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Used Games Soften GameStop Q1 Profit Decline

17 May, 2012 By: Erik Gruenwedel

GameStop Corp. reported first-quarter (ended April 28) net income of $72.5 million, down nearly 10% from net income of $80.4 million during the previous-year period.

The Grapevine, Texas-based No. 1 video game retailer said used video games softened the income decline by generating $619 million in revenue, representing nearly 31% of quarterly sales. This compared unfavorably with $625 million in revenue (a 27.4% drop) during the previous-year period.

GameStop has also begun offering sales of pre-owned digital games through its ecommerce platforms. The retailer also is pushing adoption of DLC (downloadable content) on existing games, which helps drive used-game sales. Indeed, used-game margins were the highest in three years.

“There is no question we are improving margins in that business,” CEO Paul Raines said in a call with analysts. “We still see growth in the pre-owned business in 2012. We don’t believe the pre-owned business is in a long-term decline.”

Meanwhile, new video game sales dropped 21% to $731.1 million, compared with $914.7 million last year, due largely to fewer new titles than last year. New hardware sales fell 20% to $348.6 million, compared with $432.4 million last year. Same-store sales in the United States dropped 15%.

New releases Mass Effect 3 and Prototype 2 in the quarter failed unfavorably compared to the releases of four new titles in the same period last year, which generated 500,000-unit sales of each title.

Overall revenue topped $2 billion, down nearly 14% from revenue of $2.28 billion last year.

The retailer is upbeat on the projected new console launch of the Nintendo Wii U, expected in the fall.

“Despite slower store traffic during the quarter, we achieved our earnings target due primarily to gross margin expansion and positive profit contributions from our pre-owned, mobile and digital businesses,” CEO Paul Raines said in a statement. “We expect those segments to fill the profitability gap as we transition to the new console cycle.”

In a broad survey of its Power Up Rewards members, who own 24 million game consoles, and their intent to purchase a new system, GameStop found that pending new gaming consoles must be backward compatible with previous software, have the ability to play shared and pre-owned games and be able to play physical discs. 

The latter points come as console manufacturers (Sony, Microsoft) mull the idea of incorporating restrictions on the playback of used/shared software and/or elimination of disc drives on rebooted editions of the PlayStation and Xbox.

GameStop said its Power Up membership base represents about $1.8 billion in currency available for the purchase of new consoles based on the average $75 store credit applied to consoles traded in at purchase.

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