How GameStop is Stepping Up

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Since 2008, electronics stores have experienced a 38% decline in same store sales.  GameStop has had negative same store sales for the past nine quarters, and it has been implementing digital and mobile businesses to keep customers buying games. With the next-generation console launch approaching, the company has the potential to close the year profitably. 

Margin power up
GameStop was initially a purely physical game store. Now it has transformed into a hybrid digital and physical retailer. Despite this internal shift, the company has seen sales struggle during 2013. During its most recent quarter, the company's global comps and sales were down 11.6% and 10.7%, respectively.

While the brick and mortar stores were struggling, the company's digital revenue increased 18% year over year to $158 million thanks in part to exclusive downloadable content. Mobile revenue increased 121% year over year to $55 million. The growth of GameStop's digital and mobile businesses helped increase gross margin 130 basis points to 34.8% during its most recent quarter.

GME Gross Profit Margin (Quarterly) Chart

GME Gross Profit Margin (Quarterly) data by YCharts

The chart shows that, despite seasonal trends, GameStop's gross profit margin has had continued growth. This shows that the changes that the company has made to drive digital and mobile business are helping it retain more of every dollar earned.

Despite lower same store sales, GameStop beat analyst earnings estimates by $0.02. The company's biggest quarter has yet to happen.

Next generation
Sony  and Microsoft  are about to release their next-generation gaming consoles on Nov. 15 and Nov. 22, respectively. The launch will be the biggest console launch in video game history, with PS4 and Xbox One game pre-orders having already reached 725,000 and 525,000 units, respectively. The PS4 is slightly cheaper at $399 than the Xbox One at $499, which is partially because the Xbox comes with a Kinect, Microsoft's gaming camera.

While we don't know for certain which console (*cough* PS4 *cough*) will move the most units, both have sold out of pre-orders for launch day.  With these massive launches, game retailers like GameStop and its competitor Best Buy stand to profit from the excitement.

GameStop's console allocation from Sony and Microsoft is much higher than it was for the last major launch. To accommodate volume, GameStop has expanded its supply chain capacity by 60% by using contracted distribution centers. The company has also given 4,400 of its store managers training in the new consoles to improve customer service.

Best Buy plans on opening its stores as early as 10 p.m. on Nov. 14 before the PS4's launch. Instead of waiting in line, customers at roughly 1,050 stores will be inside where they can buy accessories before getting their new console This strategy will increase the amount of time customers spend in the stores and increases the likelihood that they will buy add-ons.

In addition to pre-orders, the major game retailers have a limited console stock for people who get to the store early. The new console launch will be good for both GameStop and Best Buy regardless of which company sells more units.

Next steps
With the next-generation console launch coming up, GameStop will likely see a positive spike in sales. When this is paired with a continued rise in margins the near future looks bright for the video game store.  Expect a positive close to the year for GameStop and continued margin expansion as the company expands its mobile and digital business.

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Ben Popkin has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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