GameStop Shifts Strategies After Booking a Holiday-Quarter Loss

MarketsMotley Fool

Investors had been bracing for a tough holiday-quarter report from GameStop (NYSE: GME) ever since the company warned in early January that it might take a one-time charge of as much as $400 million against the value of its consumer tech division. In its official announcement this week, the video game retailer booked a slightly higher loss than expected while still showing healthy sales growth.

Its outlook for 2018, meanwhile, predicts a return to revenue declines and a third consecutive year of falling profits.

Continue Reading Below

More on that forecast in a moment. First, here's how the headline numbers stacked up against the prior-year period:

What happened this quarter?

Sales jumped at the best rate of the year as consumers streamed into GameStop locations to pick up popular gaming products like the Nintendo Switch. Yet the retailer struggled in other niches, particularly its consumer technology division, as overall profitability dropped.

Highlights of the quarter include:

  • Comparable-store sales growth came in at 12%, just as management had predicted in its updated holiday-quarter outlook. That improvement was powered by a 45% spike in demand for new gaming hardware like the Nintendo Switch, plus higher sales in the collectibles division. Preowned video game sales, in the meantime, fell 3%.
  • Profit margin continued trending lower as GameStop's sales shifted away from its profitable used-game division. Gross profit margin fell to 33% of sales from 35% a year ago.
  • GameStop booked an asset impairment charge of $407 million related to its technology brands business, which was slightly higher than the estimate range of $350 million to $400 million that management issued in early January. That division, which includes Simply Mac, Spring Mobile and Cricket Wireless stores, notched 14% lower sales.
  • The charge led to net losses for the period. Adjusted earnings, on the other hand, were $2.02 per share compared to $2.38 per share a year ago. That result kept the broader profit metric for the year right within management's expectations.

What management had to say

Management said the healthy sales growth demonstrated that the retailer is "the preferred destination for the gaming and collectibles customer." GameStop's success also translated into market share gains during the ultra-competitive holiday season. "Our industry leading position enabled us to provide customers with the best selection of consoles and games for the best price, in turn increasing our market share for the quarter," CEO Mike Mauler said in a press release.

Executives put the spotlight on their new collectibles business, which contributed $646 million in sales for the year, or 6.9%, compared to $494 million, or 5.7%, in the prior-year period. "Our collectibles business continued to deliver robust growth," Mauler said, "further demonstrating that the business will be an accelerating contributor to GameStop's profitability."

Looking forward

Mauler and his team plan to shift strategies for the year ahead and, rather than seek additional revenue streams, will instead focus on improving results at its three core segments: video games, collectibles, and technology brands. The retailer's long-term growth will depend on its ability to boost operating metrics in these key divisions, they said.

GameStop's official forecast calls for sales to range from flat to a 5% decline in 2018 following this past year's 6% increase. Earnings will be pressured by the same trends that pinched results last year, but management plans to shore up its cash position in part by reducing capital spending.

That financial move should leave its dividend safe -- for now -- as the company works to end its painful profitability slide over the coming quarters.

10 stocks we like better than GameStopWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and GameStop wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of March 5, 2018

Demitrios Kalogeropoulos owns shares of GameStop. The Motley Fool owns shares of GameStop and has the following options: short April 2018 $18 calls on GameStop. The Motley Fool has a disclosure policy.