Video game retailer GameStop (GME 7.58%) posted surprisingly weak third-quarter earnings results on Thursday that sent the stock sharply lower in after-hours trading. Shares fell by 12% immediately following the announcement. Let's dig right in to the results and see what has Wall Street so disappointed.
Growth slides to a halt
Quarterly sales ticked down by 1%, to $2.1 billion, which was a dramatic swing from the prior quarter's 25% revenue gain. Much of that slowdown was expected, though. Last year's third quarter benefited from an unusually strong crop of video game releases, including blockbusters Grand Theft Auto V, Battlefield 4, and Batman: Arkham Origins. By comparison, this year's new release calendar was a lot less stacked.
However, analysts weren't expecting nearly the revenue growth hangover that GameStop delivered: Sales were forecast to rise by 5% instead of falling slightly. Comparable-store sales growth also came in below expectations, dropping by 2%. The retailer's forecast in late August called for comps to improve by as much as 5%.
Executives blamed a shifting release calendar for the weakness. "Most of our major product categories performed very well, but our third quarter results were affected by Assassin's Creed Unity moving out of October," CEO Paul Raines said in a press release accompanying the results.
Some good news
On the plus side, GameStop managed significant sales growth in its other business categories -- enough to make up for almost all of the pain from that 34% dive in new video game sales. Most of the gains came from selling next-generation gaming consoles: GameStop posted a 150% jump in sales of Xbox One and PlayStation 4 devices, and has a strong hold on the market for those devices.
GameStop's profitability also saw broad improvement in the quarter. Overall gross profit margin rose by more than one percentage point, to reach 30% of sales.
Each of the company's major business segments logged a gain in profitability, too. The standouts were pre-owned games, which grew from a 45% margin to 47%, and consumer electronics, which jumped from a 17% margin to 40%. GameStop's profit profile is getting stronger, just as management has suggested it would as this generation of consoles matures, and as new business lines grow to a larger proportion of overall sales.
Weak holiday outlook
But the worst news for investors in this report comes from the company's downgraded outlook for the fourth quarter. Despite the fact that it now includes the delayed Assassins Creed title, management expects comps to fall by as much as 5% during the holiday quarter. Earnings are forecast to come in at $2.16 per share -- below Wall Street's target of $2.28 per share.
The company blamed a changing release calendar again, pointing to the fact that several large video game titles, presumably including Electronic Arts' Battlefield: Hardline, have been pushed into 2015. However, it's also possible that demand for digital game sales is growing faster than expected, which may have caught management by surprise.
For the full year, GameStop now sees per-share earnings of $3.48 at the midpoint of guidance, down from the prior quarter's guidance of $3.55 per share.
