GameStop posts $2.5 million Q3 loss
Cost of EB Games acquisition, slow game market one-two punch number one game retailer--though not as hard as expected.
Buying out a rival is never cheap. For GameStop, its purchase of former competitor Electronics Boutique (aka EB Games) poured red ink over a normally profitable quarter. Today, the now-number-one game retailer posted a $2.5 million loss for the quarter ending October 29, 2005, far below the $12.5 million in profits it enjoyed during the same period in 2004. The figure was within expectations, but at the lower end of the predicted loss range.
GameStop's shortcomings could be pinned on two major factors. First was the acquisition of EB, which created $18.8 million in merger costs in addition to the $1.44 billion in stock and cash GameStop paid for the company. Second was a 12 percent drop in "comparable store sales"--ie, sales in retail locations that have been open for more than a year. The company blamed the drop on the lack of major games released in the quarter, singling out the absence of a major title like Grand Theft Auto: San Andreas.
Despite the loss, the company put on a brave face. In a press release, it touted its quarterly net sales for the quarter were actually up 28.2 percent, going from $416.7 million in 2004 to $534.2 million in 2005. GameStop's guidance predicts $0.98-$1.06 per share in earnings for its fourth quarter, and $1.65-$1.75 per-share earnings for the fiscal year.
"We made significant progress during the third quarter to position ourselves for the fourth quarter and the long term," R. Richard Fontaine, GameStop's chairman and CEO, said in a statement. "We successfully completed our merger with Electronics Boutique, integration milestones are being met, and a number of best practices have already been cross-applied to the combined company."
However, Fontaine had a rather gloomy assessment for the rest of the year. "During November we experienced weaker than expected new video game software sales mainly due to core customers waiting for the launch of Microsoft's Xbox 360 and to value consumers continuing to gravitate to used video games," he said. "We anticipate this trend to continue to a degree throughout the holiday season, with gross sales levels declining, but strong margin contributions supporting forecasted earnings."
Analysts went one step further than the downbeat executive. Michael Pachter of Wedbush Morgan Securities downgraded his rating of the stock from "Buy" to "Hold" on account of "management's inability to forecast its allocation of Xbox 360 units; the company's reliance upon used software sales and margin growth as a driver for earnings growth; our lingering concerns about the console transition; and questions about GameStop's market position as a destination for 'hardcore' gamers."
GameStop stock was down slightly in after-hours trading, slipping just $0.04 from its market-close price of $35.14.