Bad news for GameStop: video game sales fell sharply in May

Spending on video games increased at the start of the pandemic as billions of people spent more time at home than they would like. It looks like the trend is reversing as economies reopen and people look to spend more time outdoors.

Consumer spending on video game hardware, content and accessories fell 19% in May from the month a year earlier. The $3.7 billion in spending in May was the lowest since February 2020. Let’s see why the slowdown is bad news for the video game retailer GameStop (GME 3.13%).

Falling industry sales may hurt GameStop

In its most recent quarter, which ended April 30, GameStop posted sales of $1.378 billion. This was up from $1.277 billion reported in the same quarter a year earlier. GameStop is a physical retailer with thousands of locations worldwide. As a result, it was devastated at the start of the pandemic when it had to temporarily close its doors to customers. It has rebounded steadily, supported by a resilient gaming market.

This latest news of a decline is definitely bad news. Of GameStop’s last quarterly sales, nearly $674 million came from hardware and accessories, about $484 million from software, and about $221 million from collectibles. Interestingly, hardware and accessories were down $704 million in the same quarter a year earlier.

Unfortunately, this has been a long-standing negative trend for GameStop. Manufacturers offer physical and digital copies mostly at the same prices. Therefore, the consumer has more of an incentive to buy a digital copy which they can download and start playing in minutes rather than going to the nearest GameStop to purchase a physical version.

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Even before the coronavirus outbreak, this trend was causing GameStop’s sales to plummet. Between 2013 and 2019, revenues grew from $8.9 billion to $8.3 billion. That said, some gamers prefer physical copies of games because they can sell them when they’re done playing. Likewise, they can buy second-hand copies at lower prices than a digital download. However, this segment of gamers was not enough to stem the tide of losses at GameStop.

GameStop’s turnaround is uncertain

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GameStop reported net income losses for several years. The company is taking steps to turn the tide, but it’s unclear whether these will materialize in the long term. What remains stubbornly persistent are its high expenses coupled with declining revenues. The trend of moving to digital copies is unlikely to reverse as it is also more cost effective for manufacturers (no need to spend money on packaging and shipping).

In this context, GameStop’s prospects do not look good. If you own GameStop stock, now seems like a great time to sell. If you are thinking of buying, it would be prudent to steer clear.

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