GameStop to hold off pre-owned competition - analyst

Lazard Capital senior VP Colin Sebastian has warned of new entrants into US retail's pre-owned videogames market, but remains convinced that GameStop will continue to lead in that sector despite the new competition.

"According to our industry checks, one large consumer electronics retail chain is rekindling efforts to sell used videogames, while another general merchandise 'big box' store is in trials to buy back games in exchange for store credit," he wrote in an investor note.

"We estimate that sales of used videogame products generate at least USD 2 billion in merchandise sales annually in North America, at close to 50 per cent gross margins, which is a market currently dominated by GameStop and Game Crazy, as well as online marketplace eBay.

"Used is a more profitable, but more demanding category. We believe the barriers to establishing a liquid and profitable used videogame business are fairly high, including dedicated systems to track and manage used inventory and pricing, and the ability to refurbish products and restock stores to balance supply."

But he underlined his confidence in the strength of GameStop in the used games market, dismissing the company's share price falls when apparently threatened by new competition.

"We view these developments as largely headline risks for GameStop," he wrote. "While shares of GameStop have fallen under pressure historically as word of new entrants in the used market takes hold we note there is little, if any, evidence that competitor initiatives have impacted the company's revenues.

"We continue to expect GameStop to maintain a competitive advantage with a core gamer consumer base, broad inventory of new and used video games, and high barriers to entry."

Sebastian therefore maintained Lazard Capital's Buy rating on the retailer, with a price target of USD 31. The retailer's current stock price at close yesterday was down almost 4 per cent at USD 28.62.