GameStop has released its earnings and financials for the second quarter of 2012, and recently held a conference call to discuss the details and more with investors and analysts.
Overall sales for the period were down by more than 11%, which was attributed to slow traffic due to a weak new release slate. Sales of pre-owned merchandise, which is GameStop’s most significant margin category, were also down more than 11%. The bright spot for the quarter was growth in GameStop’s “Other” category, which was up nearly 41%. This category includes mobile and digital sales, which are new sectors of business for the retailer.
Here are five other observations that I made during the earnings call:
1. DLC, especially at launch, is vital for GameStop and for publishers. GameStop CEO Paul Raines and his executive team made this a recurring theme during the call. Despite the negative associations made by some consumers with this practice, it was made clear during the call that it’s only going to expand moving forward. Quotes from the call driving this point home included “You need to have DLC at launch” and “Every single major title is releasing with DLC”. The market is increasingly as reliant on off-disc content as it is on what’s on the game disc.
2. The PlayStation 2 is (finally) dead. We’ve known for some time that GameStop has been taking its PlayStation 2 inventory out of some stores, and the reasoning is becoming more and more clear: Very few customers are buying them anymore. Proof of this point: Sales of current-generation preowned games were flat for the quarter, and yet overall sales were off more than 11%. It’s not hard to figure out what’s pulling the number down here. It was noted that PlayStation 2 inventory was moved to stores in more urban areas, generally with lower income levels.
3. Caution for Q3 and Q4... GameStop predicts that its 2012 revenue will be between 2-10% lower than 2011. The company is trying to be "pragmatic" with its projections for the remainder of 2012, especially with regards to the launch of the WiiU and how it will affect the retailer's overall results. While all the right words were said about the WiiU launch, there was a sense of doubt in terms of Nintendo's ability to meet demand for the WiiU. This can be attributed to supply issues with the launch of the Wii in 2006-07, but there continues to be some concern about how much product that Nintendo can get to retail due to "manufacturing issues". GameStop also seems to be concerned that, despite a solid release slate for the remainder of the year, traffic won't recover to former levels.
4. ...but a brighter Q1 2013. GameStop does, however, see growth returning in the first quarter of next year. There's a formidable release slate during the period, especially as compared to the rather weak slate seen this past year. Weak comps will aid the growth outlook, plus the WiiU variable will likely add to better numbers overall. It doesn't seem like much of a stretch to call for growth given the facts, but good news is still good news.
5. Gen4 and physical media seem be to stuck together. Observations from both GameStop execs and an analyst during the question & answer session of the call seem to point to Gen4 hardware from Sony and Microsoft as having some sort of physical media option. Gen4 consoles, according to GameStop execs, "will have plenty of discs in them." It should be noted that GameStop execs have not yet seen the purported new hardware from either Microsoft or Sony, but I believe that it's becoming safer to expect that physical media will stick around for the next generation, when it finally arrives.
GameStop seems to be doing all it can to keep itself relevant in a changing marketplace. Results in its digital and mobile sectors are showing some promise, and the retailer is continuing to expand efforts there. I think that GameStop is right to be concerned about Q3 and Q4 results, given recent trends and economic developments; however, if their hunch is right about Q1 2013, perhaps there's a light at the end of what's been a long and deep tunnel.