GameStop's (NYSE:GME) on Thursday posted a surprisingly large sales dip for its fourth quarter. The video game retailer also announced light guidance for the year ahead. However, GameStop's business hit a record-high profitability level and earned a new all-time high market share for video game sales.
After the announcement, CEO Paul Raines and his executive team discussed those mixed results in a conference call with Wall Street analysts. Here are a few highlights from the chat.
Why the sales shortfall
"The console market grew 9% [in 2014] to $16 billion versus the 13% increase that had been predicted." -- Raines
GameStop's video game sales were weaker than management, and most industry watchers, had forecasted. But that slip wasn't due to competitors stealing market share, or gamers opting for digital video game delivery.
Instead, the main reason for that miss was complications from the next-generation console rollout. Gamers spent more on buying Xbox One and PlayStation 4 devices last year and less on prior-generation video games than expected. In fact, hardware sales were $500 million above target, while software sales for the past generation titles were $800 million below expectations.
Market share record
"We delivered all-time high market share of 28% on hardware and 46% on software." — Raines
GameStop continued its dominance over the video game industry in 2014. It achieved a record-high share of console device sales and was responsible for nearly half of all next-gen software sales.
Rivals just couldn't keep pace. GameStop even added share in its profitable used game business despite Wal-Mart's leap into the market. "Competitors who have entered the pre-owned market have not hurt our market leading position, but have helped create greater awareness among consumers," Raines said.
"Gross margins expanded 50 basis points for the year resulting in a 29.9% margin rate, which is our highest annual gross margin rate and the highest gross profit dollars we have achieved in our history." — Chief Financial Officer Rob Lloyd
After setting a new high profitability mark of 30% of sales, the outlook is bright for GameStop's earnings growth. Relatively unprofitable next-gen console devices will keep dropping as a percentage of sales. And new and used software, which are much more profitable to the retailer, promise to march higher. Management is forecasting EPS of as much as $3.80 this year, up 10% from 2014.
Digital downloadable content
"We are a key player in the digital value chain and we have plans in place to be full participants in all facets of digital gaming" -- Chief Operating Officer Tony Bartel
GameStop's market share in digital game sales was 42%, the company estimates, which is comparable to its dominant share in physical video games. Management aims to keep leading in this category as selling moves toward full-game downloads.
One promising sign is that game publishers expect to charge more for digital games this year after giving millions of titles away as part of hardware bundles in 2013 and 2014. That shift should help both publishers and GameStop by raising the effective price on digitally delivered games.
Stepping away from video game retailing
"We are exploring acquisition and partnership opportunities that leverage GameStop's core competencies and provide great value and growth for our shareholders both in the U.S. and in our international markets." — Vice President Mike Hogan
GameStop has been working for years at diversifying away from its core business of physical video game sales. The early results are promising: Revenue from non-core categories reached 16% of its business in 2014. That proportion should rise to 20% this year, management says.
GameStop aims to close about 3% of its video game stores, up from 2% in each of the last two years. Meanwhile, it will boost its tech brands stores (including Apple retailing and AT&T wireless services) by as many as 550. Management sees this portion of the business reaching $1.4 billion of annual sales by 2019, for a compound annual growth rate of 35% from last year's $329 million mark.