U.S. Markets open in 8 hrs 52 mins

GameStop Investors Should Watch for These 4 Things in Q4

Rich Duprey, The Motley Fool

GameStop (NYSE: GME) has a new CEO and a new game plan, but its fourth-quarter numbers are a result of the old playbook executed by an interim executive. Don't expect the predictions of future gains to play a role just yet.

With the video-game retailer scheduled to report earnings on Tuesday, April 2, let's see what investors ought to be looking at as they prepare for this new era.

Family playing video games

Image source: Getty Images.

Sales growth

Where will GameStop's growth come from? Collectibles has been doing well, but it only accounts for 7% of total revenue, while used video games, which accounts for nearly one-fifth of all sales and is part of its core business, fell 13%.

New hardware and new software sales both did well last quarter, rising 13% and 11%, respectively, helped by new gaming consoles from Microsoft and Sony, as well as new game titles like Red Dead Redemption 2 and Spider-Man. However, both segments also contribute the least amount to GameStop's gross profit.

With major releases, GameStop is still able to pull customers into its stores, but the lulls between releases have been tough. The trends haven't been looking good.

The Christmas selling season

GameStop had already warned it was expecting the holidays to be worse than anticipated. Because sales had tilted decidedly in favor of hardware, and it was experiencing worse-than-expected performance with certain titles, pre-owned games, and with its sales promotions in the fourth quarter, GameStop lowered its full-year guidance. Now it expects sales to be down 2% to 6%, comparable-store sales to be flat to down 5%, and adjusted earnings to be $2.55 to $2.75 per share, a big drop from its previously expressed guidance of $3 and $3.35 per share.

Store closings

The retailer has been reducing the size of its physical footprint by closing underperforming stores -- over 130 of them in 2017 and nearly 60 through the first nine months of 2018. With 3,800 stores in the U.S., it has room to pare down that number a lot, and with thousands of leases expiring over the next three years, it will have the chance to do so. How aggressive it will be in this endeavor remains to be seen.

Impact of activist investors

Hestia Capital and Permit Capital recently called for GameStop to reinvigorate its sclerotic board of directors as well as return value to shareholders by returning much of the cash it has back to shareholders. GameStop authorized a stock buyback as a result, but neither the proposal nor the response have actually done anything to fix the business.

The private equity funds also recommend cutting more than $50 million from expenses, and it could achieve a portion of the savings in other ways, like store closings, but again, that doesn't help its core business improve.

Key investment takeaway

Investors are likely going to hear a lot about GameStop's new plans for the future, and management will likely downplay the impact of its past performance. While there is an argument to be made for such a future-focused attitude, so far there is no proof the retailer will be able to effectively implement its proposals, and it certainly won't be able to change course overnight. Its past will be GameStop's future for some time to come.

GameStop does have a new CEO with experience turning around big, troubled companies, but the growth of digital gaming -- and the launch of competing services by the likes of Google and Apple (NASDAQ: AAPL) -- will complicate GameStop's future even more. That shouldn't be lost in the discussion of what just happened in the fourth quarter.

More From The Motley Fool

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Microsoft. The Motley Fool owns shares of GameStop and has the following options: short April 2019 $13 calls on GameStop, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.