Game Group - which saw its top two executives quit in April - is leading the FTSE 250 fallers after another hefty decline in sales.
The computer game retailer said like for like sales fell 12.3% in the 19 weeks to June 12, just a slight improvement on the 14.4% decline in the 11 weeks to the start of April.
It said the market for PC and video games was challenging across Europe, and even new releases like Red Dead Redemption and Battlefield: Bad Company 2 - while selling well - did not do enough to offset the overall decline. It maintains however it was outperforming the market, partly by offering exclusive extras such as digital weapons and vehicle designs for Battlefield.
Outside the UK, it is restructuring its businesses in France and Australia and hopes to break even in both countries in 2011, although there will be some costs associated with the changes.
It hopes for a boost from some of the announcements from the E3 show, including Microsoft's Kinect and Nintendo's 3DS, as well as new software releases such as Halo:Reach, Legend of Zelda:Skyward Sword and Gran Turismo 5. But it admits this will not happen until next year. In the meantime it still expects year on year market revenue declines in 2010, with negative full year like for like figures.
Meanwhile Ian Shepherd - previously Vodafone's UK consumer director - is set to take over as the new chief executive at the end of this month. The interim boss, Chris Bell, will then go back to being the company's senior non-executive director.
The company's shares have fallen 5.6p to 82.65p, and Freddie George at Seymour Pierce downgraded his recommendation, saying:
Following this update, we are reducing our 2010/11 pre-tax profit forecasts from £65m to £50m taking earnings per share from 13.4p to 10.4p and also reducing our 2011/11 pre-tax profit forecasts from £73m to £65m (EPS down from 14.9p to 13.3p). Management states that with the strengthening of the company's value proposition, it now expects gross margins to decrease by 1% point.
We have been wrong on the stock and are moving our recommendation from buy to hold. At these levels there is good value in the stock, 8.5 times 2010/11 earnings and the dividend yield is over 7%. We are, however, becoming more concerned re structural changes evolving and in particular the growing development of the food retailers in the games categories.
Eithne O'Leary at Oriel Securities also has a hold rating on the shares:
Investors may start to look through earnings downgrades to the next games cycle: Games cycles are notoriously difficult to predict and whilst today's downgrade is disappointing, we are encouraged that the pace of decline in like for like sales has moderated to -9.5% (from -14.4% at the prelims) for the group as a whole over the last 8 weeks.
By lowering margins and successfully defending its market share, we believe that Game Group no longer offers the supermarkets a soft target at which to take aim. Over the coming months we expect Sony and Microsoft to clarify their plans to bring the Move and Kinect to the UK. With a strong line up of software titles, we expect a stronger finish to the year in sales terms. We believe that this improving sales profile could put a floor under the earnings and should investor confidence return, we expect Game shares to have a much better second half. Ahead of greater clarity on the timing of the launch schedule, we stay with our hold recommendation.
