Video games retailer Game on Tuesday warned it may breach the terms of its loans, blaming difficult market conditions that forced it to cut prices in the run-up to Christmas and resulted in a slump in sales.
The firm, which was the first British high street stores group to warn on profit during the run-up to Christmas, said sales had been even worse than feared.
Group sales over the last eight weeks were 14.7% weaker than a year earlier and fell by 12.9% at stores open a year in the 49 weeks to January 7 versus a 13.1% decline for the overall games market.
For the full year Game Group predicted a like-for-like sales decline of at least 10.3% versus the 7% drop predicted on November 16.
The company also warned that sales promotions over Christmas had hit profitability with full-year gross margins now seen dropping by 190 basis points versus the 150 basis point drop previously predicted.
“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 2012,” Game Group said in a trading statement.
‘Constructive dialogue’
The company said a cash position similar to last year’s £120-million level meant it should meet the debt service requirements on its loans and that it was in “regular and constructive dialogue” with its lenders, describing their stance as supportive.
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.
With British shoppers’ 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 chief executive Ian Shepherd said. “We are adapting to the changing market and are well prepared for the next hardware cycle.” — Reuters