Game Group

AVOID

10/01/2012 Ben Jaglom

Videogames retailer Game Group (GMG) reported a 12.9% slide in like-for-like sales over the Christmas period as it warned of a possible breach of its banking covenants.

The fully-listed concern declared a 12.9% slump in like-for-like sales over the 8 weeks to 7 January, with sales sliding by 15.2% in its UK & Irish stores and 11.4% in its international outlets. In addition the company remarked that what it calls 'difficult market conditions' raise the likelihood 'that it will not meet its EBITDA covenants' when they are tested on the 27 February.

The dismal results came despite a bumper period of releases that included first person shooter Call of Duty Modern Warfare 3 and football series Fifa 12 while adventure title Uncharted 3: Drake's Deception was only released prior to the 8 weeks on the 3rd November.

Analysts at Panmure Gordon are forecasting a loss of £30m (loss of 6.05p a share) for the year to January 2012.

As previously highlighted by Growth Company Investor the retailer faces a number of challenges that threaten its long-term future. Not least due to the huge buying power of Amazon and the challenge of the increased popularity of rental services such as LOVEFiLM. As a result customers can now play and complete a game in two weeks, reducing the demand for titles that do not have replay value or a strong online service such as Call of Duty.

The videogames industry is moving increasingly towards offering content online, reducing the need for the physical purchasing of games altogether. While both handheld console the Playstation Vita and the Wii U are released this year neither have received a particularly warm welcome with most gamers instead focused on the possibility of a new Xbox and PS4.

Growth Company Investor recommended avoiding shares in GAME in January of 2010 at 100.2p and again in October of the same year at 71.25p, reiterating this advice later in June of 2011 and again in November. Since our initial recommendation the shares have since plummeted 95% to the current price of 4.85p. Even at the bombed-out price they are best still avoided with the company facing falling sales and long-term structural challenges to its business model.