Europe's leading video-game retailer finds life tough on the high street.
On Thursday, Game Group (LSE: GMG) -- Europe's leading independent retailer of video games and consoles -- released a trading statement covering the period from 1 February to 12 June.
It's a tough old Game
Game warned that the market for PC and video games is challenging across Europe, especially in the UK, where Game operates 641 of its 1,343 stores and franchised outlets.
Despite good sales of top releases such as Red Dead Redemption and Battlefield: Bad Company 2, Game was hit hard by a 33% drop in hardware revenues, plus an 11% slide in software sales. Hence, total sales fell 11.4% and like-for-like sales dropped 12.3%.
Game's UK operations saw even steeper falls: down 18.5% in total and 17.2% like-for-like. Offsetting this weakness was a 1.2% rise in international sales and a 13.5% rise in online sales.
Another worry for Game is discounting, which is expected to knock a full percentage point off its full-year gross profit margin.
To trim its costs, Game identified 42 stores to be closed by 19 June, with 25 new 'concept' stores now open. The retailer will reduce its capital expenditure to £21 million in 2010/11, down from £30 million in 2009/10.
A new man at the top
In a separate announcement, Game announced the appointment of Ian Shepherd as new CEO with effect from 28 June.
Shepherd (41), formerly Vodafone's (LSE: VOD) UK Consumer Director, has been a keen gamer for 30 years, which will help him to identify with Game's youthful and mainly male customer base.
As I write, Game shares are down 6% at 83p, underperforming a wider market up 0.7%.
Game on?
Despite being positive for its outlook next year, Game expects to report an overall decline in revenues in the current financial year. Alas, the group faces four strong headwinds:
- First, it must cope with the move from physical purchases of games to digital downloads and online gaming.
- Second, its sales cycle is closely tied to new product launches from leading console and game manufacturers.
- Third, illegal piracy and online file-sharing mean that for every game legally bought in Europe, three or four are obtained dishonestly.
- Fourth, it faces stiff competition from supermarket giants such as Tesco (LSE: TSCO), ASDA and Sainsbury (LSE: SBRY), all of which are making inroads into Game's markets.
Then again, Game can look forward to three big peripheral/console launches between now and next March: Sony's Move, Microsoft's Kinect and Nintendo's 3DS.
Similarly, software releases such as Assassin's Creed: Brotherhood, Call of Duty Black Ops, Gran Turismo 5, Halo: Reach, Killzone 3, Medal of Honor, and The Legend of Zelda: Skyward Sword should boost its revenues.
Another thing for investors to watch is Game's tendency to lose money in the first half of the year and make profits in the second half, largely due to Christmas sales. Thus, net cash of £45 million as at 31 January turned into net debt of £78 million just four months later.
No doubt Game shareholders will be keen to hear more at its Annual General Meeting on 22 June. In the meantime, there is a long and lively discussion about Game's value characteristics on our ever-popular Paulypilot's Pub discussion board.
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