GameStop released its holiday earnings report this week, rather than waiting to roll holiday results into its next quarterly report. The company reported that store sales were down 27.5 percent for the Christmas holiday compared with 2018. Of course, GameStop has closed a number of stores recently, so same-store sales are a better metric for overall performance. Unfortunately, same-store sales also fell 24.7 percent.
GameStop CEO George Sherman attempted to put a positive spin on this by referencing the new console launches of 2020. It’s true that new platform launches will probably drive GameStop’s revenue in a positive direction, but the company always made significantly more off game sales (both new and used) than it did off just hardware. The only bright spot in the company’s performance was apparently the Switch, but GameStop didn’t give any numbers on what sales figures were.
GameStop is now predicting that its fiscal year 2019 (FY2019) will come in below previous guidance and it expects the challenging environment to continue into 2020. It’s important to note that not all of GameStop’s problems came from collapsing software shipments — hardware sales fell 46 percent while software dropped 33 percent. These are larger declines than we saw last generation, where the drop was in the mid-30s during the last year of the previous console generation.
The problem is, it’s not clear that GameStop’s business is ever coming back. The company generated tremendous ill will with gamers by artificially inflating used game prices to its own benefit. I have no sympathy for video game publishers who hate the used game market — the first sale doctrine exists for a reason, and digital media on physical discs doesn’t get an exception to it — but GameStop scarcely positioned itself as a defender of the common gamer. The company would keep high prices on popular titles long after the games had stopped being current as a means of inflating its own profits. The switch to digital media and the inability to resell games in that format has hit the retailer hard. Companies often fail to understand the difference between loyal customers that actively want to give you money and captive customers that give you money because you’ve cornered the market. Loyal customers will stick with you. Captives depart at the first opportunity.
GameStop’s Four Pillars
GameStop claims to have a plan for returning to profitability. It rests on four pillars: improved operational efficiency, transform GameStop stores into social and cultural hubs, create a “frictionless digital ecosystem,” and “transform our vendor and partner relationships for the future of gaming.”
The company has already taken a number of steps to support the first pillar, including closing stores, cutting costs, and reducing its debt and inventory levels. GameStop has evidently begun stocking PC accessories in an effort to appeal to that market. As a PC gamer who used to love going into physical game stores and looking through the boxes, I haven’t forgotten the fact that most if not all GameStop locations quit stocking PC games a decade or more ago. The chain’s abandonment of the market helped shift PC titles almost entirely to digital and I’m not keen to revisit it for anything PC-related.
As for turning GameStop into a cultural or social hub for gaming, I’d love to see GameStop transform itself into a place where people could go to play games together. I’d really love to see how the company could possibly pull off transforming itself into a social hub given that most GameStop stores can only comfortably hold a handful of people. Every GameStop store I’ve ever seen dedicates the vast majority of its floor space to products and giving up room for local gatherings would mean reducing visible store inventory.
GameStop claims to be pleased with its early efforts to make e-sports a profit center and with early store renovation efforts, so we’ll have to wait and see how this plays out or if it proves a sustainable profit center. The company shared relatively little about its fourth pillar in the Q3 2019 conference call and described various improvements in its online store performance metrics. All told, the company’s efforts to pump its own recovery story sound like what we heard from Blockbuster or RIM before their respective failure and collapse. GameStop is attempting to reinvent itself after teaching its customers to treat it like a location of last resort.
Not all of GameStop’s problems are driven by collapsing game sales. The company reported a net loss from continuing operations of $83.2 million in Q3 2019. It spent $115M on stock buybacks in the same quarter.
The irony in all of this is that I think gaming and gamers will be genuinely worse off once GameStop is gone. The benefits of being able to drive to a store and pick up a physical copy of a game as opposed to ordering it are real, but as fewer and fewer gamers buy physical games, GameStop’s ability to generate continuing profits will be increasingly imperiled. If the physical market for games dies — as it seems likely to do during the next console generation — how will GameStop reinvent itself as a gaming hub and e-sports location, and what’s the value of the stores themselves if purchases are moving online?