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Video game and entertainment software retailer, GameStop Corporation (GME - Analyst Report) recently entered into an agreement with Sony Computer Entertainment Europe (SCEE) to sell downloadable content (DLC) from PlayStation Network in Europe and Australia.

As per the agreement, GameStop, through its 1,600 stores across Australia, New Zealand, France, Italy, Germany, Spain, Austria and Switzerland, will provide gamers the flexibility of purchasing DLCs with trade credits, gift cards and cash.

However, the continuous slump in the video gaming industry, stemming from increased online gaming activities, and shifting preferences toward tablets and mobile phones from traditional game consoles, remains a concern for the company.

GameStop bore the brunt of weak traffic and lack of significant game title launches, which was well reflected in its dismal first quarter 2012 sales numbers. The company posted total revenue of $2.0 billion during the quarter, which was down 12.2% from the year-ago quarter, and also below the Zacks Consensus Revenue Estimate of $2.1 billion.

The move is consistent with GameStop’s digital strategy, wherein the company continues to transform itself into a retailer of not just physical but also digital gaming and electronics products.

We expect the company’s digital, iDevice and gaming tablet initiatives to be accretive to its results going forward. The company’s buy-sell-trade model of selling new games, the buying back of used games and the PowerUp Rewards program makes it a popular destination for shopping.

GameStop is well positioned to take the advantage of the growing market for video game products and PC entertainment software. The company’s strategy is to grow through store expansions in favorable localities, where it typically provides the largest title collection of video games. It has also been leveraging its first-to-market distribution network to offer the latest hardware and software releases.

Currently, we have a long-term Neutral recommendation on GameStop. However, GameStop, which faces stiff competition from Amazon.com Inc. (AMZN - Analyst Report), holds a Zacks #4 Rank that translates into a short-term Sell rating, reflecting the company’s sluggish comparable-store sales outlook for the second quarter of fiscal 2012.

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