LONDON (Reuters) - British video games retailer Game Group warned on Tuesday that poor trading over Christmas meant it may breach the terms of its loans, wiping a third off the share price of the company as it struggles to adapt to a shift towards online gaming.
The firm, which was the first British high street stores group to warn on profits in the run-up to Christmas, said on Tuesday sales had been even worse than feared, adding that price cuts would eat into earnings.
Game, which trades from nearly 1,300 stores in nine European markets and Australia, faces intense competition from internet players and supermarkets, who often sell new blockbuster titles as loss leaders.
The firm has been closing stores and moving into digital gaming, aiming to avoid the fate of other struggling specialist retailers, such as music group HMV.
But its share price was down 31 percent at 4.67 pence by 0932 GMT on Tuesday, a level not seen in 16 years.
“We are reducing our target price from 10 pence to 5 pence on the basis of these weaker numbers and uncertainty as to what the implications will be for equity shareholders after the banks have extracted their pound of flesh,” Panmure Gordon analyst Philip Dorgan said in a note to clients.
Game said group sales over the last eight weeks were down 14.7 percent on the same period a year ago and fell by 10 percent at stores open a year in the 49 weeks to January 7 compared with a 13.1 percent decline in the overall games market.
For the full year Game Group predicted a like-for-like sales decline of at least 10.3 percent, worse than the 7 percent drop predicted on November 16.
The company also said sales promotions over Christmas had hit profitability with full-year gross margins now seen dropping by 1.9 percentage points, having previously predicted a fall of 1.5 percentage points.
“The group currently remains compliant with its loan covenants. However, the difficult market conditions raise the likelihood that it will not meet its EBITDA (core earnings) covenants ... when they are tested on February 27,” Game Group said.
The company said a cash position similar to last year’s 120 million-pound level meant it should meet the debt service requirements on its loans and that it was in “regular and constructive dialogue” with lenders, saying their stance was supportive.
Panmure’s Dorgan said, however, the sales numbers indicated it would make a full year loss of about 30 million pounds.
“This will result in a significant underlying cash outflow,” he said. “While (the coming year) will see the launch of PlayStation Vita in February and the Nintendo Wii U later in the year, we believe that the supermarkets and online operators could be the prime beneficiaries.”
With disposable incomes squeezed by rising prices, muted wages growth and government austerity measures, store chains generally had a tough Christmas, using early sales to attract customers. They do not expect 2012 to be much better.
“Our industry had an incredibly tough 2011,” Game Group’s chief executive Ian Shepherd said. “We are adapting to the changing market and are well prepared for the next hardware cycle.”
Additional reporting by James Davey; Editing by Greg Mahlich