GameStop, I'm Not Impressed

GameStop (NYSE: GME  ) investors are getting a glimpse of the future of the leading video game retailer, and it's not pretty. 

GameStop shares opened 15% lower today after it announced disappointing results for the critical holiday shopping season. The top line isn't scary. Global sales climbed 9.3% to $3.15 billion for the nine weeks through Jan. 4, fueled by a 7.1% increase in domestic comps and an impressive 17.4% spike in comps for its international locations. 

However, as you can probably imagine, the growth here was entirely the handiwork of Microsoft (NASDAQ: MSFT  ) and Sony (NYSE: SNE  ) putting out new consoles in November. New hardware sales nearly doubled as folks snapped up $500 Xbox One and $400 PlayStation 4 systems. 

That's pretty much where the good news ends. New software sales plunged by 22.5%. This was worse than GameStop projected, but any gamer could've seen this coming. Microsoft's Xbox One and Sony's PS4 are not compatible with game discs from earlier generations. Owners of Xbox One and PS3 consoles aren't going to be making big investments in software if they plan to upgrade later.

There's also the very nature of the Xbox One and PS4. Yes, they play games on discs, but they are also high-end TV-viewing set-top boxes. They feed into each company's digital marketplace where GameStop's once-potent niche of selling software is less relevant, given the vibrant ecosystems that Microsoft and Sony have established. 

This is the worst possible scenario for GameStop investors, because hardware is a low-margin category. GameStop has its biggest markups on software and pre-owned games and gear. If folks are walking into GameStop just to buy a next-generation console, they won't be buying too many physical games -- much less trading them in for store credit -- in the future. 

GameStop did experience a 7% increase in pre-owned sales, but that was mostly the older consoles that are now that much cheaper since they were traded in by early adopters saving up for the new Microsoft and Sony platforms. It wouldn't be a surprise to see pre-owned sales start to slip after this, just as it wouldn't be a surprise if new software sales don't bounce back as the digital migration takes over.

The end result of better-than-expected hardware sales and weaker-than-expected software sales is that the bottom line is going to take a hit. GameStop now sees a profit of $1.85 to $1.95 a share for the quarter, well short of the $1.97-to-$2.14-a-share range that it was forecasting less than two months ago.

GameStop shares nearly doubled in 2013 as investors warmed up to the potential of the Xbox One and PS4. Well, they're here, and now we're seeing holiday profits falling well below the $2.16 a share it rang up a year earlier.

The game isn't over for GameStop. It's still very profitable, and it's in fine financial condition. However, expect the naysayers who wrongly argued that the chain had peaked two years ago to begin getting vocal again. This time, they may be right.

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Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On January 14, 2014, at 3:56 PM, crymsonkyng wrote:

    without a doubt a "foolish" you guys have ANY idea just how big next gen games are??? The vast majority of gamers simply DO NOT HAVE the speed or bandwidth to download digital copies...and that is even if they are so inclined which the majority I know ARE NOT. We like to own what we buy...copyright laws aside...mostly ignored on the consumer end anyway. Digital sales of small independent games with increase, but that is all. Physical Disk sales are safe.

  • Report this Comment On January 14, 2014, at 4:30 PM, kao469 wrote:

    So there sales are up on every category except the New Software(Games). What does Motley Fool say? They state that this is the end and that Game Stop has Peaked. This is the dumbest argument to have. It is not surprising in the least that New Game sales are down. Game Stops whole premise, their bread and butter, is to sell you on used first. Why? Because they make more money off used. Also why doesn't any put the connection together that when Nintendo is down the industry is down. That trend has been seen time and time again.

  • Report this Comment On January 14, 2014, at 4:35 PM, moopert wrote:

    The game sales slump was because there simply weren't very many games worth buying for either system. Once the games start coming, you'll backtrack on this trash article's content just like you backtracked on your ridiculous claims of console gaming's demise you kept making. Even for the PS3 and 360 there wasn't a strong lineup of new games for the holiday season. All the big titles had been available for months.

  • Report this Comment On January 14, 2014, at 7:56 PM, Expert01565 wrote:

    And yet ANOTHER bad article by these morons, Isnt there something can do about this bull,, Every single article that these people write is just non-sence and garbage!! Fool kno one actually goes on what you say!!

  • Report this Comment On January 15, 2014, at 12:37 AM, Mattenth wrote:

    Don't listen to the fools above. THIS ARTICLE IS SPOT ON.

    1) @crymsonkyng "do you have any idea how big nextgen games are?" - It hasn't stopped digital from rising on the PC? So why would it stop consoles? Additionally, many of the next gen games AREN'T that big. Look at Don't Starve, Resogun, Flower, and others. Finally, games like Call of Duty were sending out uncompressed textures to make headlines. Don't expect 30gb+ to be the norm.

    Additionally, look at Netflix on the Xbox 360. Most people already have the capability to stream 1080p almost all day. With the partial downloading system that both games have, I'm sure many players are able to participate in digital.

    2) @kao469 - We're in the midst of the biggest console and game launches ever, and yet GameStop's earnings continue to dwindle? Investors were expecting a "golden age" to start now, and instead are seeing GameStop's margins and software sales continue to decline.

  • Report this Comment On January 15, 2014, at 12:04 PM, mitchellrcole82 wrote:

    I hate Motley Fool. These hacks never shut up and clutter the news feeds

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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