In his latest note to investors, Lazard's Colin Sebastian has downplayed concerns over the impact of digital distribution on retailer GameStop, and said the company is in a strong position for the second half of the year as Wii supplies grow and an Xbox 360 price cut looms.
"Approaching the end of GameStop’s second quarter, we believe business trends remain strong," said Sebastian, "and are likely tracking ahead of the company’s guidance range and our original estimates."
In addition to NPD's May and June reports showing industry sales rising 49 and 31 percent respectively, Sebastian notes that GameStop competitor Game Crazy has reported a solid 30% year-over-year increase for its quarter ending July 1st, as well as Activision's report that its first quarter results would exceed guidance as indicators that the industry is quite healthy.
"Despite tougher year-over-year comparisons in [the second half of 2007], we expect GameStop to maintain positive momentum," said Sebastian pointing to a summer lineup that will include NCAA
and Madden NFL
, as well as a strong holiday lineup of Halo 3, GTA IV, Guitar Hero
and Rock Band
In addition, Sebastian says Nintendo has added production capacity for its Wii console, despite channel checks still indicating short supply, and says "an Xbox 360 price cut before the end of the summer could help offset any negative impact from the recently disclosed hardware failures."
Looking at the risks an increase in digital download strategies might have on the retailer, Sebastian downplays the impact, saying "while traditional retailers are exposed to the emerging digital market, we believe it will be at least several years before consumers are regularly downloading full console games due in part to storage capacity constraints, bandwidth issues, and piracy concerns."
"As such," he continues, "we expect console downloads largely to remain 'bite-sized' content and game add-ons such as items/tools, levels and episodes, which are currently enabled by Xbox Marketplace and Arcade as well as similar services from Sony and Nintendo."
"We note that retailers such as GameStop will also likely participate in the download market through in-store sales of point cards (stored value systems) and starter kits, in addition to the full-console games downloaded over their e-commerce sites," he concludes.