Gamestop Corporation (GME)

GameStop Corp. (GME) sells software, hardware, and game accessories for video game systems and personal computers. The company is also the largest reseller of used video games. It currently operates 5,557 retail stores across North America and Europe. GameStop makes its stores easily accessible to clients of all age groups by locating its stores within walking or biking distance. The company has focused on high-traffic areas. Most of its stores are located in strip malls, with the remaining stores located in shopping malls. GameStop Corp. also offers strategy guides, action figures, as well as other computer and video game magazines to its customers. The company's strategy is to grow through store expansions in favorable localities, by providing the largest title collection of used and new video games, and by leveraging its first-to-market distribution network to offer the latest hardware and software releases.

We continue to expect the company to benefit from the current video game cycle, which is still in the early stages. We believe GameStop is well-positioned to take advantage of this video game cycle that is being driven by next-generation video game consoles and the best video games ever designed. The cycle got underway in November 2005 with the Xbox 360 from Microsoft. The Xbox 360 is essentially a high-end PC gaming machine complete with digital media and networking capabilities housed in a sleek package. This new console takes gaming to the next level of entertainment and interactivity. During the past year, Sony rolled out the PlayStation 3 and Nintendo began selling its Wii. These two consoles (especially the Wii) are also popular with gamers and should continue to help boost GameStop's sales, as consumers upgrade their game systems.

From 2005 through 2007, consumers purchased 75 million consoles, and GameStop estimates that another 32 million will be sold in 2008. That is over 100 million game consoles in just four years. The consumers who purchased those units will continue to look for new games to play on those systems, and the demand for those games should continue for the next few years. Indeed, GameStop management believes "that this [video game] cycle will be deeper, wider, and longer than any previous period of new console introductions." That bodes well for GameStop's long-term earnings growth.

To be sure, the current video game cycle will shake out winners and losers as consumers decide which systems and games they like the most. From GameStop's perspective, however, it doesn't matter which game console is the most popular or which video game makers create the most popular titles. GameStop's results will thrive as long as demand for the video games remains strong. Instead of picking the winners, GameStop closely monitors the pulse of the video game world and stocks its shelves with the most popular titles. We are confident that GameStop will continue executing this part of its business model.

In addition, GameStop's store expansion strategy continues to drive sales as well. GameStop is aggressively opening new stores in favored strip mall locations. These stores offer superior customer service and focus on trade-ins and used game sales. Going forward, we expect GameStop to continue pursuing these strategies in the U.S. and internationally. In the second quarter, the company opened 104 net new stores. The company currently operates 5,557, up from 5,264 stores at the end of fiscal 2007. It is the largest video game retailer in the world. This size affords the company many competitive advantages and cost savings that should help drive solid sales growth and profit margin expansion in the years ahead. The competitive advantages include being the first stop for serious gamers to seek out new and used games and offering a higher level of product knowledge customer service than its competitors. These advantages should lead to additional market share gains.

The long-term outlook for GameStop remains bright. We rate the stock a Buy with a target price of $60.

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