GameStop Corp. Returns to Growth With Help From Nintendo
GameStop (NYSE: GME)announced first-quarter results this week. The main highlight: a return to sales growth following a brutal end to the 2016 fiscal year. The retailer's push into new business lines helped protect profitability, meanwhile, even as its core video game segment shrank.
Here's how the headline numbers stacked up against the prior-year period:
|
Metric |
Q1 2017 |
Q1 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$2.05 billion |
$1.97 billion |
4% |
|
Net income |
$59 million |
$66 million |
(11%) |
|
Earnings per share |
$0.58 |
$0.63 |
(11%) |
Data source: GameStop's financial filing.
What happened this quarter?
Overall sales rose 4% to mark a solid recovery from the prior quarter's 14% slump. GameStop's results were lifted by strong demand for Nintendo's (NASDAQOTH: NTDOY) new Switch gaming console, especially in international markets, and by continued growth in its consumer technology and collectibles divisions.
Image source: Getty Images.
Other highlights of the quarter include:
- Comparable-store sales rose 2.3% in a seasonally weak period for the industry. Those gains were comprised of a 25% spike in new hardware sales and an 8% decline in new software sales.
- GameStop's highly profitable pre-owned game segment shrank 6%.
- Sales fell slightly in the U.S. market while rising 17% internationally.
- The collectibles business increased 39% to $115 million, and the tech brand division enjoyed robust gains as it passed $200 million of sales.
- Gross profit margin held steady at 34% of sales as the retailer offset declines in its highly profitable used video games business with higher prices on hardware such as new consoles and smartphones.
- Other expenses rose due to store-closing charges. As a result, operating profit dipped to 4.9% of sales from 5.8%, and bottom-line profitability ticked down to 2.9% from 3.3%.
- Dividend payments of $0.38 per share amounted to 60% of adjusted earnings, leaving the hefty dividend yield well covered by profits.
What management had to say
Executives said they were pleased with GameStop's progress at gaining ground in the video game segment while expanding out into new business lines. "Our first quarter results reflect the power of our leadership position within the video game market and our ongoing diversification effort," CEO Paul Raines said in a press release.
According to management, the rest of the fiscal year should roughly follow the same operating and financial tracks. "Our focus will continue to be executing our diversification strategy, exercising cost discipline and increasing our share in the video game market," Raines explained.
Looking forward
Rains and his team recently ended their practice of issuing quarterly sales and profit forecasts since volatility in the video game segment has made it tough to predict short-term shopping trends. They affirmed their full-year guidance, though, which calls for comps to range between flat and a 5% decrease.
The tech brands segment isn't included in those comps forecasts, but should contribute as much as $120 million to operating earnings this year to lessen the retailer's reliance on the market for physical video game discs. Executives aim to generate more than half of operating profits from business lines other than video games by 2019.
Over the shorter term, GameStop is planning to produce net income of between $320 million and $354 million in 2017, which would mark the second straight annual drop after 2015's record $400 million haul. The earnings slump shows the risks associated with the retailer's attempts to diversify away from a video game segment that it has dominated for years. Its steady sales and profitability figures, on the other hand, suggest it could pull off the shift without too great a disruption to operations.
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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short July 2017 $24 calls on GameStop. The Motley Fool has a disclosure policy.