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Tech, Collectibles Drive GameStop Q2 Profit

25 Aug, 2016 By: Erik Gruenwedel

Facing industry-wide declines in video game hardware and software sales, GameStop eyes tech and collectible categories filling the void — to the bottom line.

The nation’s largest video game retailer generated second-quarter (ended July 30) net income of $27.9 million, compared with net income of $25.3 million during the previous-year period. Notably, the increase in profit came despite an 8% drop in revenue to $1.63 billion.

"The continued growth and increased profit contribution of our non-physical gaming businesses drove our results,” said CEO Paul Raines. “These new businesses offset a tough quarter for video gaming and prove that our diversification strategy is succeeding."

Indeed, hardware (consoles) sales dropped 33% and software fell 18% due to weaker innovation, according to GameStop. The top five games launched in Q2 of 2015 generated $253 million in revenue, while the top five games launched in Q2 this year sold $194 million — a 23% decrease.

With The NPD group reporting 31% and 12.5% declines, respectively, in hardware and software in the quarter, GameStop upped collectibles revenue 120% to $90 million, with consolidated gross margins at 37.9% — driven by sales of ThinkGeek.com, various Pokémon products, assorted "Five Nights at Freddy's" products and character pop vinyls from recently Warner Bros. movie Suicide Squad.

Collectibles include action figures, T-shirts, posters, trading cards and related memorabilia associated with movies, TV shows, games and popular culture. GameStop opened 10 collectibles stores worldwide, bringing the store count to 47, including four ThinkGeek locations, in the United States.

“‘Game of Thrones’ will come out and people come into our stores and buy 50 to 100 products for ‘Game of Thrones’ parties to launch the premiere. And so the culture and people's behavior is actually starting to change because we've made the product so accessible,” said Mike Hogan, EVP of strategy and business development at GameStop.

Tech brands, which include the recent acquisition of 507 independently operated AT&T retail locations (1,424 stores total), generated operating earnings of $13.9 million, compared with $400,000 a year ago. Overall, the segment contributed 23.8% of the company's second-quarter operating earnings.

GameStop expects annual collectibles revenue from $450 million to $500 million, and tech brands revenue from $800 million to $850 million. The retailer is projecting to triple this year collectibles’ $27 million in operating income from last year.

In July, GameStop, via its GameTrust division and partnership with Insomniac Games, launched its first game, Song of the Deep. GameTrust has several new titles in development, including De-formers, set to launch this holiday season.

“We are already excited about the demand that we have seen for the recently launched Xbox One S No Man's Sky and Madden 2017,” said COO Tony Bartel.

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