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By KRISTEN KENEDY
SAN MATEO, CALIF.
Entertain-ment software publishers say they have only one thing standing between them and robust retail sales this fourth quarter: robust retailers.
While overall computer-related retail sales continue to climb, a spate of losses or decreased earnings among entertainment retailers has caused some concern among publishers.
None are remotely suggesting that all hope is lost. Indeed, publishers, such as Sierra On-Line, and retailers, such as Virgin Megastores, may see stronger sales than last year. And publishers and analysts foresee revenue growth of 20 percent in the entertainment software category is the average expectation for the fourth quarter, thanks to a healthy Windows 95 conversion level and an anticipated increase in fourth-quarter hardware purchases.
But things remain unsettled.
Certainly, the greatest level of concern exists for the 707 Software Etc. and Babbage¹s stores, whose parent NeoStar filed for Chapter 11 bankruptcy protection earlier this month. Although the $513.5- million company is not expected to close any stores before the holidays, NeoStar chairman Tom Plaskett said the retailer will review stores and merchandising concepts early in 1997.
NeoStar reported a loss of $21.5 million on an 18 percent decrease in sales to $75.2- million for its second quarter ended Aug. 3. Comparable-store sales declined 25 percent primarily due to a "significant" drop-off in sales of PC software, supplies and accessories, the company reported.
While some customers will look to other stores for software purchases, Motika said it is unlikely that "100 percent of what NeoStar is technically losing" will be picked up by other formats. Larry Marcus, an analyst at Alex. Brown, San Francisco, said a disabled NeoStar could throw sales off significantly during the holiday season.
"There is disequilibrium in the retail market," Marcus said. "If someone is having trouble paying, it throws the whole system off balance."
Citing poor store performance, Musicland closed two of of its Media Play superstores in the Dayton, Ohio, area last week. This follows the company shutting down the seven Media Play stores operating in Texas three months ago. Although separate Media Play financial results are not available, in August Musicland, which also operates Sam Goody and Sun Coast Video outlets, posted a 4.1 percent drop in comp-store sales, while overall sales rose 2 percent.
A Musicland spokeswoman said earlier this year the company had decided to eliminate 10 to 15 Media Play stores and concentrate its efforts on the better performing locations.
Egghead, which sells predominantly business and productivity titles, has also experienced its share of difficulties. For its fiscal year ended March 30, Egghead reported a loss of $11.1 million. During its first quarter ended June 29, the company reported a loss of $7.6 million.
Eric Paulson, chairman and chief executive officer of Navarre, said the number of retailers "in grave shape" or moving into difficulty is troubling. Still, he characterized the overall outlook for entertainment software as "positive."
Likewise, many entertainment software publishers said they still hope to have a successful fourth quarter-but their apprehension is significant.
"We know today that NeoStar does not have the proper mix representation to support the customer," said Kim Motika, vice president of sales at Interplay. "Until NeoStar gets in a position to have [all] the products customers are asking for and a properly presented mix for Christmas, they will still be a good retailer for Christmas, but not nearly as good as they were last year."
Bill Moore, vice president of sales at Sierra On-Line, said, "We see that there is a possibility for a stronger-than-expected Christmas." In particular, Moore added, there is less consumer confusion this year over the platform and even the operating system of choice. "Everyone that held out last year may make PC purchases this year, depending on the economy," he said.
Bobby Kotick, chief executive officer at Activision, said he hopes that NeoStar can come up with the financing necessary to keep a competitive assortment stocked on the shelves. Tight margins will further aggravate NeoStar's difficult situation, he said.
Retailers were positive about potential sales, as well.
"I expect to have a better Christmas than last year, which was also very good," said Jon Viscott, a software buyer for the Virgin Megastores.
Hambrecht & Quist analyst Genni Combes said she expects to see a healthy growth rate in the PC games market. Similar to last year, Combes is anticipating a case where the big publishers "are getting bigger."
This is particularly troubling for small publishers that have been dropping out in ever-increasing numbers. Last week, for example, Viacom NewMedia confirmed its intention to fold administrative functions into its distributor and sister-company Virgin Interactive. Trimark Interactive hung up its publishing hat in favor of development deals, and GT Interactive Software acquired three publishers, The WizardWorks Group, Humongous Entertainment and FormGen, in the span of about one month. FOR ADDITIONAL CRW BREAKING NEWS STORIES, CLICK HERE