GameStop (NYSE: GME) investors have been growing increasingly pessimistic about the business in recent quarters. They've seen the video game retailer make a costly pivot away from its diversification strategy, leading to capital losses in 2018. More importantly, the company ended the year without a permanent CEO and a clear recovery plan.
In its fiscal first-quarter report Tuesday afternoon, GameStop began to answer some of inventors' key questions regarding its rebound strategy. But its latest operating metrics show just how difficult that turnaround could be.
What happened with GameStop this quarter?
GameStop's sales fell sharply due to weak demand in key product categories and an apparent shift in strategy to prioritize profitability over revenue gains.
Highlights of the quarter include:
- Reported sales were hurt by foreign exchange rate shifts, but currency-neutral results weren't strong, either. Comparable-store sales dropped 10% during the seasonally weak period. For context, comps were flat over the prior 12 months and expanded by 6% in fiscal 2017.
- GameStop's sales declines were concentrated in two areas: new video game hardware (like gaming consoles) and pre-owned game titles. Its collectibles division was the only segment that managed significant growth.
- The company continued its recent strategy of scaling back on promotions, and while the shift hurt sales, it helped protect profit margins. Gross profitability rose in the collectibles and accessory segments, in fact, which helped overall gross margin improve to 30.4% of sales from 29.7% of sales a year earlier.
- Cost cuts reduced GameStop's expense profile. However, profits still fell significantly even after adjusting for the recent sale of its Spring Mobile business. Before-tax earnings from continuing operations plunged 70% to $10 million.
- Management paid $39 million of its 2021 debt, which carries a 6.5% interest rate, leaving $436 million of these liabilities remaining.
What management had to say
CEO George Sherman, who only stepped into the role a month ago, focused his comments on the retailer's recovery potential. "I have been undertaking a thorough review of the business and working closely with the team to improve our operational and financial performance, address the challenges that have impacted our results, and execute both deliberately and with urgency," he said in a press release.
A major outcome of that review was the decision to eliminate GameStop's dividend so that management can direct the cash toward more productive uses. "The board is confident that redirecting capital toward debt reduction and transformation initiatives will create additional shareholder value over the long-term," Executive Chairman Dan DeMatteo said.
The dividend cut will free up about $160 million per year, much of which will go toward reducing GameStop's debt and interest burdens. The company also believes it can cut costs enough to support a $100 million improvement in annual operating profit this year.
The bigger question is how the company might stabilize its shrinking sales base, and investors aren't any closer to an answer on this point. Instead, management reiterated its expectations for comps to drop by between 5% and 10% in 2019 to mark GameStop's worst result since the gaming console transition disrupted sales in 2016.
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