GameStop on Thursday reported that this year it will close between 2% to 3% of its global store footprint, at least 150 stores. However, the gaming retailer also anticipates opening 35 new Collectibles stores and 65 Technology Brand stores globally, according to the company's fiscal fourth quarter earnings release.
Q4 total global sales fell 13.6% to $3.05 billion, while consolidated same-store sales declined 16.3% (down 20.8% in the U.S. and 4.6% internationally), hit by weak sales over the holidays of certain game titles and aggressive console promotions by other retailers on Thanksgiving Day and Black Friday, helping send new hardware sales in the quarter down 29.1% and new software sales down 19.3%. Q4 profit fell 16% to $208.7 million, or $2.04 per share. The results missed expectations, with Thomson Reuters analysts forecasting $2.29 per share on $3.1 billion in revenue, according to MarketWatch.
For the full year, GameStop’s total global sales fell 8.1% to $8.61 billion, while consolidated same-store sales declined 11% (down 13.5% in the U.S. and 4.4% internationally). Its Expanded gross margin rate for the year expanded nearly 400 basis points to a record 35%, representing its third consecutive year of gross margin improvement. The Collectibles business achieved the high-end of its $450 million to $500 million revenue target, as sales increased 59.5% to $494.1 million in fiscal 2016; its Technology Brands business delivered $90.2 million for the year, a 216.4% increase over 2015; and its non-physical gaming businesses provided 36.9% of its total adjusted operating earnings in fiscal 2016 compared to 24.5% in fiscal 2015.
In the face of massive digitization of video games, GameStop is doubling down on its approach to diversify its merchandise, especially in its collectibles business. Pre-owned sales outperformed new video games, declining 6.7% compared to the year-ago period. Q4 collectibles sales rose 27.8% to $212.4 million, driven by strong sales of Pokémon-related toys and apparel. Still, CEO Paul Raines downplayed the effect of digital downloads, saying that much of the retailer’s troubles stemmed from deep discounts from rivals over the holidays.
“Our conclusions are that overall gaming declined slightly in 2016 as mobile growth slowed in console digital was flat,” he told analysts, according to a transcript of a conference call from Seeking Alpha. “So, I think it's critical for our analysts and investors to understand that 2016's physical game decline were not caused solely by acceleration of full game downloads.”
The company added 17 Collectibles stores during the quarter, bringing the total global portfolio to 86 stores, including 24 ThinkGeek stores in the U.S. But its changes include a retraction in its physical footprint. For example, COO Tony Bartel told analysts in a conference call that 50 of the largest U.S. stores and 100 international stores will be converted into hybrid stores, where half of the store footprints are dedicated to collectibles.
GameStop shares fell some 11% Thursday on the news, but Moody’s Investors Service gave its blessing to the retailer’s approach. “We continue with our view that the strategy behind GameStop’s transformation is sound, with its Q4 2016 and FYE results in line with our overall expectations, especially when viewed through the lens of gross margin expansion,” Moody’s lead retail analyst Charlie O’Shea said in an email to Retail Dive. “Given the periodic challenges inherent in the gaming sector due to its reliance on new hardware, GameStop’s heightened focus on its Technology and Collectibles segments, both of which drive higher margins and benefit from steadier and less fickle demand, makes good long-term sense.”
The company expects earnings this year to fall between $3.10 per share and $3.40 per share and revenue to range between a 2% decline and a 2% increase, missing the Thomson Reuters forecast for $3.75 per share on a 0.7% revenue increase. Same-store sales this year will likely range from flat to a 5% decline, in line with the FactSet forecast for a 2.4% decrease.