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Analyst: Summer Shortfall To Impact GameStop

Analysts suggest that GameStop revenues may fall behind goals as NPD retail revenues show significant lag -- but its "quasi-monopoly" status will help it grow through further leveraging used game sales.
GameStop is expected to post lower revenue than expected for its second fiscal quarter as the industry faces tough comps and several straight months of declining NPD numbers. The company had planned on same-store declines of about 8 to 11 percent, but Wedbush Morgan analyst Michael Pachter says "it is clear that the company is tracking well below this level." But according to Pachter, the company's likely been driving increases in sales of used games in its stores, and that this boost can offset the damage a bit. The retailer's also likely to lower promotional spending and limit new store openings to conserve resources through the Summer lull, says the analyst. As the year shifts into the Fall-Holiday season, the company will shift its product mix back to higher-margin new and used software -- a trend that Pachter says the retailer will continue for "the next few years." As a result, the analyst predicts the company's earnings to end up 19 percent up this year and 14 percent up in fiscal 2010. From there, the analyst suggests that the majority of the retailer's used game biz growth will occur in Europe, while increased second-hand market competition and a migration to a digital business model may constrain the company's growth to "low double digits" in 2011 and 2012. Not only will the negative comps trend begin to reverse toward the holiday, helping restore investor confidence in companies like GameStop, but the holiday release slate -- notably Activision's push to make Call of Duty: Modern Warfare 2 "the biggest entertainment launch of all time" -- will also help make the holiday quarter a strong one for the retailer, says Pachter. "This year, GameStop will likely grow earnings through used game growth," he says. "As a quasi-monopoly, the company is well positioned to compress the time between new game releases and trade-ins, driving used game pricing higher."

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