GameStop Stock Plunges After Earnings Underscore Its Losing Battle

The industry's migration toward downloads and online access is still a big problem

GameStop stock - GameStop Stock Plunges After Earnings Underscore Its Losing Battle

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It’s a good news/bad news situation. The good news is, video game retailer GameStop (NYSE:GME) topped its third-quarter estimates. The bad news is, disappointing fourth-quarter guidance sent GameStop stock careening following Thursday’s post-close report.

As it turns out, gamers are still playing. They just don’t need the brick-and-mortar venue as much as they did in the past to get their gaming fix.

The funny thing is, the retailer is doing well with product categories that arguably should be struggling, and GME is struggling on fronts that should be doing well.

Whatever the case, GameStop increasingly understands it may not be able to survive as-is, and as such, it continues to entertain all of its options. That includes the possibility of a merger or buyout.

GameStop Earnings Recap

For the quarter ending on Nov. 3, GME turned $2.1 billion in revenue into a per-share profit of 67 cents. Both were up from year-ago figures of $2.0 billion and 54 cents per share of GameStop stock, respectively. And, perhaps more important, the top and bottom lines were better than expected. The pros were only calling for earnings of 57 cents per share and revenue of just a bit more than $2 billion.

The path taken to reach those results, however, wasn’t quite the one GameStop stock owners were expecting.

Hardware sales — primarily game consoles like the Xbox One from Microsoft (NASDAQ:MSFT) and the PlayStation 4 from Sony (NYSE:SNE) — were up 12.8%, even though most recent versions of both platforms have been available since last year. Meanwhile, despite the ongoing shift toward downloaded video games and move away from disk-based or cartridge-based games, new software revenue grew 10.9% year-over-year.

Meanwhile, sales of pre-owned games fell 13.4%, while its Technology Brands arm (wireless service stores Simply Mac, Spring Mobile and Cricket Wireless) experienced an 11.9% decline in revenue compared to the third quarter of 2017. The company announced a few days ago it would be shedding its Spring Mobile business, with that unit never quite fitting into the mix.

And yet, any bullish take on the results and the upside of any streamlining the company may be doing were wiped away by lowered Q4 guidance.

Perspective for GME

The third-quarter numbers themselves looked solid enough, even if not stellar. Sales were up, as were profits. Even same-store sales grew 2.1%. Yet, previously guiding for a full-year profit of between $3 and $3.55 per share, GameStop dialed that outlook back to a range of only $2.55 to $2.75 per share. Why does the company believe things have turned so sour, so quickly? (Historically, about 60% of the company’s annual profits are produced in the final quarter of the year.)

Chief among the explanations is timing.

The current version of the Xbox One, the Xbox One X, wasn’t launched until the GameStop’s fourth quarter of last year, and therefore didn’t exaggerate the Q3-2017 new-hardware top line. Indeed, some gamers may have been holding off on making any console purchase up until that point, leading to what could make for very tough Q4 comps. Conversely, the PS4 (PlayStation 4) Pro was launched in the latter part of 2016, and was no longer a new “must-have” during last year’s third quarter.

In other words, third-quarter hardware sales didn’t surge as much as they looked relatively strong compared to a soft third quarter in 2017.

Simultaneously, although game publishers such as Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA) always have something new hitting shelves (or increasingly, available online), recent game launches have been especially hot.

The long-awaited Red Dead Redemption II, from Take-Two Interactive (NASDAQ:TTWO) subsidiary Rockstar, was launched in late October … just in time to let GME plug into the game’s record-breaking opening weekend. Meanwhile, Activision’s Call of Duty franchise was updated with the early October release of Black Ops 4, and its reception has been a warm one too.

GameStop found a tailwind on this front.

And yet, the launch nuances of Black Ops 4 also once again underscore a bigger problem GameStop faces. While the game was a strong seller right out of the gate, Black Ops 4 is also Activision’s biggest-ever digital-download release. Gamestop, once a major game distributor, has become a middleman the industry doesn’t entirely need.

That’s even true for games that aren’t new. Used game sales were down 13.4%, as more and more publishers are offering online access to their older titles, selling them for a fraction of what a disc or cartridge would cost at a GameStop store.

Looking Ahead for GameStop Stock

The end result is, among other things, more discounting that ultimately eats into profits … not that GameStop has been growing the top line.

Overall revenue has been stagnant (at best) since 2012, and while the game retailer has managed to log the occasional quarter of earnings growth, by and large it’s fighting a losing battle on that front as well. More recently, gross profits and net income have been dwindling, with GameStop seemingly powerless to resist the tide.

CEO Rob Lloyd knows it, to be clear, conceding “we are evaluating all aspects of our business, including our store and omni-channel experience, cost structure, strategic and economic partnerships with publishing and platform partners, and relationships with customers and the services we offer to them.”

The company may want to evaluate all of those things a little faster than it currently is, however, with total sales as well as same-stores sales likely to fall once the current year’s final tallies are taken.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media,

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