GameStop Mixes Things Up Beyond Games

December 31, 2015, 3:22 PM UTC

While GameStop (GME) stock has dropped 27% since late November, the retailer’s chief financial officer believes the company has taken the necessary steps to diversify its business beyond the sale of physical video game software.

“We have maintained a balance sheet that allows us to diversify, whether it’s inside the gaming space or outside of it,” Rob Lloyd says.

Over the past two years, the specialty video game retailer has grown its Cricket Wireless, Spring Mobile, and Simply Mac retail locations from 150 to over 1,000 stores. GameStop’s electronics and mobile division accounted for $165 million in revenue in its fiscal third quarter. Lloyd says the company is on a path for its electronics business to generate $1.5 billion by 2019.

The company recently launched three ThinkGeek stores in Orlando, Fla.; Palisades, N.Y.; and Dallas. Lloyd says the stores, which sell collectible merchandise from pop culture franchises like Star Wars and Marvel, are connecting with consumers. He says ThinkGeek remains a strong online business, and its collectibles merchandise has been integrated into all GameStop stores as well. The collectibles business generated $138 million in revenue last quarter.

With over 6,000 video game stores, Lloyd says GameStop can seamlessly transform stores from games to electronics or ThinkGeek locations.

Lloyd believes preowned game sales, which returns over $1 billion in trade currency to GameStop customers annually, has helped the company navigate new businesses.

“Preowned sales have been an important differentiator in our ability to survive in the consumer electronics category, which can be a challenging business,” Lloyd says.

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“GameStop is the last retailer to lose customers to digital downloads, due to their buy-sell-trade business,” says Michael Pachter, an analyst at Wedbush Securities.

Pachter believes investors who bailed on GameStop overreacted, as November is historically a self-purchase month while December is typically a gift-giver month.

“We should see a rebound to positive physical sales growth in December,” Pachter says.

Another trend that likely will end with Christmas now in the books is the record number of software bundles with new hardware. Pachter estimates that free software totaled 3 million units in November, up 100% from a year ago, and totaling 15% of physical software sold.

“This also has a dampening impact on GameStop sales,” Pachter says.

The video game industry is evolving. The explosion of free-to-play games across mobile devices, PC, and even consoles has grown the number of global gamers to over 1.4 billion according to research firm Newzoo.

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Newzoo CEO Peter Warman forecasts that mobile games will generate $30.3 billion worldwide, generating more money than console games ($26.4 billion) for the first time. The firm expects sales for the total worldwide gaming market to be $91.95 billion in 2015.

With Sony selling over 30 million PlayStation 4 consoles faster than any previous console in history, Pachter believes Sony and Microsoft will launch new consoles in 2018 or 2019.

“But sales will likely be 50% as big cycle over cycle as we see a migration to other smart devices that will allow a similar in-home experience,” Pachter says.

In the short term, Lloyd is bullish on virtual reality. Three new high-end virtual reality platforms will launch in 2016, including Facebook’s Oculus Rift, Sony’s PlayStation VR, and the HTC Vive.

“These broader VR products that will make use of technology to drive the VR content is a place we’ll play in heavily,” Lloyd says. “We’re particularly excited about the gaming content that will be driven by these devices.”

Pachter forecasts $500 million in headset sales in 2016, and virtual reality could help GameStop in 2017 and beyond.

“It could bolster sales, and certainly will help offset continued market share losses to digital,” Pachter says.


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