KEY POINTS:
SEPTEMBER NPD DATA DUE MONDAY, OCTOBER 18th.
ESTIMATE SEPT TOTAL SW SALES UP 15%-20% (ON EASY COMP).
ASPs EXPECTED TO DECLINE 5% DURING MONTH.
WE LIKE VIDEO GAME PUBLISHER STOCKS 5%-10% LOWER.
TERRIFIC HOLIDAY SALES ON DECK - FAVORS RETAILERS.
TOTAL SOFTWARE SALES EST. UP 15%-20%: We estimate retail sales of
video game software increased 15%-20% during the month of September to
approximately $375 million. The industry faced a relatively easy comparison
(-9.7%) to the prior year period. All told, checks indicate September was a strong
sales month at retail driven by sales of Madden Football, ESPN NFL 2K5, Fable,
Pokemon Fire Red, and Star Wars to name a few. The best is yet to come... the
holiday (Oct-Dec) line-up looks the strongest ever.
SOFTWARE SALES EXPECTATIONS BY COMPANY: Below we
highlight our September software sales expectations by company. We combine
actual July and August NPD data with our September estimated range to
determine our September quarter estimates listed below.
Company Sept. Sales Grth Jul Sales Aug Sales Sep Q Sales Est.
Electronic Arts Up 10%-15% $78M (+33%) $141M (+16%) $306M (+18%)
Activision Up 75%-100% $51M (+366%) $21M (135%) $94M (+198%)
THQ, Inc. Down 20%-25% $17M (-9%) $12M (-27%) $47M (-21%)
Take-Two Up 50%-70% $26M (+84%) $25M (+92%) $69M (+81%)
Total SW Sales Up 15%-20% $350M (+28%) $337M (+1%) $1,062 (+14%)
FORWARD NPD COMPS REMAIN "EASY:" Looking ahead, software sales
comps for the remainder of 2004 appear easy. Comps include: October (-14.6%
to PY), November (+7.2% to PY), and December (+12.8% to PY). We anticipate
an 11% increase in software sales during October-December over the same period
in 2003 driven by a very strong holiday 2004 title slate. Based on our growth
estimate, the December quarter will represent approximately 50% of full-year
2004 sales.
IMPORTANT LAUNCH DATES: Highly-anticipated titles launching during
the December quarter include: THUG 2 (Activision, Oct. 4), GTA: San Andreas
(Take-Two, Oct. 26), Metal Gear Solid: Snake Eater (Konami, Nov. 1), Half-Life
2 (VU Games, Nov. 1), Halo 2 (Microsoft, Nov. 9), Metroid Prime 2 Echoes
(Nintendo, Nov. 15), Need For Speed (EA, Nov. 15), and Gran Turismo 4 (Sony,
Dec. 14).
RISKS: We consider 2005 and 2006 as transitional years for the video game
sector, a period characterized by sales declines and slowing growth. It's likely that
valuations will be challenged before sector growth rates decline in 2005.
INDUSTRY THESIS: We consider 2005 and 2006 as transitional years for the video game sector, a period characterized by sales declines and slowing growth. We continue to recommend investors reduce exposure to the video game publishers before year-end and look to video game retailers as a more balanced approach to the cycle transition.
FORWARD LOOKING STATEMENTS: We think Activision, Electronic Arts, and THQ Inc. will reiterate FY05 annual sales and earnings guidance. We think Activision is the most likely to outperform guidance, while EA and THQ perform in-line. Looking to the December quarter sales period, we see more demand variability among publishers than we've seen at any time during the past four years - brace yourself for a bumpy ride. We think enornous sales absorbed by titles such as Grand Theft Auto - SA, Halo-2, Metal Gear Solid - 3, and Gran Turismo to name a few, will create an unpredictable sales environment for our coverage companies during the
holidays.
REMAIN CONSTRUCTIVE ON RETAILERS: We believe video game retailers will directly benefit from a very strong holiday 2004 software line-up, hardware price cuts, expanding and maturing store bases, new hardware launches, margin expansion, and growing selections of used software. We remain constructive on ELBO and GME and reiterate our Outperform investment ratings.
