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Daniel Lynch

GameStop Corp. (NYSE:GME) is a retail chain selling video game hardware and software. The company has expanded rapidly, growing its store count by 295% over the last 3 years, from 1,514 to 5,123^[1]. With the acquisition of Electronics Boutique and its 2,000 stores in 2005^[2], the company became the largest video game retailer in the world; The company has saturated U.S. mall locations, and is now expanding into strip centers and international locations to drive store growth. In addition to its size, Game Stop differentiates itself from its competitors by carrying one of the largest assortments of used video games. The used business is important to GameStop, as used games are more profitable, with 49.5% margins in 2006 vs. 21.2% for new games.

Like other video game retailers, the company is also dependent on new console releases to drive software and accessory sales. The end of 2007 marks the middle of a new cycle driven by Sony (SNE)'s Playstation 3, Microsoft (MSFT)'s Xbox 360 and Nintendo (NTDOY)'s Wii (see Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii). Retailers, like GameStop, will be much more successful in the middle of cycles and will generally fare worse in between cycles.

Business Financials

The vast majority of GameStop's revenue comes from the sale of video game hardware, software, and accessories in its stores and on its website. In 2006, about 20 percent of revenue came from the sale of new video game hardware, 38 percent came from new game sales, and 17 percent came from sales of accessories and other items. The remaining 25 percent came from the sale of used games. Over the past five years revenue has grown four-fold, from 1.35 billion in 2002 to 5.32 billion in 2006.^[3][4] Operating income has also grown almost four-fold over the same time period from 87.1 million to 333.68 million.^[5][6]

^[7][8]

In recent years GameStop has sought to expand the company worldwide. After its acquisition of Electronics Boutique in October of 2005, the combined company became the largest video game retailer in the world. GameStop operates in sixteen countries, focused mainly on Australia, Europe and Canada. As of February 2007, GameStop operates 979 stores internationally. ^[9]

^[10]

Key Trends and Forces

• The Video Game Industry is Very Cyclical: Video game producers and retailers are extremely dependent on new video game hardware to drive business. 2007 marks the beginning stages of a cycle driven by Sony (SNE)'s Playstation 3, Microsoft (MSFT)'s Xbox 360 and Nintendo (NTDOY)'s Wii (see Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii). All three systems debuted in late 2006 or early 2007. Hardware sales are usually greatest in the third year of a cycle, and software sales are greatest in the fifth year.

• Expanding Target Market: In the late 1970's when video games were first created, the average age of a gamer was ten years old. The average age of a gamer today is 33 years old, according to the Entertainment Software Association.^[11] In addition, 25 percent of Americans over the age of 50 play video games on a regular basis.^[12] More and more people are spending money on video game hardware and software, which benefits the entire industry. Also, young children are spending more time playing video games, and less time with traditional toys and games. Finally, 53% of gamers expect to be playing video games just as much or more than they are now ten years from now.^[13]

1. Female Video Game Use: Video games have traditionally been a male-dominated market, but in recent years the number of female gamers has grown significantly. In 2003 32% of video game users were female, but by 2005 that percentage had grown to 38%.^[14] However, most of these female gamers are casual gamers who play card, word, and puzzle games online. These typically older women are not buying video game hardware and software, but they do make up roughly 42 percent of online gamers. ^[15]

• Increasing Popularity of Video Games: In the past decade video games have become a significant player in the entertainment industry. For the past 5 years video game sales have topped movie box office revenue. Video game sales also grew at a 10.2% compound annual growth rate (CAGR) over the ten year period from 1995-2005, versus a 4.6% CAGR for the movie box office. Although video game use is still a relatively small part of total media consumption (about 2.2% of total U.S. Media consumption per person), it is growing faster than broadcast television, cable television, radio and music. Sales of video game software jumped from 2.6 billion dollars in 1996, to 7.6 billion dollars in 2006.^[16]

Competition

GameStop faces competition from many large retailers, such as Toys R' Us, Target (TGT), Best Buy (BBY), Circuit City Stores (CC), Wal-Mart Stores (WMT), and Amazon.com (AMZN). However, these companies sell a wide range of products, of which video game hardware and software is a small part of their overall business. The large retailers are generally able to offer lower prices than GameStop. GameStop tries to overcome this disadvantage by offering superior service and having a very knowledgeable staff. GameStop also competes with a number of smaller video game retailers, but GameStop is the only publicly traded retailer that specializes in the video game industry. As of August 23, 2007, GameStop's U.S. market share was about 23%. ^[17]

References

1. ↑ GME 2004 10K http://edgar.sec.gov/Archives/edgar/data/1157644/000095013405007222/d24121e10vk.htm
2. ↑ New GameStop/EB entity to control 25% of market http://findarticles.com/p/articles/mi_m0FNP/is_9_44/ai_n13734454
3. ↑ GME 2006 10K http://edgar.sec.gov/Archives/edgar/data/1326380/000095013407007555/d45113e10vk.htm pg. 25
4. ↑ GME 2004 10K http://edgar.sec.gov/Archives/edgar/data/1157644/000095013405007222/d24121e10vk.htm pg. 20
5. ↑ GME 2006 10K http://edgar.sec.gov/Archives/edgar/data/1326380/000095013407007555/d45113e10vk.htm pg. 25
6. ↑ GME 2004 10K http://edgar.sec.gov/Archives/edgar/data/1157644/000095013405007222/d24121e10vk.htm pg. 20
7. ↑ GME 2006 10K http://edgar.sec.gov/Archives/edgar/data/1326380/000095013407007555/d45113e10vk.htm pg. 25
8. ↑ GME 2004 10K http://edgar.sec.gov/Archives/edgar/data/1157644/000095013405007222/d24121e10vk.htm pg. 20
9. ↑ GME 2006 10K http://edgar.sec.gov/Archives/edgar/data/1326380/000095013407007555/d45113e10vk.htm pg. 11
10. ↑ GME 2006 10K http://edgar.sec.gov/Archives/edgar/data/1326380/000095013407007555/d45113e10vk.htm pg. 33
11. ↑ Entertainment Software Association Gamer Data http://www.theesa.com/facts/gamer_data.php
12. ↑ Entertainment Software Association Gamer Data http://www.theesa.com/facts/gamer_data.php
13. ↑ Entertainment Software Association Gamer Data http://www.theesa.com/facts/gamer_data.php
14. ↑ Entertainment Software Association Gamer Data http://www.theesa.com/facts/gamer_data.php
15. ↑ Entertainment Software Association Gamer Data http://www.theesa.com/facts/gamer_data.php
16. ↑ Entertainment Software Association Statistics http://www.theesa.com/archives/ESA-EF%202007%20F.pdf pg. 13
17. ↑ GME 2nd Quarter 2007 Conference Call Transcript http://seekingalpha.com/article/45497-gamestop-f2q07-qtr-end-8-4-07-earnings-call-transcript