What GameStop Wants Investors to Know

MarketsMotley Fool

There are significant uncertainties swirling around GameStop's (NYSE: GME) business today. The retailer hasn't had a permanent CEO for several quarters, after all, and it isn't expected to hire a new leader until management completes a review that might result in a major strategic pivot or a deal to take the entire company private.

Its recent earnings results didn't clarify whether that sale will happen, but they did answer some important questions investors had about the health of its business at the start of the holiday shopping period.

Continue Reading Below

Below are a few highlights from the conference call that interim CEO Shane Kim and his executive team had with investors to put the third-quarter report into perspective.

A good quarter for new games

The third quarter, and October in particular, was a huge selling period for the video game industry thanks to major releases like Red Dead Redemption 2 and Call of Duty: Black Ops 4. GameStop executed well during this time and grabbed market share in the physical video game space, executives said. Launch promotions around these big releases helped drive customer traffic higher, leading to the retailer's first quarter of positive global comps since late 2017. The healthy demand also lifted results in ancillary categories like accessories and collectibles.

The trade-in business is shrinking

GameStop is finding it hard to adjust its business model to the new realities of a digital-focused video game industry. Pre-owned software sales fell 13% due to the combination of several negative factors including lower inventory. That represents a worsening from the prior quarter's 10% drop.

This slump forced the retailer to rely more on the sale of new hardware and new software, but these categories deliver much lower profit margins. As a result, overall gross profitability fell to 33.1% of sales from 34.7% a year earlier. "We continue to face challenges in our traditional physical video game retail business model," Kim said.

A promotion-heavy quarter ahead

Thanks to a condensed video game release calendar, GameStop's business is so heavily dependent on the holiday shopping season that even small demand shifts during the period can produce big swings in its 2018 outlook. That's what happened in late November, when management noticed that several of its software titles, and a few sales promotions, were underperforming expectations.

This led to a downward revision to its earnings outlook so that profits should now land between $2.55 and $2.75 per share rather than the prior range of $3.00 to $3.35 per share. That result would still easily cover its generous dividend payment, but it translates into significant profitability struggles despite GameStop's strong hold on the physical video game retailing niche.

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 quadrupled 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 November 14, 2018

Demitrios Kalogeropoulos owns shares of GameStop. The Motley Fool owns shares of GameStop and has the following options: short January 2019 $16 calls on GameStop. The Motley Fool has a disclosure policy.