The fall and winter selling periods are important to most consumer businesses, but GameStop (GME +1.39%) is taking that seasonality up a notch this year. In fact, the specialty retailer expects to produce roughly 90% of its earnings in the fiscal third and fourth quarters of 2018.
That intense seasonal focus means investors will be highly interested in what GameStop has to say about its business trends on Thursday, Nov. 29, just a few days after the official kickoff of the holiday shopping period.
Let's take a closer look.
Image source: Getty Images.
Growth and profits
Sales in its core retailing business returned to modestly positive territory last quarter, inching higher by less than 1% compared to a 5% decline in the prior quarter. But GameStop struggled with weak demand in two areas that will need to improve over the next few quarters if it's going to achieve management's full-year targets. New software sales plunged 19% last quarter, after all, and the pre-owned video game business fell 10%.
Excitement around newly released console gaming devices helped lift its hardware sales, but that product category delivers GameStop's lowest profit margins, by far. As a result, the retailer needs a modest rebound in its core new and used software business for sales and profit margins, to begin climbing higher again.
This sales period included a few of the biggest launches of the year from developers like Activision Blizzard and Take-Two Interactive, and so we'll find out on Thursday if GameStop can still draw customers to its stores for these banner gaming releases.
Financial moves
Just days ahead of the earnings report, GameStop announced that it is selling off its struggling Spring Mobile segment for $700 million. The stock jumped in response to the news, indicating that investors liked the price and the fact that the retailer is exiting a business that has required significant writedown charges in recent quarters.
The company might have more financial moves to talk about this week because the management team is still looking at transactions, up to and including taking the entire company private, aimed at boosting long-term shareholder returns. At the very least, investors will get details about how the Spring Mobile sale fits into the company's new plan to focus on its gaming and collectables retailing businesses.
The holiday outlook
GameStop affirmed its outlook back in September and still expects comparable-store sales to range from flat to down 5% as adjusted earnings land somewhere between $3 and $3.35 per share. It wouldn't be a surprise to see major revisions to those prediction that reflect the most recent demand trends heading into the holiday season and the divestment of the Spring Mobile business.
Looking further out, investors have fundamental questions about GameStop's bigger-picture strategy, including the fact that it lacks a permanent CEO and appears to be shifting away from its diversification plans to refocus on the video game segment. The possibility of a buyout complicates efforts to remove these uncertainties, since a new owner would have its individual ideas about the best path forward for GameStop. Thursday's earnings release might not clear up these important strategic questions, but at least they'll shed light on the health of the retailing business as it approaches the make-or-break fourth-quarter selling period.
