Game’s float last year was controversial because of its 2012 collapse, and its profit warning yesterday will have set doubters’ tongues wagging.

To be fair to Game, it had a successful start as a quoted retailer. It floated in June and ended 2014 as the best-performing float of the year; so far so good.

But it hasn’t lasted long. Game crashed yesterday like a car in Grand Theft Auto and forecasts EBITDA of £51.3m for the year to August 1, 2015, much lower than an earlier consensus of £63.8m.

Like Boohoo, which issued a profit warning last week, Game was similarly impacted by heavy promotional discounting over the Christmas period, which was kicked off by Black Friday.

While retailers such as Dixons Carphone and Shop Direct have spoken out in favour of Black Friday, for Game Digital it proved to be a tough ride. The retailer said that unprecedented promotional activity led to a faster than expected fall in the average selling prices of hardware as well as a greater prevalence of software bundling. Both these resulted in lower market value growth than unit growth in both of the group’s markets.

However, while analysts Liberum believe Game has been hit hard by Black Friday, they see a silver lining in that the day helped create a total installed base of 3.1 million PlayStation 4 and Xbox One consoles in the UK.

Strong CRM

Liberum analyst Tom Gadsby adds that Game has built a strong CRM system that shows an average spend across the cycle of around £2,500 from “the best segment of customers after buying a console from the company”. He believes additional sales are to be had by the retailer, which raised eyebrows when it floated last year just two years after it had entered administration.

“While some of the Black Friday customers would undoubtedly have been promiscuous bargain hunters there are clearly many who will be sticky in the longer term,” says Gadsby.

He adds that Game would have risked losing future customers if it had stepped back from Black Friday. “There may be a very natural fear among investors that we could see exactly the same situation next year but we see several reasons why this may not be the case.”

Weak footing

But even without Black Friday, Game’s business model puts it on a weak footing. It is driven by the console cycle and is reliant on innovation from the console manufacturers and games firms.

Another challenge the retailer faces is that even though it remains a UK market leader and will continue to shift large volumes of consoles, it faces a strong challenge from the rise of online gaming, most notably from Microsoft and Sony.

Cautious optimism

However, Peel Hunt analyst John Stevenson says he’s cautiously optimistic about Game’s future.

“Game was performing strongly because of the phase of the cycle – we’re at the early stage of hardware sales,” says Stevenson. “They have a dominant market share and should continue to trade well. I think this profit warning was a lot driven by expectations. Game had climbed a big hill and was trading well in the first half of the year.”

Similarly Gadsby says that while this profit warning will raise concerns among investors “we believe that this is a very different company from the one that went into administration”.

He adds: “The company has halved its UK store base from 2011 and yet has restored market share to pre-administration levels. Average lease costs are now three to four years and the business is, as we have seen, highly cash-generative.”

A profit warning at the start of the year may cause the January blues for investors, but they’ll be hoping that this crash is just another part of the cyclical wave that Game continues to ride.