Following up on yesterday's news that Circuit City is
entering the used game market, analysts from Stern, Agee & Leach have agreed that any pressure put on GameStop will "dissipate in the near-term."
Though news of a "competitive threat" in the used business market has typically resulted in what the group calls a "knee-jerk reaction" in GameStop shares, the analysts point out a number of factors that might temper reactions.
"Circuit City is apparently testing the used games concept in a handful of stores and on its website," say analysts, adding, "Recall that Best Buy, which is three to four times bigger in the new video games space compared to Circuit City, tested the used video games business a couple of years ago and dropped it."
Movie rental giant Blockbuster, they continue, "recently sold all of its Rhino video game stores to Game Stop, and we believe one of the reasons for the sale was the lack of traction in the highly profitable used games category."
Finally, the group also notes that Movie Gallery, which operates rental outlet Hollywood Video, "has been struggling with its store-in-a-store Game Crazy video game concept for many years."
Compare that with GameStop, whose acquisition of EB Games has doubled its used game market, currently holding some 80-90 percent share, with "4,000 stockkeeping units in its store, an average selling price of $13 and about 50% gross margins."
This is a very complicated business," said analysts, "and accurately and appropriately buying the used game from your customer is critical."
With GameStop currently getting nearly 25-30 percent of its sales from used games and some 50 percent of its profits, "concerns," say Stern, Agee & Leach, "on Circuit City’s test will dissipate in the near-term, and [GameStop] will likely report good earnings, helping bolster the stock."
