GameStop Earnings: Time To Play Smarter

(Bloomberg Gadfly) -- It's time for GameStop to make some bolder moves.

Shares in GameStop Corp. plunged 14 percent Wednesday after the video-game and mobile-phone retailer warned of a bigger second-half sales decline than expected. It now sees third-quarter sales at established stores falling by 6 percent to 7 percent from the year before, compared to estimates of a 2 percent drop.

It also took down full-year earnings and sales guidance, indicating things won't likely get better in the critical fourth quarter -- where the retailer picks up about 40 percent of its annual revenue. 

The company attributed much of the lowered forecasts to new hardware and video-game releases that failed to take off with customers as hoped.

This points to an important change in GameStop's business: The sales lift from new gaming-console launches may no longer be as big as it used to be. Historically, new consoles would boost sales for the following couple of years, according to data compiled by Bloomberg Intelligence. That means the new Playstation VR and the upcoming Nintendo NX and Microsoft Project Scorpio releases could actually be pretty disappointing for GameStop. 

It's a problem because, as much as GameStop is smartly trying to overhaul its business model to be less dependent on physical video games in the long term, it will need the cash generated by the games business to sustain itself until it can grow its newer business units. 

I argued last April that GameStop was smart to focus on selling and fixing gadgets through its 72 Simply Mac and 1,400 Spring Mobile specialty tech stores -- which sell AT&T, Apple and other products -- as well as its digital and collectibles businesses. Such an approach could buy it some extra lives.

Indeed, initial progress in these areas prompted GameStop shares to outperform those of Best Buy during the first half of 2016.

But since then, investors have started to lose patience. Its shares are down 25 percent so far this year. GameStop has to find ways to expand its newer businesses faster, whether through acquisitions, partnership deals, or other means. Or it has to start closing some more legacy gaming stores to show investors it's serious about shifting its business model. 

Even a good plan is useless if it's not well-executed or carried out quickly enough. As GameStop's legacy business falls off at an accelerating pace, it's running out of time to change its game.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Shelly Banjo in New York at sbanjo@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.