Is This the End for GameStop?


Things didn't play out so well for GameStop (NYS: GME) in its latest quarter. Total sales fell 3%, to $1.74 billion, bogged down by a jaw-dropping 9.1% decline in comparable-store sales. Analysts figured that total sales would actually rise during the period.

The small-box retailer is quick to point out the positive. However, one is left to wonder how bad comps would be if pre-owned sales hadn't increased by 12% and how much further sales would have fallen if digital sales hadn't spiked by 69%.

Given the juicy markups on trade-ins and the fluid nature of digital distribution, one would naturally expect gross margins to improve during the period, but the same can't be said all the way down the income statement.

Earnings tumbled 23%, to $30.9 million, though aggressive share repurchases over the past year kept the bottom-line damage down on a per-share basis to the $0.22 that Wall Street was expecting.

When I recommended that investors throw this stock away last month -- as I have over the past two years with mixed results -- the stock was in the mid-$20s. Today's second-quarter report finds the shares opening in the teens, a bruising 25% lower than where GameStop was perched at the time of last month's column.

The same GameStop that hit fresh two-year highs in May is now another sneeze away from hitting fresh lows.

GameStop is working with what it can. It's teaming up with Activision Blizzard (NAS: ATVI) this month on a pre-game order promotion for a game that won't be out until next April. It has also been taking a page out of the Electronic Arts (NAS: ERTS) playbook by acquiring digital-savvy upstarts.

Will it ever be enough, though?

CEO Paul Raines refers to GameStop as a "resilient retail model" in this morning's release, but that may not hold up. GameStop may be faring well with its higher-margin resale business, but if the new items aren't selling, won't that restrict future trade-ins? As EA, Activision Blizzard, and Take-Two Interactive (NAS: TTWO) embrace digital delivery -- and diversion creators including Zynga and Glu Mobile (NAS: GLUU) work on models that eschew physical distribution entirely -- can GameStop support a mall-based concept when there are no more games to resell?

GameStop is far more optimistic than I am, naturally. The retailer is still sticking to its guidance for earnings to grow between 6% and 10% this fiscal year. However, the fiscal-year comps that the retailer thought would climb by 3.5% to 5.5% just three months ago have now been narrowed to a range between 1% and 3%.

We'll see if that guidance gets hosed down yet again in three months, though it's at least somewhat comforting to see GameStop holding up on the bottom line.

Everyone knows that the future will be a challenge for GameStop. The tricky part for investors has been figuring out when the present ends and tomorrow begins. Despite GameStop's cheery outlook, tomorrow may already be here.

Would you be a buyer or a seller of video game stocks here? Share your thoughts in the comments box below.

At the time thisarticle was published The Motley Fool owns shares of GameStop and Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard. Motley Fool newsletter services have recommended writing covered calls in GameStop. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. 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. Longtime Fool contributor Rick Munarriz will admit to still playing video games, though finding time is the rub. He does not own shares in any of the companies in this story. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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Originally published