GameStop Corp. Growth Turns Negative as the Video Game Business Stumbles

GameStop posted third quarter earnings results on Nov. 23 that failed to meet Wall Street -- or even management -- expectations. The video game retailer booked a double-digit drop in net income as sales and per-share earnings both slipped lower.

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

Source: GameStop financial filings

What happened this quarter?GameStop managed strong gains in its newest product lines of consumer technology, wireless services, and collectibles. However, its core video game business showed surprising weakness heading into the critical holiday shopping season, which is likely the reason why shares sank immediately after the results were posted.

Comparable-store sales fell by 1%. That was a significant slowdown from the prior quarter's 8% gainand also well below GameStop's August projection of 1% to 4% third quarter growth.
New video game hardware sales, primarily next-generation consoles, sank by 20% (or 15% in constant currency).
New game software slipped 9% lower (or 4% in constant currency).
Pre-owned game sales, GameStop's largest source of profit, rose by 4%.
The tech brands segment, powered by the Cricket, Simply Mac, and Spring Mobile stores, logged a 32% sales improvement.
Sales of collectibles merchandise spiked higher by 400%.
Overall gross profit margin rose from 29.7% of sales last year to 32.5% of sales, yet net profit margin hardly budged (2.7% compared to 2.6% last year).
GameStop reiterated its 2015 per-share earnings guidance but lowered its sales growth target.

What management had to say"Our third-quarter results were at the low end of our guidance range," CEO Paul Raines said in a press release discussing the results. The key driver behind the underperformance was surprising weakness in the new video game hardware and software categories, according to executives. This year's release calendar wasn't strong enough to match last year's banner results that were powered by titles likeDestiny and Super Smash Bros.

Management also cited struggles in opening enough new stores. GameStop launched 105 new locations in the third quarter, down from the 182 stores opened in the prior quarter.

Yet executives still believe they'll meet their 2015 objectives. "Our expectations for the full-year have not changed. A solid [fourth quarter] slate of new video games, coupled with contributions from our diversifiedAT&T,Apple,and ThinkGeek businesses and our in-store collectibles offerings are expected to drive our fourth quarter results," Raines said.

GameStop's profitability is approaching a new high, even as sales growth slows.GME Gross Profit Margin (TTM) data by YCharts

Looking forwardGameStop's earnings target of $3.66 to $3.86 per share didn't change, but its sales growth outlook did. The company now sees full-year comps growing at somewhere between 2% and 6%, down slightly from the 2% to 7% range it had forecast last quarter.

The article GameStop Corp. Growth Turns Negative as the Video Game Business Stumbles originally appeared on Fool.com.

Demitrios Kalogeropoulos owns shares of Apple. The Motley Fool owns shares of and recommends Apple. 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.