GameStop (GME -4.83%) reported some solid numbers as part of its recent holiday-quarter earnings release. Sales growth shot up to a healthy 12% pace, after all, from 2% in each of the prior three quarters. Thanks to that success, the video game retailer managed a dramatic rebound as same-store sales increased 6% for the full year compared to an 11% slump in fiscal 2016.
Yet the earnings report contained plenty of bad news for shareholders. Let's look beyond the headline sales-growth figure and focus on a few of the numbers that should worry GameStop investors.
45%: New-hardware sales increase
The biggest contributor to GameStop's revenue growth for the quarter was demand for new gaming hardware, particularly the Nintendo Switch console. Sales in that segment shot up by 45% over the holidays and by 28% for the full year.
That shift toward new hardware hurts the business in two ways. First, it reduces earnings since these sales are GameStop's least profitable ones -- by far. Gross profit margin for new video game hardware was 7.3% last quarter, compared to 23% for new video games. Second, the tilt toward fresh hardware and software leaves less inventory available in GameStop's pre-owned division, which is its core profit generator.
29%: Gross profit margin
Profitability fell hard over the holidays, slipping to 29% of sales from 33% a year ago. That drop was mainly driven by the sales mix shifting toward gaming hardware, but GameStop also logged reduced margins in its new video game segment, its pre-owned division, and its collectibles unit.
These numbers demonstrate that the retailer had to give up a lot of earning power to keep customer traffic chugging along at a healthy pace. The fact that none of its major business lines boosted profitability, meanwhile, suggests it won't be easy to get margins back on track.
14%: New businesses as a percentage of total sales
GameStop's long-term diversification plan calls for its new business lines to pick up the slack from a shrinking market for physical video game disks. However, reality isn't cooperating with that goal.
Together, the tech brands and collectibles segments accounted for 13.7% of sales last quarter to mark a decrease from the 15.4% rate they reached a year ago. The tech brands division missed expectations by such a wide margin that management booked a writedown on its value. Collectibles, meanwhile, came in just shy of GameStop's goal of between $650 million and $700 million of sales.
$3.18: Full-year earnings forecast
Executives issued a 2018 profit forecast range of between $3 per share and $3.35. At the midpoint, that $3.18-per-share figure implies a drop from this past year's $3.34 level. It would also mark the company's third consecutive year of falling earnings.
In addition to the over $400 million writedown, that profit pinch is contributing to a worsening financial picture for the retailer. GameStop plans to adjust to the new reality by cutting costs and scaling back its investments in new business. These changes should protect its huge dividend for now, but GameStop is clearly in a defensive posture when it comes to its finances.
90%: The percentage of earnings likely to come around the holidays
One of the biggest risks in GameStop's business is its intense seasonality. Traditionally, around three-quarters of its earnings are generated in the final two quarters of the year, which can amplify any misstep around the holiday season into a potentially huge profit hit.
That risk has increased for 2018. Given the timing of big releases including Call of Duty Black Ops 4 and Red Dead Redemption 2, management says as much as 90% of earnings will come in the second half of the year, right around the holidays. In addition to raising the potential for a nasty sales surprise in the fall or winter, that projection means investors likely won't know whether GameStop's turnaround plan is working until 2019 at the earliest.