Video game and consumer electronic retailer GameStop (GME
13.85, -0.78, -5.34%) opened more than 11% lower on the final trading day of November
after the company trimmed fiscal 2018 guidance and forecasted lower than
expected fourth quarter earnings in reaction to sales skewing more heavily
toward hardware than initially planned.
The company’s lowered outlook outweighed an otherwise strong third quarter. In that vein, Q3 earnings, excluding some non-operating impairment charges, were $0.67 per share. GAAP earnings were $0.59 per share.
Gross margins were down 160 basis points to 33.1%, primarily due to the growth in the sales of lower-margin categories.
Total global Q3 sales were up 4.8% (increased 6.3% in constant currency) to $2.08 bln, resulting in better than expected consolidated comparable store sales increase of 2.1% (3.4% increase in the U.S. and 0.5% decrease internationally). Management highlighted that the increase in Q3 comp sales was driven by a stronger software line up this quarter, including several marquee titles that were released earlier in the calendar compared to last year.
By segment: new hardware sales grew 12.8%, driven by demand for Xbox One X (MSFT) and Sony PS4 (SNE), which was partially offset by a decrease in Nintendo Switch (NTDOY), as the anniversary of last year's launch of that title came and went in the spring. New software sales increased 10.9%, driven by the strong slate of titles that launched during the quarter. Accessories sales increased 32.6% on the strength of headset and controller sales. Pre-owned sales declined 13.4%. The company continued to see declines in pre-owned software, reflective of fewer title launches and a decline in physical software sales earlier in 2018, which affect inventory levels; weakening demand in the face of digital adoption, including digital access to older titles; and fewer promotions offered to customers in the quarter.
Digital receipts were up 29.5% to $341.6 mln, driven mostly by strength in sales of digital currency. Collectibles sales increased 11.7% to $154.6 mln due to continued growth in both GME’s domestic and international collectibles business.
Turning to the guidance, then, GameStop updated its previously issued annual guidance for fiscal 2018 based on current sales and margins trends. GameStop’s guidance includes the expected results of the Spring Mobile business, which the company anticipates will be classified as discontinued operations in the fourth quarter and for fiscal 2018.
Specifically, GameStop now sees FY18 EPS in the range of $2.55-2.75, down from the prior expectation of $3.00-3.35. The company reaffirmed total sales guidance of -2.0% to -6.0% as well as comparable store sales (excluding Tech Brands stores) between flat to -5%. What’s more, free cash flow for the year is now expected to be $200 mln compared to the $300 mln anticipated earlier.
But a point, which some perhaps overlooked, that GameStop management touched on was the company’s ongoing review of strategic and financial alternatives for the business. Management also highlighted that the search for a new CEO remains ongoing. Recall that in May of this year, CEO Michael Mauler resigned from his post citing personal reasons only three months after taking the job. Following the departure, Board of Directors member Shane Kim was named interim CEO while Rob Lloyd was concurrently appointed to the positions of COO and CFO.
So, despite the strong performance in Q3, GameStop sees soft margins continuing and the shift to hardware being more of a hinderance than previously thought. Additionally, underperformance of certain new software titles, including some November launches; weakness in pre-owned; and recent sales promotions are all contributing to GameStop’s expectation that Q4 earnings will be below what the company anticipated coming into the back half of the year.
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