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GameStop's New COO Levels Up

Posted: Sep 08, 2008 14:26 PM by Derek Simon

Tickers in this Article: GME, HD, LOW, TTWO, ATVI, KNM, BBY, WMT

If, as the Roman philosopher Seneca once noted, "Luck is what happens when preparation meets opportunity," then J. Paul Raines is one lucky man.

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How else can one describe a guy who, at the tender age of 44, finds himself the new chief operating officer (COO) of GameStop (NYSE:GME), a rising retail star, after spending the past eight years with Home Depot (NYSE:HD), a company that appears to be on the verge of going supernova?

Preparation
Arriving at Home Depot in 2000, the same year that controversial Robert Nardelli (now with Chrysler) became the company's CEO, Raines quickly ascended from HD's Director of Labor Management to Executive Vice President of Stores by April 2007.

For much of that time, Home Depot grew like Jack's beanstalk, going from 1,134 stores and $45.7 billion in sales at the start of the new millennium to 2,042 stores and a record $77 billion in sales by the end of fiscal year 2005. Yet, the company's stock failed to follow, dropping more than 35% in value from January 1, 2000, to December 30, 2005. This was especially egregious to HD shareholders in light of rival Lowe's (NYSE:LOW) 143% equity increase over the same six-year period.

When the housing crisis hit, things got worse: Home Depot's sales and earnings fell so fast that even Nardelli's $210 million golden parachute (negotiated when he resigned on Jan. 3, 2007) couldn't slow the descent.

Opportunity
While Home Depot has floundered, GameStop has flourished. Fueled by booming sales of Take-Two Interactive's (Nasdaq:TTWO) "Grand Theft Auto," Activision Blizzard's (Nasdaq:ATVI) "Guitar Hero" and "World of Warcraft", and Konami's (NYSE:KNM) "Metal Gear" software series, store revenue has more than quadrupled since 2004.

Full-year 2008 is off to a rousing start as well. In the second quarter ended Aug. 2, GameStop reported net income of $57.2 million, which is earnings per share (EPS) of 34 cents, compared to net income of $21.8 million (13 cents a share) for the same three months last year. The 34 cents EPS was 6 cents more than analysts had expected.

Better still, the company revised its full-year guidance as a result of those stellar second quarter results, with earnings for FY 2008 now expected to come in at $2.45-2.50 per share.

There appears to be no stopping GameStop. The company has a history of exceeding expectations, and it has price/earnings growth under 1, which is in line with industry standards and superior to competitors such as Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT).

Luck
In fact, Raines' hiring was a direct result of the electronics retailer's recent growth. R. Richard Fontaine, the CEO of GameStop since the company's inception in 1996, relinquished that role to Daniel A. DeMatteo on September 7; thereby clearing the way for Raines to assume DeMatteo's former position as COO.

Fontaine has been named GameStop's executive chairman and will be focused on international operations, acquisition opportunities and strategic development.

"We feel that his 30-year career within the retail sector, the fact that he co-founded GameStop, and has spearheaded much of our domestic and international growth over the past 12 years, made him the obvious choice," noted GameStop's Divisional Vice President of Corporate Communications, Chris Olivera, regarding Fontaine's reassignment.

And Raines?
"We feel fortunate to have a seasoned executive such as Paul join us from another leading brand," Olivera said. I'm betting Raines feels pretty fortunate too.

By Derek Simon

Derek Simon is a fulltime freelance business/sports writer who became interested in the stock market when he read a biography of Warren Buffett while still in high school. Although Simon's net worth is considerably less than Mr. Buffett's and his "yacht" has an air valve, he firmly believes in the value approach preached by Oracle of Omaha and, thus, is fond of taking contrarian viewpoints.

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