3 Reasons Why GameStop Might Not Bounce Back
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GameStop (NYSE: GME)shareholders are losing the game today. Shares of the video game retailer tumbled to four-year lows this morning after offering up problematic preliminary results for its fiscal third quarter.
The small-box retailer sees revenue for the recently concluded fiscal third quarter to clock in at $2 billion, with comps declining 6% to 7% since the prior year. Its profit target now stands between $0.45 and $0.49 per share. Back in late August, it was forecasting a profit of $0.53 to $0.58 a share with comps ranging between a decline of 2% and a gain of 1%.
GameStop is also naturally revising its guidance for all of fiscal 2016. We'll know the ultimate financials in three weeks, but it's clearly not going to be pretty. Opportunistic investors may see the stock hitting levels last seen 50 months ago as a compelling entry point, but let's go over a few of the reasons why the future may not be getting any brighter for GameStock shareholders.
1. New platforms aren't helping
We're at the dawning of virtual reality, and GameStop could've been a big winner if Sony's (NYSE: SNE) new entry in the niche was a hit. PlayStation VR -- PSVR for short -- hit the market a few weeks ago. Sony made the initial pre-order allotment available across several outlets, but a second batch of available systems was made exclusively through GameStop.PSVR isn't as hyped as Oculus Rift, but PSVR is cheaper and it doesn't require a tricked-out PC to work. It wasn't enough to save GameStop in October, apparently.
Pokemon Go -- the game developed by Niantic Labs based onNintendo's (NASDAQOTH: NTDOY) iconic franchise -- was played up by GameStopCEO J. Paul Raines as a major score for his chain. He pointed out over the summer that sales had initially doubled at stores that also serve as virtual gyms and PokeStops in the augmented reality game. They obviously didn't hold up.
GameStop will also inevitably be talking up the arrival of Nintendo Switch -- Nintendo's upcoming console that doubles as a handheld system -- will drum up interest early next year, but we've seen how third-party hype hasn't trickled down to GameStop lately.
2. You can't buy higher earnings per share forever
It's easy to admire GameStop's model. Rent is cheap for its small-box locations in suburban strip malls. It commands decent markups on its wares, especially its preowned games and gear. GameStop has used that cash flow to eat at its share count, going from apeak of 164.7 million during the third quarter of fiscal year 2009 to just 104.3 million as of its latest quarter,according toS&P Global Market Intelligencedata. The end result is that earnings per share have looked a lot better than actual earnings.
Knowing that the stock is at a four-year low now tells you a lot about how much GameStop has overpaid for its shares in the past. The pace of the buybacks has also slowed considerably. It initiated a quarterly dividend policy five years ago, and with the payouts going on to more than double, there's less money left to repurchase stock. If the fundamentals continue to deteriorate, that will mean even less greenbacks for its share-eating ways.
3. The trends are not GameStop's friend
Sony's PSVR and Nintendo's Switch may be head-turning platforms, but anyone that owns a PS4 or an Xbox One already knows that you can do a lot with your console without ever having to buy a game on disc. Digital delivery is the present, and it's certainly going to be the future.
GameStop has tried to remain relevant. It has struck deals for exclusive content with developers, and it has made its own push into digital content. However, the model's slide will continue. GameStop has tried to diversify into mobile products. It also snapped up the ThinkGeek specialty retailer last year. These are all smart moves, but it may not be enough to offset the gradual fade of its flagship business.
The stock took a big hit today. GameStop deserved it, peddling hope in late August that it can't fulfill now. It's hard not to be worried about the chain's long-term prospects.
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Rick Munarriz has no position in any stocks mentioned. The Motley Fool has the following options: short January 2017 $28 puts on GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.