GameStop Corp. Earnings Hit by $350 Million Next-Gen Console Hangover

Specialty retailer GameStop today posted fourth-quarter earnings results that were below expectations on both the top and bottom lines. Sales shrunk by 6%, to $3.48, billion, and profit rose by 13%, to hit $2.15 per share. Wall Street pros were looking for slightly higher numbers on both metrics:

Source: Yahoo Finance! and company financial filings.

What happenedAs expected, GameStop's hardware sales tanked in comparison to last year's holiday season when next-generation consoles from Microsoftand Sonywere flying off the shelves. The company booked just $809 million in hardware sales, or $350 million less than in 2013's fourth quarter.

GameStop posted small gains in new software sales and in its growing consumer electronics business. But those improvements weren't enough to overcome the huge hardware drop. Pre-owned video game sales were flat, at $730 million.

The good news is that next-gen consoles are the least-profitable products that GameStop sells. Profit margin clocked in at 9% for those devices, compared to 23% for new video games, and 48% for pre-owned games. The changing sales composition resulted in rising overall profitability for the retailer. GameStop's gross margin climbed higher by a full percentage point, to 28% of sales.

The company did a good job fending off rivals in the competitive video game industry last year, according to CEO Paul Raines. "We achieved our highest market share in history with 28% share of next-generation hardware, 46% share of next-generation software, and an estimated 42% share of downloadable content," he said in a press release.

Shifting modelBut video games will be a smaller part of GameStop's business going forward. The company announced plans to speed up the closings of its core retailing stores while increasing its bet on the consumer electronics business. Management plans to shut down 3% of its video game locations, as compared to 2% in each of the last two fiscal years. At the same time, it plans to add as many as 550 shops in its tech-brands portfolio that includes Apple retailing and AT&T wireless services.

For the full year, GameStop executives expect to post sales growth of less than 4%, to about $9.7 billion. Profit should rise 7%, to $3.70 per share. Both of those forecasts were below Wall Street's targets, which could explain why GameStop's shares were down 3% immediately following the earnings announcement.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of 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.

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