Video game retailer GameStop (NYSE:GME) last week posted surprisingly strong first-quarter results. Comparable-store sales jumped higher by 9%, blowing past management's expectation for a 6% gain. Profit surged higher by 15% to $0.68 per share.
After the announcement, CEO Paul Raines and his executive team held a conference call with Wall Street analysts to provide more detail on GameStop's business and outlook. Here are five highlights from that presentation.
The core business model is healthy
"GameStop sold 46% of all Xbox One and PlayStation 4 hardware and software combined during the quarter, up 610 basis points from last year. We continue to gain share in a new cycle that is significantly outpacing previous launches." -- Chief Operating Officer Tony Bartel.
The retailer set a new first-quarter market share record in its core video game business, accounting for just under half of the industry's sales. GameStop is reaping the benefits of a dominant position in a video game cycle that is stronger than any prior console cycle.
Rivals, including traditional retailers Wal-Mart (NYSE:WMT) and Best Buy (NYSE:BBY), continue to lose ground to GameStop's buy-sell-trade approach. "The model of reserving games, providing unique content, and delivering midnight launches continues to differentiate us in the market," Raines said.
"One significant global driver of GameStop same-store sales and profitability increase during the quarter was the expansion of our license, merchandise, and collectibles category, or what our customers like to call loot." -- President, International Mike Mauler.
GameStop also continues to show its flexibility by growing sales in categories that aren't limited to video game software and hardware. Branded products including toys, collectibles, and apparel sold briskly during the quarter. Management believes this business segment can grow to $500 million a year by 2017. This year's sales should be driven by releases in popular franchises including Avengers, Hunger Games, and Star Wars.
Solid digital downloads
"GameStop's full game AAA downloads more than tripled and our downloadable content increased by 83% during the quarter. " -- Bartel.
GameStop's digital business posted solid growth during the quarter, with total sales up 23% over the prior year on a 77% profit margin. That growth pace is on par with Electronic Arts' latest numbers. Meanwhile, the other two major game publishers, Activision Blizzard (NASDAQ:ATVI) and Take-Two, managed heftier 45% gains. Still, digital revenue is a tiny portion of GameStop's business, weighing in at just 2% of sales during the quarter.
Tech brands: strong and growing
"Technology brands stores that have been open more than a year are growing earnings at a strong double digit pace and this gives us confidence to continue to invest in this fast growth concept. We are currently the largest and fastest growing Apple authorized reseller, the second largest and fastest growing AT&T authorized dealer, and a top five Cricket dealer." -- Bartel.
Management's push to diversify beyond video game retailing is paying off. The company's technology brands unit, which includes cell phone service and consumer electronics sales under the Simply Mac, Cricket, and Spring Mobile brands, booked 70% growth in the quarter as operating margin leaped from 36% a year ago to 40%.
And GameStop is planning a huge summer for the division: It will open 200 new stores in the next few months, four times the highest number of openings it has ever managed.
Bumpy ride for the second quarter
"We expect monthly software results to vary dramatically during second quarter." -- Chief Financial Officer Rob Lloyd.
The video game industry faces a tough comparison this summer that will likely lead to flat or even lower overall sales. The prior-year period had two huge blockbusters: Nintendo's Mario Kart 8 and Ubisoft's Watch Dogs. Meanwhile, this year's comparable releases, The Witcher 3 and Batman: Arkham Knight, aren't expected to match 2014's banner summer launches.
That's why management sees second-quarter comps ranging between 0% and 3%, for a significant slowdown from the first quarter's 10% bounce.