GameStop Plans on a Big End to the Year

Investors had some big concerns heading into GameStop's (NYSE: GME) second-quarter report, including worries about weakening operating trends and finances, along with the prospect that the retailer could be preparing to sell itself to an outside party.

The video game specialist's earnings announcement this week didn't answer that key privatization question, but it did add some clarity about the strength of the business heading into the critical holiday shopping season.

Let's take a closer look:

What happened this quarter?

GameStop's finances continued to suffer from declining demand for video game software titles, which was only partially offset by gains in other business lines. The swing to a net loss was mostly powered by a one-time tax charge. However, GameStop posted weaker profitability in the core business, too.

Highlights of the quarter include:

  • Sales at existing locations fell 0.5% to mark a solid improvement over the prior quarter's 5% slump. The U.S. market returned to modest growth in the period, but that was offset by GameStop's shrinking international segment.
  • Hardware sales spiked thanks to excitement around newly introduced products like the Xbox One X gaming console. Those gains didn't lift the software business, though, as new software sales plunged 19% and pre-owned sales declined 10%.
  • GameStop noted improved results from its new business lines, with collectible sales rising 16% and the technology brands division posting a 35% earnings increase despite a 10% revenue decline.
  • Profitability slipped, mainly thanks to the fact that sales tilted toward low-margin hardware sales. Gross profit margin fell to 36.2% of sales from 37% a year ago. That shift combined with a slight boost in expenses to send operating profit down to $79 million, or 2.2% of sales, from $145 million, or 3.9% of sales, a year ago.
  • After adjusting for one-time tax expenses, earnings in the seasonally weak period fell to $0.05 per share from $0.15 per share.

What management had to say

Executives kept their comments focused on the third and fourth quarters, which will generate nearly all of the retailer's 2018 profit. "As we enter the back half of the year," CFO Rob Lloyd said in a press release, "we are focused on preparing our organization, particularly our stores and associates, to deliver the best customer experience in the video game industry to support an exciting slate of titles launching this fall."

Management had no news to deliver on its wider operating plans, except to say that GameStop "continues to conduct a comprehensive review of strategic and financial alternatives, including, but not limited to, a potential sale of the business." Executives are still in discussions with multiple parties about a possible transaction, but there are no guarantees that any of these will work out.

Looking forward

GameStop again affirmed a 2018 outlook that calls for comparable-store sales to range from flat to a 5% decline. Adjusted earnings are still expected to land between $3 per share and $3.35 per share to easily cover the retailer's $1.52-per-share dividend commitment.

That earnings total currently sits at just $0.43 per share, though, which illustrates just how much is riding on the next two quarters. With huge game releases like Call of Duty: Black Ops 4 and Battlefield V on the way, GameStop is counting on a solid performance around the holiday shopping season to deliver nearly 90% of its expected profit for the year during the next six months.

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Demitrios Kalogeropoulos owns shares of GameStop. The Motley Fool owns shares of GameStop and has the following options: short October 2018 $15 calls on GameStop. The Motley Fool has a disclosure policy.