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GameStop Corp. Overcomes Video-Game Software Slump to Post Profit Growth

By Demitri Kalogeropoulos – Mar 25, 2016 at 10:06AM

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With its core business shrinking, the retailer found a way to keep sales and earnings climbing during the holidays.

Specialty retailer GameStop (GME -2.98%) posted quarterly results on March 24 that included healthy sales and earnings figures, along with a large improvement in profitability. However, management forecast a tough fiscal 2016 ahead. Here's how the headline results stacked up against the prior-year period:

 

Q4 2015 Actuals

Q4 2014 Actuals

Growth (YOY)

Revenue

$3.53 billion

$3.48 billion

1%

Net Income

$248 million

$244 million

2%

Earnings Per Share

$0.36

$0.33

9%

Source: GameStop's financial filing.

What happened this quarter?
Sales rose by 1% as reported, and by 5% after accounting for foreign-currency swings. That translated into $3.90 per share of profit for the full fiscal year, beating management's earnings guidance issued in January.

Other highlights of the quarter include:

  • Comparable-store sales rose 3% overall as gains in its non-core business offset a 10% plunge in new video-game software sales.
  • Pre-owned software sales were flat against the prior year, and new video-game hardware rose slightly.
  • GameStop's mobile, consumer electronics, and collectibles segments all posted solid growth.
  • Gross margin rose to 30% of sales from 28% thanks to big contributions from the company's new business lines.

What management had to say
CEO Paul Raines highlighted key wins that the retailer accomplished this fiscal year. "The company posted its third straight year of positive comps, exceeded $1 billion in digital receipts, gained market share in our core video game business, and introduced new collectibles products that contributed over $300 million in sales," he said in a press release.

GameStop's collectibles business grew to more than $300 million in the fiscal year. Source: GameStop.

"These accomplishments drove record gross profit and net income, strong earnings-per-share growth and an increase in per store profits in our GameStop branded stores for the third straight year," Raines explained.

Looking ahead, the retailer aims to keep diversifying away from the shrinking video-game business while keeping profitability churning higher. "For 2016, we are focused on continuing to expand store profit contribution and our diversification efforts, as we build upon our leadership in video gaming," Raines said.

Looking forward
GameStop issued a conservative forecast for the new fiscal year by predicting that comps will fall by 1.5% at the midpoint of guidance compared to a 4% rise in fiscal 2015. However, some of that expected drop is likely a quirk of the video-game release calendar. In the prior year's first quarter, GameStop's comps spiked higher by 9% thanks to a banner crop of new releases, including Evolve and Mortal Kombat X. The lack of comparable introductions this spring might explain the company's expectation for a brutal 8% comps decline in this year's fiscal Q1.

Longer term, GameStop will need to continue adapting to a video-game market that's moving away from digital disks, and it plans to do that with greater help from its new business lines (mobile services, consumer electronics, collectibles). The good news for investors is that management sees this transition as being immediately beneficial to the bottom line: GameStop predicts it will generate $415 million of net income this year, up 3% from last year's haul despite flat expected sales.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool has the following options: short July 2016 $28 puts on GameStop. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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