Even though GameStop (NYSE:GME) met its growth forecasts over the first half of fiscal 2018, investors have kept the stock's returns well below the broader market this year. That's because the retailer has been predicting that the vast majority -- roughly 90% -- of its earnings will be generated in the third and fourth quarters around the holiday shopping period.

Its latest quarterly report illustrated the risk involved with that intense seasonality, as a slight change in GameStop's operating trends forced a large downward revision to management's earnings outlook.

More on that profit target in a moment. First let's take a closer look at the headline results.

GameStop: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Growth

Revenue

$2.1 billion

$2 billion

5%

Net income (loss)

($489 million)

$59 million

N/A

Earnings per share

($4.78)

$0.59

N/A

Data source: GameStop's financial filing. 

What happened this quarter

The specialty retailer returned to overall sales growth and sped up its revenue gains as compared with the prior quarter. Its massive loss, meanwhile, was mostly driven by accounting charges related to recent business acquisitions that didn't pan out as executives had expected. However, profitability declined even after adjusting for those charges.

Kids playing console games.

Image source: Getty Images.

Highlights of the quarter include:

  • Sales at its existing stores rose 2% to mark the second straight quarter of improving trends and the first positive growth result since late 2017. A modest decline in its international business was more than offset by healthy growth in the U.S.
  • Demand was strongest around new hardware and software sales, along with gaming accessories. GameStop's pre-owned software segment, a key profit generator, shrank by 13% versus a 10% decline in the prior quarter.
  • Results were mixed from the non-video game segments, with the consumer tech division posting lower sales and the collectibles business expanding by 12%.
  • The shift away from pre-owned software sales and toward video game hardware continued to hurt profitability, as gross profit margin fell to 33.1% of sales from 34.7%.

What management had to say 

Executives said they were pleased with the company's performance in the core retailing segments. In a press release, CFO Rob Lloyd said, "We experienced solid growth in the third quarter, including double-digit growth across software, hardware, accessories, and collectibles." This performance highlighted GameStop's "leadership position in video games and our unique ability to satisfy all of our customers' needs," Lloyd said.

Management also noted that the retailer gained market share in the physical video-game industry thanks to strong execution around the release of hit titles like Take-Two Interactive's Red Dead Redemption 2 and Activision Blizzard's Call of Duty: Black Ops 4.

Looking forward

GameStop's updated outlook was influenced by disappointing early results from the peak holiday shopping season. Sales are skewing even more sharply toward hardware, executives said, and a few titles and sales promotions aren't performing as well as they had hoped. These issues "will result in fourth-quarter earnings that are below our previous expectations," management said. Specifically, while sales are still expected to range from flat to down 5% in 2018, GameStop's earnings should now come in between $2.55 and $2.75 per share, compared with the prior forecast of $3 to $3.35.

The retailer didn't have any certainty to offer investors on broader questions around its business, including whether more divestments -- or a full privatization -- might be happening soon. GameStop is still working with multiple parties about a possible transaction, the company said, and so clarity on the likely significant changes to its long-term strategic approach will have to wait until that process concludes. In the meantime, the immediate focus is on executing as well as possible during this make-or-break retailing period.

Demitrios Kalogeropoulos owns shares of Activision Blizzard and GameStop. The Motley Fool owns shares of and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool owns shares of GameStop and has the following options: short January 2019 $16 calls on GameStop. The Motley Fool has a disclosure policy.