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GameStop shares continue slide as earnings come in light

The GameStop store sign is seen at its shop in Westminster
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The GameStop store sign is seen at its shop in Westminster, Colorado January 14, 2014. REUTERS/Rick Wilking

GameStop (GME) was having its worst post-earnings stock decline since the first quarter of 2012 after its latest results prompted a selloff in the video-game retailer, keeping its pullback of the past few months intact.

After reporting fourth-quarter numbers that missed key metrics, GameStop's shares slid 7.5% to $35.97 Thursday. The Grapevine, Texas-based company had sales for the quarter of $3.68 billion, and though that was up 3.4% from the prior-year period, it lagged the $3.78 billion consensus. Same-store sales rose 7.8% but analysts were looking for 8.8% growth, according to FactSet. On the bottom line, adjusted earnings of $1.90 a share were also below expectations.

Short sellers have a sizable interest in GameStop, now totaling around 36% of the float, Yahoo Finance data show. As a result, any misstep simply emboldens the stock's detractors to press their case. Shares of GameStop soared last year in the run-up to two new console releases, the PlayStation 4 from Sony (SNE) and the Xbox One from Microsoft (MSFT), gaining 96.3%. However, in 2014 they're down almost 27%.

Despite the results, GameStop executives were fairly optimistic on the call regarding current sales for new consoles in comparison with the the prior Xbox 360 and PS3. That said, and not really surprisingly, the rate at which they're selling has been in decline considering many purchasers already did their buying in the early days.

"We were pleased with the demand for the consoles," GameStop Chief Financial Officer Robert Lloyd said in an interview. "We sold far more consoles at this stage of the cycle than we had last cycle. That of course bodes well for how the software will be adopted in the future." Additionally, he said that, with the number of customer game trade-ins around the Christmas holiday and console launches, he's upbeat about the state of the pre-owned business.

Lower software sales

The start of Take-Two Interactive's (TTWO) "Grand Theft Auto V" in September, a massive event that spurred more than $1 billion in sales within days, "may have taken some of the money out of the market for some of the other titles," Lloyd says. Initially, the game was released for the PS3 and the Xbox 360.

"I think what we saw with the remaining games that came out after GTA was a little bit of indecision on the part of the consumer as to whether or not they wanted the game for the consoles they already owned — those 360s and PS3s — or whether or not they were going to wait and get those games when the new consoles came out."

GameStop already announced in January that it had sales of $3.15 billion during the nine-week holiday period, a 9.3% increase from the previous year. The positive there was the rollout of the updated PS and Xbox, though sales of new software titles were weaker than hoped. For the quarter, new software sales declined to $1.21 billion from $1.61 billion a year earlier. Sales of used and lower-priced older games were also lower, falling to $741.9 million from $752.8 million.

Used games are about 20% of GameStop's revenue, but they're highly valued by the company because of their low acquisition cost and favorable resale price. For the fourth quarter, for instance, the gross margin on used and low-priced games was 48%, compared with 25.4% for new software. Walmart's (WMT) recent announcement that it would be offering used games dented GameStop's shares. Still, while the world's biggest retailer always demands competitive respect, its program doesn't operate as GameStop's does, and it's difficult to see it becoming a regular destination for serious gamers at present.

First-quarter earnings will likely be 55 cents to 60 cents, which would exceed the 54-cent analyst projection, and GameStop believes sales will climb 7% to 10%. That implies revenue of $2 billion to $2.06 billion, whereas the mean forecast stands currently just under $2.04 billion. For the year ahead, earnings will probably be $3.40 to $3.70 a share, below the $3.76 Wall Street view, though that might go up depending on stock buybacks.

GameStop is planning to close about 2% of its roughly 6,400 game stores this year. At the same time, it's diversifying by getting into new business lines, such as Simply Mac, a unit that resells Apple products, and Spring Mobile, a wireless services division. It also this week announced the GameStop Technology Institute, a consumer research and technology arm.

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