GameStop's Outstanding Numbers

It looks like my love for Gamestop has translated into some big gains.

Shares of GameStop gained $4.74, or 10.9%, to $48.16, after the company
announced second-quarter earnings that grew 581.3%, to $21.8 million, or 14
cents per share, from $3.2 million, or 2 cents per share, a year ago. Analysts
polled by Thomson Financial expected earnings per share of 9 cents for the
period ending August 4.

The stock was up from $38.98 when I started to take a look at it to $47.45 today. A nice 20% paper gain in 5 days. The stock still seems pretty well poised for more gains in the next few quarters due to that lineup of cool new games I talked about. The stock is priced to perfection at a 44 PE though This tidbit could be a key to further margin expansion as well:

Used video game sales continued to be incredibly lucrative for GameStop.
Like other game retailers, GameStop allows customers to trade in old games at a
steep discount for new games. GameStop then marks up the trade-ins and sells
them at a handsome margin.

GameStop earned $173.2 million on used game sales at a gross profit percent of 48.5%. That towered over the gross profit percentage earned by new game hardware and software sales, which were 7.3% and 20.3%, respectively.

I think GameStop should try to expand its Used Game reach by starting an online market to buy and sell used games. They could start an Ebay store or even do something with their website where you will be able to buy used and sell used games online. The buyer will then pay a shipping cost or pick it up at one of their stores for free. The seller, on the other hand, would drop off the game at a nearby GameStop (where they might buy some additional product) then their account will be credited.

Of course they won't offer any first run games for sale for a certain period of time to prevent the used market from eroding their current game market. I think this move would expand their reach and allow them to corner the market in used games. This segment really doesn't have any credible competitors that could challenge GameStop once they got rolling. I don't see Best Buy stocking rows of used games and buying games from the gamer in need of cash.

I have to say that any business where you can charge like $10-$15 for a used game and turn around and sell that same game for $25-$30 is great for gamers and GameStop alike. The gamer gets games at a discount and an outlet in which to get rid of games that they have already passed. While GameStop gets to pocket the spread. It is a win-win

Watching GameStop

Gamestop (GME) has just launched their Monday Night Madness event to kick off Madden 2008. The stock however has been trading pretty flat in a range of about $38-$39 in the past few days. Part of the reason for the sluggish performance is the push back of GTA4 to 2008 which will make for lower revenues in the Christmas season.

I think this will be small potatoes because the game hasn't been delayed indefinitely or anything like that. When it comes out it will be a shoe-in for the top game of the first quarter of 2008. I would expect that quite a few gift cards will be hoarded to plunk down on this game.

In the meantime there will be a pile of category killers coming out for the different platforms. First of all we have Madden 2008 which will be a huge seller if the past games are any indication. The last game sold 6 million copies and now the installed base for the PS3, Xbox360, and the Wii are much bigger then last year.

Then we have Bioshock on August 21st. I have read quite a bit about this game and from what I see it is going to be big. It has lots of customisable game play and tries to stretch the limits of the Xbox 360. Also the visuals are stunning and it looks like the kind of game that you may have bought your Xbox360 to play. Then we have Halo 3 coming out on September 25th so the Xbox360 will have lots of great games in the near future. Halo 3 will be huge and it will sell millions of copies no matter what.

Then we have Assassin's Creed coming out September 1 for the PS3. If this game lives up to the hype it will be one of the reasons why people will buy a PS3. From what I have seen the graphics are outstanding and it used the PS3 graphics and processor as much as possible. It may be the kind of game that actually makes people buy a PS3.

Another top seller will be Guitar Hero 3: Legends of Rock which comes out on October 29th. The Guitar Hero series has been a huge success and this new one will probably do as well or better then the other versions have for Activision. Also EA will bring out Rock Band in November hot on the heels of GH3. If Rock Hero is a big seller for EA (it sure looks that way,) they will have a get a nice margin bump from selling the guitar, mike, and drum add-on peripherals. These babies will raise the average selling price of each copy of the game and bring in a pretty good windfall for EA in the 4th Quarter.

In any case, each one of these games will be great for GameStop since gaming is one of the more recession proof entertainments out there. It seems that GameStop has doubled in that past few months since people are looking at the stock as a way to play the console switchover without having to bid on the higher risk gaming stocks. If they can keep same store sales up and people keep buying games like crazy GameStop will look cheap at $38 a share.