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GameStop Downplaying Physical Games Business

26 Mar, 2017 By: Erik Gruenwedel

After a fourth quarter (ended Jan. 28) that saw same-store sales drop 20%, GameStop, the nation’s largest video game retailer, continues to de-emphasize packaged media and focus on collectibles, technology brands and digital games.

Collectibles, which includes merchandise from action figures to posters to T-shirts, rose 27.8% to $212.4 million from $166.2 million, driven by strong sales of Pokémon-related toys and apparel. The company added 17 collectibles stores during the quarter, bringing the total base to 86 stores, including 24 ThinkGeek stores in the U.S.

Technology brands include Simply Mac, Spring Mobile and Cricket Wireless stores and are not factored into GameStop same-store sales. The segment, which includes numerous RadioShack locations acquired after the CE retailer shuttered operations, reported revenue of $256 million, up 44% from $178 million during the previous-year period.

On the March 23 fiscal call CEO Paul Raines said the fact 37% of GameStop quarterly earnings came from non-physical media should be good sign for investors.

“Why do we think that is important? Because that de-risks your investment in [GameStop], while providing [an] upside [to] the frequent cycles in gaming,” Raines said. “As we grow our non-physical assets, we believe the value in our collective franchises will prove much higher than it is today.”

GameStop is aiming to generate 50% of operating earnings come from sources other than physical gaming by the end of 2019.

The chain reported quarterly income of $209 million on revenue of more than $3 billion, compared with income of $248 million on revenue of more than $3.5 billion.

Michael Pachter, media analyst with Wedbush Securities in Los Angeles, believes the purchase of shuttered Radio Shack stores was a mistake.

“We remain unconvinced that the huge outlays for the tech brands businesses were a wise investment given a spotty execution track record and debt of $815 million,” Pachter wrote in a March 24 note.

While the analyst agrees the core physical video game market is challenged, he contends GameStop has bigger issues.

“Tech brands business generated only $34 million of operating profit, below its $53 million in interest expense for debt incurred to buy the stores. Either way (before or after store closing expenses), tech brands is providing a return well below expectations, and we question management’s judgment in carrying over $800 million in debt to finance the segment’s expansion,” Pachter wrote.

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