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Gamers Open Wallets, Readers Stay On Couch

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GameStop, Barners & Noble at mercy of consumer preferences.

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Barnes & Noble (BKS) and GameStop (GME) are headed in opposite directions. Heavily dependent on shoppers' waning discretionary dollars, the fate of the two retailers lies squarely in consumers' fickle hands.

According to The Wall Street Journal, Barnes & Noble reported a $2.2 million loss for the quarter ending May 3rd, including an $8.3 million charge stemming from a legal battle in California over the collection of sales tax online. The bookseller also lowered sales estimates for fiscal 2008, but reiterated its view that earnings per share will fall in line with its previous forecast.

The Journal reported earlier this week that Barnes & Noble may be looking to buy Borders Group (BGP), which put itself on the block in March. Regulators are likely to scoff at a merger of the two companies, however, as it would create a book retailer with more than 30% market share.

But pricing power in the world of print may not matter; who reads books these days anyway? Certainly no one between the ages of 12 and 25 - they're too busy playing Grand Theft Auto IV (TTWO) or Guitar Hero (ATVI).

That's good news for GameStop. The purveyor of new and used video games saw profits double from a year ago amid strong demand for new titles like the aforementioned Grand Theft Auto IV and Rock Band. Despite a dip in margins, same-store sales jumped 27% - stronger than the company's own estimates. New video game sales increased 72% from a year prior, while used game sales grew by 27%. GameStop guided earnings for the second quarter at the high end of analysts' estimates.

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During tough economic times, consumer preferences play a more significant role in which retailers stay in the black and which ones fold. Investors should expect niche players like GameStop, well positioned despite a sluggish economy, to outperform catch-all electronics stores like Best Buy (BBY).

In contrast to fad products like Crocs (CROX) and Under Armor (UA), video games represent a longer-term trend toward a more interactive entertainment experience. The popularity of games like Guitar Hero and Nintendo's (NTDOY) Wii Fit that force users to get off the couch is evidence of this shift.

And unlike TVs and computers that have relative shelf lives, video games "must" be replaced every six to twelve months when a new release or edition comes out. Final Fantasy, a popular role playing series for the Sony (SNY) PlayStation, is already up to its 13th iteration.

Gamers are a loyal bunch. The ability to buy used games for a fraction of the cost of new ones, even during tough economic times, means they can keep on playing.

No positions in stocks mentioned.

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