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Can GameStop Stay Relevant Through the Next-Gen Disruption?

Investors didn't find a lot to celebrate in GameStop's (NYSE: GME) latest earnings report. While the announcement showed progress at cutting costs and improving cash flow, it contained no hint of a sales growth rebound.

In a conference call with Wall Street analysts, CEO George Sherman and his team explained why they believe the retailer is on the right track heading into the next generation of video game consoles. Executives see financial flexibility as being just as important, since there are many risks ahead that could derail its growth hopes.

Let's look at a few highlights from that presentation.

Image source: Getty Images.

Shrinking the base

Our high sales transfer rate and expanded omnichannel capabilities will continue to allow us to accretively optimize market and trade area profitability.
-- Sherman

Most of the industry's defining trends today -- including the shift toward digital game purchasing, reduced in-person shopping, and a demand lull due to anticipation for new console launches -- are working against GameStop. Yet the management team believes it has the right strategy in place to navigate through that brutal selling environment.

It is busy closing underproductive stores, for example, having reduced its selling footprint by 10% year over year. The good news is that a large portion of the business from those locations transferred to neighboring stores or to the online channel this quarter. As a result, GameStop is gaining efficiency and reducing risk even as it shrinks its total addressable market.

There's a future for gaming disks

We are not debating the growth of digital gaming. ... We are simply saying that the life of physical game is here to stay for the foreseeable future.
-- Sherman

While conceding that digital gaming is the future of the industry, GameStop isn't ready to walk away from the buy-sell-trade platform that built its business. The next-gen consoles launching in coming weeks will accept physical disks, which don't require any bandwidth to deliver and can be in a customer's hands on the same day of purchase even through online ordering methods.

These products have other advantages, including the ability to trade, that might keep GameStop a relevant option for gamers well into this next generation of consoles. "Consumers like the physical aspects of games," Sherman noted. "They collect them and they add value as a trade-in."

Still a major player

When there is newness in video games, whether titles or consoles, we perform very well.
-- CFO Jim Bell

GameStop is on track to close as many as 450 stores in 2020 from its current base of around 5,000. The retailer made other cash-conserving moves since the start of the pandemic, including dramatically reducing its inventory ordering rate, slashing costs, and selling some corporate real estate. These trends all helped the business become more efficient, and solidly cash flow positive, despite major sales headwinds.

Those gains position the game retailer to take advantage of any surge in hardware and software demand once new consoles and game releases flood the market beginning in November. They also give executives flexibility to weather a prolonged sales growth downturn.

While both of those scenarios are possible, GameStop is aiming to be a major player in the rollout of hardware products like the PlayStation 5 and software releases like the latest in the Call of Duty franchise.

Seven years ago, the chain had a reasonable expectation to dominate industry sales of next-gen products while earning cash from a vibrant pre-owned market. This time around, its ambitions are more limited. "We will participate in the console cycle," Sherman said, "in a very significant way."

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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