March 27, 2014

GameStop profit declines, but execs see growth ahead

The Grapevine-based video game retailer says it will trim its video game store count by 2 percent but plans to add 300 to 400 stores selling other technology products.

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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