GameStop stock tumbles after poor holiday sales

Though GameStop had a profitable holiday season, the gaming company posted a weaker than expected outlook for Q4. The reason? Digital gaming is giving the brick-and-mortar chain a run for its money.

Between the PlayStation 4 and Xbox One releases, record-shattering Grand Theft Auto sales, and gaming innovations like the steam machine, video game enthusiasts had a thrilling year culminating in a holiday season with some desirable products.

But those innovations didn't bode well for another sector of the gaming world: brick-and-mortar video game stores.

Despite an overall gain in holiday sales, gaming retailer GameStop saw its stock tumble nearly 20 percent Tuesday, its biggest single-day drop in 11 years. The reason? The retailer lowered its expectations for fourth-quarter earnings, attributing the drop to lower than expected software sales, which sheds light on the challenges of physical stores in an increasingly online industry.

New software holiday sales were down 22.5 percent, which the Grapevine, Texas, company says is due to the transition period between old and new consoles, according to a release. Conversely, overall sales were up 9.3 percent from last year, with gains stemming from the PlayStation 4 and Xbox One, which were both released in November 2013.

“Clearly, same store sales were driven by very strong growth in new hardware,” says Robert Lloyd, GameStop's chief financial officer, in the release. “The higher percentage of sales in the hardware category resulted in better than expected comps, but lower gross margin dollars during the holiday selling period. In addition, new software sales came in below our expectations.” 

This caused GameStop to lower its projected fourth quarter earnings to a range of $1.85 to $1.95 per share rather than the $2.14 that analysts polled by Thomson Reuters had targeted before Tuesday's statement.

This is the second time the gaming retailer’s stocks have sunk precipitously this month. Just last week GameStop's stock dipped 8 percent following the announcement of PlayStation Now, a streaming gaming service that allows players to download games straight from the Internet to their consoles, like Netflix for gaming. Straight-to-TV gaming could send gaming retailers the way of video rental stores like Blockbuster.

Major game-console companies aren’t the only threat to physical stores. Mobile and social gaming has exploded in recent years. A recent forecast by Amsterdam-based market research group Newzoo says mobile games will grow at an average annual rate of 19 percent for smart phones and 48 percent for tablets through 2016, at which time the two combined could make up 27.8 percent of the gaming market.

GameStop says it anticipates software earnings to get back on track in the first quarter, when the consoles have had a chance to integrate into the gaming world and developers have released more games. The company also acquired AT&T wireless retailer Spring Mobile in November 2013, which GameStop says will help it move into the wireless market in 2014.

Analysts are split as to whether GameStop can maintain sales. Baird Equity Research analyst Colin Sebastian said in a research note he anticipates momentum will pick up after Q1 once more games are released, while Benchmark Research analyst Mike Hickey said in his research note that long term sales could be hurt by the trend toward digital, mobile, and streaming games.

Overall, electronics sales were down 2.5 percent this holiday season, the Commerce Department reported Tuesday, and general retail sales were only up 0.2 percent. Most of the gains were seen in clothing retailers, which increased 1.8 percent.

“This report confirms that this holiday shopping season was not very kind to many retailers,” says Chris G. Christopher, Jr., director of consumer economics at IHS Global Insight in an e-mailed analysis. “Heavy discounting and weak foot traffic hurt many retailers on the per unit margins.”

Online sales, however, were up 1.4 percent from last year, which could bode well for GameStop, which saw a 47 percent increase in mobile sales and 37 percent increase in online sales during the holiday season.