Please ensure Javascript is enabled for purposes of website accessibility

Everything Goes Wrong for GameStop

By Timothy Green - Updated Sep 10, 2019 at 8:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The lead-up to the next-gen game consoles is only making things worse.

An already bad year just got much worse for video game retailer GameStop (GME -4.79%). The company's second-quarter report was a train wreck, with adjusted losses more that tripling as sales tumbled by a double-digit percentage. Another gigantic write-off erased the remaining goodwill on the balance sheet, leading to a GAAP net loss in excess of $400 million.

Sales are falling off a cliff

GameStop fell short of analyst estimates across the board:


Q2 2019

Q2 2018

Compared to Average Analyst Estimate


$1.286 billion

$1.501 billion

Missed by $50 million

GAAP net income

($415.3 million)

($24.9 million)


Non-GAAP earnings per share



Missed by $0.10

Data source: GameStop.

Total sales slumped 14.3% year over year, with comparable sales tumbling 11.6%. Operating costs increased from one year ago, despite much lower sales.

In terms of product categories, sales were down nearly everywhere:

Product Category


Change (YOY)

New video game hardware

$175.6 million


New video game software

$285.0 million


Pre-owned and value video game products

$373.1 million


Video game accessories

$169.6 million



$36.3 million



$171.8 million


Data source: GameStop. YOY = year over year.

The steep decline in new game hardware is understandable -- both Sony and Microsoft have begun to unveil details about their next-generation game consoles likely coming out next year. The slump in pre-owned sales is the biggest problem, as that category carries a gross margin of more than 40%. That compares to 21% for new video game software and less than 10% for new video game hardware.

The pre-owned business has been in decline for years, and it's not getting any better. While next-gen game consoles will have disc drives, the shift toward digital downloads and streaming all but guarantees that physical game discs are on their way to obsolescence. The very concept of a used game is poised to disappear, along with GameStop's biggest source of profits.

A game over graphic.

Image source: Getty Images.

A guidance cut, and a questionable strategy

Given the weak second quarter, GameStop lowered its already terrible full-year guidance:


New Guidance

Old Guidance

Comparable store sales

Down a low-teens percentage

Down 5% to 10%

Adjusted EPS

Between $1.15 and $1.30

Not given

Data source: GameStop.

The midpoint of GameStop's adjusted EPS guidance represents a year-over-year decline of 54%.

GameStop's strategy is to double down on cost cutting. The company now expects to improve operating profit by $200 million by 2021, up from a previous goal of $100 million. This plan involves supply chain efficiencies, operating improvements, expense savings, and changes to pricing and promotions.

The other parts of GameStop's strategy sound like things that every retailer should be doing by default. These include improving the store experience, investing in digital capabilities, and transforming vendor partnerships.

"While we experienced sales declines across a number of our categories during the quarter, these trends are consistent with what we have historically observed toward the end of a hardware cycle," said CFO Jim Bell in prepared remarks included in the earnings release. That's true -- GameStop suffered steep sales declines prior to the launch of the PlayStation 4 and Xbox One in 2013.

But the used games business has been declining for years, and it's now much smaller than it was in the past. GameStop has changed its reporting segments over time, so this comparison isn't quite apples-to-apples. But the $373.1 million of revenue from used and value video game products in the second quarter of 2019 is down 34% from the second quarter of 2012. Segment gross profit is down 41% in that time.

Total sales will almost certainly be boosted by the next-gen game consoles, but they won't change the long-term trends affecting the used games business. Selling new hardware and software is a low-margin affair for GameStop; the performance of the used games business matters much more for the bottom line.

GameStop has over $400 million in cash, which buys it flexibility and time. But if cost cutting is the best strategy the company can come up with, it won't matter in the long run.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

GameStop Corp. Stock Quote
GameStop Corp.
$135.21 (-4.79%) $-6.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.