Saturday, January 7, 2012

Diary: Games Group

GMG - cyclical or structural declinek, the debate rages on. Sketch notes here - I spend waaaaay too long on this blog.

On 23-Jun-2011, Christopher Waller at Seeking Alpha argued that the problem was purely cyclical.

Analyst Steve Baines recently put it on his Retailer-deathwatch Tumblr account. Oh dear, that can't be good. As he notes from an Independent article: "Game Group is poised to hire a restructuring team at Deloitte, the accountancy firm, to deliver a strategic plan for next year to help it turn around its dire performance."

 For those with a good memory, I promised to say why I didn't believe the cyclical argument. Christopher's view is that sales rise and fall with the release of next generation consoles. Whilst my rebuttal is not particularly robust, I do note an RNS dated 08-Dec-2010 which says: 
The difficult market has benefited from a strong launch schedule of new software titles and peripherals
As Microsoft's lead partner in Europe for Kinect, we took a very strong market share of the product in each of our territories.
 That sounds vaguely (although I admit my argument is a little weak) like an argument that profits should recover in 2011. Alas, GMG share pricee is down 90% over the ensuing year, vastly underperforming the market.

What beggars belief is the continual positive management spin on what is clearly a worsening situation. In its trading statement issued on 13-Jan-2011 for the christmas period, it reported declining absolute an lfl sales across all regions, including online. Yet management narrative was chirpy:
Customers continued to shop at GAME
Yeah, well, I guess two people do count as customers plural.  There are other gems like:
Our specialist proposition ... provided unique appeal for customers
we saw encouraging signs that customers are still looking for exciting products at reasonable prices
Yes, but according to the numbers, I'd say that they were only looking, not buying. The company points out
However there will be further innovative launches in the $40bn global games marketplace including Nintendo's new handheld 3DS, additional software for Move and Kinect, and an exciting line up of pc and console titles.
 If you're following the cyclical thesis, then we should expect some kind of pickup in 2011. After all, how much new hardware is required? Alas, it was not to be. On 16-Nov-2011, an IMS reported total and lfl sales down again:
Revenues across all categories: software, hardware, preowned and accessories are down year over year.
Despite the whole edifice slowly sliding down the slope, management felt that "the medium term strategy is making progress".

I'm with  Jim Chanos on this: it's going to look like value all the way down. I could be wrong of course, but there are risks aplenty. It has a PTBV of 0.35, if you like that kind of thing.

1 comment:

Richard Beddard said...

You've got to be more sceptical of cyclical companies facing secular change. While they may be able withstand the normal cycle and recover, is that still true while people are playing games on facebook, ipod, downloading direct to playstations i.e. bypassing the retailer? Mix in the specific problem high street retailers have: that regardless of their business fewer people are going to the high street generally, and they have high fixed costs in paying the rent. It seems like there are a lot of difficult questions you've got to come up with positive answers to before you invest in a company like Game.