GameStop (NYSE:GME) investors had been bracing for bad news in the company's earnings report. Yet Wall Street was still shocked by the retailer's actual first-quarter results.
Shares plummeted after the video game retailer revealed significant demand declines. Modest financial improvements were ignored as investors focused instead on news that the company has ended its hefty dividend payment.
CEO George Sherman, who stepped into the leadership role about a month earlier, was clear in a conference call with analysts that GameStop has a big challenge ahead as it works to transform the business under difficult industry conditions. Below are a few highlights from that presentation by the management team.
A brutal selling environment
Coming into the year, we anticipated a challenging top-line comparison given that we're nearing the end of the current console cycle, comping a stronger title slate released in 2018, and [seeing] ongoing underperformance in our pre-owned video game category. All three of these expectations came to fruition in the first quarter.
-- CFO Rob Lloyd
Sales trends contained few bright spots, and several flashing red warning signs. Revenue dived 35% in the hardware segment as people put off purchasing gaming consoles in anticipation of new releases on the way in 2020. Software sales fell 4%, with executives mainly blaming a relatively weak release calendar. And the pre-owned business shrank 20% due to the continued transition to digitally delivered games.
Each of these challenges might be manageable on its own, but together they produced a brutal revenue decline, with double-digit comparable-store drops both in the U.S. and in GameStop's international segment.
Ending a massive dividend
We remain committed to return capital to shareholders when it's prudent. That said, in the near term we are confident that redirecting capital toward debt reduction and reserving capital for successful transformation initiatives will put us in a better position to drive increased shareholder value over the long term.
The retailer's double-digit dividend yield seemed impossibly high, yet it has been well covered in recent quarters by healthy cash generation. Given the latest sales trends, though, management decided it was time to end that payout to stock up on cash to direct toward debt repayments and the turnaround efforts.
Management said it didn't intend to go on an acquisition spree or attempt to diversify outside of the core video game business. And capital returns are still a priority, it stressed. These comments were backed up by an aggressive stock repurchase announcement in the days following the earnings report. However, a potentially rough transition to next-generation consoles has executives deciding to take the most conservative possible cash posture for now.
Asking for lots of patience
I believe that we can parlay all the attributes that make us an industry leader today to become the leader of tomorrow and beyond.
Beyond general expressions of the strength of the business, GameStop didn't give investors much in the way of concrete rebound targets. The most tangible part of its turnaround strategy over the next few quarters will be its cost transformation, as operating margin finds support from changes in product sourcing and higher prices.
In the meantime, executives aren't suggesting that the business will strengthen for the foreseeable future. Sales are projected to fall by 5% to 10% this year and may be pressured more during the expected console transition in 2020. Overall, GameStop is signaling a "multiyear" transformation that may require investors to wait until late 2020 or beyond before they see clear signs of stabilization in operating trends.