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Why Are GameStop Shares Sinking?

Stocks in this article: GME WMT

NEW YORK (TheStreet) - GameStop (GME) shares were sinking 4.7% to $37.88 on Tuesday after Wal-Mart (WMT) announced it was about to creep onto the video game retailer's trade-in and pre-owned business.

Walmart said that it was launching a video game trade-in program, in which the big box retailer will go after the $2 billion used video game market. 

Starting March 26, approximately 3,100 U.S. Walmart stores will begin accepting video game trade-ins. The traded-in games will be sent to be refurbished and made available for purchase in like-new condition both online and in stores. The video games will be labeled "Certified Pre-Owned," which means the product is fully refurbished and in like-new condition, Walmart says.

"We're going to shake up the market place," said Duncan Mac Naughton, chief merchandising and marketing officer for Walmart U.S., in a conference call with reporters. "We're not participating in the $2 billion used gaming industry at all."

The move will place pressure on Best Buy (BBY)and Amazon (AMZN), but it will especially hit GameStop as the Grapevine, Texas-based company formed a niche selling video games and gaming hardware.

"This WMT news will very likely represent the latest worry for GME investors and make for another weight upon shares at least near term. WMT is retailing's '800 lb. gorilla,' and we cannot discount any of its moves," Oppenheimer analyst Brian Nagel wrote in a note to clients.

That said, any "buy-sell-trade" model is "notoriously difficult for even seasoned retail chains to execute," Nagel said. "GME has been successful in the business for a long time. We are very hesitant to discount meaningfully the dominance of GME in the category, even against WMT. The market has worried that used video games might become the next 'dinosaur' in consumer products. We view WMT's move into the category as a validation of the category's longevity." Oppenheimer's Nagel rates GameStop at a "outperform."

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