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It’s been a rough stretch for most retailers—the
SPDR S&P Retail ETF
is down 16% over the last 12 months. But
GameStop
is in a class of its own. The videogame seller is down 66% in the last year, even as the
S&P 500
has gained 4%.
The selloff entered a new realm Wednesday, after GameStop (ticker: GME) reported disappointing earnings and eliminated its dividend. The stock tumbled 36% Wednesday to $5.04, its lowest close since 2003.
With GameStop, the problems go well beyond just being a bricks-and-mortar retailer in the age of
Amazon.com
(AMZN).
Once a crucial player in the gaming food chain both domestically and abroad, GameStop is the latest business victimized by the digitization of basically everything. A far-reaching chain of videogame stores, GameStop made sense in the days when gamers wanted to buy their wares on disks inside boxes at stores based in malls; the appeal seems a lot lower when physical disks appear to be going the way of CDs and DVDs. Gamers can download their games, or stream them. Or buy them from Amazon or
Best Buy
(BBY),
Walmart
(WMT), or
Target
(TGT), while shopping for everything else they need. That dynamic is problematic for GameStop, which still has 3,777 stores domestically and another 1,912 around the world.
Consider the current landscape. The leading game console companies—
Nintendo
(NTDOY),
Sony
(SNE), and
Microsoft
(MSFT)—all offer options for downloading games directly from the network. While that eliminates the ability to resell games into the used market, it also potentially eliminates the need to get off the couch and go the mall. Meanwhile, digital distribution by Steam and other online services has basically crushed the hard copy distribution of PC games.
Gaming isn’t going away—in fact, casual gaming seems more popular than ever.
Apple
(AAPL) is getting ready to launch Apple Arcade, a new subscription service that will have more than 100 original games for a single monthly price and be offered on all Apple platforms. And
Alphabet
-unit (GOOGL) Google is getting ready to launch its own cloud gaming platform called Stadia.
In yesterday’s investor call following its disappointing earnings report, GameStop suggested that it just needs to tighten up on expenses, shuffle operations, and make other tweaks. CEO George Sherman said that GameStop can “leverage and improve” their store experience. He says they can declutter stores and reduce the number of products sold, increase the sale of “collectibles” like plastic figurines and T-shirts, and offer more “immersive interactive experiences.”
“We are committed to testing, learning, and implementing our transformation quickly, through think big, start small, scale quickly; all of the disciplined approach to measuring results in ROI,” he said, adding that he has “told our team that we don’t have a real estate problem.”
Joe Feldman, an analyst with Telsey Advisory Group, says you can trace GameStop’s issues back to the launch of Apple’s iPhone, which gave rise to the ability to play games basically anywhere. Another factor: the increasing speed and capacity of home internet connectivity, making it practical to download entire games.
Feldman says that videogame publishers like
Electronic Arts
(EA) and
Activision
(ATVI) are seeing growth from their digital businesses as their physical game operations shrink. In the 12 months ended March 31, EA saw 7.5% growth in digital revenues—and a 27% drop in “packaged goods” revenue.
Feldman notes that the gaming industry will gather in Los Angeles next week for the annual E3 trade show, and there are hopes that Sony and/or Microsoft will provide some details of their next generation consoles—the current platforms are getting old, as reflected in GameStop’s fading hardware sales. Having new hardware to sell would certainly be positive for game retailers like GameStop. But that’s not likely to turn around the trend toward digital distribution and cloud-based gaming.
Feldman says the good news is that the average lease life of GameStop’s existing stores is short—only about two years—which gives them some financial flexibility. And he says there is some opportunity for the company to make the stores more experiential—to make them a place where gamers want to hang out, and not just a place to buy games, accessories, figurines, and T-shirts. Feldman notes that the 60 million customers in their loyalty program suggest potential to draw people into the stores with a better experience.
That said, Feldman is neutral on GameStop shares, which he thinks will trade sideways for a while. To buy the stock for the long run, you have to believe that the new management team at GameStop can pull off the a turnaround that never happened at Circuit City, Borders, or Blockbuster. For now, the skeptics are dominating the conversation.
Write to Eric J. Savitz at eric.savitz@barrons.com