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Subject:  Revisiting GameStop Date:  6/15/2011  9:21 AM
Author:  TMFGebinr Number:  384 of 1287

Hi everyone,

When I purchased GameStop last November, I wrote that I was looking for a stop in the slide of margins and growth of net income and operating income. I was also worried about others coming into the used-game business.

But on reading through the Q1 earnings and conference call, and looking at some margin numbers and growth numbers, things actually might be turning around.

For instance, for the TTM periods ending on the date given, here are the revenue, operating, and net income YoY growth rates:

Rev Oper Net
7/31/10 3.5% (5.6%) (1.1%)
10/30/10 2.9% (3.5%) (1.9%)
1/29/11 4.4% 4.0% 8.1%
4/30/11 5.4% 5.7% 8.1%

You can see that for the year ending last summer, the situation was not good, but beginning with the year ending after holiday season, operating and net income began growing and in the last TTM period, they both grew more than revenue. That's what I've been wanting to see.

The reason seems to be the Power Up membership service, which was launched last October. It now has 10 million members and they've been learning a lot about the shopping habits of their customers. Management said that they are now tracking 50% of the sales at the register to specific people and they expect that to increase. Their customers don't stick to one store, they don't shop exclusively in the store. But with this tracking, they can micromarket -- targeted ads or discounts aimed at individual people based on what they buy (e.g. you like first-person shooters, give them a discount on a game they haven't bought before). This is driving more sales (members spend three-times what non-members spend) and more types of sales (downloadable, used, new, with downloadable both driving and being driven by the box games).

I think they've got a winner on their hands with this service and they seem to be using it to good effect.

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