It’s certainly a grueling time for many brick-and-mortar retailers. The fact is that consumers continue to shift their spending to e-commerce platforms, especially to the mighty Amazon.com, Inc. (AMZN).
Actually, for some retailers, the situation may be life and death.
Just take a look at GameStop Corp. (GME). The company must deal with the likely prospect that its customers will increasingly use online platforms to download and play video games.
Already, investors have been discounting this. From late 2013, GameStop shares have lost nearly half their value. Yet during this time there has been growth with the major video game publishers. For example, Electronic Arts Inc. (EA) is up close to 200% and Activision Blizzard, Inc. (ATVI) has logged a return of about 90%.
GME Stock Making Moves
Yet GameStop has taken swift actions — and a key part has been to invest more in digital platforms. To this end, there was the purchase of Geeknet, which is an e-commerce site that sells collectibles, apparel, gadgets, electronics and toys.
GME also has developed systems to deliver games online, such as by using prepaid digital cards for Microsoft Corporation’s (MSFT) Xbox Live and Sony Corp (ADR)’s (SNE) PlayStation Plus. However, the business only represents about 2% of overall sales.
The interesting thing is that GameStop is doubling down on its brick-and-mortar business. And yes, there is certainly a good rationale for this. As GME CEO Julian Paul Raines noted on the most recent earnings call: “This strategy is built on our core competencies in real estate, human talent, ability to deploy capital effectively, buy-sell-trade and PowerUp rewards.”
In the case of the buy-sell-trade business, GME has posted growth for seven consecutive quarters. And as for the PowerUp program, it has 45 million members across the globe and the average yearly spend is a hefty $322.
But GameStop has been making aggressive moves beyond its gaming focus. Keep in mind that the company has shelled out hundreds of millions to get a piece of the mobile phone retailer market. So far, GME has 888 AT&T Inc. (T) stores, 76 Apple Inc. (AAPL) retail operations and 70 Cricket Wireless locations (which is also owned by AT&T).
Although, this is still a small part of the business. Keep in mind that the GME retail footprint is nearly 7,100 stores worldwide.
Something else to consider: New video game sales are still the biggest part of the business, coming to over $1 billion in the latest quarter. The problem is that this segment plunged by nearly 10% during the latest quarter.
GameStop management blamed this on the lack of titles for the Nintendo platform. But this seems a bit of a stretch. Rather, the poor performance may be further evidence of the secular trend of games going digital.
And if history is any indication, the transition is likely to be very challenging for GME. Just look at some of the failures. One example is Egghead Software, which eventually went bankrupt because consumers increasingly used the Net to get software. Then there was the fall of CompUSA, whose big-box model for selling tech equipment became mostly a dinosaur. Of course, another classic case is Blockbuster Video, which faded away because of the Netflix, Inc. (NFLX) juggernaut.
Bottom Line for GME Stock
In other words, GameStop faces a tough strategic challenge. Unfortunately, the moves to diversify may not provide much growth, either. Let’s face it, the smartphone retail business is fairly mature in the US.
Granted, all this is not to say that GME stock is on the verge of implosion. The company still produces strong cash flows and pays an attractive 4.8% dividend.
But again, it could be tough for investors to get sustainable gains, especially when the core business appears to be the target of disruption from e-commerce and online technologies.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
