GameStop reported its fiscal year 2013 financial results, with a ix of good news and bad news. Sales for the company’s fourth quarter (which ended Feb 1, 2014) were $3.68 billion, which was up 3.4 percent compared to last year’s quarter (which was one week longer). This rise was driven by the sales of new consoles, the Xbox One and PlayStation 4. While sales were up, earnings were down, dropping to $220.5 million from last year’s $261.1 million. Investors responded by driving GameStop’s share price down by over 7 percent so far today in trading.
For the full year GameStop had sales of $9.04 billion, up 1.7 percent from the previous year. Full-year comparable sales grew 3.8 percent. At the same time, GameStop reported a drop in current-gen software, which they expected as customers transition to new consoles. CFO Rob Lloyd confirmed that “current-gen software sales declined at a faster rate than expected,” but he doesn’t see an increase in the rate of current-gen decline.
GameStop is expecting to have a good fiscal 2014, with total sales up between 12 and 22 percent, with income projected to be around double the amount reported for FY 2013. Earnings per share are expected to be about $3.56 per share for FY 2014. The company expects store count to drop about 2 percent, but they will continue to remodel old stores. GameStop projects next gen consoles at 125 percent of last generation for the next three years, in dollar volume, where prior to launch they had expected next-gen to trail previous gen launch numbers. That’s less impressive when you factor in inflation since the last time consoles were launched.
There are signs of weakness buried in the numbers, though. GameStop’s results were buoyed by hardware, but software sales (both new and used) were down from last year. New software was $1.2 billion compared to $1.6 billion in FY 2012, and pre-owned software was $742 million compared to $752.8 million the previous year. Customers are buying hardware at retail, but not as much software as they used to. This was also true for the full fiscal year.
Part of the change must be due to customers buying digital content directly instead of heading to the retail store. That’s probably more DLC than full titles, but of course it’s hard to track all that. Another factor must be increased diversion of consumer attention and spending to online and mobile games. All of that spending on League of Legends and mobile games has to come from somewhere, and it’s likely that some of that is coming at the expense of retail sales.
GameStop is certainly going to do well to the extent that new consoles sell well. They have already sold more new consoles than they had in the first 15 months of the last console launch. Their attach rate is more than 3.3 for these new consoles, as GameStop does well at adding on software sales to the hardware. GameStop’s market share for next-gen hardware is 47 percent so far this year, according to their comments in the earnings call. GameStop sales associates also work hard at adding DLC on to new software sales, and the company will doubtless continue to push that. Lloyd noted that GameStop expects by late in the year next-gen and current-gen software sales will equalize, with next-gen software then continuing to pull ahead.
Titanfall had 4 times the amount of reservations on Xbox One than on the Xbox 360. “Gamers are showing strong demand for games on new consoles,” said GameStop president Tony Bartel. There’s also strong demand for big upcoming titles like Watch Dogs and Destiny, more reasons why GameStop is looking forward to the rest of the year. Launches of next-gen consoles are still continuing internationally as well, with Microsoft launching the Xbox One in 26 more countries. GameStop’s international sales grew 14 percent in the fourth quarter, and 5.6 percent for the full year, so more next-gen interest in other countries will likely help GameStop.
Digital sales grew 4 percent in the fourth quarter. PC digital grew 27 percent, while console digital dropped 6 percent. Steam cards grew over 100 percent. Digital is still only about 2 percent of GameStop’s overall business, though, so even high rates of growth in that segment aren’t going to move the needle much for the company as a whole.
Kongregate grew very well for GameStop, more than doubling sales in the fourth quarter. GameStop did close its Spawn Labs acquisition, “based on lack of demand from customers.” GameStop will focus its effort on selling next-gen streaming services such as PlayStation Now, rather than doing it themselves. Digital receipts grew 15 percent for the full year.
GameStop does project an increase in the pre-owned game business, which is good considering that about half of the company’s profits come from that part of the business. “I would point out it’s a good sign that previous competitors have returned,” said CEO Paul Raines, referring to Walmart getting back into used games. The pre-owned business is a supply-constrained business, so GameStop is cutting deals with publishers to make value-priced software available to fill in that supply for hot titles.
“We believe GameStop has to maintain a higher rate of internal change than the environment around us,” said Raines. That’s a wise viewpoint as rapid change continues in the game industry, with digital games continuing to outpace traditional retail in terms of growth and market share. GameStop is doing well as next-gen consoles continue to revive interest in console games, but it’s not clear how long this will last or how it will change in the future.