Investors have found it hard to get optimistic about GameStop (GME 2.84%) lately. The specialty retailer's stock is down over 20% so far in 2018, and it's collapsed by about 70% in the last three years.
There are good reasons for the slump, given that GameStop's last few quarterly reports have called management's rebound strategy into question. After all, the company's core video game business is declining at a faster rate than executives had hoped. Meanwhile, GameStop's new operating segments aren't achieving the results that shareholders had been promised.
Against that backdrop, the retailer will post fiscal second-quarter 2018 earnings results on Sept. 6 that will be closely scrutinized for signs of worsening sales trends. Investors are also eagerly awaiting updates on GameStop's leadership plans, along with any developments in its talks to potentially sell itself.
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The core business
The beginning of GameStop's fiscal year didn't provide much reason for investor optimism. Sales dropped 8% in the first quarter after accounting for currency swings, thanks to the combination of a 5% decline at the company's existing stores and a 16% slump in its new technology brands division.
The good news for investors was that the video game downturn, with hardware sales down 8% and software sales falling 10%, was mainly due to a difficult comparison against the blockbuster launch of Nintendo's Switch console in the year-ago period. Without a similarly popular release this time around, GameStop's results were bound to be pressured.
Those same trends are likely to show up in this week's earnings results since the year's biggest video game releases won't happen until the third and fourth quarters. GameStop ended its practice of issuing quarterly sales guidance last year, but investors who follow the stock are expecting sales to fall by about 5% to $1.6 billion.
The new business lines
The retailer's rebound strategy involved milking its dominant hold on the video game market while aggressively extending into attractive new business lines. But recently GameStop has delivered bad news to investors on this diversification effort. Back in May, management revealed that its consumer technology segment posted sharply lower sales and profits just one quarter after the company took a $350 million writedown on the division, which includes Cricket Wireless, Simply Mac, and Spring Mobile stores.
GameStop's new collectibles unit turned in strong results, but the gains weren't enough to offset struggles in the technology brands department. Investors will be watching closely for signs that the consumer tech business is at least stabilizing.
Outlook
GameStop affirmed its full-year sales and profit guidance last quarter, and, despite all the recent operating stumbles, the retailer still believes overall sales will post just modest declines as adjusted earnings fall to between $3 and $3.35 per share.
However, the risk of missing that forecast is greater than shareholders are used to seeing at this point in GameStop's fiscal year. The cadence of video game releases is heavily tilted toward the third and fourth quarters in 2018, which means that this period should account for as much as 90% of the retailer's annual earnings compared to about 75% in more typical years. Given that intense seasonality, there's not much hope for a dramatic upgrade to GameStop's outlook this week.
Management could still surprise Wall Street on Thursday by announcing leadership changes or by revealing a positive outcome from its exploratory talks on going private. Outside of those events, the retailer's operating results aren't likely to significantly change its weak momentum as it heads into the critical holiday shopping sales period.
