The end of a console cycle can be a rough time for video game retailers as hardware sales decline in anticipation of new launches. Factor in the decline of retail shopping and physical game sales, and it means GameStop is having an incredibly bad time of things right now.
Sales fell by 13.3 percent globally (11.5 percent when currency fluctuations are taken into account). The comparable store decrease average in the United States was 10.3 percent. The drop was driven by a sharp decline in console hardware sales, with revenue from this business segment dropping by 35 percent, despite strong continuing sales of the Nintendo Switch. Software sales, by comparison, fell by just 4.3 percent, a fact GameStop attributed to “weaker new title launches in the quarter compared to last year.” While the company didn’t lose money in Q1 2019, its net income fell to just $ 6.8M, down from $ 28.2M in Q1 2018.
One major potential wrinkle for console sales in 2019 is the potential for seamless backward compatibility with the next console generation. We don’t know the full details on how Sony and MS will handle this issue yet, but assuming both companies take the same tack and make their current-generation libraries fully backwards compatible, new software sales may not necessarily drop off — especially if there’s an option for PS4-era titles to be patched for superior performance on PS5 without the need to issue an entirely new version of the game (of course, we’ll likely see at least some PS3 and PS4-era remakes come to PS5 as well).
But the damage to GameStop’s sales wasn’t just confined to new hardware. Pre-owned sales declined by 20 percent as well. GameStop essentially owns the pre-owned game market, making this a huge source of its revenue.
According to company CEO George Sherman, GameStop is in the midst of a reboot. On the company’s latest conference call, Sherman called the company reboot “a holistic and extensive review of all aspects of our business and how we can transform it. This is going to be a critical piece of our transformation. It is not simply a cost-cutting initiative. Though, there will be an element of that to the overall process. I expect this process to drive margin improvement, including some better sourcing, pricing and promotions and leveraging our scale.”
As part of this effort, Sherman expects GameStop stores to laser-focus on the businesses that earn it the most money, cut the areas that don’t, and find new adjacencies and markets to expand into if they are a natural fit for its brand and business. ThinkGeek, for example, will be folded into the GameStop shopping experience. The company has eliminated its quarterly dividend, which will save it $ 157M per year.
GameStop talks a brave game, but the ongoing shift to digital distribution has the potential to kill the company altogether. By all accounts, console gamers have shifted markedly towards digital distribution channels, just as PC gamers have. The fact that the company’s stock is now trading at levels it hasn’t brushed since the early 2000s is evidence of just how badly the firm has performed of late.
Clearly, investors aren’t certain if GameStop can meaningfully pivot to a market strategy that doesn’t depend on physical game sales as a primary source of revenue. If gamers continue to pull back from buying physical games, pre-owned sales will naturally fall as well. It’s not currently clear that GameStop can create enough of a secondary market for accessories and digital game sales to replace the revenue it earns in other markets.
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