The stock market steadily gained ground on Wednesday, with meaningful gains by early afternoon for all the major indices.


Change at 1:30 p.m. EDT

Dow Jones Industrial Average (DJINDICES:^DJI)




Nasdaq Composite (NASDAQINDEX:^IXIC)


Data source: Yahoo! Finance.

Those broad stock market gains were no match for the bad news that wreaked havoc on shares of GameStop (NYSE:GME) and Dave & Buster's (NASDAQ:PLAY). Both stocks plunged after reporting disappointing results and slashing full-year guidance.

GameStop isn't doing well

Weak sales from video game retailer GameStop are to be expected, given that the next-generation of video game consoles are likely to be launched next year. But a lot more is going wrong for the company than the timing of the product cycle. GameStop stock was down 12.1% at 1:30 p.m. EDT Wednesday following a weak report and a guidance cut.

GameStop's second-quarter sales plunged 14.3%, driven by an 11.6% decline in comparable store sales. Adjusted loss per share more than tripled to $0.32, missing analyst estimates by $0.10, and the company posted a massive $415 million GAAP loss thanks to a non-cash write-off.

The biggest problem for GameStop is its lucrative used games business. Sales of pre-owned and value video game products crashed 17.5% in the quarter, and that segment is now about one-third smaller than it was in the lead-up to the previous console generation launch. Used games carry gross margins in excess of 40%, far higher than new games and hardware.

With a weak second quarter in the books, GameStop lowered its full-year guidance. The company now expects comparable store sales to decline by a low-teens percentage, down from previous guidance calling for a 5% to 10% decline.

New game consoles will eventually provide GameStop with a temporary sales boost, but it's hard to see a future for a brick-and-mortar seller of physical game discs.

No fun for Dave & Buster's

Shares of Dave & Buster's were down 5.8% at 1:30 p.m. EDT Wednesday after getting hit by two analyst downgrades following its second-quarter report. While revenue rose thanks to new locations, comparable store sales declined.

Games inside of a Dave & Buster's.

Image source: Dave and Buster's.

Total revenue was up 8% to $344.6 million, but this was driven by an 11.1% increase in the number of stores. Comparable store sales were down 1.8%, with an 0.8% decline in amusements and other, and a 3.2% decline in food and beverage.

The bottom line beat expectations, but it wasn't enough to overshadow the weak sales performance. Earnings per share came in at $0.90, ahead of analyst estimates by $0.06.

Analysts at Raymond James and William Blair reduced their ratings to "market perform" following the earnings report. Raymond James is concerned about deteriorating comparable sales trends, enough to warrant a downgrade despite a depressed valuation.

Given the weak results, Dave & Buster's lowered its guidance for the full year. The company now expects comparable store sales to decline by 2% to 3.5%, down from a previous range of negative 1.5% to positive 0.5%.

Building new stores will continue to grow revenue, but the market isn't happy about the problems at existing stores.

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