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Tempted by GameStop’s 2.5% Dividend Yield and Buybacks? Or is it the Blockbuster of Video Gaming?

When video retail chain Blockbuster filed for bankruptcy in 2010, one of its main problems was clinging too long to an outdated retail model that failed to capitalize on the changing habits of movie lovers.

Is video game retailer GameStop (GME) following the same path?

The company, which sells new and used video games, continues to open more and more stores while revenue growth is anemic and same-store sales are falling.

GameStop Revenue Growth Chart

GameStop Revenue Growth Chart by YCharts

If the future of video gaming is in digital delivery, like the business model of Zynga (ZNGA), as opposed to a physical package of discs, typified by Electronic Arts (EA) big sellers over the years, then what will GameStop have to sell in its stores?

Same-store sales over this past Christmas holiday period, defined by the company as the nine weeks ended Dec. 31, were down 0.3%, which followed a 0.6% drop in the third quarter ended Oct. 29. The company warned that store comps are likely to fall between 1% and 2% for the full fiscal year that ended Jan. 29.

GameStop capital expenditures are focused on retail outlets. In the fiscal year ended January 2011, the company spent $202 million primarily to open 365 stores, it said. At the same time, it spent only $38 million in acquisitions to build up its digital initiatives. For fiscal 2011, the company planned to open another 280 stores. At the end of October, 2011, it had 6,627 stores, almost 70% of which are in the U.S.

For shareholders, the company's use of cash has been bittersweet. While it continues to fund new brick and mortar outlets at a time when cloud and Internet gaming is the latest thing, it has been buying back its stock.

GameStop stock buybacks were about $220 million in the three quarters that ended back in October, and then said in January that it had picked up another $45 million worth over the holiday period. That at least is giving some support to earnings per share over the past few years as net income growth has been flat.

GameStop Shares Outstanding Chart

GameStop Shares Outstanding Chart by YCharts

GameStop also implemented its first-ever dividend earlier this year, giving shareholders 60 cents per year, for another $83 million, and a GameStop dividend yield of almost 2.5%. Perhaps that's a reward for shareholders who stuck with GameStop over the past three years while it's been stuck in a narrow trading range awaiting more solid revenue or earnings growth.

GameStop Stock Chart

GameStop Stock Chart by YCharts

The question is whether GameStop's reliance on the retail model will not pose bigger problems than it has. While digital sales grew 60% in the third quarter, the company said, it remains a small part of its business. And there doesn't seem to be the capital behind making it bigger.

Michael McHugh is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings, stock screener and portfolio strategies.

Read more articles about: Company Analysis  

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