GameStop faced a plethora of challenges in 2016: deep discounting by rivals, sluggish sales of ageing consoles, games and accessories, and pressure on store traffic as more customers download games digitally. Nintendo Switch has provided another headache: the new console continues to sell out, meaning management can't gauge demand for it.
Sales of hardware, software, pre-owned goods and accessories all fell in 2016, sending the company's comparable revenues down 11% and operating profits down 7%. "The physical gaming category is in a...cyclical decline before a new set of technologies," said CEO Paul Raines, pointing to virtual-reality rigs from PlayStation and Facebook-owned Oculus, as well as Microsoft's Xbox Scorpio, an enhanced version of its Xbox One console.
Digital sales rose, but the real standouts were GameStop's 1,500-odd Tech Brands stores - which sell Apple and AT&T products and services - and its 86 collectibles outlets, which stock toys, apparel and other licensed products. Both segments grew sales by more than 50%. Moreover, management expects collectibles, buoyed by the phenomenal popularity of Pokémon Go last year, to become a billion-dollar business by the end of 2019.
Given the company's weak results, GameStop's executives made sure to trumpet Nintendo Switch's stellar prospects on their earnings call. The console's launch was "very successful" and sparked a "dramatic lift" in store traffic, said CEO Paul Raines. Moreover, the average buyer has picked up between five and six games - particularly The Legend of Zelda: Breath of the Wild - and other add-ons. GameStop also exhausted its Switch stock within two days of release, and the console has repeatedly sold out within hours of replenishment.
The Switch's innovative design - it can 'switch' from a home console to a mobile gaming device without interrupting play - and active playstyle give it "tremendous" potential to convert non-gamers and expand the gaming market, Raines argued. However, strong interest means GameStop will likely be "chasing supply" throughout 2017, warned COO Tony Bartel. And the platform's popularity makes it tough to judge its potential. "We just don't know how high (the demand) is because every time we get it out in our stores it's literally gone," said Bartel.
Fast-changing retail and gaming markets, dated hardware, disappointing games and pricing pressure have given GameStop plenty to worry about. A console too hot to keep in stock - that should be a welcome reprieve.