GameStop circles the drain

Some years ago, I visited GameStop’s reprocessing plant in Dallas, and marveled at the scale and efficiency of the operation. I wrote that the place, where millions of games and electronics were turned around for resale “isn’t just a factory, it’s a mint”.

In those days, used games were a valid currency, with much of the revenue generated from trades going back into the purchase of new games. Of course, this still happens, but the rise of digital sales has significantly diminished their financial significance, and thereby the power of GameStop, America’s biggest physical games retailer.

In its most recent quarterly financial statement, the company posted sales of $1.2 billion (down 10% year-on-year from $1.4 billion) and a loss of more than $50 million.

This shortfall is actually a significant improvement on the same period last year, when the company dropped almost $160 million., but still, not great. Much of this is down to cost-cutting measures. Costs for the quarter were $345.7 million, or 27.9 percent of net sales for the period, compared to $452.2 million, or 32.8 percent. The company has been especially aggressive cutting back its operations in Europe, but it’s also been busy shutting down stores in the U.S.

Cauterize losses

Sales for the whole of last year – as reported in March, 2023 – were down 1.4 percent to $5.9 billion. The company lost $313 million, a slight improvement on its 2021 losses of more than $380 million. While sales of hardware were only marginally down, software sales were down almost 10 percent year-on-year, a catastrophic sign of how the market has shifted from solid goods, to virtual purchases.

Back at the start of the last decade, GameStop was regularly pulling in more than $9 billion a year in sales. Pre-pandemic, that number had fallen to just over $6 billion, and is further being eroded.

If you’ve visited a GameStop recently, you’ll see signs of the company’s efforts to cauterize the losses; relying heavily on the sale of dolls and collectibles. That part of the business is relatively healthy, but even there it’s not all plain sailing. Famously, its biggest supplier, Funko, dumped $30 million worth of toys in landfills, due to a shortfall in demand.

GameStop’s store count has dropped precipitously in recent years. In 2017, the company had 5,241 stores in the United States – now it has fewer than 3,000, with more closing at a regular clip.

Over the years, various attempts to diversify into digital retailing, mobile phones and, most recently, NFTs, have come to nothing.

Short squeeze

The company is probably best known for its “short squeeze” meme stock rise of 2021, in which its share price rose almost overnight from $4.42 to more than $80. Today, GameStop stock is trading at around $24, which almost certainly represents an inflatory view of the firm’s value.

A report today bewailed the fate of short-sellers who recognize this fact – as did those in 2021 – but are taking a hit, possibly as high as $320 million in investment losses in 2023 alone. The stock looks more resilient than the company’s actual outlook, given the parlous state of American retail chains, and the rapidity of gaming’s move towards primarily digital sales.

Perhaps most concerning is the merry-go-round among GameStop’s executives. CEO Matt Furlong was fired on the ame day the firm made its last financial statement, during which an earnings call was also canceled. Board chairman Ryan Cohen – best known for canny investments in meme stocks and for founding pet food e-retailer Chewy – was declared as executive chairman.

Furlong had been at the helm for only a year, having previously been in charge of the company’s Australian operations. Prior to that, he spent almost a decade at Amazon. Other previously former Amazon execs, who’d been brought in to settle the ship, have also found their way to the exits. As The Verge noted: “CFO Michael Recupero was fired in July, former COO Jenna Owens left after just seven months in the role, former CTO Matt Francis left in April, and former chief growth officer Elliott Wilke left in September.”

Poor management

GameStop also has an unenviable reputation for poor management of consumer-facing staff. As I reported in 2020, the company took “increasingly desperate measures to shore up sales” including “a tightening regime of strict sales targets and intrusive customer scripts, designed to extract as much value as possible from the company’s dwindling base”.

All this comes at a time when the shifting models of video game revenues are becoming evermore stark. Yesterday, GamesBeat reported on a survey from PwC that celebrated total U.S. video games and esports revenue in the U.S. at $54.1 billion in 2022, which is forecast to rise at a six percent annual rate over the next five years. But “traditional games are only 26.7 percent of total U.S. game and esports revenues now.”

PwC’s researcher CJ Bangah pointed out that a lot of former retail-based revenue is now going directly to producers. “From a corporate perspective, the companies have additional ways to monetize the consumer. I can make money on the gaming subscription, I can make money on video game ads. I can make money creating live experiences for them to interact with. I can make money doing a rev share with a major studio or Hollywood company. I can make money selling them hoodies, sweatshirts, hats, stress balls, you name it. From a console player experience or from a consumer experience.”

Cohen has a lot on his plate. Yahoo Finance editor-in-chief Brian Sozzi recently published a scathing open letter to the GameStop boss stating: “Do better. Way better. This is painful to watch.” He added: “The company remains structurally challenged because of increasing digital game downloads. You still have more than 4,000 retail stores open globally despite more people buying goods and services online. Your push into NFTs failed. Your move to open more fulfillment centers has arguably failed due to top line pressures that aren’t going away.:

He called for the company to diversify, so that it might attract non-gamers into stores. But apart from collectibles, all attempts to move on from retailing packaged games – and specifically used packaged games – have produced lackluster results.

All retail chains face challenges, as we recover from the pandemic, and as the world becomes more comfortable with online purchasing. But for a games retailer the problem is exacerbated by the digital nature of the product. And for GameStop, a catalog of errors going back years only makes things worse.