GameStop Corp. Sales Trends Improve Ahead of Critical Holiday Season

GameStop (GME -1.01%) took much of the thunder out of the third-quarter results it posted this week by pre-announcing many of the figures earlier in the month. Still, investors learned a few important details about the specialty retailer's business trends, its struggles in the video game market, and its outlook for the holiday season ahead.

Image source: Getty Images.

More on the critical fourth quarter in a moment. First, here's how the headline results stacked up against the prior-year period.

Data source: GameStop's financial filing.

What happened with GameStop this quarter?

As expected, GameStop's sales declined as rising growth businesses failed to offset the negative impact from a slumping video game market. Comparable-store sales declined 6.5%, marking an improvement over the prior quarter's 11% drop.

Other highlights of the quarter include:

• The video game segment's free fall only improved slightly, with new video game device sales plunging 21% compared to the prior quarter's 35% slump.
• New game software fell 9%, consistent with management's warning in early November that title launches in October failed to live up to projected demand.
• GameStop enjoyed a 54% jump in its tech brands division that includes growth categories like consumer electronics. That segment nearly tripled its earnings production to $7 million and grew to nearly one-quarter of the company's operating profits.
• Collectibles revenue spiked by 37% thanks to popular products in the Pokemon and Five Nights at Freddy's franchises.
• Because the sales declines were limited to GameStop's least profitable business lines, overall gross margin improved markedly, rising to 36% of sales from 33% last year.
• Operating profit rose to 5% of sales from 4.5%, but increased interest and tax expenses produced a dip in net income margin -- down to 2.6% of sales from 2.8% last year.

What management had to say

While admitting that the core video game business is struggling, CEO Paul Raines stressed the fact that operating earnings are improving thanks to its diverse collection of retailing segments. "While the video game business has underperformed recently," Raines said in a press release, "we are focused on maintaining our leading market position, especially during the holiday season, as well as driving diversification through the growth of technology brands, digital and collectibles."

"Despite the softness in video games, I'm proud that our team was able to increase total operating earnings by nine percent year-over-year," Raines explained. Executives said they believe GameStop is well positioned to "continue to drive strong free cash flow and return value to shareholders through a combination of share repurchases and dividends."

Looking forward

Raines and his team affirmed the full-year outlook for both sales and profits, issued earlier in the month, that projects a brutal 8% comps decline at the midpoint of guidance and overall earnings of roughly $3.73 per share. The holiday quarter will be an especially rough time, they believe, with a comps decline of as much as 12%.

These figures show a business that's enduring significant losses in its core retailing category while also enjoying solid gains in the segments that aren't tied to physical video game sales. Much of that pessimism is already reflected in GameStop's 38% decline over the last year, and so shares could bounce higher on even faint signs of a turnaround. For any rebound to mature into sustained growth, though, the retailer will have to demonstrate that it has a bright future even as the video game industry continues to shrink.