GameStop Corp. (GME:US) tumbled the most in 11 years after the video-game retailer cut its earnings forecast because of lower-than-expected sales of games and reduced profit margin from consoles in the holiday period.
GameStop shares (GME:US) fell 20 percent to $36.31 at the close in New York, the biggest decline since December 2002. The stock rose 96 percent last year.
Chief Financial Officer Rob Lloyd said the higher percentage of sales in the hardware category, driven by demand for Sony Corp. (6758)’s PlayStation 4 and Microsoft Corp. (MSFT:US)’s Xbox One, resulted in lower profit margin. At the same time, new software sales slumped 23 percent in the nine-week period ended Jan. 4.
Games were “materially weaker than even our cautious expectations,” Michael Olson, an analyst at Piper Jaffray Cos., said today in a research note. “The weakness in new software is more of a cyclical issue that has recovery potential later in 2014 as the next gen console installed base continues to grow.”
Olson has an overweight rating on the shares, the equivalent of a buy rating.
GameStop’s stumble comes as the video-game industry positions itself to capitalize on the new consoles. The retailer, along with console producers and game publishers, has weathered a two-year drop in consumer spending as play on social networks and mobile phones grew in popularity.
Fourth-quarter profit will be $1.95 a share at most, reduced from a maximum of $2.14. Analysts projected $2.14, the average of estimates compiled by Bloomberg.
Holiday same-store sales rose 10 percent amid demand for the new consoles, Grapevine, Texas-based GameStop said today in a statement (GME:US). Total global sales increased 9.3 percent to $3.15 billion.
Full-year profit will be $3.06 a share at most, reduced from a previous forecast of $3.25. Analysts projected $3.25, on average.
Sony announced Jan. 7 that it had sold 4.2 million PlayStation 4 game consoles worldwide as of Dec. 28, beating Microsoft’s 3 million Xbox Ones sold. The PS4 went on sale Nov. 15, with the Xbox One following a week later.
GameStop probably accounted for at least 1.8 million of the 7.2 million new consoles purchased, and will sell another 300,000 before the end of the month, said Michael Pachter, an analyst at Wedbush Securities in Los Angeles, said in a research note on Jan. 8.
Shares of GameStop fell 8.4 percent on Jan. 7 after Sony announced plans for a new video-game streaming service that would give users the ability to download titles from the Internet rather than purchase them new or used from GameStop stores. Given the lack of details on Sony’s (SNE:US) pricing or the extent of its catalog, the competitive threat to GameStop isn’t clear, Pachter wrote.
Pachter and other analysts project a drop in December software sales for the industry when industry tracker NPD Group reports monthly video-game revenue on Jan. 16. The new consoles probably led some consumers to delay purchases after the new machines sold out in some locations.
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