GameStop CFO’s Departure Has Investors Nervous

Chris Morris|Special to

Investors and analysts are wondering why GameStop’s CFO abruptly (and unexpectedly) left the company after just six months – and the company’s stock is taking a drubbing because of it.

Paul Taggart | Bloomberg | Getty Images

Gamestop shares were down nearly 9 percent in midday trading after Wednesday’s after-the-bell announcement that Catherine Smith would be leaving the job she took in late August. The company did not give much guidance as to why Smith was leaving so early, only saying that she had accepted a position at Wal-Mart .

While some analysts think the lure of a Wal-Mart position may have been too tempting to refuse, Smith’s rapid departure has others wondering if she saw something at GameStop that made her rethink her decision to join the video game retailer.

“Given her short stay at the firm, Smith’s departure raises questions on the condition of the company, particularly following a sharply disappointing holiday season,” wrote Goldman Sachs analyst Robert Higginbotham in a note.

Piper Jaffray analyst Anthony Gikas downgraded GameStop today to Neutral from Overweight, adjusting his price target from $24 to $16. Other analysts were cautious about the company as well.

“With the company losing its second CFO in the last six months, while facing a challenging environment in the short term as well as potential long-term headwinds, we believe that it's best to remain on the sidelines,” wrote BMO Capital Markets’ Edward S. Williams.

“Though the stock looks cheap, we would like to see improving industry fundamentals, continuity with its CFO position as well as a well-defined strategy for how the company can position itself with regards to the growing interest in digital distribution.”

Meanwhile, Broadpoint AmTech’s Ben Schachter said he was putting his GameStop estimates, rating, and price target under review until he is able to gain more clarity on the circumstances behind Smith’s departure.

Smith’s departure comes as analysts are beginning to take a hard look at what the future could hold for GameStop. Used game sales, which make up more than 50 percent of the company’s revenues, continue to face competition.

Amazon has an ongoing used game exchange pilot program. And Wal-Mart itself has tried to butt into the used game market, though it has had little success to date. (E-Play, the retailer’s partner in the experiment, suspended operations earlier this month. The company was also running the used game test program at Best Buy.)

Of greater concern, though, is the industry’s push towards digital distribution of games and game content - which could cut deeply into the company’s earnings long term. Last year, at roughly the same time Smith joined the company, GameStop hired a general manager of digital media to develop a digital strategy for the company.

That could mean acquisitions – but the company doesn’t seem in a rush, saying it feels digital distribution won’t be a threat until 2014. Analysts think that timeframe could be inaccurate.

“Packaged goods game sales will shift into permanent decline within 18 months,” said Gikas. “Retail game sales will peak during 2010 and GameStop’s EPS will peak during 2011 … We find it difficult to recommend a business with little long-term earnings growth.”

While the speculation swirls about what Smith’s departure might mean, GameStop is staying quiet. The company did not address matters regarding Smith's departure, but noted that her predecessor David Carlson would be retiring March 1st (he had stayed on to ease transition), though he will remain a consultant for the company through 2012.

Still, that leaves a lot of unanswered questions for investors, who are starting to assume the worst.

Video game publishers, including Electronic Arts are predicting that the industry will once again post negative growth in 2010, despite a slew of big-name titles and the introduction of new hardware (Nintendo will begin selling a new handheld system on March 28 and Microsoft and Sony will introduce motion control devices at the end of the year).

If those dire predictions prove accurate, GameStop will be hit hard. And Smith may not be the last executive to depart.