More Troubles Brewing in Video Game Land? (GME, WMT, ATVI, ERTS, AAPL)

There is one headline about management that almost always brings up concerns from the financial community…..  CFO Resignations.  GameStop Corp. (NYSE: GME) is paying a price this morning because CFO Catherine Smith left the company.  To make matters worse, she only joined GameStop late in 2009.  Smith took a job with Wal-Mart Stores Inc. (NYSE: WMT) in the Walmart International operations.  When CFOs resign and already have a job lined up it is usually less of a concern than when CFOs resign for personal reasons or due to fundamental disagreements.  In the case of GameStop, the news implications here might not just be that the added bad news is a ‘one and done’ scenario.

For starters, if Smith thought that GameStop was about to embark on a major growth wave she would have been far less likely to jump ship.  Could officers stand to make more on company stock options in a video game company if the timing it right? or in Wal-Mart stock?  Wal-Mart has been dead money for a  decade even if you consider the boom-bust moves in the video game sector.

We also know the state of the video game sector.  It is mixed, at best.  The sector did not exactly get the couch potato boost from the recession that many hoped.  It has also failed to spark any real recovery even as the economy rebounded.

Activision Blizzard Inc. (NASDAQ: ATVI) has been an exception, but its stock has failed to grow.  Electronic Arts Inc. (NASDAQ: ERTS) has performed awfully.  The used game market dominated by GameStop for trade-ins has been met with new, larger competition in the last gaming cycle.  And now we are starting to reach the gaming cycle where games are starting to or at least getting closer to reality of full online downloads which can bypass retail outlets.

And Apple Inc. (NASDAQ: AAPL) is starting to emerge as a  player in the sector.  All those iPhone and iTouch downloads have started to rack up.  Apple probably isn’t going to wipe video games off the map, but the publishers do make games for Apple’s popular devices and these are generally far cheaper than new video game titles for PCs or consoles.  That won’t matter on the mega-hits, but time spent on $0.99 video games on a hand-held device is time that is not being spent on console games.  And those same hand-held download games are all effectively bypassing GameStop and its retail brick and mortar destinations.

GameStop did announce that Robert A. Lloyd, Senior Vice President and Chief Accounting Officer was named interim CFO.  It would seem plausible on the surface to give the company a pass since Smith is leaving with another position in hand.  But with this being such a new CFO and with the state of the video game sector having seen much more trouble than reward of late, our take is that Catherine Smith just announced that she is not expecting a major jump up in GameStop sales and figures ahead.

So far Wall Street is voting for the same verdict.  GameStop shares are down now almost 8% at $17.34 and its average daily volume of 5.66 million shares has almost been reached in just the first 75 minutes of trading today.

JON C. OGG