GameStop, the worlds biggest video game retailer, managed to grow in its fourth fiscal quarter thanks to sales of used games and new store openings. Even in the age of digital distribution from rivals such as OnLive, GameStop plans on opening 400 stores in the coming year.
The Grapevine, Texas-based company reported that sales for the fourth fiscal quarter ended Jan. 30 grew almost 1 percent to $3.52 billion from $3.49 billion a year ago. Earnings were $215.9 million, down 7.1 percent from $232.3 million a year ago, though earnings a year ago got a $12 million boost due to a merger. Analysts had expected revenue of $3.45 billion and earnings per share of $1.28. GameStop itself had expected earnings of $1.25 a share to $1.29 a share. GameStop shares are up this morning based on a stronger outlook than expected.
Earnings per share were $1.29, compared to $1.39 a share (including 5 cents a share from one-time merger income) a year ago. Strong sellers in the quarter included Mass Effect 2, Darksiders, MAG, and Army of Two: the 40th Day.
For the fiscal year, revenues were up 3.1 percent to $9.08 billion, up from $8.81 billion a year earlier. Same-store sales (for stores open at least a year) fell 7.9 percent. Net earnings were $377.3 million, down 5.3 percent compared to a year ago of $398.3 million. Diluted earnings per share were $2.25, compared with $2.38 a share a year ago.
The performance was strong, considering overall video game sales fell 8 percent in the U.S. last year as gamers were stung by the recession and game publishers had a hard time matching the blockbuster games of a year before. But the performance shows the power of sales of used games (up 8.8 percent in the quarter), which recession-weary gamers love but publishers hate because they generate no secondary sales income from those used game sales. Overall, GameStop revenue is shifting to high-margin used sales and software sales, from hardware sales. On average, GameStop pays just $7.61 for each used game.
Daniel DeMatteo, chief executive, said GameStop grew market share in the weak economic environment and posted its second-highest earnings year ever. The company will continue to invest in new stores and strategic initiatives with customers, he said. Last week, Chris Petrovic, senior vice president of GameStop Digital Ventures, said at our GamesBeat@GDC conference that the company is exploring options in digital distribution, but generally believed the retail will remain strong for years to come. For instance, GameStop is beginning this month to use its Jolt acquisition to launch sales of a browser-based game, Legends of Zork, on kiosks in its stores. That’s a way for the company to participate in digital distribution sales.
“We are asked why we continue to open new stores,” DeMatteo said on a conference call. He said the company is doing it to gain market share and takes care not to cannibalize same store sales.
For the current fiscal year, GameStop predicts sales growth of 4 percent to 6 percent. It expects a decline in new hardware sales of 5 percent to 15 percent. New software sales are expected to grow 2 percent to 5 percent, and used game sales are expected to grow 5 percent to 10 percent. In 2009, used sales grew 18 percent, while used inventory grew only 13 percent. The overall U.S. software sales market is expected to be up 2 percent. Both the Wii and PlayStation 3 are in short supply. The Wii will likely come into stock faster than the PS 3, and the shortage is expected to abate in the next couple of months.
The company said it plans to spend $75 million opening 400 new stores this year (up from 388 stores added in the past year and 674 stores the year before) and make $125 million in store improvements. It will spend $100 million on acquisitions and investments and buy back $300 million worth of shares. It projects it will close the current 2010 fiscal year with $900 million in cash. On average, the company closes about 100 stores a year.
In the first fiscal quarter, which ends at the end of April, the company expects same-store sales to be flat or fall 3 percent, thanks to lower hardware prices. Big game launches this quarter include God of War III, Pokemon Heart Gold and Silver, Battlefield: Bad Company 2, and Final Fantasy XIII. Nintendo is also coming up with a new version of its handheld game player, the Nintendo DSi XL, later this month. Nintendo is rumored to be coming up with a new Wii console early next year, but the company has declined comment on that and GameStop also had no comment on it.
Overall, GameStop has 6,450 stores in 17 countries. It operates e-commerce sites such as GameStop.com, where downloaded games doubled in the last quarter. But it will be very interesting to see how quickly digital distribution from rivals such as Valve’s Steam and OnLive (which launches in June) eats into sales. GameStop has to watch out lest it become the Blockbuster Video of the game industry.
The console makers and publishers are selling a lot of downloadable content direct to consumers on Xbox Live, WiiWare, and the PlayStation Network. Otoy, Gaikai, Playcast, and others are also preparing launches of online game services that bypass physical retail stores entirely.
Publishers are talking about putting digital rights management on games, and they’re also shifting toward downloadable game content for online additions to retail games. GameStop argues that used game customers are fairly price sensitive and that it is best able to market downloadable game content in its stores. It also argues that publishers should consider adding a lower-priced version of downloadable content for used games.
The company hopes that Microsoft’s Project Natal and Sony’s Move controller will inject new life into the game business this fall. Neither is factored into the forecast this year, since the company doesn’t have a sense yet of how much stock it will be able to sell. But GameStop executives said they were excited about their potential to boost both hardware and software sales.
Digital content prepaid cards generated $170 million in sales in fiscal 2009, up 55 percent from a year ago. That’s a pretty puny portion — less than 2 percent — of the overall sales of $9.08 billion. GameStop is also beefing up its loyalty rewards programs for its customers to keep people coming back to stores. The company plans to launch the new program in May. The program will help it gain knowledge of customer tastes and recommend products for them to buy.