M+E Connections

GameStop is seeing strong initial demand for the new Nintendo Switch hybrid video game console and portable system, but supplies are still not meeting demand and likely won’t be anytime soon, according to executives at the retailer.

The lack of adequate Switch hardware since its March 3 launch was one of several issues that GameStop faced in what proved to be “a more difficult year than we originally forecast,” CEO Paul Raines said on a March 23 earnings call. The retailer “encountered stiff headwinds as we completed the third year” of the current-generation video game console cycle that started with the Sony PlayStation 4 (PS4) and Microsoft Xbox One, he said.

GameStop shares were down 12.42% at $20.99 in early afternoon trading March 24, after it reported revenue for the fourth quarter (ended Jan. 28) fell 13.6% from a year earlier, to $3.05 billion, while comparable store sales tumbled 16.3% and profit slipped to $208.7 million ($2.04 a share) from $247.8 million ($2.36).

“We have had a very successful launch so far” for Switch, with “high attach rates of software, particularly” for Nintendo’s “The Legend of Zelda: Breath of the Wild” and “related add-ons,” Raines told analysts on the call. The Switch has “provided a dramatic lift in traffic in-store and has real potential to be Wii-like in its ability to expand the gaming category from core to broad audiences,” he said, referring to the hugely successful Wii console. Nintendo followed the Wii with the weak-selling Wii U.

Raines pointed to one reason for optimism: A recent published report that said Nintendo may double its Switch hardware production over the next 12 months. “For now, we continue to receive more allocation, strengthening what we believe is already leading market share” among all sellers of the new game system, he said.

But, as soon as additional units of the Switch arrive at GameStop stores, they’re sold out “within hours,” COO Tony Bartel said, predicting “we’re going to be chasing supply this entire year.” Consumers who buy the system are “picking up any game that they can” for it and GameStop is seeing “almost a one-to-one attach” rate for the Zelda title, he said, adding there’s “tremendous demand” for Switch, but “we just don’t know how high it is because every time we get it out in our stores, it’s literally gone” quickly.

GameStop, meanwhile, is “looking forward” to the March 28 release of the title “Has-Been Heroes” from the retailer’s GameTrust Games publishing label, Raines said. Versions of the game are being released for Switch, as well as PC, PS4 and Xbox One. GameTrust is also preparing to release the game “Deformers” for PC, PS4 and Xbox One in the next two weeks, Bartel said.

Other issues that hurt GameStop results in the fourth quarter included a slowdown in sales of new game titles compared to the prior year that led to most publishers starting to discount games “much earlier than previous years,” Raines said.

Despite the decline in physical game software sales, the “purchase intent for new consoles is high” among gamers, with “more than 50 percent of non-owners still planning to upgrade to a PS4 or Xbox One,” he said. Purchase intent for Switch and Microsoft’s coming “Project Scorpio” 4K game console that’s shipping this holiday season, meanwhile, are “at PS4 levels or higher,” he said. (https://www.mesaonline.org/2016/06/13/e3-microsoft-adds-4k-hdr-to-xbox-one/)

Despite the “cyclical declines” being seen in the game market, GameStop has “very strong cards to play” with Switch, Sony’s PlayStation (PS) VR virtual reality system for the PS4 and Scorpio, he said.

VR has been in “strong demand” at GameStop stores – and, like Switch, supplies have not been consistently satisfying demand, Bartel told analysts. New titles supporting PS VR, including Capcom’s “Resident Evil 7: Biohazard,” “create spikes in demand and we do believe the demand will continue to outstrip supply this year” for PS VR as a result, he said.

There are also, meanwhile, “several meaningful” technology and hardware releases planned for the third and fourth quarters of this year, including Apple’s next iPhone that CFO Robert Lloyd predicted will “likely drive increased spending in the second half.”

After telling investors in April that GameStop expected to achieve $700 million in 2019 operating profit, Lloyd said on the March 23 call that it “will now take contributions from the Switch and Scorpio launches for us to achieve that goal.”

Wedbush Securities analyst Michael Pachter predicted shares in the retailer will “trade at a compressed” earnings per share “multiple until GameStop slows the decline in its core” video game business. Switch “has the potential to improve the perception about the long-term trajectory of GameStop’s video game business, but we are less optimistic” about Scorpio, he said in a research note March 24.