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Video game retail sales declined for the eleventh consecutive month in October 2012. According to market research firm NPD, U.S video game store sales slumped 25.0% year over year to $755.5 million in the month of October.

The year-over-year decline widened compared with the prior-month level and dollar sales also decreased from $843.3 million reported in September. The weak retail sales were primarily due to the ongoing transition from physical to digital platform and aging hardware consoles.

Hardware sales plunged 37% year over year to $187.3 million while total software sales declined 25.0% year over year to $432.6 million. Including PC games, total software declined 25.4% year over year to $451.8 million in October.

However, accessories sales increased 5.0% year over year to $135.6 million. The growth was primarily driven by strong sales of Skylanders Giants accessories, the new game from Activision Blizzard Inc. (ATVI - Snapshot Report), which has a Zacks #1 Rank that implies a “Strong Buy” rating over the next 3-6 months.

According to NPD, NBA 2K13 from Take-Two Interactive (TTWO - Snapshot Report) topped the game sales chart pushing September topper Madden NFL 13 from Electronic Arts (EA - Analyst Report) to #6 spot in the top 10 list. Both Take-Two and EA carry a Zacks #3 Rank, which implies a “Hold” rating over the next 3-6 months.

Resident Evil 6 from Capcom was placed at #2, while Nintendo’s new release Pokemon Black version 2 grabbed the #3 spot. Notably, EA had two other games in the top 10, with FIFA Soccer 13 at #7 and its just released Medal of Honor: Warfighter debuting at #8.

On the hardware front, Microsoft Corp’s (MSFT - Analyst Report) Xbox 360 was again the top-selling console for the twenty second straight month (according to Bloomberg) with 270K units sold. Currently, Microsoft has a Zacks #3 Rank that implies a “Hold” rating over the next 3-6 months.

We believe that the upcoming holiday season will boost video game sales over the next couple of months. Newly released games such as EA’s Medal of Honor: Warfighter and Microsoft’s Halo 4 and upcoming releases from Ubisoft (Assassin’s Creed III) and Activision (Call of Duty: Black Ops) will be the key growth factor in our view.

However, declining consumer spending on video games and the continued rapid adoption of free-to-play games remain the main headwinds over the long term. Although, we believe that the ongoing transition from the physical to the digital platform will ultimately benefit the video game industry (due to the cost effectiveness), low priced digital games have failed to offset the rapid decline of high priced retail sales in recent times.

Moreover, the highly fragmented video game market continues to witness increased competitive pressures, which are hurting overall profitability.

We maintain our Neutral recommendation on Activision, EA and Microsoft over the long term.

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