After thirteen consecutive months of decline, video game sales increased in Jan 2013, thanks to an additional week. According to market research firm NPD, sales increased 9.0% year over year to $834.7 million last month.

The NPD group follows the National Retail Federation’s calendar, which adds a week every six or seven years at the time of reporting sales. On a regular basis (four week month), sales would have declined 13% from the year-ago month.

Software sales climbed 1% (over the five week period) year over year to $373.1 million. On a regular basis, sales would have declined 19% from Jan 2012 levels. Activision’s ( ATVI - Snapshot Report ) Call of Duty: Black Ops II continued to top the game sales chart in Jan 2013. Currently, Activision has a Zacks Rank #3 (Hold).

Ubisoft’s Far Cry 3 was #2, which pushed December runner-up Just Dance 4 from the same developer to #3. Take-Two Interactive’s ( TTWO - Snapshot Report ) NBA 2K13 was placed at #4 and Electronic Arts ( EA - Analyst Report ) Madden NFL 13 at #5. Currently, Take-Two has a Zacks Rank #1 (Strong Buy), while EA has a Zacks Rank #4 (Sell).

Hardware sales increased 4.0% (over the five week period) year over year to $205.0 million. On a regular basis, sales would have declined 17% from Jan 2012. Microsoft’s ( MSFT - Analyst Report ) Xbox 360 was again the top-selling console with 281,000 units sold in January. Currently, Microsoft has a Zacks Rank #3 (Hold).

Accessories reported strong year-over-year growth as sales surged 30% over the five week month. On a regular basis, sales would have increased 4.0% from the year-ago quarter. The strong growth was primarily driven by higher demand for Activision’s Skylander toys.

According to NPD, consumers spent approximately $141.0 million on used games and rentals and $382.0 million toward mobile games and downloadable content.

Our Take

We expect video game sales to remain sluggish over the next few months. 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, declining software sales remain a concern. We believe that the rapid adoption of free-to-play games will continue to cannibalize retail software sales in 2013. Further, the highly fragmented video game market will continue to witness increased competitive pressures, which will hurt overall profitability.

However, we believe that the highly anticipated launch of new hardware consoles from Microsoft and Sony (expected in 2013) will boost the sagging video game retail sales market going forward.