GameStop Sales Decline On Games Biz's Weak Summer

The weak economics of the games business this summer is impacting major specialty game retailer GameStop. Although sales were down only slightly in its second fiscal quarter, dropping 3.7 percent to $1.74 billion, comparable store sales fell 14 percent on weak console sales and few strong software releases. The top five selling games during the quarter were THQ’s UFC 2009 Undisputed, Activision’s Prototype, EA’s Fight Night Round 4 and NCAA Football 2010, and Atari’s Ghostbusters, says the retailer. Even with depressed consumer spending, however, GameStop still reported the second-highest profit for the traditionally slow Q2/summer quarter in its history. Although it set its record last year with $57.2 million, this quarter's 32.3 percent year-over-year decrease to $38.7 million is its next-best performance. The shift of highly-anticipated titles like BioShock 2 and StarCraft II out of the holiday quarter means that the retailer has to lower its forecast for the rest of the calendar year. This is even after factoring in a planned year-over-year increase in new software sales for the period, thanks to debuts for Call of Duty: Modern Warfare 2, Assassin’s Creed 2 and Halo 3: ODST. GameStop now expects a decline in comparable store sales of 6 to 11 percent on the year. But on its results call to analysts, GameStop said it expects its impressive margin on used games sales to stay high -- in the 48-50 percent range over the back half of the year, as long as the retailer doesn't encounter the need to implement aggressive promotions around its used games business. Asked about whether he expects price cuts for rival consoles to follow Sony's new $299 PlayStation 3 Slim, DeMatteo said GameStop is actually factoring in such an occurrence into its third-quarter forecast. "Historically, what has happened is that the other manufacturers will follow... others with a price reduction," he said. "We assume in our forecast sometime in Q3 that will occur -- we don't have any data on that, though. But we have an assumption it will." "Due to the effects of the recession and strong prior year comparisons, the video game industry experienced a sharp decline in consumer spending during the quarter," says CEO Dan DeMatteo. "Looking ahead, as the new title release schedule improves, we expect positive earnings growth in the back half of the year." [UPDATE: Comments from analyst call added.]