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GameStop Bulls Drop Switch Talk, Look To iPhone 8

John Miller profile picture
John Miller
1.35K Followers

Summary

  • Gross profit declines in physical games of $24 million outpaced the Switch related $10 million gross profit rise.
  • Xbox and PlayStation networks continue to shorten GameStop's all important B-tier game tail.
  • Stores in the U.S. are doubling shelf space from 7-15% for collectibles.
  • Analysts predict a strong cycle as many iPhone 5 and 6 customers waited but are now ready to upgrade.
  • The future of mobile hardware and activation is online.

Sales of Nintendo's (OTCPK:NTDOY) Switch drove a 25%, $77 million increase in new hardware revenues for GameStop (NYSE:GME) in the first quarter. However, the larger, higher margin new and pre-owned software segments continue to see substantial declines, down $47 million and $34 million respectively. Gross profit declines in these physical game segments of a combined $24 million outpaced the $10 million gross profit rise in new hardware.

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Source: GameStop Corp. 2017 Q1 Results Earnings Call Slides

Taken as a whole, GameStop's core gaming segment is facing substantial and sustained declines. New games software is pressured not just by the advent of full game digital downloads, but by the online networks and communities driving the shift. Specifically, the Xbox and PlayStation networks continue to shorten GameStop's all important B-tier game tail. And pricing in the used segment appears pressured by Amazon's (AMZN) Trade-In program.

New hardware sales are supported by the Switch launch, though GameStop's allocation is unspectacular. Major retailers are running promotions for the Switch and its new titles. Target (TGT), for instance, decked out shopping carts at 650 locations for the launch of Mario Cart 8 for Switch. GameStop's COO Tony Bartel added the following color on the Q1 conference call:

Yes, we were lower than our, what we would call, our average next-gen market share. So, and that's typical when you have a highly allocated product, it would take an incredibly bold company to allocate us at our normal market share. The calls they would get from our competitors would be, I can't imagine. So it would be a very bold move and it has never happened. So this is typical when there's a launch of a heavily allocated product.

Offsetting the slide in core gaming, collectibles continued to excel, up 39% over Q1'16. Though note in the charts above, the size

This article was written by

John Miller profile picture
1.35K Followers
Experience as a senior manager for a large retail chain. Managed multiple locations with sales in the low seven digits. Hands on P&L responsibility and controllable costs management experience. Expert in customer care and customer care training for team members. Studied international affairs at the George Washington University with a specialization in economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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