Wall Street expected bad third-quarter results from GameStop (GME 1.22%) but not this bad. Revenue declined 26% year over year, comparable-store sales were down 23%, and though the company has reduced its share count 34% year to date, it still lost $1.02 per share. It also sold its Spring Mobile and Simply Mac businesses, which comprised the only profitable business segment GameStop had last year. It's no wonder shares are down over 60% from their 52-week high.
By now, enough's been said about how bad things are for GameStop. But surely, there are some optimists out there wondering how the company can turn its business around. Here are two things the company must do to survive.
Image source: Getty Images.
What's not going to work
Here's what won't save GameStop. The fiscal third quarter's poor results were exacerbated by the lack of new video game consoles. The Nintendo Switch, released in 2017, is the newest system out there. Microsoft's Xbox and Sony's Playstation haven't seen major updates since 2013, but both promise to launch new systems next year.
Regarding GameStop's poor results, CEO George E. Sherman said during the earnings call, "This is not uniquely a GameStop issue. This is a console issue." However, investors should ask if physical game consoles will even exist in the future. Video game company Ubisoft made headlines last year when its CEO Yves Guillemot shared his belief that the next round of physical hardware consoles will be the last. After that, cloud gaming will take over.
I'm inclined to believe that's true. At the very least, it's easy to envision many gamers migrating to cloud gaming if given the opportunity. Alphabet's Google has launched a cloud-gaming service called Stadia. While its debut was marred by latency issues, this is the first step toward a console-less future.
While it's true that new console launches next year could boost GameStop's sales, the cyclical nature of console sales would eventually reach another down cycle. Only this time, a console hardware update might not actually happen.
So, what are two things GameStop can actually do to save its business?
Location destinations
GameStop's physical footprint is enormous with over 5,600 locations. In the age of e-commerce and direct-to-consumer sales, being just a brick-and-mortar middleman is a bad business model. However, simply shuttering stores won't save the company. To turn things around, GameStop will have to leverage its 5,600 stores somehow.
Dick's Sporting Goods is doing this. When it discontinued gun sales, it replaced those sections with things like batting cages -- real-life experiences that websites can't offer. Over the last 12 months, Dick's has added these HitTrax batting cages to 170 stores. While it's perhaps not the sole reason, I don't think it's a coincidence that the company's comparable sales are up 6% over that time. Dick's is giving its physical locations a reason to exist.
GameStop needs to do the same and is experimenting with this in Tulsa, Okla. While the company is mum on details, it wants to turn its stores into places for gamers to come together -- perhaps in an e-sports tournament setting. It's too early to know if GameStop can successfully create these spaces to attract customers, but it's the right move.
Private-label brands
Another liability for GameStop is its reliance on products from other companies. It sells video games and consoles, but it doesn't own or manufacture them. As companies increasingly cut out middlemen and adopt direct-to-consumer models, GameStop needs its own portfolio of brands.
Company-owned brands is a strategy Designer Brands has pursued. In Oct. 2018, the shoe retailer acquired the Camuto Group for $375 million. Direct-to-consumer shoe sales are a particularly strong e-commerce trend, and acquiring its own brand was Designer Brands' attempt to mitigate this risk. In the third quarter, its comparable sales held steady year over year despite consumers increasingly shopping direct. Unfortunately for Designer Brands, private-label brands have opened it up to the negative impact of tariffs, as its shoes are manufactured in China.
Gamestop needs to focus on game-related products. The company already has Minecraft and Star Wars-related merchandise under its ThinkGeek label, but going forward, a larger percentage of inventory should be private-label products. This was mentioned parenthetically in the third-quarter earnings call, but it needs to become a key part of the overall business-saving strategy.
A hard road ahead
It'll be a challenging turnaround for GameStop. The company isn't changing fast enough, and there's no guarantee its efforts will be enough anyway. But if it can survive until new game consoles are launched, that'll buy GameStop some time. Long term, the company will need to make significant progress toward being a business with retail experience destinations and private brands that will bring shoppers to its stores. That looks like a best-case scenario.
