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Walmart Looks to Leave GameStop '4 Dead' This Christmas

GameStop could find coal in its Christmas stocking this year, as Walmart announced price rollbacks on top video game titles good through December 24. The box retailer's move could cut into holiday season sales at the nation's largest video game retailer.

Walmart said it is lowering prices on 25 of the most popular video games -- such as Rock Band: Beatles and Left 4 Dead 2 -- by 15 percent to 25 percent until Christmas Eve. Starting Saturday, December 5, shoppers will also receive a $50 Walmart Gift Card with the purchase of a $199 Wii console in stores, through December 12.

GameStop said store traffic rose at its 6,300 stores during the third quarter ending October 31, principally driven by popular new title releases like Madden NFL 10 and Halo 3 ODST. The company posted a turnaround in gross margins, too, with year-over-year gains of 60 basis points to 28.5 percent, as product mix shifted from low-margin hardware (gross margin of 8.3%) to more profitable gaming sales (41.9%). Matching Walmart's and other mass merchants' price cuts will likely pressure gross profit in the all-important holiday quarter.

A check of the GameStop Web site shows that the company is selectively discounting video game titles: resisting price rollbacks on new titles like Call of Duty: Modern Warfare 2 -- still listed at its regular retail price of $59.99. Other bestsellers, however, like Left 4 Dead 2 and Halo 3:ODST for the Xbox 360 each sold for $39.99 -- off $20 and $10, respectively, from their regular prices.

In fiscal 2008, GameStop generated approximately 40 percent of its sales and 56 percent of its operating profit during the all-important fourth-quarter holiday selling season. Despite an anticipated decline in comparable store sales (up to seven percent), chief financial officer Cathy Smith reiterated fourth-quarter earnings guidance on the last conference call in the range of $1.47 to $1.65 per share, compared to $1.39 in the prior-year quarter. Given the fight for limited consumer dollars, expect the company to post a profit in the low end of that range.

The holiday season is also critical to the company's cash flow. For the first half of fiscal 2009, GameStop bled $261 million. Nonetheless, GameStop expects to generate free cash flow in the range of $400 million to $425 million this fiscal year -- fueled by holiday sales.

Notwithstanding the competitive environment of the gaming industry, the overall health of GameStop's balance sheet suggests the retailer can weather a few lumps of coal in its Christmas stocking. At October 31, the company had approximately $559 million of indebtedness, only 21 percent of stockholder equity. Debt service is manageable, with earnings coverage approximately 5.7 times total fixed charges of $135 million.

"There is never a need to outrun anything you can outwit," said Garfied the Cat. GameStop need not worry, in my opinion, about outrunning a mass merchant like Walmart or Target. More likely the company will need to outwit consumers looking to download their PC entertainment from the Internet. As the digital world of gaming and entertainment evolves, GameStop is positioning itself with a progressive multi-channel strategy -- most recently, having acquired a majority interest in browsing gamer Jolt Online Gaming.

Previously on BNET Retail:

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