 06 2012 at 3:51 AM Report abuse rate up rate down Reply
JWest

Gamestop: A failure is you! A failure to adapt to the changing market. As we speak forward thinking services like Steam and EA's Origin are starting to take hold. I imagine in the years to come other publishers are going to be following in Steam and Origin's shoes and start to offer their goods digitally. But here's the rub: no one is going to want a dozen apps running on their PC/Mac/Phone etc. Wouldn't it be better to create one centralized digital location for all of this? That's where Gamestop can come in. But the fools that run it are too dumb to see this. In business if you can't adapt, you die. Right Blockbuster?

August 31 2012 at 5:38 PM Report abuse rate up rate down Reply
JWest

Gamestop: A failure is you! A failure to adapt to the changing market. As we speak forward thinking services like Steam and EA's Origin are starting to take hold. I imagine in the years to come other publishers are going to be following in Steam and Origin's shoes and start to offer their goods digitally. But here's the rub: no one is going to want a dozen apps running on their PC/Mac/Phone etc. Wouldn't it be better to create one centralized digital location for all of this? That's where Gamestop can come in. But the fools that run it are too dumb to see this. In business if you can't adapt, you die. Right Blockbuster?

August 31 2012 at 5:38 PM Report abuse rate up rate down Reply
goslingsawagreen

well give people a deal instead bait and switch with the used games

August 26 2012 at 2:13 PM Report abuse rate up rate down Reply
street.spirits

if digital games are cheaper i would be all for it

August 25 2012 at 7:18 PM Report abuse rate up rate down Reply
Mr Bismarck

As a PC Gamer, Game Stop died years ago.

This schadenfreude is delicious.

August 25 2012 at 9:57 AM Report abuse rate up rate down Reply
Gregory Wagner

Now you all know that the term (Changing with the times) really does suck after all.

Problem: Lazy fatass kids, teenagers, young men and adults Do their shopping Via phone or online!

Solution: GET OFF YOUR FATASSES, AND WALK TO WHERE YOU WANT TO GO!

Your phones can't wipe your asses, wash your cars or feed you. So don't blame GameStop or there employees for ALL OF YOU ditching them and stupidly putting your entire lives (probably your SSNs too) online. Bunch of fat, lazy fools! YOUR FAULTS, NO ONE ELSES!

P.S. Unlike some of you pissers and moners, i enjoy (and still do) every privilage i get when i walk through their doors, its like Game heaven!

August 25 2012 at 6:55 AM Report abuse rate up rate down Reply