It May Be "Game Over" For GameStop Soon


It may not be long before GameStop (GME) becomes more Stop than Game.

The video game retailer is coming off another disappointing quarter. Sales plunged 11% to $1.55 billion, well short of the $1.61 billion that Wall Street was expecting. Same-store sales fell by a problematic 9.3%.

It gets worse.

Even the thrifty die-hard gamers are now staying away.

I'll Give You $7 for That Old Super Mario Game

Video game sales have been sluggish for three years, but GameStop has survived on the strength of its resale business. The chain's thousands of small-box stores will gladly take in your pre-owned games and gear in exchange for store credit or a little bit of cash.

GameStop then refurbishes the consoles, cleans the discs and cartridges, and sells them as discounted pre-owned items.

%Gallery-161566%Gamers complain that the chain is ripping them off, and they're probably right. GameStop offers so little in credit that even at marked-down resale price it's where the chain scores its thickest profit margins.

Well, either consumers have caught on or they're no longer interested in playing older games. Pre-owned sales fell by a whopping 11% in GameStop's latest quarter.

There Isn't Always an Option to Continue

This was supposed to be the last line of defense at GameStop. As software publishers and players embrace digital delivery, there isn't necessarily a need for a physical retailer as a middleman.

Software companies won't shed a tear for the demise of GameStop. Keep in mind that they only get paid on new releases. And developers and royalty-collecting console makers don't collect any money on pre-owned sales.

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Gaming websites reported last year that Microsoft (MSFT) and Sony (SNE) were even considering either going all digital or incorporating features that would prevent secondhand games from playing on the new consoles that should hit the market within the next two years.

However, pre-owned sales were supposed to be resilient. Older games were supposed to have long shelf lives if the discounts were ample, and this business was supposed to continue thriving as penny-pinching gamers wax nostalgic.

Well, those days are apparently over.

It's a Model in Flux

It was just three years ago that Activision Blizzard (ATVI) raised the bar -- or at least the bar chord -- with the release of Guitar Hero.

GameStop executives were even exploring ways to grow their store space to accommodate the plastic guitars and Rock Band drum kits that were all the rage.

Well, that rhythmic music craze died quickly. Activision Blizzard went on to ax the fake guitars, and GameStop went back to gamers who were starting to turn to smartphones and tablets as outlets for cheap casual and social games.

Obviously there's no comparison between a $60 copy of Skyrim and a $0.99 Angry Birds app, but for mainstream audiences it's been more than enough. There's a reason that physical hardware and software sales in the video game industry have been freefalling since 2009.

Where does that leave GameStop?

With its high-margin resale business teetering, net income plunged 32% in its latest quarter. GameStop may point to its digital and mobile sales as growth markets, but those two categories added up to just 11% of GameStop's sales this past quarter.

Things seem to get worse with every passing quarter.

The Ever-Shrinking Small-Box Retailer

Back in March, GameStop was targeting positive comps of 1% to 5% for the entire fiscal year. Two months later the outlook for same-store sales was down to between flat and off by 5%. In last week's report, GameStop's eyeing comps to fall by as much as 10% this year.

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GameStop has a clean balance sheet. The stores are still profitable. It's been buying back shares – sadly, at higher prices -- to keep earnings on a per-share basis respectable.

However, this story doesn't end well.

It's been 10 months since my original "Why GameStop Will Never Be Great Again" article, and the stock has shed a quarter of its value. Even with a beefy dividend that was hiked last week, investors know that GameStop's relevance is on a downward spiral.

It was a good run, but the market's ready to play a different game now.

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Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Activision Blizzard, Microsoft, and GameStop. Motley Fool newsletter services have recommended buying shares of Activision Blizzard and Microsoft, creating a synthetic covered call position in Microsoft, creating a synthetic long position in Activision Blizzard, and creating a modified stock repair position in GameStop.