GameStop(NYSE: GME) reported its fourth-quarter and full-year results on Mar. 28. While on the surface, both the top and bottom line were better than expected, weakness in key parts of the company's business further highlighted the precarious state of its turnaround.
Before getting into that, here's a quick sales and earnings comparison across the retailer's last two fiscal years:
Metric
Year ending Jan. 28, 2017
Year ending Feb. 3, 2018
Revenue
$8.61 billion
$9.23 billion
Adjusted earnings per share
$3.74
$3.34
Data source: GameStop.
Much of the sales momentum in the year was spurred by the successful launch of the Nintendo Switch console, but the positive effects were dampened by weakness in other areas of the business. A softer-than-expected launch for the Apple iPhone X and changes from AT&T in its compensation packages for retail partners wrought havoc on the technology-brands segment. The unit's sales dipped roughly 1% year over year in 2017 despite a much-hyped iPhone launch, and the retailer took a roughly $340 million write-down after taxes -- reducing the company's unadjusted earnings per share by roughly $3 for the year and savaging the company's share price.
With pressure on its video game segment due to the rise of digital distribution, and its mobile hardware and services business in a weakened state, the company is focusing on these five strategic imperatives in order to improve performance.
A person connecting a controller to the Nintendo Switch, which is displaying The Legend of Zelda: Breath of the Wild
Image source: Nintendo.
1. Pausing new investment in order to refocus
The first priority listed in GameStop's new five-pronged strategy is a pause on new investments in favor of a back-to-basics focus on its core competencies -- emphasizing an admission that the company has been overzealous in its acquisitions in recent years. Here's GameStop's new CEO Mike Mauler outlining some of the negative effects of its previous expansion efforts in the technology brands space, and the upside of reorganizing its operating structure and closing underperforming stores:
The extremely fast store count growth through close to 40 acquisitions did pressure internal systems, business processes, and the organization's capabilities. All of these steps will allow the team to focus on operational improvements in the retail portfolio that [have] potential for long-term growth.
The company believes that focusing on the aspects of its technology brands, video games, and collectibles businesses that are working well, and building from there, will be a path to creating growth for shareholders.
2. Expanding with the hardcore gamers
GameStop expects that it can still do more to bring hardcore gamers into its stores. Much of the company's efforts to improve sales from its core audience will likely revolve around growing its membership program and increasing engagement among those who are already members. Here's Mauler discussing the importance of the membership program and how it might be further leveraged to address weakness in GameStop's pre-owned software segment:
These areas are being addressed, as well as continuing to improve our video game and collectibles categories. In 2017, our pre-owned business was down nearly 5% [compared] to the prior year. This is a business where GameStop has a built-in advantage. Leveraging our loyalty program, trade credit benefits, and the expertise of our sales associates, we can engage our core customer and provide value unlike any other retailer.
The company has had considerable success in building its membership program, and new wins on that front could have a significant impact on the business' outlook. GameStop's PowerUp Rewards members account for somewhere in the neighborhood of 70% of sales in the collectibles segment. This is evidence of the importance of its most enthusiastic customers and the opportunities that could be created by bringing more people into this high-value category.
3. Expanding with casuals
Somewhere around 50% of U.S. adults play games, according to a study by Pew Research. Many of these players engage exclusively on mobile platforms that GameStop has little direct sales access to, but there are still a lot of potential customers who could be courted and brought into the company's stores. Here's the CEO on the need to reach new audiences and how the company might achieve that:
We need to expand our customer demographics, and when we develop that strategy, we need to change the shopability of our stores to be a better value proposition to moms and families, for example. We need to expand our range of cool and relevant products and the type of merchandise we sell, so when we bring in these new customers, that once we get them into the GameStop ecosystem, that we can market other products to them.
Mauler stated that the company has already opened some stores that are focusing on catering to these potential growth demographics and is seeing some impressive results. GameStop aims to make a bigger push in the apparel space and get casual customers more involved in the trade-in process by increasing promotional outreach. Only 30% of the company's customers trade in games, and management sees an opportunity if it can increase participation there.
4. Improving average transaction value
In addition to reaching new customers, the company is also looking at ways to increase the average value of each sale. Here's Mauler on the fourth pillar of the company's strategy:
And, finally, a better attach rate -- once we get these new customers into our stores and expand that demographic, making sure that we're increasing the average transaction value through warranties and accessories. So those are just some examples of the areas that we would want to focus on.
Getting Nintendo Switch owners more involved in the trade-in ecosystem and ramping up its promotional campaigns will also likely be important for the company on this front.
5. Reducing operating expenses
With the near-term growth trajectory looking choppy and negative effects associated with the failed expansion of its technology-brands retail footprint, GameStop is looking to cost-cutting as the final pillar of its turnaround strategy. Here's the company commenting on the outlook for the technology brands segment in relation to AT&T's compensation packages, store closings, and other expense-reduction initiatives:
We believe that AT&T is a good partner and we are in discussions with them to improve the compensation plans. Both partners want the other to succeed, and I believe we will find improvements that will [be] a win-win for both companies. In the interim, we have taken several steps to improve the profitability of this division, including the sale of our Cricket Wireless stores, the closing of underperforming AT&T locations, and the reorganization of our operating structure.
Last year, the company reduced its net count of video game stores by 131 locations and its technology-brands footprint by 80 locations, and it kicked off 2018 by selling 65 Cricket Wireless locations. On the other hand, the company opened 17 new collectibles stores -- bringing its total count to 103 at the end of the 2017 fiscal year.
GameStop is guiding for adjusted earnings per share in the current fiscal year of between $3.00 and $3.35. Landing at the midpoint of that range would mean that earnings will be down roughly 6%, even amid the company's cost-cutting initiatives.
Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of GameStop and has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short April 2018 $18 calls on GameStop. The Motley Fool has a disclosure policy.
