GameStop (NYSE:GME) investors, through much of January, were bracing for what could be a rough holiday-quarter sales update from the retailer. The company set the stage by reducing its outlook in late November after a slow start to the peak selling period. And with nearly all its annual earnings tied up in those key months surrounding the Christmas shopping season, there was risk of a significant downgrade to the video game retailer's profit outlook.
Shareholders can relax a bit now.
GameStop's actual holiday results didn't spur an earnings downgrade; instead the company gave investors a few reasons to be optimistic about its business even as the management team explores potential going-private transactions.
Executives revealed on Friday that sales fell 5% for the nine-week period that ended on Dec. 30, but the decline was mostly due to calendar shifts that added an extra selling week in 2017's period. Strip out that impact, and comparable-store sales nudged higher by 1.5% to mark a continuation of the modestly positive trends investors have seen for the past two quarters. At the big-picture level, this metric describes a stable business, not one that's in deep retreat, as many investors had feared.
Looking closer at results, GameStop continued to struggle in its legacy video game segments while performing better in newer business segments. Preowned software and hardware sales slumped by a brutal 16%, and that trend isn't likely to improve by much as video game spending shifts online. But the retailer saw strength in its accessory business and its collectibles division. Digital sales were a bright spot as well, climbing 17% to $353 million. "As we anticipated coming into the holiday season," CFO Rob Lloyd said in a press release, "we were able to leverage our position as a leader in the video game industry to drive positive comps on top of what was a strong holiday period in 2017."
Profit hints and an updated outlook
The update focused on sales rather than profits, but the report included hints at healthy earnings results for the period. For one, new video game hardware sales dipped slightly as a percentage of overall sales. This product niche is by far GameStop's least profitable one, since the company books margins of about 10% on the sale of gaming consoles. That's why it's good news for the business that video game accessory sales -- at around a 36% margin -- rose to 12% of revenue from 9% a year ago. GameStop also implied that profitability held up in the collectibles segment as management engaged in "significantly lower promotional activity."
As for the full year, executives affirmed their prior guidance of booking between $2.55 per share and $2.75 per share of earnings in 2018. For the exact result, investors will have to wait until the retailer issues detailed fourth-quarter results in late March.
It's possible GameStop will announce major financial moves before then, including a potential sale of the entire business. It just closed a $700 million sale of its Spring Mobile division and is still actively looking at other divestments. Management's hand in these negotiations, if they're still happening, is likely a bit stronger today given that its core retailing business appears to be stable and producing profits and significant cash flow.