As GameStop Goes, So Goes the Consumer

Well said by MARK VEVERKA.COMPUTER VIDEOGAME analyst Mike Hickey of Janco Partners in Colorado still thinks the glass is half full. He notes that the company posted extraordinarily strong earnings and sales for the third quarter, beating the Street estimate by 10 cents. Some of the current apprehension, says Hickey, is simply a calendar issue: This year's holiday shopping season is shorter than last and therefore will reduce fourth-quarter earnings by about a nickel from 2006 levels.

THE PREOCCUPATION WITH CONSUMER spending is all-consuming going into the holiday shopping season.

Judging by fourth-quarter guidance from corporate buyers of technology, the big spenders of the Barron's 400 are unlikely to spend a penny more -- more likely, a penny less -- than their tech-spending budgets allow, due to the sputtering economy. The abysmal performance by Nasdaq during November certainly didn't help (See Eric Savitz's Tech Trader Daily blog).

That puts a lot of pressure on Mom, Dad and Santa to place a slew of computer games, iPods, notebooks, mobile phones and other gadgets under the tree this year. Consumers have already begun to increase their share of the load in recent quarters, considering that the tech leaders have been the likes of Google (ticker: GOOG), Apple (AAPL), Research In Motion (RIMM) and Nokia (NOK).

One company that is ground zero for electronics and software sales this holiday season is GameStop (GME), the $7.8 billion-in-sales computer-game retail chain with about 5,000 stores in 17 countries.

It sells consumer technology, the kind that consumers have continued to buy in previous periods of weak spending. It is a purveyor of big-ticket computer hardware (game consoles) and must-have software (computer games) that kids and teens prefer in their stockings over other items, such as apparel.

GameStop bears watching to assess whether the consumer is going to capitulate this season. There are a few scenarios: 1. Most retailers, including GameStop, have a surprisingly merry Christmas. 2. The computer-game retailer thrives while the rest of the retail economy endures a blue Christmas. 3. GameStop suffers a lousy season, a sign of a worst-case scenario for retailing.

That's what made last week's comments by GameStop management so fascinating. They forecast fiscal-fourth- quarter earnings of 95 to 97 cents a share, a few cents higher than their previous guidance.

Unfortunately for shareholders, that was still lower than the lofty $1.01-a-share consensus for the fiscal quarter ending Jan. 31. As a result, GameStop shares were punished before the dawn of Black Friday. Piper Jaffray's Anthony Gikas, for instance, reiterated his Neutral rating and cut his price target to 54 from 59. Shares closed Friday at 50.15. There is also a sizable short position in GameStop shares, betting that Scrooge prevails.

Even so, Hickey thinks consumers won't skimp on the things that children really want. "Kids aren't getting clothes this Christmas. They're going to get a Wii," he says, referring to the red-hot gaming console by Nintendo.

The Wii machine is a super-popular computer game that, as clichéd as it sounds, is fun for the whole family. Because it's physically engaging and easy to use, nongaming geeks can play it. Some fans even go so far as to credit it with getting their game-addicted kids off the couch. "The iPod is sort of a solo experience, but the Wii brings families together while the Monopoly board is collecting dust in the basement," Hickey says.

The machine has been such a smash hit that consoles have been hard to come by. While Nintendo has ramped up production, supply will still be tight, Hickey says. GameStop is a big seller of Wii machines and other game hardware. It also handles some of the season's more popular gaming software, such as Guitar Hero III.

Of course, a game console isn't going to save the holiday retail season, or the economy. But it provides a glimmer of hope that at least one segment can ward off the ghosts of the subprime-mortgage mess. Hickey is so confident that he reiterates his Buy rating for GameStop, with a target of 68. Says Hickey: "They are just going to crush it."

If that isn't holiday cheer, I don't know what is.

HERE AT PLUGGED IN, we don't write about many privately held companies. But once in a while we bend the rules to focus on game-breaking technologies or business models that might have legs. Ingenio was one such private company (Plugged In, Oct. 4, 2004). A pioneer in "click to call" online advertising services, Ingenio didn't go public like some others we have discussed. But it was bought last week by AT&T (T) for an undisclosed sum.