GameStop: Ugly Holiday Hides Gaming Software Growth, Management Fixing Past Mistake – Seeking Alpha

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As Seeking Alpha’s resident GameStop (NYSE:GME) bear and longtime critic, I am well aware of the company’s off-beam $6.9 billion valuation. I also recognize the large and somewhat unexpected 400 basis point gross margin compression seen during this past holiday quarter, as well as the tens of millions of dollars in new core expenses over the last half of 2021. But with that as a preface, and despite the ugly headline earnings loss, the recently announced holiday quarter results had the best news for the company’s operating fundamentals since the announcement of the strategic partnership with Microsoft in 2020.

Surprisingly, GameStop appears to have sold more games to more gamers. This is despite the ever-present secular trend to digital download and live services, as well as some technical issues working against software sales related to the console cycle. And what is more important, for the first time leadership openly recognized and adequately articulated the key mistake of prior management.

We have learned from the mistakes of the past decade when GameStop failed to adapt to the future of gaming… We’ve also had to change the way we assess revenue opportunities by starting to embrace, rather than run from, the new frontiers of gaming.

CEO Matt Furlong, Q4 2021 Results – Earnings Call Transcript, 3/17/22

2017 2018 2019 2020 2021

Software Sales

(Holiday Quarter)

$1042* $961* $984 $731 $786

PowerUp Rewards Members

Paying (Year)

5.8 5.6 5.0 4.4 5.8

[Both data are in millions. *The 2017 & 2018 Software Sales shown above are meaningfully skewed lower due to current reporting methods. Sourced from Form 10ks.]

So one may rightly ask, what is the big deal about $55 million in top-line software growth when there was a $148 million loss for the quarter? Further, one may question the importance of a small gain in the content category relative to the substantially larger declines witnessed over the past few years (see table above). But importantly, it is a reversal against the heretofore strong downward secular trend. Its importance and details are considered below.

Putting The Games Back In GameStop

First, the base gross profit percentage of the software category, before any shipping costs assumed by the company, is two to three times higher than in the hardware category. Historically, gaming software was the primary contributor to the gross profit dollars. So a GameStop turnaround can’t just be focused on expanding low margin hardware SKUs and must be predicated on recapturing share of gaming content sales.

Further, these software revenue gains of about 7% during the 2021 holiday are meaningful because they do not appear based solely on a cyclical boost. Looking back, one may have expected a strong cyclical boost in software to accompany the strong 2020 holiday launches of the PS5 and Xbox Series X/S. Company proponents from a year ago will well remember how GameStop focused on bundled sales of the hot consoles. Because extraordinary demand outstripped supply, players often accepted a higher price point that included software or accessories just to obtain the underlying box.

And there was also the notion that the excitement …….



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