GameStop (GME -0.38%) investors had every reason to be cautious heading into its earnings report this week. The video game retailer had missed management's growth targets in recent quarterly announcements. The odds of a quick rebound were tiny, too, thanks to several negative trends in its core industry niches.
On Tuesday, consistent with its recent track record, GameStop's actual results again trailed expectations, and the retailer lowered its full-year outlook. The stock fell 19.3% on the day following the report's release. Let's take a closer look and why investor's were inclined to sell.
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Worsening growth trends
CEO George Sherman warned investors that things would likely get worse before they got better on the growth score. Yet the scale of GameStop's retreat was still surprising.
Comparable-store sales plummeted 23% to mark a sharp deceleration from the prior quarter's 12% drop and the 10% decrease the consumer stock posted in Q1. Management was right about the negative trends impacting the industry, including the weaker game release calendar compared to last year and the choice by consumers to forego purchasing current-generation game consoles in anticipation of next year's refreshed releases.
However, declines were brutal and touched most of its core selling niches. New hardware sales collapsed by 46%, new software sales dove 33%, and pre-owned sales fell 13%. GameStop even noted a double-digit drop in accessories and just a 4% uptick in the collectibles niche. Both of these channels had been supporting sales in recent quarters but were little help in the context of diving customer traffic this year.
Gross profit challenges
Gross profit margin improved to 31% of sales from 29% a year ago. Yet investors shouldn't celebrate that achievement. It resulted from collapsing demand for video game hardware, which is GameStop's least-profitable product line.
At the same time, the business continued suffering from residual shocks from its failed efforts to diversify into consumer tech. Operating loss landed at $474 million compared to $470 million last year. After adjusting for GameStop's many impairment and restructuring charges, net loss was $40 million compared to a $65 million loss in the year-ago period. These figures suggest there isn't much to show for management's cost-cutting program that ramped up over the last few months.
Keeping promises
GameStop has kept its promise of returning plenty of cash to shareholders while reducing its debt burden. The company accelerated its stock repurchase spending, in fact, retiring 23 million shares this past quarter for a total of $116 million. That buyback amounted to nearly one-fourth of the retailer's outstanding share count.
If investors were tempted to take that spending as an encouraging note of confidence, GameStop's outlook likely forced a few second thoughts. The chain now sees sales declining in the high-teen-percentage range for the full year compared to the mid-teen range it had projected a few months ago.
This downgrade reflects a next-gen console transition that's causing an "unprecedented" decline in hardware sales, according to management. Yet with new consoles still about a year away from release, and with most of its other sales categories in retreat, GameStop is likely to continue shrinking well into 2020 before showing any evidence of a sustainable rebound.
