Wall Street Journal: Used Games Score Big for Gamestop (GME)

For all my "death to Smoochie" rantings towards the U.S. consumer, I expect low(er) cost entertainment to hold up 'relatively' well - video games are one area of that ecosystem. Gamestop (GME) is the retailer of choice in this niche and has fundamentally done quite well; chart is not that great (sorry no charts today) but "for a retailer" the chart is good. An interesting story in the Wall Street Journal today re: the impact of used games in their business model. I didn't realize used games were about a quarter of sales... and frankly the cost they sell the used games is not that much below a new game - savvy business model there.

• Amid a devastating period for most retailers, videogame seller GameStop Corp. has posted big sales gains, in part by aggressively marketing used products to cash-strapped consumers. GameStop this month reported a 22% jump in overall sales and a 10% increase in sales at stores open more than 12 months for the holiday sales period ended Jan. 3. It didn't hurt that videogame sales climbed 9% in December to a record $5.3 billion, according to market research firm NPD Group.
• What sets it apart from other game retailers is its virtual lock on used game sales. Those sales are expected to reach $2 billion, or 23%, of GameStop's revenue for its fiscal year ending Jan. 31, according to Pacific Crest Securities. That is up from $1.6 billion, or 22.4%, of revenue a year earlier.
• Customers can trade in old games for credit toward new purchases. It sells used console games for $5 to $10 less than the roughly $60 price of a brand-new game. GameStop generally buys a used game for about half the price a buyer will later pay.
• Its business has gathered steam in the recession as consumers pinch their pennies. In the nine weeks ended Jan. 3, its sales of new games and consoles increased 19% to $1.9 billion. But sales of used games and consoles rose an even stronger 32%, to $543.5 million.
• "Nobody else has that used-games draw," said retail analyst Joseph Feldman of Telsey Advisory Group. "Once you have played a game awhile and it loses its value, GameStop is pretty much the only place where you can get something for it, and that's a big deal in this economy."
• The used-game business is very profitable, too. GameStop's gross profit margin was a hefty 48% for used products (hubba hubba - nice margins) in the quarter ended Nov. 1. In contrast, gross margins for new consoles and games are 7% to 20%, according to analysts.
• About 42% of GameStop's overall gross profits come from its secondhand business, compared with half that level for new games. "When you consider that most retailers operate on single-digit margins, it's astronomical," said Evan Wilson, an industry analyst with Pacific Crest.
• Unlike with new games, where GameStop typically shares revenue from sales with the game publishers, the retailer doesn't share revenue from used game sales with the game makers. (oy! even better) As a result, more game publishers are coming up with new add-on features for games that encourage customers to keep them.

Speaking of consumer discretionary, Apple (AAPL) reports after the bell today which should set the mood tomorrow.

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