GameStop profit declines, but execs see growth ahead

Posted Thursday, Mar. 27, 2014  comments  Print Reprints
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GameStop Corp. expects the video game market to continue to expand after the successful launch of the PlayStation 4 and Xbox One systems, but it also plans to diversify by adding stores that sell other technology products, executives said Thursday.

The Grapevine-based retailer, which operates more than 6,600 stores, said its fourth-quarter profits were lower because sales were focused more on lower-margin console systems than on video games.

GameStop’s net income fell 16 percent to $220.5 million, or $1.89 a share, in the fiscal fourth quarter, which ended Feb. 1, from $261.1 million, or $2.15, a year earlier. Analysts estimated $1.93 on average.

Total sales increased by 3.4 percent to $3.68 billion, and sales at stores open at least a year, an industry benchmark, grew by 7.8 percent.

The retailer predicted 2014 earnings of $3.40 to $3.70 a share, compared with the $3.76 average of estimates compiled by Bloomberg News. Its stock (ticker: GME) lost $1.57 a share to $37.33 on the New York Stock Exchange as the forecast and quarterly sales fell short of expectations.

GameStop executives predicted in January that a higher percentage of sales in the hardware category, driven by demand for Sony’s PlayStation 4 and Microsoft’s Xbox One, would lower profit margins.

The retailer, which generates profit from software sales and from buying used games and consoles and reselling them at a markup, is facing rising competition from rivals online and in stores. Sony said in January that it would test a streaming service, and Wal-Mart Stores said this month that it will offer store credit for used video games.

On a conference call, GameStop CEO Paul Raines said the video game industry has “tremendous growth ahead” and said GameStop will continue to be a dominant force in the sale of used games despite increased competition from Wal-Mart.

“I would point out that it is a great sign for the category that large competitors return after previous attempts, as they see that the pre-owned video game business has a lot of growth to it,” Raines said. “GameStop, of course, is a formidable competitor in this space.”

GameStop said it plans to reduce its store count by 2 percent over the next year by consolidating locations. But it also plans to accelerate growth in its other technology brands, including two chains it acquired last year: Simply Mac, a 20-store chain that sells Apple products in smaller markets, and Spring Mobile, which has about 100 stores selling AT&T wireless services. It also operates Aio Cricket AT&T prepaid stores.

Raines said the company plans to open 300 to 400 additional technology brand stores, with more details to be announced during a meeting with investors this month. GameStop has about 2,400 employees in the Grapevine area.

It recently boosted its annual dividend by 20 percent to $1.32 a share, and its stock repurchases, debt buybacks and dividend payments have totaled more than $2.1 billion since 2010.

“They’ve done a very good job at managing the business for profitability,” said Matthew DiFilippo, chief portfolio strategist at Stewart Capital. “GameStop has a strong balance sheet and cash earnings. They’re very well-positioned for the new gaming cycle. They manage inventory at the store level. It’s going to take a while for their competitors to replicate that.”

Steve Kaskovich contributed to this report, which includes material from Bloomberg News.

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