Analysis: GameStop sees solid future despite video game shift to digital

Tue Apr 3, 2012 2:30pm EDT
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By Liana B. Baker

(Reuters) - GameStop executives are tired of hearing about investors who bet against the stock of the video game retailer that they have given them a nickname: shallow divers.

The knock against shareholders with a negative short-term view of the stock is meant to prove a point: take a more thorough view of GameStop to understand it will not end with the same fate as movie rental chain Blockbuster, which filed for bankruptcy protection in 2010.

"Are we paralyzed in fear that our business model isn't working? Not at all ... Investors are a trailing indicator," GameStop Chief Executive Paul Raines said in an interview.

Raines and his team have their work cut out for them, as a growing number of their investors are getting pessimistic. Hedge fund manager James Chanos of Kynikos Associates singled out GameStop at a conference last fall for following in the footsteps of Blockbuster and struggling UK entertainment retail chain HMV Group in slides he presented entitled "digital distribution destruction."

"Packaged games are pressured by growth in casual, mobile and social network games," and game publishers, such as Electronic Arts "are increasingly direct competitors," Chanos said in a slide show reviewed by Reuters.

About 41 percent of GameStop's shares are now held by short sellers who are betting that its stock price will fall instead of rise over the long-term. That is up from 30 percent in January and more than double the amount of retailer Best Buy, which has short interest of 17 percent and has been posting weak quarterly sales.

Raines and GameStop's other top executives have become well-versed in explaining to investors why it will not become the next Blockbuster. They note that GameStop currently has no debt on its balance sheet, which is rare for a retailer -- and unlike Blockbuster -- it has short-term, flexible leases on its 6,200 global stores and much smaller square footage.

Raines has been driving change at GameStop since being recruited to lead the company from Home Depot in 2008. Raines has challenged executives to find a way to sell digital game downloads in stores, something that had not been done before. Raines also set aside $100 million for acquisitions related to online gaming and helped devise a customer loyalty program to ensure that gamers keep coming back to stores.   Continued...

People enter a GameStop store during "Black Friday" sales in Carle Place, New York November 25, 2011. REUTERS/Shannon Stapleton