Industry News

Shares in Game Group (LSE: GMG.L - news) fell more than 8 per cent on Thursday after the group reported falling sales in the first half, as it lacked a blockbuster game release like 2008's Wii Fit and Grand Theft Auto IV, which boosted sales for the same period last year.

However, the video game retailer said that a slew of new game releases in the second half would drive increased sales and improve margins.

Shares fell 8.1 per cent or 13¼p to 150¾p in morning trading.

In the five months to the end of June, group sales fell 9.1 per cent with like-for-like sales (excluding the effect of new store openings) down 15.4 per cent.

In Britain and Ireland, sales were down 12.4 per cent with like-for-like sales down by 15.8 per cent. At Game's international stores in Spain, France, Portugal, Australia and Scandinavia, sales fell 1.1 per cent with like-for-like sales down 14.4 per cent.

Game said that pre-tax profit for the first half of the year would be between £13m and £16m, a decrease of about 60 per cent on this time last year.

The company opened 25 stores during the past five months bringing its total to 1,367 stores, with plans to open 50 to 60 more by Christmas.

Game suffered from the relative absence of blockbuster releases in both software and hardware in the period, whereas the first half of 2008 saw the release of Nintendo's Wii Fit video game console, and the crime-themed video game Grand Theft Auto IV.

However, several new releases are scheduled for the second half of the year including the video games DJ Hero, and Mario and Sonic at the Olympic Winter Games, while Nintendo releases Wii Fit Plus, an update of its existing fitness console.

Game expects gross margin for this full-year to improve by between 150 and 175 basis points.

Analysts gave a mixed reception to the results, diverging over the relative importance to the retailer of games software and hardware, as well as the long-term threat of games being downloaded on the internet.

"We still believe the concept of the console cycle will remain the primary driver of profits," said John Stevenson at KBC Peel Hunt who rates the group a 'sell'.

"We believe absolute gross profit generation peaked in the 2009 financial year, and expect to see profit generation decline over a number of years until further major hardware releases."

Meanwhile, David Stoddart at Altium said the group's vulnerability to online distribution had been overestimated and recommends buying the stock.

"We share the view that Game Group should trade on a discount rating to allow for the risk to its store-based model that is posed by games downloading. That said, we believe that downloading will not be a major feature of the market for perhaps five years."