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No. of Recommendations: 3
This morning GME reported their second quarter results. All together the quarter was fantastic. It soared over analyst estimates, but somehow the price is down over 4% today. I don't think I'll ever understand this market. It's crazy!

Here are the top things of the quarter-

1. Revenue grew 34.8% to $1,804.4 million from 1,338.2 million this quarter last year.
2. Net Income increased a huge 162.1% to $57.2 million from $21.8 million last year.
3. Comparable store sales increased 20%.
4. Diluted EPS grew to $0.34 from $0.16 last year.
5. Cost of sales grew 35.15% to $1,320,297 million from $976,894 million last year.
6. Cash grew to $539,898 from $344,277 this quarter last year.
7. Long term liabilities grew to $82,299 from $72,492 last year.
8. Profit margin grew to 3.17% from 1.63% last year.
9. Gross margin shrunk to 26.83% from 27% last year.
10. Operating margin grew to 5.55% from 3.79% last year.

Obviously this quarter was great. It beat analyst estimates and should continue to grow strong in the future. Management said that they had record revenue in all of the geological areas that they operate in. The growth rates were tremendous with revenue increasing 35% and earnings with over 160% growth. Same store sales did great this quarter from the 43% sales growth in new video game software. The top five games of the quarter were Take Two's Grand Theft Auto IV, Metal Gear Solid 4: Guns of the Patriots from Konami, NCAA Football 09 by Electronic Arts, Nintendo's Wii Fit and Battlefield: Bad Company from Electronic Arts. The balance sheet continues to look healthier and stronger with growing cash, shrinking LT debt, and shareholders equity growing about 30% from the prior year. All the margins except the gross margin have grown, but even that hasn't shrunk that much.

Here are some of the words that Richard Fontaine, CEO and chairman said-

"In the second quarter, we produced record revenues in each of the geographical regions where we operate. By prioritizing our investments and focusing our resources, GameStop continues to significantly outperform the specialty retail segment as a whole, when comparing top-line growth, comparable store sales, and net earnings growth."

Fontaine continued, "We are raising our full year 2008 EPS guidance based on growth of the worldwide installed base and our expectations of a strong second half of the year. We have consistently delivered superior returns to our shareholders by driving value through our new and used business model, generating exceptional returns from our new store expansion and we fully expect this performance to continue."

These words from the CEO show that GME is doing great and should continue to outperform the market and grow even more in the second half of the fiscal year. Growth into Europe will help achieve this with the new releases coming out this second half of the year. This includes Guitar Hero: World Tour and Call of Duty: World at War, new IP such as LEGO Batman, Little Big Planet and Spore, as well as second generation hits like Fable 2, Rock Band 2 and Gears of War 2 as reported by Daniel Matteo, GME vice chairman and COO. One of the big risk I've always seen with GME is not showing right now and for the year ahead. This risk is can gaming companies such as ERTS and ATVI produce top games that people want? The problem that I have with GME is that they depend on other companies to get them the great products they need for great sales. I don't see this problem at all right now because of the awesome new releases coming out, but it is always a thing to keep an eye on. If those companies are having a hard time making good games, GME could have some hard times ahead too.

GME does have competition too. The two top competitors I see are Best Buy and online sellers such as Amazon. With BBY I could include Circuit City, but their market share has been shrinking and I don't see much potential in them as long as BBY is around. BBY has been a top seller in video games along side GME. Sadly BBY has been attempting to make some ground in used games which could hurt some of GME's business. Luckily for GME, they have the stronger brand name and people know them more for used games than anybody else. This can give GME a stronger moat. Many people can and are starting to choose to buy games online from online realtors such as AMZN and other competitors. For GME to stop this problem they need to build up a stronger online store and advertise it so that it will lure people away from the other competitors. These are the two main places where I see competition. There is competition in Europe too beecause they already have companies there that do what GME does. GME could have a harder time gaining ground here, but it is definitely not impossible. GME is larger than most competitors and if they save enough cash they could make some aquisitions of smaller companies over there. I don't know all the details about this, but this is the best way I see growing over there possible.

I am looking foreward to seeing what GME will do in the future. As a shareholder, I will try to keep an eye on the stock and hope for the best. I see many great possibilities ahead for GME and I hope management make the right choices and for the game producers to come out with great games. All this added up with GME's growth should give shareholders great returns in the future.

Here's where I got my info-


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