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Retail

Stock Ticker: GAME Group

Fri 30 Sep 2011 8:00am GMT / 4:00am EDT / 1:00am PDT
Business

Is an orderly, managed decline the best that the UK's largest specialist retailer can hope for?

This week's first half financial results for British specialist retailer The GAME Group were dreadful by anyone's measure. Talk about "tough trading conditions" only goes so far; GAME dropped 10% off its year on year sales, despite the launch of a new console (the admittedly under-performing 3DS), and its pre-tax losses doubled, topping the 50 million mark.

Yet interestingly, the stock market didn't respond by giving GAME's share price a kicking - rather, the company actually experienced a bit of a rally, with its stock price rising by a few points as the details of the financial report were processed by the market. Was there some gem of good news in there which the markets noticed but which wasn't highlighted in the media coverage?

In short, no, there wasn't. The response of the market looks positive, but it's actually an indication of just how negative the sentiment about GAME Group is right now - investors almost certainly expected GAME's results to be even worse than they actually were, so the stock rallied slightly when the bad news turned out to be marginally less bad than anticipated. The reality is that unless they'd been vastly more awful, GAME's results were never going to move the stock price very much - the markets have already given the company a kicking over the past 12 months, and the expectation of disappointing results is very much allowed for in the share price now.

1

The problems facing GAME have been explored in great depth across the trade press and financial press, and perhaps the most distressing thing for the company is that few of the problems are of its own creation. As a growing retail chain, GAME has been almost exemplary in its management - the issue is that specialist retailers in this sector are rapidly being rendered obsolete, squeezed on one side by the deep discounting of supermarkets and on the other by competition from online retailers and digital download services.

As a result, it should be no surprise that it's not just GAME whose share price graph looks unhealthy right now - it's a problem which spreads across specialist retail in general in the UK. The two publicly listed firms most commonly grouped together with GAME by UK investors are the Dixons Group - largely a consumer electronics retailer but with a significant sideline in videogame products - and HMV, whose game sales have become a key pillar for the music and movie retailer.

2

Graphing the three retailers together reveals how much worse things could be for GAME Group, and perhaps explains why the stock market seems relieved rather than horrified by the firm's latest results. Indeed, perhaps the best thing that can be said about GAME is that "at least it's not HMV" - the 60% of its share value which GAME has lost over the past year is peanuts compared to the shocking market performance of HMV, which has dropped almost 90% of its value. Indeed, GAME's performance is comparable with Dixons, a much larger retailer (Dixons' market capitalisation is over 400 million, compared to around 80 million for GAME) in a somewhat more stable business sector.

Yet the fact that HMV stock is performing so much worse doesn't change the reality of what's happening to GAME Group. It would be silly to find much optimism in the fact that the company's management is doing a fine job of managing the decline of the firm's entire market sector - "well-managed decline" is hardly an attractive option for an investor, after all, and it speaks of a company which doesn't see a path forward as the industry continues to turn away from boxed retail products.

It's also important to dismiss the talk of "tough market conditions", which carries with it false hope that GAME's business might pick up when the country's economic conditions improve. The quickest way to puncture that idea is to look at how the performance of the specialist retail sector stacks up with the overall performance of British companies - in this instance, I'm using the FTSE 350 index, which tracks the top 350 listed firms in the UK, as the red line on the comparison graph.

3

As you can see, while GAME somewhat outperformed the rest of the stock market in the trailing months of last year, the picture in 2011 to date is completely bleak. It's interesting to note that the serious decline of the stock kicks in around the time of the Nintendo 3DS launch. It's likely that some investors were expecting the 3DS to provide UK retailers with a fairly major boost during the first half of this year, and have thus far been disappointed - but it's equally likely that the poor sales of the 3DS have acted as a wake-up call for many investors, forcing them to acknowledge the fact that specialist retailers are facing an "evolve or die out" challenge which few of them seem equipped to overcome.

Perhaps the best thing that can be said about GAME is that "at least it's not HMV".

Something it's worth bearing in mind when we talk about stock market performance is that the investors who really move the price of a stock are not private individuals or traders with a specific interest in the company in question. For the most part, large stock trades are carried out on behalf of institutions, by traders whose knowledge and understanding of the specifics of the business whose shares they're trading is extremely limited, and largely focused on financial data and perhaps a few analyst reports.

As such, it's the big, sweeping, headline stories about a company or a market sector which manage to filter into the consciousness of traders, and in the case of GAME Group (and indeed HMV), those headline stories are not positive. The firm's growth has slowed to a halt and it is now in decline, and it hasn't got a clear strategy to transition its business to take advantage of new opportunities and escape from the sinking ship of traditional specialist retail. That one-line summary and a glance at GAME Group's financials is all most traders feel that they need to know, and they're quite probably right.

In this instance, the lack of a clear strategy for GAME Group's future is the real kicker. Traditional specialist retail is suffering across the board, as HMV and Dixons demonstrate - but if you look outside the UK, it's clear that some companies are doing far better than others at making the leap away from specialist retail before the ship sinks entirely. Take a look at how the performance of giant US specialist retailer GameStop over the past 12 months compares with that of GAME Group:

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As you can see, being in specialist retail doesn't have to be the kiss of death - and while plenty of industry insiders and commentators are dubious about how effective GameStop's future plans (which range from digital distribution and streaming services through to the launch of an Android-based gaming tablet to compete with the iPad), the markets are obviously happy to see that GameStop at least has those proactive, forward-looking plans.

The UK's specialist retailers, on the other hand, seem content to simply have an orderly, well-managed decline into obsolescence. If they're not content with this state of affairs, then they're certainly showing no signs of being capable of breaking out of it and improving their lot. Right now, the best that retailers like GAME Group seem able to do is to try and grab a slightly bigger slice of the ever-shrinking pie by using its muscle with publishers to secure exclusive special editions of major titles. This tit-for-tat squabbling between retailers is not unlike rearranging the deckchairs while the Titanic sinks - far bolder, braver and more thoughtful moves will be required if GAME Group is to make any steps towards halting its decline.

11 Comments

Daniel Leaver
Creative Director

23 4 0.2
Excellent article. A really interesting read.

Posted:3 years ago

#1

Darren Stewart
Videogame investor

52 17 0.3
Another excellent article although I think you may be being a bit harsh to say that GAME don't have a clear strategy. I think their strategy is clear which is to be the best specialist retailer in the games industry. The problem is, as you say, that if the games industry is shrinking by 10% year on year then, unless GAME can massively grow market share, their sales also drop 10% year on year which is pretty much what they said at H1.

However, the strong holiday line-up (the best I can think of in quite a few years) does make me think that the downward sloping graphs representing sales are going to tick up over the next few months.

And the investment markets are fickle and I do wonder if the strong holiday line-up will cause people to wonder if the death of the traditional gaming industry has been exaggerated or if it will be seen as a last hurrah.

http://www.bougafer.com - investing in the video game industry

Posted:3 years ago

#2

Nick Parker
Consultant

284 151 0.5
Investors have already built in a number of challenges into the price since last year such as a declining market and the long term fortunes of specialist retailers faced with competition from online stores/streaming and supermarkets.

The final quarter of this year will yield some strong performers and slow down the decline but it will take a lot to pull back the year into break even or positive year on year comparables. My view is single digit decline for 2011.

Posted:3 years ago

#3

Darren Stewart
Videogame investor

52 17 0.3
Nicholas, have you ever seen this thread on Bougafer?

http://www.bougafer.com/forum/2011-great...

I agree that it seems very unlikely we will see a break even for the full year but I am half-expecting to see year on year increases on a month basis from October. And that could be dismissed as a blip or it could be seen as a reversal of fortune.

You know what these analysts are like ;)

Disagree?

Edited 5 times. Last edit by Darren Stewart on 1st October 2011 12:09pm

Posted:3 years ago

#4
I've been watching GAME's share price with interest for a while now as I think it makes a good barometer of how the industry is changing.

It will be a shame to see GAME go, they've been such a huge force in the UK industry for so long, but at the same time I just don't see what they offer that would make people want to shop there. Their staff are ok, but not great, their prices are quite uncompetitive, they don't have the same choice that I get online (either through DD or online stores) and whilst their locations are good for when you're out shopping on a Saturday afternoon, if I'm wanting to pick up a new release on the way home from work on a Friday it's much easier for me to pop into a supermarket.

Posted:3 years ago

#5

Terence Gage
Freelance writer

1,288 120 0.1
Maybe with the increasing decline of the traditional high street GAME's only chance of a profitable future is to massively cut down the size of their business or become an internet-only company. Or perhaps they need to work with publishers, as opposed to placing so much onus on pre-owned and trying to cut publishers out of the loop, and in doing so helping to spur on a download-only future.

Or perhaps the way forward is investing in downloadable platforms or going into publishing themselves - what if GAME were to publish games on behalf of other development studios? Their market obviously isn't global, but they could certainly push these products hard in-store.

Edited 2 times. Last edit by Terence Gage on 30th September 2011 1:36pm

Posted:3 years ago

#6

Graham Simpson
Tea boy

219 7 0.0
The reason the share price did not fall was a) the company has said sales will fall by 3% for the year previously. It's just that the first half was worse than hoped for (poor slate) but they did confirm that they were still on target for -3% growth for the year, and b) they maintained the dividend (implying a stunning 25% yield). Add to that all of the directors' commited to spending 20% of this year's salary on buying shares. If they had reduced the dividend and said they were still on for -3% growth no one would have believed them. So the fact they have maintaned the dividend...

I think I should make it clear for my sins I recently bought shares in GMG... and this comment definitely do not constitute as research or a recommendation to buy them (not that many of you would reading the previous posts!). These are my personal views alone. Do you own research etc.

Posted:3 years ago

#7

Adam Chapman
Studying PhD History as the Videogame

1 0 0.0
THe problem is that Game and Gamestation are both losing the core markets. The Game Stores Group has a great opportunity to appeal to two sides of the market by owning both chains but they need to differentiate their appeal. When Mums and Grandmas by games for little Joey they go to Game because its clearly labelled :), friendly, easy and standardised. Gamestation is offering exactly the same thing, whats the point? Most towns have a Gamestation and a Game! Gamestation should cater for the hardcore gamer market not by offering games at online prices (obviously not feasible) but by stocking eveything else that relates to gaming culture. Memorabilia such as figures, statues clothing etc, specialist Japanese/US imports, retro games and consoles have virtually (pardon the pun) no place on the high street bu there is a market for this kind of stuff. How many avid Halo fans are aware of Mcfarlane vast range of Halo figures? Each wave should see SOME high street marketing. A simple window display with a diorama could be seriously effective. Gamestation should be for game culture and Game should be for games. Perhaps this way the group could attract back some of the market that they have lost to online retail.

Posted:3 years ago

#8

Graham Simpson
Tea boy

219 7 0.0
I think it's also worth pointing out that while I understand why Game has been compared to Dixons and HMW (in so far as they are a high street retailer) I also think that can be misleading. HMW sells a product that has been hit by a technological paradigm shift (love that '80s management speak) in the form of rampant music piracy while a newer digital 'iTunes' music generation shun physical copies as well (same applies to DVD i.e. Blockbuster). At the other end of the spectrum you have Dixons which sells expensive discretionary electronics and in the age of austerity and given the state of the economy many housesholds cannot afford these items anymore. Video Games neither suffer the rampant piracy or big expense - and don't jump down my throat about PC piracy. It's console games that pay shareholders (with WoW being the exception of course).

I think the best example is when it is compared to GameStop where is has clearly underperformed. That said, I also see Game now doing a lot of what GameStop has been doing for the last 18 months. Personally I'm not convinced bricks and mortar video games retail is going the way of the dodo just yet.

Edited 2 times. Last edit by Graham Simpson on 30th September 2011 3:06pm

Posted:3 years ago

#9
I think the announcement that GAME Group will be partnering up with OnLive would be a positive note for any investor. As well as this, GAME Group have also recently launched digital download sales across all stores which shows that they are embracing the move to digital content. Building relationships with the online retail market in this way will surely grant them some security in the future.

Posted:3 years ago

#10

Patrick Frost
QA Project Monitor

396 195 0.5
Richard I would have thought so too however my local GAME crew, who are usually quite up on things, had no idea that they were an official partner and knew no plans on how/when/what they would be stocking for Onlive.

Posted:3 years ago

#11

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