Oh, GameStop (NYSE:GME). I give and give and give and all I get in return is failure. This time around, GameStop sold new-generation consoles over the holiday season -- excellent. In fact, it sold so many that the company managed a huge increase in comparable sales. So why is the stock sitting down 18% today? Every time I look at this company, I think, "Here it comes -- here comes the bounce," and every time I turn around to some failure.
This time, GameStop is suffering from a fall in margins from the big console push. While GameStop had big success with the new Microsoft (NASDAQ:MSFT) Xbox and Sony (NYSE:SNE) PlayStation, it didn't have any luck with new software -- somehow.
Who does this?
How, how does a company manage to sell more razors without managing to sell any blades? Over the nine-week holiday sales period, GameStop's new hardware sales almost doubled. So, of course, sales of the games that make the hardware even remotely interesting jumped, too, right? Wrong. Sales of new software dropped 23% as GameStop failed to make anything useful out of its strong hardware position.
In its defense -- which seems to be the only thing I do these days, make excuses -- GameStop had a smaller catalog to sell from. With the new console launches, the market is suddenly flooded with users who are trying to play the newest games, but there are only a handful of games so far. On the other hand, if you look back at 2006 when the PlayStation 3 launched, you see a much stronger sales picture. Hardware sales for the quarter increased 77% and new software sales grew 18%.
Can GameStop fix its problems?
For the past year or so, I've said that GameStop was in a strong position. All it needed to do, I thought, was make it past the new console launch period and then things would turn its way. Instead, it may be that digital sales have already passed the tipping point and GameStop will continue to suffer.
Digital sales have long been seen as the specter at GameStop's door, waiting to take away the retailer's new game dominance. Already, digital sales have overtaken physical sales in the U.K. and they're growing rapidly in the U.S. as well.
For GameStop, that means that the future is coming faster than it planned, and it may not be ready for the shift. While I still think that GameStop has a fighting chance, I'm no longer as confident that 2014 is going to be the "Year of GameStop." Investors looking to cash in on the new consoles may be better off looking at the console makers or software developers. Both stand to see gains from the shift to digital sales in a way that GameStop won't... right now.