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Electronics Boutique is up in a down world

While software retailers are ailing, the healthy exception is Electronics Boutique--the only publicly traded player in the thriving video game retail sector.

Software retailers are ailing, but Electronics Boutique is proving the healthy exception.

The travails of software sales, PC-related retailers and the retail industry in general are no secret. The S&P Retail Index is down 12 percent from this year's peak reached in the spring. Major electronics retailer Circuit City has seen its stock price fall 31.9 percent in the past year. Another, CompUSA, decided it couldn't survive as an independent entity and last year sold out to Mexican retailer Grupo Sanborns.

And software specialty stores are closing their doors amid poor sales and tough competition.

But at least one niche is thriving: video game retail.

Wall Street's optimism for this sector is evident. Electronics Boutique, the only publicly traded player in this game, saw its stock go as high as $42.18 during the first week of September. Shares have since fallen from that peak, but they remain 61.5 percent higher than a year ago.

A better measure of investor enthusiasm not only for Electronics Boutique, but for video games in general, comes from the market for initial public offerings.

Shares for the asking
Stock offerings have been rare sightings this year as economic worries drove markets lower. Yet Electronics Boutique not only sold 4 million shares in a stock offering in August, underwriters purchased another 600,000--the maximum allowed--to cover additional requests for shares.

Barnes & Noble's GameStop subsidiary filed for an IPO just weeks after Electronics Boutique's latest share offering.

Electronics Boutique's "pure play" appeal alone would be enough to draw the attention of many investors because the video game market as a whole is surging.

In terms of units sold, Sony's PlayStation 2 is just hitting its stride after its worldwide release a year ago, so the market for PS2 games has plenty of room for growth. Add to that mix new game consoles due this holiday season from Nintendo and Microsoft, and it's easy to see a rosy picture for the next few years. Annual growth estimates for the electronic games industry, on a percentage basis, generally range from the mid-20s to the high 30s for the next few years.

And game sales were thriving even before the PlayStation 2 appeared last year. The U.S. electronic game market grew at a compound annual rate of 18.5 percent in the past five years.

Electronics Boutique did better in the same period, with compound annual growth of 22.7 percent. And that's one of the biggest reasons investors have driven up the stock.

"What it comes down to is execution," said Richard Zimmerman, analyst with Commerce Capital Markets, which started covering Electronics Boutique with a "strong buy" rating. "These guys do a good job."

Disappearing rivals
Elsewhere in the sector, all but one of Electronics Boutique's major game-specific rivals disappeared in the past few years in a web of bankruptcy, acquisitions and mergers that ultimately resulted in the creation of GameStop.

Meanwhile, Electronics Boutique has chugged along, opening new stores and building an inventory-management system that kept in touch with game publishers. That helped Electronics Boutique garner a reputation for having games available immediately after their launches.

see special report: Off the shelf Electronics Boutique became the retailer of choice for hard-core gamers. "It's like a cult, and cults like to hang out together," said Shelly Hale, an analyst with Banc of America Securities.

The gamers in turn give the retail chain a strong amount of preorders for popular games, which means the company can demand strong allocations from game software publishers, which means Electronics Boutique establishes a good reputation among hard-core gamers...

You get the idea.

"It's a factor of their focus," said Zimmerman, whose company is one of only two non-underwriter investment firms that First Call lists as covering Electronics Boutique. "They're a category killer in video electronic games."

One of Wall Street's doubters happens to be the other non-underwriter research company. Alan Weichselbaum, of Fulcrum Global Partners, started covering Electronics Boutique last month with a "sell" rating.

However, none of Weichselbaum's reasons for doubt involve the company's ability.

The Fulcrum analyst argues that Electronics Boutique's current stock price already factors in the company's potential growth.

"While all the good news is already reflected in the price, there are certain factors that we believe could cause the company to miss numbers and put pressure on the stock," Weichselbaum wrote.

For example, he said, the economic slowdown could drive Electronics Boutique's sales below expectations, despite the company's best efforts.