GameStop (NYSE: GME) recently recorded yet another ugly quarter, with first-quarter global sales tumbling 13.3% to $1.5 billion as comparable sales plunged over 10%, causing net income to crater 75% to just $6.8 million, or $0.07 per share.
The catastrophic earnings performance led the board of directors to eliminate GameStop's dividend of $1.52 per share, which will save it $157 million a year. The retailer's stock plunged nearly 36% the day after that announcement.
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Crashing down around it
New CEO George Sherman admits the industry has changed around GameStop and it needs to transform the business to meet the challenge, but the market's reaction suggests this is an uphill battle that investors don't think can be won.
At GameStop, new hardware sales plummeted 35% in the quarter even though Nintendo Switch sales soared. In part that's because the most recent generation of Sony's PlayStation and Microsoft's Xbox are coming to the end of their lifecycles, and gamers are waiting for the newer models to come out. It's always a dicey situation just before a new model is expected to hit, and that isn't expected until late 2020. In the meantime, GameStop has more problems than that.
Sales of new software fell 4.3% in the quarter, with the company faulting "weaker new title launches ... compared to last year." Sales of pre-owned products tumbled 20%. That is the company's second-biggest category behind hardware, but it also brings in the most gross profit and accounts for 37% of the total.
Digital receipts, or the money GameStop makes off digital content and digital subscriptions to its Game Informer magazine, also declined, and while sales of accessories such as headsets and controllers were higher, they were up only marginally, 0.6%. So despite that category being how GameStop was previously staying afloat as more gaming moved online, now even that seems like an exceptionally weak point for the retailer.
The one bright spot was GameStop's collectibles business, which saw a 10% increase in revenue. Unfortunately, it's also one of its smallest segments and represents just 10% of total revenue, so it's not a business the company can stake its future on.
Operating from a position of weakness
There was also some worrisome commentary from management about where GameStop will head. Sherman told analysts on the earnings conference call that the company was thinking about new ways it could generate revenue and "how we can and should participate in the digital economy, particularly given the significant number of loyal customers we bring to publishers and console makers." That sounds as if GameStop is looking at ways it can extract payments from publishers and console makers based upon the traffic it delivers.
If that's the path GameStop is following, it doesn't sound like it would end well. GameStop may be an easy conduit at the moment -- it says it is the leading retailer for downloadable content for Xbox Live and the PlayStation Network -- but gamers will find alternative routes to their games if GameStop is not around, and in its current financial straits, it doesn't look like it has a lot of leverage.
Time is running out
GameStop needs a radical makeover -- and fast. During the conference call, it briefly mentioned partnerships in esports, perhaps the one hope it has of remaining relevant, but Sherman failed to articulate any course of action GameStop is taking to meaningfully ignite change.
That's likely because there is none. GameStop is no longer relevant to much of the gaming market, and its earnings report indicates how far it has fallen. Eliminating the dividend, while prudent, also indicates there are few avenues available for it to generate cash flow, and that should be an even more troubling thought for GameStop investors.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool owns shares of GameStop. The Motley Fool recommends Nintendo. The Motley Fool has a disclosure policy.