GameStop Corp. Earnings: Steady Sales Growth as Profit Margin Slips

GameStop (NYSE: GME) posted earnings results this week that paired sales gains with a decline in profitability as the company gets ready for the all-important holiday shopping season.

Here's how the headline numbers stacked up against the prior-year period:

What happened this quarter?

Revenue ticked higher for the second straight quarter, thanks to booming collectibles sales and continued strong demand for Nintendo's new Switch gaming console. Growth in these segments offset sharp drops in GameStop's pre-owned and new software divisions.

Other highlights of the quarter include:

  • Comparable-store sales growth was 1.9%, or about even with the prior quarter's pace.
  • GameStop's gaming hardware business jumped to $248 million from $216 million. The collectibles segment chipped in strong gains, too, spiking to $123 million from $90 million.
  • Detracting from those improvements was an 8% slump in the pre-owned game unit and a 3% decline in new software sales.
  • Gross profit margin dipped to 37% of sales from 37.9% as several of its retailing divisions, including game hardware and new game software, became less profitable. Growth in high-margin divisions like consumer tech and digital downloads failed to fully offset this slump.
  • Operating expenses rose as a percentage of sales, leading to a worsening of bottom-line profitability. Net income slipped to 1.3% of sales from 1.7% a year ago.
  • GameStop's dividend payment amounted to slightly more than net income this quarter. For the past six months, which are seasonally weak for the retailer, the $0.76 per share of dividend payments equates to 95% of earnings.

What management had to say

GameStop's management team credited both its core video game segment and its new divisions for this quarter's growth. "Our second quarter sales results were driven by continued strong demand for Nintendo Switch and collectibles," CEO Paul Raines said in a press release. On the Switch release, Raines highlighted the retailer's multichannel approach that "leveraged all of its sales platforms, including website, web-in-store, pickup-at-store, ship-from-store, and mobile."

The 36% spike in collectibles, executives explained, was powered by popular licensed merchandise including Marvel and Pokemon products. That segment is on track to hit executives' sales target of $650 million to $700 million this year, they noted.

Looking forward

Raines and his team see several reasons for optimism about the second half of the fiscal year. The Nintendo Switch should continue selling well, and customer traffic will likely spike around the launch of Microsoft's new Xbox console, too. There's also a strong slate of major video game releases ahead, including tent-pole launches from Activision Blizzard. At the same time, a major upgrade cycle for the latest iPhone should lift results at GameStop's consumer technology segment.

These tailwinds have management feeling confident that the company will hit the high end of its full-year sales growth guidance, which would mark flat comparable-store sales following last year's 11% slump. The company still believes it will generate between $3.10 and $3.40 per share of earnings for the year, translating into somewhere between a flat result and a 9% profit decline. In either case, GameStop's generous dividend payment should be well covered, with the payout ratio remaining below 50%.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Demitrios Kalogeropoulos owns shares of ATVI, and GameStop. The Motley Fool owns shares of and recommends ATVI . The Motley Fool owns shares of GameStop and has the following options: short October 2017 $22 calls on GameStop. The Motley Fool has a disclosure policy.