GameStop (NYSE: GME ) shares may have opened slightly higher this morning, but that doesn't mean that today's quarterly report is at all comforting.
Total global sales fell 3% to $3.58 billion at a time when analysts were holding out for a marginal uptick.
Thankfully, a plunge in hardware sales -- the category where GameStop scores the lousiest profit margin -- is the culprit. Adjusted earnings for the fiscal fourth quarter managed to squeeze out a 0.3% gain. GameStop's feverish share repurchases over the past year are propping up profitability on a per-share basis 10% to hit the $1.73 a share that analysts were expecting.
How convenient. GameStop can disappoint on the top line, but still buy its way out of a bottom-line disappointment.
File that tactic away for now, because things are about to get even more unappetizing.
Gamers are just flat-out disappearing
The small-box retailer sees comps plunging by 7.5% to 9% during the current quarter, with sales essentially following suit. Wall Street was settling for flattish sales growth. However, GameStop's projected profit of $0.52 to $0.55 a share is well short of the $0.59 a share that analysts were expecting.
This is the kind of bleak near-term forecast that would send many stocks plummeting, but GameStop's holding up because its outlook for the entire new fiscal year is far more encouraging. Sales will climb 1% to 5%. The midpoint of its comps guidance is actually slightly positive. Earning $3.10 to $3.30 a share -- as it expects -- would be a reasonable 8% to 15% growth spurt.
However, what about the fact that GameStop expects to close more stores -- 150 -- than the 100 it is hoping to open this year? What about the fact that we're talking about "adjusted" earnings for the recently concluded holiday quarter because a series of charges include costs to exit certain international markets? This isn't a charge; it's a retreat.
If that's not enough to temper your expectations, how about the fact that GameStop slashed its same-store sales target three times during the course of fiscal 2011 -- yet still managed to come up short. A year ago GameStop was proudly aiming for a 3.5% to 5.5% boost in comps. That figure was worked down all the way to a negative 1% to 2% showing in same-store sales as of two months ago. The final snapshot calls for a 2.1% decline!
How confident can you be now that the same thing won't happen again? Take a mental photograph of this morning's guidance. It probably won't age well with every quarterly adjustment.
The new hardware is coming
This should be a year of new blood on the hardware front, but last month's debut of Sony's (NYSE: SNE ) PS Vita obviously can't be going well given the negative comps that GameStop is targeting for the current quarter. There is heartier hope for Nintendo's Wii U revolutionary console upgrade this summer -- and consoles are holding up better than portable gaming systems -- but shouldn't the hardware refreshing be stinging margins?
On the software end, Activision Blizzard (Nasdaq: ATVI ) shareholders have May 15 -- the day Diablo III hits the market -- circled in red. Obviously, there will be a new Call of Duty installment out before the crucial holidays. These may seem to be encouraging signs, but -- then again -- why is GameStop going to close 50 more stores than it opens this year?
GameStop's been using its money to keep shareholders around. It's been pumping up profits on a per-share basis through buybacks for some time, and it initiated a generous dividend rate last month. GameStop also retired the last of its senior notes during fiscal 2011. I'm a cynic, but I have no problem applauding its cash-management moves.
My concerns are with the model itself. Best Buy (NYSE: BBY ) and Amazon.com (Nasdaq: AMZN ) have been getting more aggressive about competing against GameStop's high-margin trade-in program. Best Buy mentioned that it was "pleased" with the progress of its trade-in volume during last year's second quarter conference call. Amazon even covers shipping costs for those looking to trade in their used games.
Then again, don't we need new sales to fuel the pipeline of future trade-ins? Digital delivery is going to crush this model before long. Yes, GameStop's made some decent headway to grow in digital. If it weren't for digital sales, fiscal 2011 would have seen total sales decline. However, digital is still less than 5% of GameStop's total revenue mix. If it ever grows to be a material factor, the retail model is probably dead.
I'm sorry, GameStop. I'm not impressed with guidance that I know will be tweaked lower. Your money can buy back shares and debt. It can even cut fresh dividend checks. It can't buy out my skepticism.