Has GameStop Caught Lightning in a Bottle?

The video game business lives and dies by the holiday season. In October, when
Nintendo (PINK: NTDOY ) reported a $258 million third-quarter loss , it was no
big surprise. That company and many others in the industry are accustomed to
taking a hit during the summer months when consumers spend more on activities
than indoor entertainment. The fourth quarter, when big games release and
retailers run big Black Friday-style sales, are when the profits roll in. What
was unusual about the aforementioned earnings was that Nintendo cut its forecast
for the full year, lowering its expectations to a loss of around $264 million
what would be the companys first annual loss. For game-makers like Nintendo
whose chief business is the sale of physical goods at retail, these days of
increased digital sales are making for trying times. So imagine how video game
retailers like GameStop (NYSE: GME ) are faring. Actually, dont bother
imagining. GameStop announced Thursday that, going into the holiday season,
sales are not matching expectations . New game sales for the quarter ending Oct.
29 grew just 4.8%, and total sales grew 2.5% to just under $2 billion. Profits
dipped to under $54 million, a year-on-year fall of about 1.5%. All of this
crummy news led GameStop, which decreased its full-year forecast in August to
4.5% to 6.5% revenue growth, to lower guidance again Thursday this time to 2%
to 3% growth on expectations of flat to slightly lower same-store sales. CEO
Paul Raines told The Wall Street Journal that he believes GameStops
disappointing sales are due to uncertain consumers. The news sent GME shares
down about 2.5% Thursday, though they since had regained their ground by midday
Friday. However, there is a silver lining to GameStops earnings report. As in
the August quarter, GameStop is continuing to see positive growth in sales of
digital goods and services. In particular, the company sold 600,000
subscriptions to Activision Blizzard s (NASDAQ: ATVI ) Call of Duty Elite
service. Call of Duty Elite is a $50-per-year premium service offered by
Activision Blizzard that gives players of the companys hit series Call of Duty
access to digital add-on content , as well as stat-tracking services for
players. Think of it as the video game equivalent of ESPNs fantasy sports
services. That a retailer like GameStop was able to rack up approximately $30
million in sales of a purely digital service which consumers just as easily
could have bought directly from Activison Blizzard online is promising for a
company that is contending with an increasingly digital market. Sales of Elite
were of course bolstered by sales of ATVIs latest game, Call of Duty: Modern
Warfare 3 , which itself racked up $775 million in its first five days on
shelves this month. Of course, these Elite sales arent all gravy theyll go
toward offsetting declines in its other subscription-based juggernaut , World of
Warcraft . These sales would seem to indicate that GameStop can use digital
goods sold in tandem with hit releases to offset declines in disc-based sales.
However, the Call of Duty franchise is a cultural phenomenon at this point.
Where Modern Warfare 3 sold 6.5 million copies in 24 hours, most games struggle
to sell 1 million copies within a year of release. Simply put, GameStop cant
expect to make up for revenue losses with similar services on any sort of
consistent basis. Still, the retailers overall digital operations are showing
impressive growth. Total digital sales grew 69% year-over-year in the August
quarter, with sales totaling $98 million. Those sales accounted for 42% of
GameStops profits during the period. Even if services like Call of Duty Elite
cant be replicated, they can act as supplements to the companys growing digital
concerns. GME shareholders simply need to hope those digital sales grow fast
enough before falling physical media sales kill the company. As of this writing,
Anthony John Agnello did not hold a position in any of the aforementioned
stocks. Follow him on Twitter at