GameStop’s stock traded lower today after it reported weaker-than-expected results in the fourth quarter despite strong console launches from both Sony and Microsoft.
Analysts said the disappointing results were largely driven by a switch in consumer behavior from buying games at retail to purchasing them digitally for the new consoles, as well as, playing games on mobile devices instead of buying used titles for the Xbox 360 and PlayStation 3.
“Investors came into this quarter with high expectations of how new-generation consoles would drive sales of hardware and software,” Morningstar analyst Liang Feng told Reuters. “New software sales over the past few years have been turning downward…You’re seeing some investors get jittery that maybe it’s a structural trend that will continue.”
In response, GameStop said it will be closing 2 percent of its 6,400 stores this year. Recently, it has also diversified into selling consumer electronics and cellphones though the acquisition of Simply Mac and Spring Mobile, and has developed a mobile and digital business, which has surpassed $1 billion in sales.
But it will be stopping short of creating its own digital game streaming service.
GameStop will be shutting down Spawn Labs, an R&D division that was working on a cloud-based games service. “While cloud-based delivery of video games is innovative and potentially revolutionary, the gaming consumer has not yet demonstrated that it is ready to adopt this type of service to the level that a sustainable business can be created around it,” said GameStop’s VP of investor relations Matt Hodges, in an interview with GameSpot.
GameStop’s challenges are noteworthy because of the wide level of interest coming from an unlikely list of companies that are poised to enter the games business.
Take Walmart, for instance, which confirmed last week that it was interested in the used market, announcing that consumers can trade-in old discs for store credit. Amazon too has varying degrees of interest. In February, Amazon acquired video game developer Double Helix Games, and it’s rumored to be working on an Android-based games console.
Those are just two examples of companies in the retail sector, which should be approaching the business cautiously if an entrenched retailer, like GameStop, struggles despite new hardware launches.
GameStop’s fourth-quarter sales rose 3.4 percent to $3.68 billion, falling below the $3.79 billion analysts had projected. GameStop said profits totaled $220.5 million, or $1.89 a share. When excluding impairments, earnings fell to $1.90 a share, which was in-line with what GameStop had forecast. Impairment charges will largely to do with the closure of Spawn Labs.
GameStop’s shares fell as much as 9.3 percent this morning, but recovered by the afternoon to close down 4 percent, or $1.57, to $37.33 a share.