Why Is GameStop Closing Stores After Its Best Sales Month in Years? | The Motley Fool (2024)

GameStop (GME -2.98%) is growing again. The video game retailer delivered that bright operating update as part of an otherwise brutal third-quarter report that showed slumping sales during the weeks leading up to the recent launches of two new consoles.

Those hardware debuts should allow GameStop to announce positive sales and profitability trends over the holiday season, management said in the earnings call with Wall Street analysts. But it's still not clear if the retailer will be able to consistently grow its business through this next generation of console gaming.

Here are some highlights from the conference call with CEO George Sherman and his team.

The no-good quarter

Our third-quarter results were largely as we had anticipated, marking the end of a challenging sales performance period as the industry transitions from Generation 8 to Generation 9 console video gaming products.
-- Sherman

GameStop's brutal sales declines at its existing locations can be attributed to several negative trends all hitting the business at once. These included customer traffic pressures from the COVID-19 pandemic, supply-chain disruptions, and an ongoing shift away from buying physical video game disks and toward digital downloads.

But the biggest impact came from gamers shutting their wallets in the period leading up to console launches by Sonyand Microsoft. Such generational switchovers routinely pinch GameStop's sales volumes, with the pressure peaking just before the new hardware hits shelves.

Management said the accelerating slump, which pushed sales declines to 25% from 13% last quarter, mostly was in line with expectations. "As we anticipated, sales and profitability were down," Sherman said.

Slashing costs

We have closed almost 800 stores worldwide since the beginning of 2019, representing both underperforming locations and de-densification in certain trade areas. We expect these closures to create a more profitable footprint.
-- Sherman

Management sees the booming sales in its e-commerce segment -- where revenue grew by more than 200% in Q3 -- as an opportunity to speed up its already aggressive cost-cutting program. With 100 additional stores set to close by the end of 2020, GameStop is excited about the potential to shift even more of its business into the online channel over the next few years.

That strategy, combined with inventory cuts, should give it a shot at creating sustainable profitability despite the reduction in its footprint. GameStop is just getting started with its efforts to slim down and reorient the business toward its growth opportunities, though. "We will remain intensely focused on continuing to improve our financial architecture," CFO Jim Bell added.

One good month

By all accounts, these consoles are experiencing unprecedented demand, and we continue to work with the suppliers to meet that demand.
-- Bell

GameStop overcame pandemic-necessitated store closures across Europe to post a sharp sales rebound in November, with comparable-store sales jumping 17% thanks to robust demand for the new consoles. It was the chain's best monthly performance in almost two years and likely puts the company on track to post overall sales growth and positive operating margins for its fiscal Q4, which runs from November through January.

The retailer is working hard to capitalize on this surge and continue it into 2021. However, its wider plans still reflect a business that needs to transform itself in order to compete in an environment where video games are mostly purchased and delivered online.

The good news is that GameStop still has a role to play in connecting video game developers and hardware producers to their customers through software and console sales. Now comes the hard part -- constructing a profitable business around that role.