GameStop - The Bar Bell Company

Many on this board believe that NPD data is not necessarily indicative of GameStop performance. I happen to agree based on the Bar Bell Theory.

GameStop has two big earnings drivers going for it that allow it to outperform a weak or relatively weak software sector:

1. Used Games. On the low end they have a very successful and dominant used game business that accounts for almost half of their profits. And to boot, this business is growing and is counter cyclical outperforming in weak financial times.

2. New Games/Launches. On the full price, high end of the spectrum they have significant market share of the new game market. And, yes, they are taking share on the full price launches as well. For example, by some estimates they sold close to 50% of MW2 at launch, 2.5 million copies!

So what is in the middle of the bar bell?
The middle is long but narrow, where all the weak selling games lie, whether duds or back catalog sales. This is where the industry is suffering particularly hard, and luckily for GME stockholders they are buffeted to a great degree by the two large bulges on each side of the bar bell (used + AAA new games).

Infact, it is likely that GameStop is contributing somewhat to weakness in catalog sales. Let see, we know GameStop's used business has grown at a 20% clip this year. We know they have perfected and significantly increased their penetration of the buy-sell-trade model. The model works because gamers have learned to trade their old unwanted and unused games towards credit towards either a new game or another old game. For example, about 20% of the purchase price of MW2 was paid for by trade credits. Its hard to believe this "repurposing" or "recycling" of games would not have an effect on new game sales. Perhaps not the best news for software companies, but for GameStop it's almost too good to be true. But it is true and investors ignore or misunderstand GameStops business model at their own peril.

What about the sales shortfall of music software is that hurting GameStop?
Yes, the sales of music based games have missed estimates by a huge amount this year. It definitely hurts revenue and profits as these kind of games had a particularly high selling price (particularly the ones bundled with instruments). By some analyst accounts the shortfall in this one subsector accounts for most in the shortfall in sales this year.

But, and this is A BIG BUT, this SHORTFALL is not new, it should be fully factored in managements Q-4 guidance. Remember, management INCREASED guidance to a range of $2.45 - $2.65 on the Q-3 earnings call on November 19th. By the way, these would be record earnings. Management ALREADY knew the music influenced games were very weak as most had been launched PRIOR to the earnings call. In fact, during call, management emphasized confidence in Q-4 based on the four monster AAA titles of the quarter: MW2, AC2, L4D2, and Mario Brothers. I don't think they were counting on much support from the music games, and I certainly don't think they will miss estimates either.

So in conclusion, we could have a relatively weak NPD number, and GME, the Bar Bell company, could still meet its earnings target or even beat them!