One of the world’s biggest video game retailers just announced its worst annual performance in decades, raising renewed questions about the health of the physical video game market as downloadable games continue their ascent. Net sales for GameStop were down 3 percent for the 52-week period ending February 2, a slide that helped flip last year’s modest $34.7 million profit to a sizable $673 million operating loss. On top of that, the company expects sales to decline another 5 to 10 percent in the next fiscal year.
GameStop’s massive loss is the largest ever reported by the company, and only the third annual loss since it grew out of the corporate remains of FuncoLand in 2000. GameStop last posted a loss in 2012, when it lost nearly $270 million thanks in part to weak holiday sales near the end of that era’s console generation.
But more than the amount, the reason behind the new loss could be cause for long-term concern at the retailer’s thousands of worldwide storefronts. While hardware sales were roughly flat and new software sales fell about 4 percent year over year, pre-owned software sales cratered nearly 12 percent for the year, continuing a years-long slide.
GameStop has always relied on the high margins of buying low and selling high on used game discs to buoy an otherwise low-margin business. But the rise of downloadable games, which can’t be resold, has taken the wind out of those sails to a large extent. “We continue to see declines in pre-owned software, reflecting the decline in sales of new physical games and the increasing demand for digitally offered products,” GameStop COO & CFO Robert Lloyd said in an earnings call.
It’s a play we’ve seen before when digital distribution finally reaches a tipping point that makes previously strong brick-and-mortar businesses seem largely irrelevant. Tower Records filed for bankruptcy in 2006 after decades as a market leader in music. Book-based retailer Borders shut down in 2011, liquidating hundreds of stores as online and e-book competition grew.
Gaming retailers may be hitting a similar tipping point as players increasingly just download the games and content they want. EA has been making a majority of its money from digital sales since 2013 and has been planning to become a “100 percent digital company” for even longer than that. And in 2017, Activision revealed that a majority of early console sales for Destiny 2 came from digital downloads and not retail discs, setting “a new high-water mark” for the company.
GameStop is actually seeing some growth of its own selling of digital goods in its stores. That category was up 16.5 percent, “driven by continued strength in digital currency for free to play games like Fortnite and by downloadable content,” Lloyd said. Sony’s recent decision to stop selling digital game codes in retail stores may harm that going forward, though.
As far as physical goods, the only real bright spot for GameStop last year was in collectibles. That area of the business grew over 11 percent for the year, making the company’s 2015 purchase of nerdy collectible store ThinkGeek look somewhat prescient.
The loss is the latest bad sign for GameStop after the company announced it had failed to find a buyer in January. Earlier that month, GameStop had sold its Spring Mobile cell phone retail division for $700 million in an attempt to make the remaining company more appealing.
GameStop stock was down just over four percent in daily trading late Wednesday after plummeting 13 percent earlier in the day. The current $9.78 share price is the company’s lowest since early 2005, and well below a 2013 peak of over $56 a share.
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