Commentary

GameStop Is 'De-Densifying' As It Launches New Strategy

GameStop, the Grapevine, Texas-based retail chain that peddles hardcopy video games out of more than 5,700 stores worldwide, says it will shutter 180 to 200 “under-performing” locations globally by the end of the 2019 fiscal year, with more closures to come over the next two years. It also has a plan to transform itself into a “social and cultural hub” for gamers.

“We have a clear opportunity to improve our overall profitability by de-densifying our chain,” GameStop CFO James Bell told analysts on a second-quarter earnings and sales call transcribed by Seeking Alpha

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“Bell added that while the closures expected by yearend are more opportunistic, ‘we are applying a more definitive, analytic approach, including profit levels and sales transferability, that we expect will yield a much larger tranche of closures over the coming 12 to 24 months,’” Marianne Wilson reports  for Chain Store Age.

“Shares of GameStop fell more than 15% in extended trading Tuesday after the company reported second quarter earnings and sales that missed analysts’ expectations while significantly lowering its same-store sales forecast,” CNBC’s Jasmine Wu writes.

“Losses were more than triple what they were for the same period a year ago, and sales were down 14.3% year-over-year (or 11.6% when you factor out stores that were closed in the interim). That includes a 5.3% reduction in software sales, a 17.5% reduction in pre-owned sales, and a whopping 41% drop in hardware sales. The only bright spot was collectible sales, which were up 21% to represent the 15th straight quarter of growth in that category,” Kyle Orland writes  for Ars Technica.

“The company has been grappling with major shifts in the videogame market as consumers increasingly download games through their gaming consoles and skip purchases of packaged software,” Micah Maidenberg points out in The Wall Street Journal.

“More competition is coming. On Tuesday, Apple Inc. said it would launch a videogame subscription service on Sept. 19 that costs $4.99 a month. Google, part of Alphabet Inc., plans to roll out a cloud-based gaming site in November that offers a $10-a-month option,” Maidenberg adds.

“The closures are the latest cost-saving measure from GameStop’s new leadership team -- the company has already had two waves of layoffs. Under its new leadership team, GameStop launched an initiative known as ‘GameStop Reboot’ that's intended to breathe new life into the retail chain,” Ben Gilbert writes  for Business Insider.

“The first step of the reboot involves addressing issues with so-called SG&A, a financial term that stands for Selling, General and Administrative Expenses. In simpler terms: It means lowering the cost of salaries, taxes, advertising and other nonproduction costs,” Gilbert adds. “Unfortunately, it also means layoffs and store closures.”

But it also has “a new strategic vision,” in the words of GameStop CEO George Sherman, who took over the position in April, Patrick Shanley reports for The Hollywood Reporter.

Sherman “detailed a ‘strategic plan’ anchored on four core tenets in its filing on Tuesday: ‘Optimizing the core business by driving efficiency and effectiveness, creating the social and cultural hub of gaming within each GameStop, building compelling digital capabilities and transforming our vendor and partner relationships for an evolving video game industry,’”  Shanley reports.

“It might be too soon to tell whether the earnings miss is a blow to Michael Burry’s thesis about GameStop. In August, the investor, who is most known for his calls on the subprime mortgage market that were featured in the book "The Big Short," said he believed GameStop still had upside potential. Sony and Microsoft’s upcoming consoles will have physical optic drives, which will extend GameStop’s life significantly, he told Barron’s” Tae Kim, CNBC’s Wu writes. “Shares of GameStop jumped more than 18% on that report.”

“GameStop isn’t alone in closing stores,” Kelly Tyko reminds us  in USA Today. “More than 8,200 stores are slated to shutter this year with thousands of locations already gone, based on figures from global marketing research firm Coresight Research, retailers’ earnings reports, bankruptcy filings and other records.

“According to Coresight Research's Sept. 6 weekly closing report, the announced closures are ‘40% higher than total closures in 2018.' Coresight, which has offices in Manhattan, London and Hong Kong, tracked 5,864 closings in 2018, which included all Toys R Us stores and hundreds of Kmart and Sears locations,” Tyko adds.

Transforming floor space into cultural and social hubs is a worthy aspiration. Making it happen, however, is where the game gets challenging.

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