GameStop's Earnings Suffer From a Nintendo Switch Hangover

Friends playing video games.

The fiscal first quarter represents a small fraction of GameStop 's (NYSE: GME) annual revenue and an even smaller portion of its profits. Still, investors came into this week's earnings report hoping to see evidence of management's progress at getting the business back on track.

The specialty retailer didn't end its sales or profitability slide, but the results did meet management's targets while supporting GameStop's double-digit dividend payout.

Let's take a closer look.

Data source: GameStop's financial filing.

What happened this quarter?

Sales trends were negative in a sharp turnaround from the holiday quarter that was driven by a tough comparison with the prior-year period. GameStop's profitability also took a hit due to rising costs, including store closure charges.

Highlights of the quarter include:

  • Overall sales fell 8% after accounting for foreign currency swings. Store closures were responsible for some of that decline, as sales at existing locations dropped 5%.
  • Hardware sales, which fell 8%, and new software sales, down 10%, were hurt by the fact that the Nintendo (NASDAQOTH: NTDOY) Switch launched in the year-ago period, and there was no comparable release to drive traffic to stores this year.
  • GameStop saw mixed results from its new business lines as collectibles sales jumped 24% but the technology brands segment shrank by 16%.
  • Gross profit margin held steady at 34% of sales.
  • Expenses jumped to 29.2% of sales from 27.5% a year ago, which resulted in bottom-line profitability being cut nearly in half, down to 1.5% of sales from 2.9%.
  • After adjusting for temporary charges, GameStop earned $0.38 per share of profits while paying out the same amount in dividends.

What management had to say

Executives said the overall results fit their projections as each of the retailer's core video-game segments were hurt by the highly successful launch of the Nintendo Switch in the prior-year period. "We were pleased to deliver first quarter sales and earnings in line with our expectations," Executive Chairman Dan DeMatteo said in a press release.

Management also announced the appointment of a new temporary chief executive, Shane Kim. "We are fortunate to have Shane assume the role of interim chief executive officer and welcome his insight as a video game industry veteran," DeMatteo said. Kim will focus on improving GameStop's operations as the board of directors searches for a permanent CEO. "With Shane's proven track record as a highly effective leader," executives explained, "we will position each of our businesses to optimize their operations and profitability over the long term."

Looking forward

GameStop affirmed its 2018 guidance that calls for revenue to fall by between 2% and 6% overall, with sales at existing locations ending somewhere between flat to down 5% after having risen 6% in 2017. Adjusted earnings are still expected to land between $3 per share and $3.35 per share, which would easily cover the $1.52 per share of dividend payments that the company has promised to its shareholders.

Close to 90% of that profit total is yet to come, though, and that intense seasonality is a reminder that GameStop hasn't yet succeeded in transitioning away from the volatile, and shrinking, market for physical video-game sales. Instead, its 2018 results will largely depend on the cadence of new hardware and software releases from Nintendo and other game suppliers.

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Demitrios Kalogeropoulos owns shares of GameStop. The Motley Fool owns shares of GameStop and has the following options: short July 2018 $14 calls on GameStop. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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