As we approach the dissemination of November NPD data, let's look into VGCharts sales number estimates. It may help prepare us for what's coming for GameStop (NASDAQ:GME).
Part I - November Numbers (1st 3 weeks of 2009 vs. 1st 3 weeks of 2008) + Analysis
Below are my findings in three comparisons (Top 20 games, Top 10, Bottom 10 of top 20).
Sum of Top 20 Titles
Nov 09 (1st 3 weeks) - 12,761,000
Nov 08 (1st 3 weeks) - 9,640,000
= 32% increase
Sum of Top 10 Titles
Nov 09 (1st 3 weeks) - 11,193,000
Nov 08 (1st 3 weeks) - 7,58,000
= 48% increase
Bottom 10 of Top 20 Titles
Nov 09 (1st 3 weeks) - 1,568,000
Nov 08 (1st 3 weeks) - 2,060,000
= 23% decrease
Part I Analysis
1) Overall, sales are solidly higher than in 2008 - a 30% increase, clearly a huge number, and even better in the most important quarter of the year [UPDATE: 30% applies to the top titles; overall should have read: a 10% increase].
2) The top titles in 2009 are selling many more units than the top in 2008. Looking closer, the monstrous sales of Activision Blizzard's (NASDAQ:ATVI) Modern Warfare 2 account for most of the 30% difference. Yes, just one mega title makes that much difference.
3) Even if we only look at the Games ranked 3-10 (taking out the top 2, thereby taking out MW2 from the mix) we find that the bottom 8 of the top 10, still performed 9% better than last year.
4) For games ranked 10-20, the comp goes negative 23%, a pretty sizable drop. Sales are concentrating more on top titles.
Part II: Broader Observations/Implications
1. A HIT DRIVEN INDUSTRY: As Gamestop management has been saying all along, the game industry is "hit" driven. Sales are driven by hot games. The weak comps earlier in the year were in large part due to a lack of major game releases vs. 2008. This is not to say we have not had some disappointments, because we have. For example, the music genre represents, for the most part, a good part of the sales declines in the first part of the year, due at least partially to a lack of strong titles being released.
2. MORE HIT DRIVEN THAN EVER/"WINNER TAKES ALL": The industry has always been "hit driven" but there is a definite trend towards concentration of sales on the top games (and less sales for everyone else). So there is a select tiny number of mega winners (ex: MW2/GTA), a few more solid performers (ex: Halo/Assassins Creed II), and many more losers.
The game companies all recognize this trend, and are all "focusing/investing" on fewer, but higher quality titles.
3. THEORY AS TO WHY THE ABOVE TREND: The growing installed base of all the game systems is driving top game sales. Higher installed base correlates to greater sales of blockbuster must-have games.
Your average gamer is concentrating his/hers limited resources on the sexy hot titles, and passing on all the rest. This is probably a trend made much worst by the poor economy, where people are forced to be more selective and to play it safe. If you can only buy 2-4 games in a year, which would you pick?
Furthermore, the trend is further magnified by the game companies that are reacting to it. They are investing in quality, proven sequels, and then boosting their advertising on these games. The trend is reinforced and made stronger.
Part III: Relevance to GameStop
1) Both the recent Wal*Mart (NYSE: WMT) promotion and the Take Two Interactive (NASDAQ:TTWO) blowup are non-events.
WAL*MART
The Wal*Mart promotion leaves out 3 of the top 4 games, and Left 4 Dead 2, the one top game on sale, is not heavily discounted. GameStop's price is actually cheaper on that one. So it's much less significant if they are discounting games that are not current best sellers, since there is low volume in these promoted games anyway.
Dropping pricing on older titles or ones that are not performing is a natural practice in the industry or any business. Wal*Mart's public relations department was just smart to sell it as promotion on "25 Top Games" but they left out the fact that likely 80% of sales are coming from the 3 top titles which they did not include in the promotion. The $50 gift card on the Wii is real news, and probably has some affect on Gamestop (though limited), but the rest of the change will have a minor impact, if any.
So why all the fuss in the media? Perhaps it's a lack of articulate counter attacks by analysts who know better? In any case, there is no evidence of an unusual price war. Yet, GME stock was hammered.
TTWO NEWS
As if the sell-off in GME was not steep enough on the Wal*Mart exaggerations, GME was further hit after TTWO's greatly disappointing guidance.
But Take Two only has one moderate hit with Borderlands in the Top 10 in November (ranked 8th in week of Nov 7th, with 92,000 copies; and 9th week of Nov 14th with 74,000). This compares to around 5,000,000 of MW2 just in the week of Nov 14th. In other words, sales of MW2 are more than 50 times more relevant.
Take Two has a very weak line up this quarter, and is almost irrelevant given the "Winner Takes All" trend. So what is TTWO going to do going forward? Hopefully, for their own sake, they will focus on fewer titles and invest more in quality and promotion.
2) MW2 is a MONSTER for GME
We know that MW2 sales are big, and probably higher than the already high estimates. How big is big? For the first two weeks of its release (Nov 14 & 21) it accounts for more than 50% of sales of the Top 20 games sales. Winner does take all!
And guess who sold more than their fare share of this baby? GME, of course, which keeps taking larger and larger share of mega selling titles and launches. In fact, it's a major player in the launch itself.
This probably holds for other top sellers in November/December. So why is GME down 10% on the Wal*Mart news, and down more than 20% since recent highs?
Part IV: Overall Conclusions/Caveat
1. Despite the recent "bad news", the drivers for Q4 GameStop earnings (high share of hit games + used sales) are intact. I give an earnings "beat" a much higher probability than an earnings "disappointment" in Q4 despite current investor perception. Q4 will be a record quarter, and perhaps a blowout record quarter for GME, in the midst of a recession.
2. The roster of games for Q1 is very strong as many AAA titles were moved from 2009 to 2010. A record Q1 is coming, and the year over year comps will be very easy.
Longer term, it's unclear whether digital downloads will hurt the industry, whether stronger competition from Best Buy (NYSE: BBY), RedBox video game rentals, streaming, etc. will have a negative impact. But for now GME is the clear and proven champion in what is still a growth industry. And to boot, GME is aggressively gaining market share quarter after quarter. Those are the facts and that is the real trend until proven otherwise (which has yet to happen).
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Part V: Bonus Section (Looking at VGChartz Data for week of November 28th) -
The VGChartz numbers for the black Friday mega week of November 28 came in at 25%+ over last year.
While this may or may not be accurate, note that factoring the VGChartz results for the previous three weeks of November, games are up about 32% year over year (Nov 09 623 million vs. Nov 08 471 million). These are extremely solid numbers. Let's break it down:
2009
Week 4 25.5 million
Week 3 155.5
Week 2 137
Week 1 76
TOTAL 623 million
2008
Week 4 196 million
Week 3 108
Week 2 89
Week 1 78
TOTAL 471 million
Assuming these numbers hold up through December or at least do not deteriorate, the overall industry should have a fantastic Q4. Furthermore, GME has been outperforming and taking share in the industry, so its numbers should be even better.
As we all know, stocks move on expectation and sentiment and all the hyped news lately has been remarkably negative:
1) Disappointing sales in Video Game industry in 2009 (linked to poor economy)
2) Wal*Mart Competition
3) TTWO sickening guidance
4) Disappointing Christmas sales for most retailers
This has brought down Gamestop to around $21 a share. But, the reality appears to be that November will be a blowout month for the video game industry. News should turn very positive soon, and our friends at Goldman Sachs (NYSE:GS) may even come out with an upgrade or some positive comment. Of course, this would be after they load up on cheap shares yet again as they research these same trends. Assuming my deductions are right, we are setting ourselves up for a nice clash of very positive news vs. very poor expectations. That is usually a recipe for a huge upside move.
Something else that is clear from November VGChartz is the strength of the PS3, particularly in the important week of Nov 28th, where sales more than doubled from the prior year (476,500 vs. 198,000). If we combine both sales of PS3 and Xbox, in November they account for 54% of systems sold, vs. 46% for Wii.
Here are their sales estimates for the month for each system:
Wii 09 1,374,000 Wii 08 1,860,000 - Down about 25%
PS3 09 841,000 PS3 08 440,000 - Up about 90%
Xbox 09 805,000 Xbox 08 948,000 - Down about 15%
The PS3 has finally found a price point where its installed base will expand dramatically. Xbox will have to compete, and the two will gain share vs. Nintendo's Wii. But best of all, the installed base on all systems seems to have quite a bit more room to grow as pent up demand for PS3 moves those consoles.
On the software side, software directed at PS3 and Xbox has also significant share gains this November, a trend we should expect to continue going forward.
How is this positive to GameStop? GameStop has always demonstrated it will capture a larger share of the PS3/Xbox gaming dollar than that of the Wii. PS3/Xbox games usually have higher price points, so higher sales of these games are a greater positive to GME revenue and profits. Also, the mega AAA grand event titles such as MW2, where GME has particularly strong market share and competitive advantages, are mostly PS3/Xbox games with loyal "gamer" fan bases.
Disclosure: author is long shares of GameStop
