In Depth: The State Of GameStop, Part One

[GameStop is the world's biggest specialty game retailer -- but what can we learn about the state of the game biz via it? In part one of Matt Matthews' Gamasutra-exclusive profile of GameStop's finances, we look beneath the headlines and reveal the company's revenue and profit history in the new and used software markets. Later posts will detail software unit sales and GameStop's global reach.] The name GameStop evokes a lot of strong emotions in the videogame industry. To many consumers, the world's largest videogame retailer is a source of trade-in credit and a ready supply of lower-priced used games. To publishers and developers, GameStop is an essential conduit for reaching a large consumer segment -- but also a competitor, whose used game shelves reduce sales of new product. A wealth of information about GameStop's business is contained in the 10-K filings that the company makes each year with the U.S. Securities and Exchange Commission (SEC). Over the next few days we will provide you with several looks into GameStop's financial data. Today we begin with a detailed view of GameStop's annual revenue, gross profit, and gross profit margins. Tomorrow we will examine GameStop's retail pricing trends, some modest estimates of new and used software sales (in terms of dollars and units), and examine some interesting changes in GameStop's language about publisher efforts to reduce used game sales, GameStop's most lucrative endeavor. On the final day we'll take a look at GameStop's global business and provide a reasonable estimate for GameStop's share of the new product market in the United States. Mountains of Revenue GameStop's total revenue climbed to $8.8 billion in the fiscal year ending 31 January 2009, up from $7.1 billion in the previous fiscal year, an increase of 24%. GameStop's revenue for the past year was 2.8 times the size of its revenue just three years ago. (Note: Unless otherwise noted, the figures here are for GameStop's global business, not just its business in the United States.) There is one important caveat to the 24 percent revenue growth figure. It appears that sales at established stores grew a more modest 12 percent during the year, while 1,588 new stores added almost $700 million to the firm's revenue. Thus expansion is driving a significant portion of GameStop's income growth. GameStop breaks its sales out in four large segments: new hardware, new software, used product, and other. While the new hardware and software are fairly straightforward, the used product category is awkward since it lumps used hardware, used software, and used accessories together. The other category includes PC software, other software, (presumably new) accessories, magazines, and other merchandise. For each of the last seven fiscal years, the graph below breaks the revenue out into the four segments. Depending on the year, 37 percent to 42 percent of GameStop's revenue comes from sales of new software. In the last fiscal year, that amounted to $3.7 billion dollars, up from $2.8 billion the previous year. The next largest segment of GameStop's revenue is often used product. The used market accounts for 22% to 28% of GameStop's revenue, depending on the year, and rose to $2.0 billion for the fiscal year ended 31 January 2009. Generally speaking, new hardware sales are just behind used product sales in dollar value. The only recent exception was for the fiscal year ending February 2, 2008 when revenue from new hardware just edged out used product sales. It is worth noting which segments are growing more quickly than others. In the last fiscal year, GameStop's new software revenue grew faster than the other segments, up by almost 32%. During the same period used product revenue grew by almost 28% while new hardware grew a more modest 11.5%. Taking a slightly longer view, hardware is the fastest growing segment, up 270% in three years. For the same period, new software revenue grew more slowly, up 196%, and used product sales grew by 151%. While many complain that GameStop focuses too strongly on the used market, it is important to note that revenue on new software has grown more quickly than has revenue on used products. Some of that increase in new software revenue could probably be attributed to sales of Guitar Hero and Rock Band products, as well as Wii Fit, which generally carry higher price tags. Gross Profits Recall that gross profit is the total value of goods and services sold less the cost of those goods and services. GameStop's gross profit for the last fiscal year was almost $2.3 billion on sales of $8.8 billion. The figure below shows GameStop's gross profits for the last seven fiscal years. The company's gross profit has increased by a factor of 2.6 in the past three years. When one examines GameStop's gross profit by market segment – new hardware, new software, used product, and other – the picture becomes extremely interesting. New software generates tremendous revenue for GameStop, but the cost of goods for new software is likewise somewhat high. Used products, on the other hand, cost GameStop less to purchase, stock, and distribute. For this reason GameStop's gross profit is dominated not by new software but by the higher-margin used product sales. Depending on the year, used product accounts for somewhere between 41 and 46 percent of GameStop's gross profit. In the last fiscal year, gross profit on used product almost reached $1 billion for the first time in the company's history. (The exact figure was $974.5 million, or 42.9% of the company's total gross profit.) The next largest segment of GameStop's gross profit comes from new software sales, which totaled $768 million in the fiscal year ending 31 January 2009, up from $582 million in the previous year. Gross profit on new software was 33.8 percent of the company's total gross profit. Because margins on hardware are razor-thin, the gross profit in that segment is tiny in comparison to the software segments. The gross profit on new hardware was only $113 million in the last fiscal year, or 5 percent of total gross profit. Even so, hardware has seen quite a large growth in gross profit in the past three years, up over 260 percent. Gross profit on new software over the same period grew by 188 percent, while the gross profit on used software grew a slightly more modest 154 percent. On the Margin Gross profit margin is the gross profit divided by total revenue. Generally one can think of it as the percentage of the money you get to keep when you sell a product, after your cost for the product is taken into account. For example, if you take in revenue of $60 on a unit of software and that software originally cost you $54 to obtain, then you have $60 in revenue and $6 in gross profit or $6/$60 = 10% gross profit margin. Below we will interpret these percentages as cents of gross profit per dollar of revenue (e.g. 10¢ for each dollar of revenue). This figure hammers home just how lucrative used product sales are for GameStop. On average, they get 48¢ of gross profit for each dollar of used product revenue. For each dollar of sales in the so-called Other category, which includes high-margin accessories, GameStop gets to keep almost 34¢. Further down are gross profit margins of 21¢ on new software and a mere 6¢ on new hardware. These margins are actually relatively static from year to year. For example, gross profit margins on used software have increased a mere 1.44% in the past three years (from 47.4¢ to 48.1¢ on each dollar of revenue). By comparison every other segment has seen a decrease in gross profit margins during the same period: new hardware down 1.4% and new software down 2.6%. The catchall Other category saw gross profit margins drop by 6% in the last three years.