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GameStop Enters Fiscal 2019 Without a Clear Growth Plan

Demitrios Kalogeropoulos, The Motley Fool

GameStop (NYSE: GME) shareholders haven't had much to celebrate in recent quarters. The specialty retailer lowered its growth outlook in late November, and since then has announced that it was unable to find a buyer to take its business private at an appropriate price.

Against that backdrop, the company announced fourth-quarter results this week while giving investors a first outlook for the new fiscal year. With its leadership in transition, that guidance lacked the specificity that many investors were hoping to see.

More on the 2019 forecast in a moment. First, here's how the latest results stacked up against the prior-year period:

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue

$3.1 billion

$3.3 billion

(8%)

Net income

($188 million)

($106 million)

N/A

Earnings per share

($1.84)

($1.04)

N/A

Data source: GameStop.

What happened with GameStop this quarter? 

The retailer's big-picture results landed at about where management said they would a few months ago. Yet GameStop's operating trends raised key questions about whether the business is on a path back toward sales growth.

A young boy and girl lying on the floor, playing video games.

Image source: Getty Images.

Highlights of the quarter include: 

  • Sales at its existing stores, or comps, rose 1% for the company's third consecutive quarter of gains in that metric. That result allowed GameStop to meet the reduced guidance it issued in January. The 8% reported revenue decline, meanwhile, was driven by a combination of currency exchange rate shifts and an extra selling week in the prior-year period. The comparison was also pressured by a shift in the timing of Activision Blizzard's launch of its annual Call of Duty update.
  • Demand varied widely in different areas of the business, with accessory sales spiking thanks to the continued popularity of battle royale games like Fortnite. Collectibles sold well, too, rising to 9% of the business from 8% a year ago. But these boosts were almost completely offset by a 21% slump in the core pre-owned software and hardware business.
  • Profit margins worsened slightly in key areas like pre-owned games and new video game hardware and software. As a result, gross margin slipped to 24.4% of sales from 26.1%.
  • After accounting for non-cash charges including a $413 million writedown due to the sale of its Spring Mobile business, adjusted operating income fell to $203 million, or 6.6% of sales, from $278 million, or 8.4% of sales. Adjusted earnings landed at $2.70 per share, or near the top end of management's forecast of between $2.55 and $2.75 per share.

What management had to say 

Executives highlighted the fact that the company achieved its broader financial targets, including roughly flat comps for the year. "We are pleased to have delivered fiscal 2018 results within our adjusted guidance range," COO Rob Lloyd said in a press release, "which included fourth quarter and full year sales growth across video game accessories, collectibles and digital."

Stepping back, management said the fiscal year was "pivotal" for the business in that it included the retirement of $350 million of debt, the sale of Spring Mobile, and the appointment of George Sherman as CEO. "As a result," Executive Chairman Dan Dematteo said, "we are better positioned to drive shareholder value with an intense focus on leveraging our global gaming and collectibles business."

Looking forward

Executives noted that they see significant challenges to GameStop's pre-owned video game business, and 2019 will involve major attempts to address them.

For the time being, GameStop is asking investors to accept uncertainty around the timing of any potential rebound. With a new CEO set to step in on April 15, it's impossible to project any big-picture strategic changes or a detailed path toward higher profits. Thus, GameStop declined to issue EPS guidance and forecast only that sales will likely decline by between 5% and 10% in 2019.

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Demitrios Kalogeropoulos owns shares of Activision Blizzard and GameStop. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool owns shares of GameStop and has the following options: short April 2019 $13 calls on GameStop. The Motley Fool has a disclosure policy.