Why GameStop Stock Slumped Today

MarketsMotley Fool

What happened

Shares of GameStop (NYSE: GME) tumbled on Thursday following the video game retailer's fourth-quarter report. While GameStop posted impressive comparable sales growth and beat analyst estimates across the board, a massive write-off related to its technology brands business and lackluster guidance overshadowed those positives. The stock was down about 9% at 12:10 p.m. EDT, and it was down as much as 13.8% earlier in the day.

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So what

GameStop reported fourth-quarter revenue of $3.5 billion, up 15% year over year and $230 million higher than the average analyst estimate. Comparable-store sales, excluding technology brands, jumped 12.2%, driven by a 44.8% increase in hardware sales. The popularity of the Nintendo Switch was largely responsible. Non-GAAP EPS came in at $2.02, down from $2.38 in the prior-year period but $0.05 better than analysts were expecting.

GameStop's results may seem impressive on the surface, but there was plenty of bad news. Sales of technology brands crashed 14.2% due to a change in AT&T's compensation structure. GameStop recorded total charges of $406.5 million during the quarter, mostly asset impairments related to the technology brands business. The plan going forward is to pause investments in new businesses and acquisitions, which brings into question the company's entire strategy of diversifying away from games.

Guidance wasn't so hot, either. GameStop expects comparable-store sales, excluding technology brands, to be flat to down 5% in 2018, with total sales down 2% to 6%. Non-GAAP EPS between $3 and $3.35 is expected, compared to $3.34 in 2017.

Now what

GameStop's impairment charges are equivalent to more than five times the adjusted operating income of the technology brands business in 2017. These charges confirm that GameStop's strategy of betting on stores that sell mobile phones has not worked out as planned.

GameStop will need a new strategy, because game consoles will eventually shift entirely to digital games. That would render GameStop's core business, which includes the highly profitable used-game business, largely obsolete.

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Timothy Green has no position in any of the stocks mentioned. 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.