Investors punished GameStop after the consumer electronics retailer reported disappointing third-quarter results on Monday, but executives expressed confidence that its diversification strategy is paying off.
The Grapevine-based company, the leading seller of video games, reported net income of $55.9 million, or 53 cents a share, compared with $56.4 million, or 50 cents a share, last year. Excluding one-time items, earnings were 54 cents per share.
Analysts had predicted profit of 59 cents and sales of $2.14 billion. GameStop reiterated its full-year profit guidance of $3.66 to $3.86 a share.
Shares (ticker: GME) dropped $1.65, or more than 4 percent, to $37.61 after dropping as much as 16 percent to $33.
Wall Street has been growing wary of GameStop as it faces a shift in gaming toward mobile devices. In the first three quarters of the year, digital sales outpaced physical sales in the industry, according to analysis from market research firm SuperData, a trend expected to hurt GameStop’s sprawling chain of about 6,000 retail stores.
“Blockbuster, RadioShack — there’s a whole list of former retailers that have been dislocated by digital adoption, and I think eventually you can add GameStop to the list,” said Mike Hickey, an analyst at Benchmark Co., who recommends selling the stock. “They’re going to need to close more stores and cut expenses.”
Faced with the shift to digital downloads, the company has been diversifying. It acquired two other chains — Spring Mobile, which sells AT&T mobile products, and Simply Mac — and has been expanding those aggressively.
In the past year, the company has doubled the number of these so-called “Technology Brands” stores, which totaled 834 at the end of the quarter, through new openings and acquisition, including some former RadioShack locations. The stores are expected to generate $1.5 billion in revenue by 2019.
“The reason we're in these categories is because they are higher margin,” said CEO Paul Raines during a conference call with analysts.
Executives blamed the third-quarter sales shortfall to underperforming titles such as Halo 5 and Assassion’s Creed, as well as weaker-than-expected demand for the highly anticipated new Star Wars: Battlefront.
But they expect sales to pick up in the fourth quarter, including the Star Wars game.
“We anticipate, given the buzz around the movie ... that this game is going to be a very strong game when the movie launches in mid-December,” said Tony Bartel, chief operating officer.
Sales of pre-owned products rose 4.9 percent in the quarter, and the company saw growth in new area such as collectibles, which it calls Loot, as well as its other retail chains. GameStop employs about 2,400 at its headquarters and refurbishment center in Grapevine.
Staff writer Steve Kaskovich contributed to this report, which includes material from Bloomberg News and The Associated Press.