Dangerous Curves Ahead for GameStop
GameStop's third-quarter results came in just in line with market expectations, and had diluted earnings of $0.58 per share. The stock dropped like a stone, though, as the company announced a less-than-spectacular outlook for the fourth quarter. Analysts were looking for more, especially given the launch of two new consoles during the quarter. At midday, the stock was down 6%.
Can GameStop recover?
The idea of a recovery is the usual way to think about GameStop. After all, the company used to be strong, but with the advent of Amazon, digital game sales, and the growth of mobile gaming, the company has fallen. Recovery -- the idea of getting back to that better time -- is meaningless now. What investors should be asking is: "Can GameStop change?"
The forecast for the fourth quarter is broad, with management expecting comparable-store sales growth between 2% and 9%. Even though that would put year-end comparable sales up between 1.5% and 4.5%, it still wouldn't show that the company had figured the new system out.
In its defense, GameStop has tried. It grew digital and mobile sales by 8.6% and 14.4%, respectively, but it hasn't been enough. The market for mobile games is forecast to grow by more than 25% for the next few years, and that's a distraction from traditional gaming.
The move away from used sales
Used-game sales made up 23% of total sales for the quarter, which was a drop from the 28% share they took in the previous year. With the newer consoles, customers are less likely to have used games to trade, even though the consoles allow their use. The problem for GameStop is that digital distribution has become ubiquitous.
Right now, it's not clear that GameStop has a solution. It does sell digital PC games, but that leaves it out of the digital console market.
GameStop's fourth quarter and beyond
There's still the potential for GameStop to have a great fourth quarter. Already, it is set up to have good comparable-sales growth. That means that the business could get some important market share back from competitors like Amazon and Best Buy. But to really win, the company needs more than that.
If digital sales are the new norm -- and there's no reason to think that they won't be -- GameStop needs to completely dominate the physical gaming market. Best Buy has been slipping in its console sales, but that may change if it makes a strong push this quarter. If I were a GameStop investor, I'd want the company to focus on beating these other physical media sellers before it worries about online sales. Make GameStop the place for physical games, and it could have a chance. Otherwise, it's a slow, steady trip to the bottom.
Online sales are the future
It's not worth denying that digital sales of everything are taking over the world -- it's just the new America we live in. GameStop needs to get physical, but other retailers have cracked the online code. To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.
The article Dangerous Curves Ahead for GameStop originally appeared on Fool.com.Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. It also owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.