GameStop (GME 1.70%) investors have been used to hearing bad news over the last year. The video game retailing giant has delivered a long string of weak operating results while struggling to articulate a rebound path for the business.
The company's latest earnings report was surprisingly poor even given those low expectations. GameStop was forced to slash its annual outlook to account for weaker demand for video game hardware and software. In a conference call with investors, CEO George Sherman explained why the company missed its sales targets and expressed optimism that its negative outlook over the next few quarters is just a temporary slump.
Let's take a look at a few highlights from that call.
It's lonely at the top
The near-term headwinds confronting the industry as we enter the final stages of the current console cycles are having an outsized impact in our business, given we are the lone specialty retailer in the space. -- Sherman
GameStop's brutal 26% sales decline was even worse than the low bar investors had set for the company, and executives said the slump was mainly tied to the upcoming new console releases from Microsoft and Sony.
These issues have pressured results for major retailers like Best Buy, but hurt GameStop more since its entire model depends on gaming demand. "As an industry leader, we're feeling that pressure more directly than others," Sherman said as he noted double-digit percentage declines for the wider industry in recent months. The pressure came from reduced demand across new hardware products and sharp price cuts on the PlayStation and Xbox franchise consoles.
Still cutting costs
While the top-line decline masked some of our progress, you can see that, excluding one-time items, we delivered approximately $30 million in reduction in our corporate overhead compared to last year as a result of these actions. We have a clear line of sight to [the] remaining 50% and are confident in our ability to deliver on this goal. -- Sherman
GameStop showed little progress in reaching management's goal of slashing $200 million from its annual expense burden. In fact, adjusted losses remained significant at $40 million compared to $65 million a year ago. Nevertheless, management said they took a few aggressive steps to cut costs, including closing up shop in underperforming markets in northern Europe. These moves freed up more cash, GameStop said, which it directed mainly toward stock repurchase spending.
While the near-term top-line environment remains a challenge, we do not believe these results are indicative of what we would expect for the business in the long term. -- Sherman
GameStop took a cleaver to its 2019 outlook, in part, because of the slumping demand for new game consoles, but also because large publishers are delaying big releases until later in 2020. As a result, investors can expect more painful sales and customer traffic declines over the next few quarters. Executives expressed confidence that the company will bounce back once the video game industry recovers, just as it did following the last round of next-gen console releases in 2013.
Investors don't appear eager to wait for that rebound, but shareholders looking for a bright spot can take some solace in the fact that GameStop has a strong cash position right now and is still targeting positive free cash flow in 2019 and beyond.