GameStop's (GME +1.57%) diversification strategy isn't going according to plan. The retailer recently announced holiday-quarter results that combined plunging profit margins with a painful impairment charge against what management had hoped would be an attractive new business line.
Incoming CEO Mike Mauler and his team held a conference call with Wall Street analysts to put those results in perspective and explain how they believe they can get the business back on track. Here are a few highlights from that discussion.
Image source: Getty Images.
What worked this quarter
Our fourth quarter revenues increased 15% driven by strong sales of new hardware, new software, and collectibles. Our store team's ability to drive sales and provide exceptional customer service over the important holiday period drove a 12% increase in same-store sales. -- CEO Mike Mauler
GameStop proved that it remains a popular destination for video-game fans, and its 12% comparable-store sales boost allowed the company to beat its initial target for the year. Its new collectibles business line fared well, too, rising 23%, but the segment came in just shy of executives' 2017 goal of between $650 million and $700 million.
The pre-owned business
Our pre-owned business performed in-line with our expectations, declining nearly 3% in the quarter and 5% for the full-year. -- Mauler
The core pre-owned segment met sales expectations but came up well short on profitability, which helps explain why gross profit margin dove by nearly 4 percentage points over the holidays. GameStop said the tilt of sales toward new Nintendo Switch hardware and software, which hasn't made its way into pre-owned trades yet, hurt that result.
GME Gross Profit Margin (TTM) data by YCharts.
Used game sales were also affected by the shift toward digital gaming that has both reduced physical disc inventory and lengthened the average holding period of each title.
Tech brands struggles
The [tech brands] business has not yielded all of the returns we expected. Due to the changes in the compensation structure made by AT&T, the delayed and staggered launch of the iPhone 8 and iPhone X and operational execution challenges, we fell short of the sales and profitability goals we had outlined at the beginning of the year. -- Mauler
The technology brands segment logged a 14% sales decline for the quarter and a 1% drop for the year. That result was not what management had in mind when they created the division a few years ago, before aggressively building out its store base. Thus, in part because industry dynamics have made smartphone sales less profitable, GameStop took an over $350 million impairment charge on the segment. The company closed 75 tech brands stores in the quarter and expects further rightsizing over the next few quarters.
Shifting strategies
We will be taking a pause on investing in new businesses and acquisitions and focus on the fundamentals of fixing the businesses that we already have. Once these businesses are operating at the level that I know that they can achieve, we can then explore other opportunities to drive shareholder growth. -- Mauler
As part of his recent transition to the role of chief executive, Mauler is taking a fresh look at GameStop's entire operating structure. "We will be revisiting all of our assumptions across all parts of the business," he said on the call.
The immediate strategic shift involves getting back to basics by focusing on its three core divisions: video games, collectibles, and technology brands. Thus, investors should judge GameStop's success by management's ability to improve sales growth and profitability trends in these areas over the coming quarters.
Risky outlook
We expect growth in the collectibles business, while the video game business is expected to decline mid-single digits due to the overlap of the huge success of the Switch. -- CFO Rob Lloyd
Management's rebound plan revolves around catering to hardcore gamers while expanding its customer base to more casual shoppers. GameStop aims to cut costs where it can, too, while still investing in its core growth initiatives. Executives predict declining comps for the year, though, and are predicting that profits will fall for the third straight fiscal year.
In addition, 2018 will be riskier than usual given that the biggest gaming releases won't come until later in the year. While the fiscal third and fourth quarters traditionally account for about 75% of annual earnings, this time around, that figure could be as high as 90%. That means investors likely won't have a clear reading on GameStop's recovery until early 2019.
