GameStop is falling, and many analysts and industry observers are skeptical it can recover. The retailer reported earnings yesterday for Q1 of its fiscal 2020 yesterday where it missed its revenue target. Now, the company’s stock price has crumbled to $5, which is the lowest this has been since 2013.
For Q1, GameStop generated $1.55 billion in revenues. That was significantly short of Wall Street’s expected $1.64 billion. The company did cut costs to improve its earnings per share, but that’s not something it can do every quarter. And GameStop’s outlook is dire in part because its core business — selling hardware and used games — is starting to dry up.
Used game revenues dropped 20% year-over-year last quarter. And hardware revenues dropped 35 percent in the same comparison. And while the company has diversified into collectibles with its ThinkGeek brand, that growth wasn’t enough to offset other declines.
On top of all that, GameStop also eliminated its dividend program. Now that this stock no longer pays out earnings to shareholders, that could encourage more people to sell. In turn, that could create some volatility in the price.
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So it’s a lot of bad news, and no major analyst expects that to change for the rest of this year.
“The combination of the transformation initiatives, ongoing consumer shift to digital gaming, and current console cycle being in the very late stages are likely to make 2019 a very challenging year,” Telsey Advisory Group analyst Joseph Feldman said.
Why is GameStop doing so poorly?
Analysts are primarily focused on the near term. They live one quarterly earnings report at a time. But if you look at what they say about why GameStop’s performance is so weak, you can see that it’s not necessarily doomed.
“Pre-owned revenues declined 20% year-on-year in Q1 2019, driven by continued traffic headwinds from a tougher year-on-year software release slate,” Baird analyst Colin Sebastian wrote in a note to investors. “While new hardware sales declined 35% year-on-year, as Switch growth was more than offset by declines in Xbox One and PlayStation 4 sales. Reflecting a console cycle now long in the tooth.”
Sebastian is completely right about why GameStop is struggling today. Games like God of War, Far Cry 5, and Monster Hunter: World launched in the first half of 2018. And 2019’s releases haven’t quite matched those hits. That means fewer people are going into GameStop stores to trade in old games.
And then you have the Xbox One and PlayStation 4, which are both finally on the way out. Anyone who wants to purchase one of those consoles likely already has. And while Nintendo Switch is doing better than ever, it’s not enough to make up the difference.
The rest of 2019 probably won’t change that momentum. The second half of the year isn’t going to have anything to match Red Dead Redemption 2, for example.
One more chance
So what is GameStop doing about all of this? Well, its management is planning to try some new programs. It wants to make stores friendlier and more of a destination for gaming fans. The good news for chief executive George Sherman, who took over the role in April, is that GameStop should get at least one last shot to prove its value to gamers.
While 2019 may not have blockbusters to match 2018’s release schedule, big games are on the way. But more importantly, new hardware is coming soon. Sony has confirmed that it’s working on the next PlayStation, and Microsoft is likely going to talk about its system soon.
And that’s crucial for GameStop because it’s still the place that people go to buy new hardware. When the PlayStation 4 and Xbox One launched in November 2013, GameStop was responsible for over half of all their hardware sales. That lasted for months. Amazon is more ubiquitous than ever, so maybe GameStop won’t capture over half of PS5 and the next Xbox sales, but it could still play a big part in that.
So GameStop just needs to survive until the start of the next generation. And, in the meantime, it needs to figure out how to change its stores to convince people coming in for a PS5 that they should return regularly. It’s just not clear that the company knows how to do that.
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