Attack of the Shrinking GameStop

GameStop (NYSE: GME  ) has a problem, though it's far from fatal for now.

Another disappointing quarter of sales activity at the video game retailer's stores finds GameStop lowering its comps guidance for this fiscal year.

The chain now sees store-level sales declining between 1% and 2% for the fiscal year that concludes at the end of this month.

Let's paint this in its proper perspective, since the revisions have been minor but consistently to the downside.

  • Two months ago, GameStop was targeting comps to clock in between flat and off by 2%.
  • Just three months earlier, the small-box retailer's outlook was for a 1% to 3% uptick in same-store sales.
  • Three months before that, GameStop was proudly looking forward to a year of 3.5% to 5.5% growth in comps.

GameStop is somehow sticking to its earlier bottom-line guidance, but this doesn't mean that its earnings outlook isn't deteriorating.

If that last comment sounds confusing, let's elaborate. GameStop still sees net income of $2.82 a share to $2.92 a share, but it has actually purchased 2 million shares during the holidays. In other words, the now lower net earnings will be divided into fewer shares outstanding to meet GameStop's goal.

I'm all for buybacks, as long as investors aren't delusional about it. GameStop's slipping, even if it can touch itself up in the end through the power of repurchases.

Obviously things aren't that bad if a company can buy its way out of a bottom-line miss. GameStop also had enough money during the current quarter to retire the last of its senior notes. In a world of leveraged retailers ready to buckle, GameStop is very profitable and now has a balance sheet free of long-term debt.

GameStop's holding up well on other levels. Best Buy (NYSE: BBY  ) and Amazon.com (Nasdaq: AMZN  ) are getting more aggressive about aping GameStop's high-margin trade-in program.

"Gaming is an area of significant opportunity for us," Best Buy said in its fiscal second quarter conference call. "We have completed the physical and operational transformation of the gaming departments throughout our stores and are pleased with our progress in trade-in volume and pre-order volume."

Amazon.com is now prominently featuring the opportunity to trade-in games -- shipping included -- once gamers hit the virtual storefront's gaming section.

Despite all of this, GameStop's pre-owned sales actually climbed 3.5% over the holidays.

Digital sales grew by 60%, but it's a sum too small to move the needle here. Digital sales were led by subscriptions for downloadable content in Activision Blizzard's (Nasdaq: ATVI  ) Call of Duty ELITE.

GameStop's also been ramping up its tablet and pre-owned mobile initiatives, though it remains to be seen what kind of endgame the retailer has in mind there. Do folks need a real world retailer or an app middleman once they buy any of these devices?

Shares of GameStop slipped nearly 4% yesterday on the news, so clearly investors are seeing through the promises of growth in dead-end pursuits and tiring of GameStop buying its way into bottom-line reiterations.

The problem is real, and throwing money at the problem won't make it go away.

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The Motley Fool owns shares of Activision Blizzard, Best Buy, GameStop, and Amazon.com. The Fool has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Amazon.com and Activision Blizzard. Motley Fool newsletter services also have recommended writing covered calls in GameStop and Best Buy, as well as creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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