GameStop (GME -0.43%) investors have received a steady stream of bad news from the retailer in recent quarters. Sales declined in 2018 as more video game spending moved online. The chain's diversification strategy failed to offset that slump, too, forcing management to abandon the approach after taking several large writedown charges.
Worse yet, the retailer is entering fiscal 2019 without a clear strategy for returning to sales growth and arresting its multiyear earnings slide. The good news is investors won't have to wait long to judge whether the chain's new CEO has the right rebound strategy in place for stabilizing the business.
The first small steps along that path will show up in GameStop's first-quarter earnings results on Tuesday, June 4. Let's take a look at what the chain might reveal in that report.
Sales growth trends
GameStop's revenue trends don't look bad at first glance given that comparable-store sales were flat last year and have risen in three of the last five fiscal years. Looking more closely at that metric, though, investors can see signs of serious challenges ahead. Namely, GameStop's core business segment, its pre-owned software and hardware offerings, is fading away. It plunged 21% over the holiday quarter, in fact.
The chain is succeeding in areas that aren't being disrupted by digital game delivery, including spiking accessory sales and healthy demand for its collectibles products. But this merchandise doesn't drive the level of repeat customer traffic that its buy-sell-trade video game model did, and so the broader business is struggling.
In April, the company predicted that comparable-store sales might fall by between 5% and 10% in fiscal 2019 to mark its worst result since 2016, when revenue was impacted by the shift to next-generation console systems. Investors will find out on Tuesday whether that negative outlook is still management's best guess for big-picture demand trends this year.
GameStop's other huge challenge is that its growth areas of accessories, new video game hardware, and collectibles don't deliver nearly the same profitability that its pre-owned software business did. The company earned an 8.5% profit margin on products like gaming consoles last year compared to over 40% for used games.
As a result of the shift away from those pre-owned products, overall gross profit margin fell to 28% of sales from 29% a year earlier. That metric has been declining steadily since reaching over 31% of sales in 2016 and investors are eager to see any sign that GameStop can end this slide. Cost cuts might protect bottom-line earnings in the upcoming report, but the more important number to watch will be gross profit margin.
Shareholders have been dealing with extra uncertainty for the past year as the chain operated under temporary management while looking to sell itself. Now that the go-private approach is off the table, GameStop will need to articulate a new strategy that can add value to the business rather than destroy shareholder returns.
Incoming CEO George Sherman will have his first shot at describing that fresh approach on Tuesday, just over a month after officially taking over the retailer's top executive spot. The good news is that Sherman will likely have plenty of latitude to make wide-reaching changes like store closures, brand divestments, and aggressive restructuring. But while moves like these would support profits in the short term, they're not likely to improve the broader negative business trends shareholders have endured since mid-2018.