GameStop (NYSE: GME ) is in trouble.
The video game retailer posted disappointing quarterly results this morning, once again hosing down its same-store sales guidance for the entire fiscal year.
However, even GameStop's stronghold of pre-owned sales is starting to come undone. That's huge. Swapping used games and gear for store credit has traditionally been where the chain's chunkiest profit margins can be found.
The quarter was a dud. Sales fell 11% to $1.55 billion, shy of the $1.61 billion that Wall Street was expecting. It's hard to overcome a 9.3% slide in comps.
GameStop points to a weak slate of new releases slowing interest in die-hard gamers, but pre-owned sales actually plunged by an even steeper 11.2% during the period. Wasn't this supposed to be the recession-proof and cycle-proof element to the GameStop model? Isn't this why GameStop is showing off its refurbishing facility?
Yes, digital and mobile sales are growing, but we're talking about segments making up less than 9% and 2%, respectively, of the sinking retailer's sales mix.
GameStop's profit of $0.16 a share actually beat the $0.15 a share that analysts were targeting, but there's no way that it would've gotten there without aggressive share buybacks over the past year. Net income actually tumbled a grim 32% to $21 million. However, this is still the first time in a year that GameStop managed to post better-than-expected bottom-line results. It's a silver lining, but is it enough?
GameStop is sticking to its profit guidance, calling for a profit of $3.10 a share to $3.30 a share this year, but that's once again the handiwork of the company's aggressive buybacks. Same-store sales are now expected to fall by 2% to 10% this fiscal year. Just three months ago GameStop was eyeing comps to check in between flat and off by just 5%. Dive into the corporate archives, and you'll see a long string of quarterly downgrades on that front. Back in March, the company's outlook called for positive comps -- up 1% to 5% -- on the year.
Bulls will argue that GameStop's fortunes will change once Nintendo (OTC: NTDOY.PK) rolls out its new console later this year, inspiring Wii trade-ins and the purchases of new systems and titles, but GameStop's draw skews toward older gamers who prefer Microsoft's (Nasdaq: MSFT ) Xbox 360 and Sony's (NYSE: SNE ) PS3. Neither of those two companies is likely to introduce its next-generation platforms until 2014.
Who knows what the gaming world will look like by then? It's safe to say that all three console makers -- and software companies, too -- will be more interested in selling digital downloads, cutting out the physical retailers entirely.
GameStop's profitable, and it's certainly a cheap investment on an earnings basis. Its decision to begin paying a quarterly dividend gives the stock a meaty yield as its share price slips. However, none of this is sustainable if sales and net margins continue to contract.
GameStop may seem cheap now, but like its stash of unsold pre-owned gear it may not be worth that much in the future.
Even though the next trillion-dollar revolution will be in mobile, it may not involve GameStop's digital initiatives. A free special report will get you up to speed.