Why GameStop Stock Crashed Today

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What happened

Shares of video game retailer GameStop (NYSE: GME) plunged on Wednesday following a disastrous first-quarter report. While the results were mixed relative to analyst expectations, a double-digit revenue decline and the suspension of the dividend sent investors fleeing. The stock was down a whopping 39% at 11:30 a.m. EDT.

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So what

GameStop reported first-quarter revenue of $1.55 billion, down 13.3% year over year and $90 million below the average analyst estimate. Comparable-store sales were down 10.3%. The high-margin used and value video game products segment suffered a 20.3% sales decline, while new hardware sales fell 35% and new software sales fell 4.3%. Accessories and collectibles were the only product categories that produced growth.

Non-GAAP earnings per share from continuing operations came in at $0.07, down from $0.30 in the prior-year period and $0.10 higher than analysts were expecting. GameStop managed to reduce costs during the quarter, which helped prevent an even worse profit decline.

Along with its first-quarter results, GameStop announced that it was eliminating its quarterly dividend, effective immediately. This move will save the company $157 million annually, allowing it to more aggressively pay down its debt.

Now what

GameStop is already dealing with the ongoing shift to digital games, which is an existential threat to the company's business model. Layered on top of that is the negative impact of the next generation of game consoles likely arriving sometime next year. Weak sales of current-generation consoles knocked down the company's sales in the first quarter, and that trend will continue until the new consoles make their debut.

GameStop is working to improve its operating profit by $100 million as part of a plan announced in April, but that won't fix the fundamental problems plaguing the company. New game consoles will boost GameStop's sales when they arrive, but a chain of nearly 6,000 stores selling physical game discs doesn't make much sense in a world of downloads and streaming.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop. The Motley Fool has a disclosure policy.