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Analysis: GameStop Profit Margin On Used Almost 50%

Analysis: GameStop Profit Margin On Used Almost 50%

April 28, 2009 | By Leigh Alexander, Matt Matthews

April 28, 2009 | By Leigh Alexander, Matt Matthews
More: Console/PC

Just how lucrative is GameStop's used games business? For every dollar of revenue from pre-owned games and consoles, the company gets 48 cents of gross profits -- that's a margin of nearly 50 percent.

Overall, GameStop's total revenue climbed to $8.8 billion in the fiscal year ending 31 January 2009, up from $7.1 billion in the previous fiscal year, an increase of 24%.

In fact, GameStop's revenue for the past year was 2.8 times the size of its revenue just three years ago.

And, as part of a larger Gamasutra-exclusive analysis on the state of GameStop's business, analyst Matt Matthews explains that gross profit margin is the gross profit divided by total revenue.

For example, Matthews explains, if you take in revenue of $60 on a unit of software and that software originally cost you $54 to obtain, then you have $60 in revenue and $6 in gross profit or $6/$60 = 10% gross profit margin.

New software generates tremendous revenue for GameStop, but the cost of goods for new software is likewise somewhat high. Used products, on the other hand, cost GameStop less to purchase, stock, and distribute. In particular, it can be resold at much higher values than purchased or traded in for.

Thus, GameStop's margins as cents of gross profit per dollar of revenue (e.g. 10 for each dollar of revenue) can be calculated, as follows:

This figure hammers home just how lucrative used product sales are for GameStop. On average, they get 48 of gross profit for each dollar of used product revenue. The "Other" category includes high-margin accessories, and of these, GameStop gets to keep almost 34 for each dollar of sales.

As is widely known in the industry, GameStop's used game sales are far more profitable than its sales of new games; new software and hardware yield margins of 21 and 6, respectively.

These margins are actually relatively static from year to year for GameStop, Matthews explains. However, with rocketing revenues overall, the full article notes that used product accounts for somewhere between 41 and 46 percent of GameStop's gross profit.

In the last fiscal year, gross profit on used product almost reached $1 billion for the first time in the company's history. (The exact figure was $974.5 million, or 42.9% of the company's total gross profit.)

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