GameStop stock plunges nearly 40 per cent as gamers brace for new era of consoles

VIDEO: REUTERS

NEW YORK (WASHINGTON POST) - Shares of the video game retailer GameStop cratered on Wednesday (June 5) after the company reported steep sales declines on gaming consoles and pre-owned software and hardware, highlighting fundamental challenges for the brick-and-mortar business selling digital media, akin to video and record stores of the past.

GameStop's overall sales fell to US$1.5 billion (S$2 billion) during the first quarter of 2019 compared to US$1.8 billion in the same period last year, the company said in its earnings report on Tuesday, revealing a drop of about 13 per cent.

The company's net income took an even more substantial hit, plunging roughly 78 per cent.

Part of GameStop's immediate troubles are cyclical. Two of the current major consoles, Sony's PlayStation 4 and Microsoft's Xbox One, were released in 2013, and both tech companies are expected to launch their next-generation platforms next year.

GameStop, which saw hardware sales fall by 35 per cent this quarter, said that much of the drop stems from consumers waiting for the next generation of consoles, since the gaming market is in a transition period when older platforms are aging out but the next wave has not arrived.

But the gaming retailer also faces longer term challenges. Customers are increasingly opting to download video games over the web rather than buy games as discs. That shift in consumer behaviour is eating into GameStop's sales of pre-owned games, since a greater share of consumers no longer have physical games to trade in and a smaller share of customers want to buy them. The company said its pre-owned sales declined by more than 20 per cent this quarter.

Perhaps even more unsettling for GameStop is the explosion of online and mobile games that exists outside the traditional console world. Played on smartphones, tablets and web browsers, these games don't require the purchase of additional hardware.

What's more, an array of audacious gaming initiatives from the likes of Google, Amazon and Apple are vying to do away with consoles and develop a cloud-based gaming model that resembles the streaming powerhouse Netflix.

In its 2018 annual report, GameStop warned shareholders that if the preference for downloading games increases and if technological advancements allow people to access games through other means at home, "customers may no longer choose to purchase video games in our stores."

GameStop CEO George Sherman said during an earnings call on Tuesday that the company has hired a consulting firm to help improve its business and develop new sources of revenue.

"We have work to do to evolve and transform," he said.

Sherman pointed to developing immersive gaming experiences in stores and in deploying its loyalty programme to connect customers to game publishers as potential avenues for boosting its business.

GameStop, which operates more than 5,700 stores across 14 countries, said it expects total sales to fall from 5 to 10 per cent during fiscal 2019. The company also said the board voted to eliminate the quarterly dividend paid to investors, saving the business US$157 million a year. The funds will be used to pay down its debt and invest in initiatives, the company said.

Investors hammered the stock Wednesday after the company disclosed its latest earnings. GameStop shares closed at US$5.04, down roughly 36 per cent.