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Pachter: GameStop Q2 Performance 'Nothing Short Of Stunning'
by Brandon Boyer
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August 24, 2007
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Following GameStop's reported record Q2 earnings, Wedbush Morgan's Michael Pachter says the company's performance is "nothing short of stunning" as it breaks through its recent pattern of losing hardware sales marketshare to larger general retailers.
Said Pachter, "In the past, the company has lost hardware market share once supply and demand for hardware released the prior year was in balance," but instead, GameStop's performance implies that it "captured something close to 40% of all hardware growth during the quarter, with a retail presence of only around 23% overall."
"We are at a loss to explain this sudden surge in hardware sales," said Pachter, "as it breaks the company’s pattern of losing hardware share to mass merchant competitors as each console cycle matures."
Pachter says the only likely explanation is that the high price of consoles has kept the hardcore at bay and following both Sony and Microsoft's price drops, "these hard core gamers returned to the hard core gaming destination—GameStop."
He adds that the company's increased guidance suggests the company expects "the hardware surge will continue throughout the quarter, and it has already begun with the carryover of strong PS3 hardware sales following the price cut in mid-July and with a rebound in Xbox 360 hardware sales following the price cut in mid-August."
He also notes that the company's software performance "is no slouch, either," after showing clear signs of gaining new software market share during the quarter.
Concluding, Pachter adds, "We continue to see the UK as the most immediate opportunity for GameStop, and believe that Blockbuster’s recent sale of its 200-store Gamestation chain in the UK to rival Game Group PLC was (for a time) a lost opportunity."
"The sale to Game Group had the potential to create a greater barrier to entry into the UK market, and we think that it had the potential to set GameStop’s growth plans back by at least two years in that territory," but notes that Game's monopoly investigation might open a door for GameStop.
"We note that GameStop has over $300 million of cash on its balance sheet," he said, "and under $700 million of debt; although much of the cash will be committed to inventory build in front of the holidays, we expect GameStop to generate around $200 million of free cash by year-end, more than enough to pay for any stores that Game Group will be required to sell. We would view the acquisition of any of these stores quite positively, and believe that any such purchase would be immediately accretive."
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