Is GameStop the Next Game Group?
GameStop (NYS: GME) better hope it's not looking at a mirror when it sees the dreary reality facing overseas peer Game Group.
Game Group declared itself insolvent yesterday, after failing to smoke out any kind of buyer. PricewaterhouseCoopers is stepping in as an administrator, immediately shuttering 277 of the chain's 1,270 stores. It's hard to get too encouraged about the viability of the rest of Game Group's locations.
GameStop bulls may argue that this is more of an opportunity for the company than a vision of its inevitable future. Game Group was bleeding losses. GameStop remains very profitable. GameStop is also much larger, with 6,683 stores ringing up nearly $9.6 billion in sales in its latest fiscal year. Game Group's 1,270 stores -- located throughout Europe and Australia -- delivered just $2.6 billion on the top line.
GameStop is clearly in a better place. It has a thriving business buying and reselling used game and gear at healthier markups than its new merchandise. There's also an effective customer loyalty program that's keeping die-hard gamers close. GameStop has also made digital-facing acquisitions. However, its latest quarter was disappointing.
The video game retailer closed out its fiscal year with a decline in both profitability and same-store sales. Its outlook for the current quarter is brutal, and GameStop plans to close more stores than it opens this year.
GameStop's compelling business model assures it of making oodles of cash, even in a flat environment -- but the dynamics begin to change when sales and store counts are going the wrong way.
Yes, Game Group's fade overseas will initially give GameStop a shot at building on its international expansion, but why didn't it step up as a buyer? Game Group was obviously desperate, but maybe the fact that GameStop took charges to exit certain international markets in its latest quarter is more telling.
Instead of an opportunist, GameStop is falling more into the role of Best Buy (NYS: BBY) when Circuit City closed, Barnes & Noble (NYS: BKS) after Borders was liquidated, or DISH Network's (NAS: DISH) Blockbuster as Movie Gallery shuttered its video stores.
Best Buy, Barnes & Noble, and Blockbuster were larger. They also had more advanced digital initiatives. Best Buy was selling digital downloads; Circuit City never made it that far. Barnes & Noble has the Nook; Borders simply teamed up with the obscure Kobo. Blockbuster sells piecemeal digital rentals, and that's something Movie Gallery never got around to rolling out.
However, instead of inheriting the lost traffic, these three category killers are facing the reality that comes with shrinking revenue pies for their industries as consumers turn to digital solutions to consume their media.
Feel free to throw in the last CD store standing to complete the unsettling snapshot. Your move, GameStop.
Investors shouldn't be surprised. This is the same GameStop that slashed its same-store sales target three times over the past year. There will likely be more of that this fresh fiscal year, too. Game Group may be on the way out overseas, but it's really a reminder of GameStop's own potential mortality.
At the time this article was published The Motley Fool owns shares of GameStop and Best Buy.Motley Fool newsletter serviceshave recommended writing puts on Barnes & Noble and writing covered calls on GameStop. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.