GameStop Plays Contrarian Role in Retail Game

Andrea Ahles - Fort Worth Star-Telegram

Dan DeMatteo is the unlikely head of a video-game retailer.

The new GameStop chief executive is 60 years old, has a corner office in a nondescript shell building near Dallas/Fort Worth Airport and admits that the Nintendo Wii and XBox 360 in his house are up in his son's room.

Despite only occasionally playing Guitar Hero and Halo 3, DeMatteo was promoted to CEO in August and is in charge of the Grapevine-based company that has more than $7 billion in revenues and is continuing to grow sales by double-digits, even in the bad economy.

"We are a growth retailer, and we are in a growth industry," DeMatteo said about the company, which sells video-game consoles and new and used video games. "We believe that video games are well positioned in a down economy."

The Grapevine retailer started the year with 4,200 stores across the U.S. and in a few foreign countries. By the end of 2008, it will have more than 5,300 stores.

A large part of the store growth came from its acquisitions of a Norwegian company with 49 stores and French electronics retailer Micromania, which has 332 stores. Although its international division is a growing part of its business, GameStop has also opened 600 stores on its own, many in the U.S.

"GameStop has done a great job in terms of being close to the customer with all the stores they have opened, and their used business is holding up really well," said Arvind Bhatia, an analyst with Stern, Agee & Leach.

At GameStop, consumers are able to trade in old games for store credit, which they often use to buy new games. In the third quarter, the company said used-game sales were up 19 percent compared with last year.

And although the company did lower its full-year earnings guidance last week, GameStop still expects to report earnings per share of $2.35 to $2.40, up 34 to 37 percent from 2007.

During the holiday shopping season, GameStop's customers change from hard-core gamers to people looking to buy gifts.

To entice gift-givers into their stores, banners have already gone up promoting 2,500 gifts under $20.

"What we're trying to tell the consumer is that video games don't have to be expensive," DeMatteo said. "We have something for you even if you don't have $50."

DeMatteo said stores have stocked the popular Nintendo Wii game console but may run out as many customers have bought the Wii in November. Guitar Hero and Wii Fit are also expected to have supply issues in December.

GameStop predicts that comparable-store sales growth for the fourth quarter should range from 4 to 5 percent.

Analysts say the company's business model is well-structured and should do well this holiday season, unlike many retail chains.

"You have a store that in good times sells new video games," said Brian Bruce, the director of the ENCAP Investments & LCM Group Alternative Asset Management Center at Southern Methodist University. "They actually do better in bad times, because there is a bigger margin on used games."

DeMatteo has been with GameStop for more than 12 years, most recently as chief operating officer, working with Richard Fontaine, the former CEO who has moved into the executive chairman position.

In August, DeMatteo was promoted to the top position, and the company also hired a Home Depot executive, Paul Raines, to become chief operating officer.

With PlayStation3s and XBox 360s and Wiis floating around the office, DeMatteo's office has the usual desk furniture with a PC on top. The only sign that he runs a game company is the Wii Rock Band stashed in the corner of his office that he said he has been hoarding for a month to take to his brother's for Thanksgiving.

"I'm not an avid gamer; I'm not going to pass myself off as that," DeMatteo said. "I think I'm a typical retailer."

Although the executive suites have changed at GameStop, DeMatteo said the strategic focus of the company has not changed. The international market is seen as having the largest growth potential for the company -- GameStop has no stores in Latin America -- and DeMatteo believes that there is probably room for only 1,000 more stores in the U.S.

He admits that he does feel some added pressure as chief executive, although he's not sure if it's the position or the current economic environment that is creating the pressure. The company has put in place a hiring freeze at its corporate offices.

"I feel protective of our associates, and I do not want to get in a position ever where we have to let people go," DeMatteo said.

With the downturn in the economy, analysts are expecting sales of video games to slow from about 10 percent in the fourth quarter this year to single digits in 2009.

Analysts are worried that game buyers may not spend as much this year and gift givers looking for bargains may forgo an expensive game console this Christmas.

While GameStop's third-quarter earnings were lower than Wall Street expected and its stock dropped 15 percent in one day, its used-game business is positioned to do well, and analysts are upbeat that GameStop will be one of the retail survivors.

"We think the company is taking the right steps to size the business for modest growth [in 2009], and our confidence in management remains high," wrote Piper Jaffray analyst Anthony Gikas, adding that shares of GameStop "will be the one to own when markets settle."

Shares of GameStop (ticker: GME) rose $1.33, or 6.4 percent, to close at $22 Wednesday.

Looking toward 2009, DeMatteo said the company won't open another 1,000 stores as it did this year, but the number will still be in the hundreds. And despite a bad economy, DeMatteo said he believes that consumers still see the value in video games.

"Are we recession-proof? No. I can't say that," DeMatteo said. "Do we think that video games will hold up well? Yes, we do."

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