GameStop (NYSE:GME) shares were volatile in the weeks leading up to its second-quarter earnings release. The price swings reflected major shareholder questions about how the business might endure the accelerating shift toward digital-game purchasing and the winding down of the current generation of video game consoles.

On Tuesday, the specialty retailer demonstrated that these issues are likely to reduce sales and profits at least over the next year. Executives expressed confidence, though, that their transformation plan will turn things around. Let's take a closer look.

Metric

Q2 2019

Q2 2018

 Change

Revenue

$1.29 billion

$1.5 billion

(14%)

Net income (loss)

($415 million)

($25 million)

N/A

Earnings per share (loss)

($4.15)

($0.24)

N/A

Data source: GameStop's financial filing. 

What happened this quarter?

GameStop's sales declines accelerated as gamers pulled back their spending across hardware and software categories. Gross profitability held up, but that modest success was overwhelmed by a $400 million goodwill impairment charge in connection with the company's turnaround strategy.

Two children playing console games.

Image source: Getty Images.

Highlights of the quarter include:

  • Comparable-store sales fell 11%, compared to 10% in the previous quarter. That decline included a 41% slump in new hardware sales, 5% lower new software sales, and an 18% drop in GameStop's pre-owned gaming segment.
  • The collectibles unit was the only one of GameStop's six divisions to grow during the period as sales rose 21%, thanks to strong demand across domestic and international stores.
  • Gross profit margin held steady at 31% of sales, mainly thanks to the fact that new hardware revenue collapsed. That segment is GameStop's least profitable, so declines there tend to help profitability. Accessory sales, lifted by the popularity of games like Fortnite, continued to attract strong margins.
  • Selling expenses rose, pushing the consumer discretionary business deeper into the red. That operating loss was magnified by a $400 million impairment writedown.
  • GameStop paid off $50 million of debt and has now roughly cut its debt burden in half this year, down to $419 million.

What management had to say

CEO George Sherman and his team said they weren't surprised by the sharp drop in customer traffic and sales volumes. "We experienced sales declines across a number of our categories," CFO Jim Bell said in a press release. "These trends are consistent with what we have historically observed toward the end of a hardware cycle," Bell explained, referring to the recent announcement of new gaming consoles coming in 2020.

As for the updated operating structure, Sherman said GameStop is "committed to acting with a sense of urgency to address the areas of the business that are critical to achieving long-term success and value creation for our stakeholders." Management outlined the key tenants of that rebound plan, which include slashing costs and reducing the store base, in addition to a sharper focus on high-margin categories like accessories.

Looking forward

With next-generation console launches still about a year away and gamer spending quickly moving online, GameStop is operating in an especially difficult selling environment as it heads into the holiday-shopping season. Last quarter's decision to suspend the dividend helped shore up capital in preparation for this tough situation.

Looking further out, management's hope is to improve its annual profit generation by $200 million by fiscal 2021. But investors will likely see falling sales and subpar earnings in the meantime.