When we discussed GameStop's (GME) same-store sales last week, a reader pointed out that GameStop appeared to have a burgeoning inventory problem. Indeed, looking at the pre-Christmas inventory levels of GameStop over the last few years shows a disturbing trend:
But this is a company that has expanded tremendously over the last few years. As store count has grown, so too have inventory requirements. Therefore, it might make sense to look at inventory on a per-store level:
While not as dramatic as before, clearly the trend is still up over the last few years, with the average store's inventory having risen some 60% since 2005.
However, GameStop sells a range of products and product-types, with varying prices that may have changed over time. As such, analysts will often look at the average number of days an item stays in stock. Here's what GameStop's inventory days looks like, using pre-Christmas inventory as the level of annual inventory:
While the recent trend is still up, the situation does not look as dire as it did initially. Unfortunately, however, it is very difficult to draw any reasonable conclusions from this data. Since the company doesn't break down its inventory by type, it's difficult to determine if there is a build-up in one type of product (say, used games, as the reader was suggesting). Furthermore, the company is constantly dealing with changing product demands from consumers: hardware sales were all the rage when new consoles came out, but as major new consoles aren't slated to come out for several years, a greater percentage of sales will now be of the software kind, which come with different inventory constraints and challenges.
The reason for the jump in inventory compared to last year was attributed to the fact that the company loaded up on a single game title, Call of Duty: Modern Warfare 2. Avoiding stock outs is a key success factor in driving new software sales, as the company blamed stock outs of three key products as one of the factors that caused its lower than expected December sales.
Finally, the company does have certain protection from its vendors from obsolescence. As an important distributor in the video game market (which will likely be the case until such time as game downloads gain traction), GameStop has been able to negotiate return privileges with its major suppliers should it be unable to sell product. Of course, this would likely only apply to new products.
Determining the inventory situation at GameStop isn't easy. The company's unique challenge of a constantly changing product mix, along with the fact that it doesn't disclose inventory by segment, forces the shareholder to have to speculate somewhat as to what's going on. (Some companies make it easier to value inventory, while other companies don't.) Fortunately, the Christmas period is now over, and shareholders will soon get a look at how well the company sold through the large inventory levels it took into the holiday season.