GAMESTOP CORP. (New York symbols GME $41 and GME.B $37; WSSF Rating: Extra risk) operates over 4,400 stores in the United States and Europe that sell video game players and software. It also publishes a video game magazine.
In October 2005, GameStop paid $1.44 billion (70% in cash and 30% in stock) for rival video game retailer Electronics Boutique. That’s a huge investment for the company, which earned $1.17 a share (total $67.7 million) in the fiscal year ended January 31, 2005.
Thanks to the takeover, GameStop’s sales in the nine weeks ended December 31, 2005 rose 133% to $1.35 billion. However, if you assume that GameStop acquired Electronics Boutique a year earlier, pro forma same-store sales fell 1.5% due to shortages of Microsoft’s new Xbox 360 video game console.
While the Xbox shortage has hurt demand for new games, the company’s used game business is booming. That’s good news for GameStop, since it earns about twice as much profit reselling older games than new ones. New game consoles from Sony and Nintendo should also spur sales in 2006.
GameStop is beginning to realize some cost savings from the merger with Electronics Boutique. However, the stock is expensive at 23.3 times the $1.76 a share it will probably earn in its current fiscal year (21.0 times for the multiple voting B stock). The growth of online gaming services could also eventually cut into sales of video games at its stores.
GameStop is a hold for aggressive investors.
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