GameStop (NYSE:GME) this week posted second-quarter earnings results that included a surprisingly high 41% profit jump, along with solid improvement over last year's awesome sales growth. Yet Wall Street wasn't impressed: The stock sold off by 9% in trading immediately following the announcement.
CEO Paul Raines and his management team held a conference call with analysts to put the quarterly results in perspective, while issuing a detailed forecast for the upcoming six-month period that will account for three-quarters of GameStop's 2015 profit. Here are five key points from that presentation.
Achieving market-thumping growth
Our retail operations had another strong quarter as we continue to capitalize on our unique specialty service model and grow our new, pre-owned, and digital video game business as well as our Technology Brands business. -- Chief Operating Officer Tony Bartel
GameStop logged solid growth across its business lines this quarter. It improved on its dominant market share in the traditional video game division, with sales rising slightly despite a small drop for the industry.
The retailer also deepened its push into related categories by boosting consumer electronics sales, cell phone service revenue, and sales of collectables merchandise. Overall, comparable-store sales rose by 8% -- on top of the prior-year period's 22% jump.
A life beyond video game discs
Our ability to diversify our business has been the correct strategy, building on our leadership in video games, while exploiting our core to grow rapidly in digital, mobile and collectibles. -- Raines
Management's long-term strategy involves continuing to dominate the traditional video game retailing industry, while at the same time building up new, more-reliable sales and profit lines. GameStop made good progress on that goal this quarter, as growth in its mobile, digital, and collectibles sales pushed new businesses to account for a record 23% of gross earnings this quarter. "We expect to see that [percentage] grow over time," Raines said.
The lesson of loot
What was once an experiment in Australia a little over two years ago has turned into a global business that is feeding rapid growth. -- Raines
One of the biggest contributors to this quarter's growth was sales of merchandise, clothing, and collectables that GameStop's customers call "loot." That category grew by 200% over the prior year thanks to popular products licensed from hit franchises like Minions, Inside Out, Avengers, and Batman.
Management sees loot as another great way to diversify away from selling video game discs, and the company will be dedicating more shelf space to it, scaling back on software space as a result. The success also shows solid execution on the part of the executive team. "You have to recognize that we have a knack for identifying and developing opportunities in transformational technology and business acquisitions that are paying off for shareholders," Raines said, referring to GameStop's near record profitability this quarter.
Attacking profitable opportunities
Our early and rapid investments in refurbishing mobile devices has turned into our Technology Brands' unit, the fastest growing AT&T and Apple dealer in America. -- Raines
Tech brands is, by far, GameStop's biggest bet on growth outside of video games. This segment logged a 63% sales bounce in the second quarter, which helped it grow to 8% of sales from 6% a year ago. This business also generates some of the highest profits of any product that GameStop sells: operating margins were 45% in Q2, compared to 23% for new video games.
Investors can expect a much higher reliance on Tech brands over time. The retailer just finished opening up 182 new Spring Mobile and Simply Mac locations -- boosting its store base by 33% last quarter alone.
Softer outlook for 2015
We expect [August, September, and November] monthly software [sales] results to vary dramatically. -- Chief Financial Officer Robert Lloyd
GameStop issued soft guidance for the next six months that called for slowing sales and profit growth. Comps will only rise by between 1% and 4%, the retailer said, and the full-year profit outlook only improved by $0.03 per share despite this quarter's $0.08 per-share profit beat.
That weak outlook might explain why the stock dropped despite the surprisingly strong second-quarter results. Management said a lumpy release calendar could pressure comps, because big 2014 releases like The Sims 4 don't match up against equally strong titles in some of the next few months. And with 75% of GameStop's expected annual profit due to be collected in the next two quarters, executives chose to take the conservative route, and project muted growth to finish the year.