PS3, Wii Supplies Still Constrained, GameStop Executives Say

GameStop is “still being challenged” by PS3 and Wii hardware shortages, acting Chief Financial Officer Robert Lloyd said on a Q4 earnings call Thursday. The retailer is “working with” the console manufacturers “to accelerate through our supply chain any inventory that becomes available,” said Chief Operating Officer Paul Raines.

Wii supplies are expected to improve before PS3 does, said Tony Bartel, executive vice president of merchandising and marketing. The retailer expects the weak supplies to continue, “at least for the PS3, for another couple of months, unfortunately, because we could sell a lot more hardware than what we have” on both systems, he said. It wasn’t clear why the consoles were still in such short supply other than “unprecedented demand,” he said. “We are still scrambling to catch up from the December surge of hardware that occurred,” he said.

PS3 console supplies remained weak across all major U.S. retailers this week despite the prediction by John Koller, Sony Computer Entertainment America (SCEA) director of hardware marketing, at the Game Developers Conference (GDC) last week that his company would be in a “pretty good” position on PS3 supplies in time for this week’s release of the key game God of War III (CED March 17 p6, March 12 p2).

GameStop’s new hardware sales fell 9.2 percent in the quarter ended Jan. 30 from Q4 the prior year, “largely due to the hardware price cuts” by Sony Computer Entertainment America on the PS3 and Nintendo of America on the Wii, “as well as shortages” on the consoles, Lloyd said. Q4 comparable store sales fell 7.9 percent because of the hardware price cuts, he said.

But Lloyd said new software sales increased 5.2 percent, due to strong demand for Activision’s Call of Duty: Modern Warfare 2 and January releases including Mass Effect 2 and Army of Two: The 40th Day from Electronic Arts, THQ’s Darksiders and Sony’s MAG. Used product sales increased 8.8 percent in Q4 and were up 18 percent for the year, Lloyd said. The average price that GameStop paid for used games in 2009 was $7.61, he said.

Overall Q4 revenue increased 0.9 percent to $3.52 billion from Q4 the prior year, but profit fell to $215.9 million, $1.29 per share, from $232.3 million, $1.39. For fiscal 2009, sales increased 3.1 percent to $9.08 billion, comparable store sales fell 7.9 percent, and profit fell to $377.3 million, $2.25 per share, from $398.3 million, $2.38, in 2008. Game downloads from GameStop’s website “more than doubled” in 2009, and it’s “seeing a very healthy trend in our online sales” overall, Lloyd said.

January “finished strong and earnings came in at the high end of” the retailer’s forecast “due to better-than-anticipated software sales,” said CEO Dan DeMatteo. The company “gained significant share in both January and February as our new software grew single digits compared to double digit declines for the industry."

Bartel predicted that “as the adoption curve on 3D TVs accelerates,” stereoscopic 3D game adoption “will accelerate as well.” There won’t be “a huge push” on 3D gaming in 2010, but it “will accelerate in 2011,” he said. “The good news is that the consoles will be able to accommodate that without a lot of changes and it does not seem to be a huge expense from a publisher’s standpoint” to incorporate 3D, he said. However, Sony is the only console maker to announce plans for stereoscopic 3D gaming on its system.

Some “concerns” were raised while GameStop was in a “quiet period” ahead of the earnings announcement about the recent resignation of Cathy Smith as chief financial officer, Redbox testing videogame rentals in some markets, and GameStop’s used videogame business model, said DeMatteo. Smith stepped down after only six months to take a job at Wal-Mart, but DeMatteo said her resignation “will have no impact on the company” and there was “nothing wrong with our books.” There has always been a videogame rental channel for distribution and he predicted there will be “a shift from rental stores to machines” if Redbox finds success. But he predicted there will be “no impact on our sales.” GameStop recently started giving customers “an incremental 50 percent” for trade-ins, which was “in line with other promotions” it’s done “in the past to drive trade post-holiday, when we are low on inventory,” he said. Used game inventory “was down 2 percent on a per-store basis before we began this offer, and now it is up,” he said. The promotion has “worked extremely well and because of our external marketing of the offer we are seeing consumers trade with us that never had before,” he said. Used game competition weakened due to the recent removal of trade-in kiosks at Best Buy and Wal-Mart, as well as the closure of many Game Crazy stores, he said.

Starting by the end of next month, GameStop will start “testing the marketing of downloadable add-on content” for games and purchasing of it direct from the company’s retail stores, DeMatteo said. Its internal IT team has been working on the project with Microsoft, he said. The retailer has “great expectations for our ability to drive sales of downloadable add-on content for the industry, and see it as a meaningful way to participate in digital sales,” he said. The downloadable content test will be done at 30 unspecified stores “in the very near future,” said Raines.

GameStop bought a majority of browser game publisher Jolt late last year (CED Nov 23 p7) or (WID Nov 23 p6) and, starting this month, GameStop starts a marketing campaign in its stores that will “drive traffic to” the Jolt game Legends of Zork, DeMatteo said. This test is “another meaningful way we can participate in the growing browser game category, and will use key learnings from the test to drive traffic to other publishers’ browser games,” he said. GameStop sees digital revenue “coming from four or five different sources, and as a matter of fact we're working on more,” he said. The retailer discussed downloadable content “with all of our major publishing partners” at SCEA’s recent closed-door Destination PlayStation event, Bartel said.

In May, GameStop will start testing an expanded version of its customer loyalty program, DeMatteo said. That will be done in four unspecified markets, Raines said. The retailer will offer discounts for reaching certain purchase thresholds, as well as “unique” rewards including tickets to shows and early entry to midnight launch events, he said.

The second-hand game buyer tends to be “a value-oriented consumer,” Raines said, pointing out the average price of a used Xbox 360 game is $20. Therefore, “we don’t believe that a $10 add-on piece of downloadable content is compelling to a used game buyer,” he said. GameStop is “encouraging publishers to offer add-on content for new titles at a higher price and then a lower price option for used games,” he said. Various publishers, however, have claimed that used games hurt sales of new games -- something GameStop has denied.

GameStop “is optimistic” about the coming PlayStation Move and Microsoft “Project Natal” motion control systems, Raines said. But he cautioned, “Title development and product availability for both accessories will be critical for their success.” Neither new control system was factored into the retailer’s earnings forecast for this year, Bartel said. “There is no doubt that they will be a major part of our industry by the time that the year is done,” but it didn’t “have enough information” from Microsoft and Sony to factor them into the forecast, he said.

The retailer heard the same rumors as everybody else about a possible upgrade to the Wii console by Nintendo next year, DeMatteo said. But Cammie Dunaway, executive vice president of sales and marketing at Nintendo of America, indicated at GDC that the company was in no hurry to launch an HD Wii, telling us, “What we've seen and proven with the Wii is that it’s not about the graphics; it’s about the experience that people get playing the games -- that’s how we got to the largest installed base on the fastest pace in the history of the industry” (CED March 15 p5). DeMatteo didn’t specify whether he heard anything about a rumored new version of the DS that could follow the March 28 DSi XL launch. GameStop expects the DSi XL launch will be strong, Raines said.

GameStop opened 388 stores globally in 2009, down from 674 in 2008, Lloyd said, and the retailer ended the year with a net of 98 additional stores in the U.S. and 145 outside the U.S., factoring in store closures. The company’s 2010 capital expenditure budget factors in the opening of about 400 new stores at a cost of $75 million, it said.

For fiscal 2010, GameStop expects to report sales growth of 4-6 percent, comparable store sales that are flat to up 2 percent, earnings per share of $2.58-2.68, an increase in new software sales of 2-5 percent, and a decline in new hardware sales of 5-15 percent. For Q1, it expects to report comparable store sales that are flat to down 3 percent from Q1 last year “driven by reduced hardware price points” and earnings per share of 46-48 cents, a 7-12 percent increase over Q1 last year, it said.