Marcus Evans Group | Worldwide Headquarters | American Offices | Latin America | European Offices | African / Asian Offices

Game Group loses another 5% as Mass Effect dispute could cost more than £2m in lost profits

Analysts say not stocking forthcoming high profile game could weaken struggling retailer’s finances even further

Shares in Game Group have lost another 5% in the wake of Wednesday’s news it would not be stocking the forthcoming Mass Effect 3 after a dispute with publisher Electronic Arts.

The beleaguered retailer – already under pressure due to increased competition from online sellers and downloads – said it would refund deposits to those who had ordered Mass Effect 3, as well as giving them £5 worth of reward card points. It is also unlikely to stock the new Mario game from Nintendo. The company is already working on a refinancing, with its banks pressing for a sale of its overseas businesses, so this new disruption is the last thing it needs.

Game’s shares are currently down 0.27p at 4.65p, and analyst Mark Photiades at Singer Capital Markets issued a sell note on the business. He said Game could be facing up to £2.5m of lost profits by not stocking Mass Effect 3, on top of forecast losses for this year of £8m:

Working on the assumption that a decent triple A title sells 0.8m-1m titles in the first few weeks of release in the UK and assuming Game has around 20% share, we calculate that by not stocking Mass Effect 3, Game is potentially missing out on around £6m-£7m of revenues in the UK given the title will retail for £39.99.

With new software margins of around 24% this could result in £1.5m-£2m of lost gross profit in the current year. It is also worth noting that margins will suffer as a result of the reward card points being offered in compensation. We estimate this could amount to another £0.3m of forgone gross profit as typically pre-orders account for around 30% of initial sales. So in total there could be £2m-£2.5m of lost UK profit in a year where we are already forecasting losses of £8m.

There is also the wider threat to the company of disappointing its customers. Photiades said:

With the well documented issues that the business is currently facing customers may look to other channels and retailers to make pre-orders in the future to avoid a similar inconvenience.

This latest development is further evidence of just how tough the situation is for Game right now. We continue to see short term earnings risk from a challenging market and medium term structural pressures give limited comfort in our forecast return to profitability in outer years. The focus very much remains on pure survival as opposed to revival at this stage.

Not everyone is as negative, however. John Stevenson at Peel Hunt, who has a hold recommendation, said:

We expect Mass Effect 3 will suffer as a consequence of not supplying Game, noting other titles that Game has not stocked recently, while lower profile, certainly failed to impress in terms of chart position. We understand Game is now selling the Ubisoft Vita titles, illustrating both the fluid nature of events and the importance of Game to suppliers in the UK video gaming market.

Given recent events, further speculation and the loss of key titles will clearly not help customer confidence, future pre-order levels or Game’s overall negotiations with banks, suppliers and wider stakeholders. That aside, the group is continuing to develop a strategic plan, which we believe will likely result in the disposal of international operations and some UK store closures. The potential for new major console releases (Wii U confirmed for 2012, speculation regarding the next generation X-Box) will be a significant source of future revenue and cash generation for the group, which will be critical to underpinning any recovery plan.

And the last word goes to analyst Nick Bubb:

So, had you heard of this new so-called blockbuster game Mass Effect 3 that comes out next week? Well, nor had we, and despite all the tut-tutting about how ominous the EA supply problem is, we suspect that it is just a storm in a teacup in a seasonally quiet time of year, as the big game suppliers can’t really afford to do without Game at Christmas, given its huge share of the market. We are more concerned about the lack of news on the overseas disposal front. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds