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Gamestop Q1 Results – Shares Slump Despite Sales Growth

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May 27, 2017
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Two months ago we covered the financial year report of GameStop (NYSE:GME). The outcome of their figures were disappointing and resulted in a fairly sizable drop in share price. In an unusual twist, the company have announced a sales increase in the first quarter. However, this has been joined with a share price fall of $1.43, 6%, at time of writing.

GameStop have announced an increase in sales by 3.8% year on year, rising to $2.05 billion. This rise in sales has resulted in a 2.3% increase in same store sales. However, this is a consolidated figure, with US stores showing a decline of 2.4% with international stores increasing 17.1%.

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Despite the increase of sales, net income has declined year on year from $65.8m to $59m. This was as a result of increased costs, including $7.3m of charges as a result of store closures announced during the previous financial report.

Sales and the Switch: GameStop’s Saviour

The core driving feature of the quarter was hardware, showing an increase of 24.6%. Driven by pre-orders and sales of the Nintendo Switch. Countering this was a decline of software sales. New software saw a decline of 8.2%. Pre-owned sales also declined 6.2%, which was in line with expectations.

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What happened to be the saving grace of GameStop is the diversification strategy the company is continuing with. Helping to negate the impact of falling software sales was an increase of 39.1% from collectibles and a 21.5% increase from technology. The company also saw an increase in sales from both games accessories and digital.

Paul Raines, CEO of GameStop, stated “Our first quarter results reflect the power of our leadership position within the video game market and our ongoing diversification efforts”. Moving onto say “Throughout 2017, our focus will continue to be executing our diversification strategy, exercising cost discipline and increasing our share in the video game market.”

Growth from the above areas highlights exactly where GameStop can look to further solidify sales and their expansion. Much like what was covered in Nintendo’s (TYO:7974) end of year results, collectibles are growing to a large extent. GameStop have revealed the growth in collectibles was driven by Pokémon related items. To further build on this, the company have opened 9 new collectible stores.

Much like the previous year, Spring Mobile and Simply Mac stores have also proven to be strong for the company. Driven particularly by the Spring Mobile brand, GameStop’s authorised AT&T retailer.

How these continue, as well as the company’s omnichannel approach, will be key for the future. Omnichannel, lowering the reliance on dedicated games stores can be expected to be a core focus, particularly following a 92.9% sales increase this quarter. This allows for customers to order online or in store, ship to a specific location or store. The success of this has been viewed by the company as an example why they don’t require as many dedicated game stores.

Uncertainty and the Share Price

What may be a surprise throughout all of this is that there is a quarterly report at all. It was only in the financial year report that the company announced they would stop giving quarterly reports. During this report they stated “We believe that providing only annual guidance will reduce investor distraction as we continue to diversify the company and seek to maximize long-term shareholder value”.

Despite the increase in sales, it’s the unchanged outlook that has caused the share price to fall. As a company reports better than expected results, the outlook for the year would naturally be expected to increase. The unchanged outlook can likely be attributed to the delay of Take Two Interactive’s (NASDAQ:TTWO) Red Dead Redemption 2 and the possible reduced demand of the Nintendo Switch.

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