One of the world’s largest video game retailers has 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 march. GameStop’s net sales declined 3 percent for the 52-week period ended Feb. 2, a decline that helped turn last year’s modest profit of $34.7 million into a significant operating loss of $673 million. In addition, the company expects sales to fall another 5 to 10 percent in the coming fiscal year.
GameStop’s massive loss is the largest ever reported by the company, and only the third annual loss since it emerged from FuncoLand’s business remains in 2000. GameStop last posted a loss in 2012, when it lost nearly $270 million, in part due to weak holiday sales towards the end of that era’s console generation.
But more than the amount, the reason behind the new loss could cause long-term concern among the retailer’s thousands of storefronts worldwide. While hardware sales were roughly flat and new software sales fell about 4 percent year over year, used software sales fell nearly 12 percent for the year, continuing a year-long decline.
GameStop has always relied on the high margins of buying low and selling high of used game discs to keep a low margin business afloat. But the rise of downloadable games, which cannot be resold, has largely taken the wind out of their sails. “We continue to see declines in used software, due to the decline in sales of new physical games and increasing demand for products offered digitally,” GameStop COO & CFO Robert Lloyd said in a earnings call.
It’s a game we’ve seen before when digital distribution is finally reaching 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 music leader. Book-based retailer Borders closed in 2011, closing hundreds of stores as online and e-book competition intensified.
Gaming retailers may reach a similar tipping point as players increasingly download only the games and content they want. EA has been making most of its money from digital sales since 2013 and plans to be a “100 percent digital company” even longer. And in 2017, Activision revealed that a majority of early console sales for Lot 2 came from digital downloads and not from retail discs, marking a “new high” for the company.
GameStop is even seeing some growth in its own sales of digital goods in its stores. That category rose 16.5 percent, “driven by continued strength in digital currencies to play free games like” Fortnite and through downloadable content,” Lloyd said. However, Sony’s recent decision to stop selling digital game codes in stores could hurt that in the future.
In terms of physical goods, the only real bright spot for GameStop last year was in collectibles. That portion of the company grew more than 11 percent this year, making the company’s 2015 purchase of nerdy collectibles ThinkGeek seem somewhat prescient.
The loss is the latest bad sign for GameStop after the company announced it hadn’t found a buyer in January. Earlier that month, GameStop sold its Spring Mobile mobile phone retail business for $700 million in an effort to make the remaining business more attractive.
GameStop shares fell just over four percent in daily trading late Wednesday, after falling 13 percent earlier in the day. Its current share price of $9.78 is the company’s lowest since early 2005, and well below a 2013 peak of more than $56 per share.