One of the world's largest video game retailers announced its worst year-to-year results in decades, raising the renewed questions about the health of the physical video game market as downloadable games continue the ascent. The net sales of GameStop were down 3 percent for the 52-week period ending February 2, a slide that helped reverse last year's modest $ 34.7 million to a substantial operating profit of $ 673 million. Beyond that, the company expects sales to decrease another 5 to 1
GameStop's huge loss is the largest ever reported by the company, and only the third annual loss since it grew out of the company's Remnants of FuncoLand in 2000. GameStop last posted a loss in 2012 when it lost nearly $ 270 million, partly to weak holiday sales near the end of that time's console generation.
But more than the crowd, the reason behind the new loss can be the cause of long-term concern at the retailer's thousands of worldwide stores. While the hardware sales were roughly flat and the new software sales dropped about four percent over the year, the pre-owned software sales had nearly 12 percent for the year and continued a year long slide.
GameStop has always been on high margins by buying low and selling high on used game boards to bend an otherwise low-margin business. But the rise of downloadable games, which cannot be resold, has largely taken the wind out of the seals. "We continue to see decline in pre-owned software, reflecting the decline in sales of new physical games and the growing demand for digitally offered products," says GameStop COO & CFO Robert Lloyd in a revenue call.
It's a game we I have seen before when digital distribution finally reaches a tipping point that makes former strong brick companies seem largely irrelevant. Tower Records filed for bankruptcy in 2006 after decades as the market leader in music. 2011, and liquid hundreds of stores as online and e-book competition grew.
Gaming dealers can hit a similar tipping point as players at least simply download games and content they want. EA has made a majority of its digital sales money since 2013 and has planned to become a "100 percent digital company" for even longer than that. And in 2017, Activision revealed that a majority of early console sales for Destiny 2 came from digital downloads and not retail stores, and put in "a new high water land" for the company.
GameStop actually sees some growth in its own sales of digital goods in its stores. This category was up 16.5 percent, "driven by continued strength in digital currency free to play games like Fortnite and by downloadable content," Lloyd said. Sony's latest decision to stop selling digital game codes in stores may damage what's going on.
For physical goods, the only real bright spot for GameStop last year was in collectibles. That area of business grew over 11 percent for the year, making the company's 2015 purchase of nerdy collectible big ThinkGeek look a bit prescient.
The loss is the last bad sign for GameStop after the company announced it had not found a buyer in January. Earlier that month, GameStop had sold its mobile phone sales department for $ 700 million in an effort to make the remaining company more attractive.
The GameStop stock was down just over four percent in daily trading late Wednesday after doubling 13 percent earlier in the day. The current $ 9.78 share price is the company's lowest since early 2005, well below a 2013 peak of over $ 56 per share.