Why GameStop Stock Dropped 13% in March

What happened

Shares of GameStop (NYSE: GME) fell 13.2% last month, according to data from S&P Global Market Intelligence, following the video game retailer's weak fourth-quarter results and dismal guidance for fiscal 2019. 

So what

GameStop's fourth-quarter sales from continuing operations fell 7.6% year over year to $3.1 billion. It should be noted that the company's fourth quarter of fiscal 2018 contained 13 weeks of operating results, compared to 14 weeks in fiscal 2017, so it's not an apples-to-apples comparison. 

Still, GameStop's results showed weakness in several of its most important business segments. Most worrisome was a 21.3% decline in preowned sales. Used and value-priced games and gaming hardware accounted for 22.5% of GameStop's sales and 43.4% of its gross profits in fiscal 2018. Yet the business is shrinking as the video game industry transitions to digital game downloads.

Worse still, GameStop's guidance for 2019 suggests even more trouble ahead. The company expects comparable-store sales and total sales to fall as much as 10% in the coming year. 

"As we think about 2019 and beyond, we recognize the challenges facing our preowned video game business and are prepared to address them as we continue to evolve our business model going forward," COO and CFO Rob Lloyd said in a press release. 

A person places a finger on a declining stock chart

Digital game downloads are taking a toll on GameStop's business. Image source: Getty Images.

Now what

GameStop's shares have fallen another 3% so far in April and are now down nearly 30% over the past year. Investors appear to recognize that while the struggling retailer is not in danger of going bankrupt in the near future -- GameStop ended Q4 with about $800 million in net cash and continues to generate positive free cash flow -- it is likely to see its sales and profits decline further in the coming years as the industry's digital transformation progresses.

GameStop's management knows this. The company tried to sell itself but couldn't find a buyer. That's telling, and investors will also probably be best served by staying clear of GameStop's stock.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short April 2019 $13 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.

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