GameStop (GME) shares were being punished Friday, falling more than 6%, following the release of the video game retailer's latest quarterly results.
The struggles of the gaming industry have been apparent for weeks as the monthly industry checks have shown declining sales and revenue.
Gamers spent $509.5 million on video game hardware and software-related products in the U.S. in April, a 15% year-over-year decline from the $598.1 million they spent last year. Hardware sales fell 23% to $142.1 million from $183.7 million, while software sales declined 21% to $203.9 million from $256.7 million.
Despite the industry downturn, GameStop's in-line first-quarter results reflect the fact that the company is growing its non-gaming revenues, according to a Baird note Friday.
"While the company's long-term position remains under scrutiny given the inevitable shift of media consumption online, we believe there is option value in the company's digital initiatives, which are now beginning to bear fruit," the note read.
This was a sentiment that was echoed by GameStop in its earnings release.
"We exceeded our first-quarter same-store sales and EPS guidance in a challenging retail environment due to the outperformance of our non-physical gaming businesses (technology brands, collectibles, digital)," CEO Paul Raines said in a statement.
Despite the overall positive outlook Baird has on GameStop, the firm lowered the company's price target to $42 from $46.
The company reported revenue of $1.97 billion for the quarter, a 4% year-over-year decline that matched analyst expectations for the period. The revenue match was driven mainly by the outperformance of the company's collectibles, digital receipts and accessories segments -- which rose 261%, 19%, and 8%, respectively, year over year.
However, same-store sales during the period fell by 6.2% year over year vs. the consensus 7.7% decline expectations, while the company also guided current-quarter comps to fall between 7% and 9%. That decline was due mainly to the softening of the retailer's main product, video games.
"Similar to the traditional entertainment industry, the video game business is hit-driven with limited visibility into the performance of many new releases. As such, there is inconsistency in the performance of video game publishers and a degree of lumpiness in quarterly results," said Baird's note. "Moreover, there can be significant swings in profitability depending on sales of key titles that required large sums of development spending."
The second quarter has historically been the slowest for new video game releases, Raines said in a Bloomberg interview. GameStop expects to earn between $0.23 and $0.30 per share in the second quarter, short of analysts' $0.33 per share expectations. But that gulf may not stand up once the final results are in, according to Raines.
"We're getting beat up a bit for our guidance. We tend to lowball our estimates," the CEO told Bloomberg.
While the spring/early summer season is usually soft for the video game industry, the fourth-quarter holiday season is usually the strongest. "The video game industry, similar to many consumer discretionary sectors, is dependent on holiday shopping and gift-giving to fund nearly 50% of annual revenues and a larger portion of profitability. We also note that the video game industry may be somewhat resistant to macro-induced consumer spending declines, but is clearly not immune given declines in sales during the last recession," analysts at Baird stated.
So while there is plenty to worry about in the video game industry, GameStop still has option value thanks to the company's ancillary segments beginning to bear fruit, according to Baird. As a result, the firm maintained its Outperform rating on the stock.