GameStop Talks Switch Supply Problems In 2017, Scorpio Demand, And More

Update: GameStop's post-earnings conference call has concluded, and there was a good deal of talk about subjects like Nintendo Switch and Project Scorpio. We've broken out many of the interesting tidbits for you below.

Switch

• Demand for Switch is "incredibly strong" and GameStop expects supply to be an issue for the entire year.
• Its "multiple replenishments" of Switch stock have sold out within hours.
• The attach rate of Switch and The Legend of Zelda: Breath of the Wild is almost 1:1.
• Counting both games and accessories, the attach rate for Switch has been over 5.5 per unit sold. As a result, it expects to see an "attractive share" of future Switch allocations.
• Purchase intent for Switch and Project Scorpio is "at PS4 levels or higher."
• GameStop has had a "very successful launch so far" for Switch, which has "real potential to be Wii-like in its ability to expand the category from core to broad audiences."

Scorpio

• GameStop executives recently visited a studio and saw excitement for PlayStation VR. This leads the retailer to believe it puts pressure on Microsoft to answer with its own VR solution, which in turn bodes well for sales of a VR-capable Scorpio.
• The retailer sees Scorpio as a "very gaming-centric, very powerful unit" that will see "great games" made for it.
• With PlayStation VR selling out, GameStop CEO Tony Bartel says, "You have to believe others will want to get into that game. So that's one of the reasons we're bullish [on Scorpio]."

VR

• VR is in "strong demand," spikes of which are driven by games like Resident Evil 7.
• GameStop's limited allocation typically sells out in "less than a week," and it believes demand will continue to outpace supply during the upcoming year.

Business

• For the upcoming year, GameStop expects hardware sales to be "roughly flat" as it doesn't know if Switch and Scorpio sales will be enough to "offset the expected decline in hardware sales resulting from recent trends and the decline in average hardware price point."
• The store expects to see 40% of its operating earnings come from things other than physical games, and it's still on track to hit its goal of 50% by the end of 2019.
• GameStop plans to "expand its space" for PC and indie games, as well as "linear in-game content" like GTA Online Shark cash and Madden/FIFA Ultimate Team.
• Excluding Pokemon, the top eight physical games declined over 40% from October through December compared with 2015 (according to NPD data). This led to games being discounted more quickly than usual.
• The 2016 holiday season was "more promotional than prior ones," resulting in average hardware prices being down 15 percent compared to previous years.
• Console upgrades (likely referring to Xbox One S and PS4 Pro) were "not as meaningful" as GameStop had hoped.
• GameStop believes 2016's physical game decline was "not caused solely by acceleration in full game downloads."
• About 35 new collectibles-focused stores and 65 Technology Brand stores will be opened this coming year, but overall it will reduce 2-3% of its total stores worldwide.

The original story follows.

GameStop today reported its earnings for both its fourth fiscal quarter and the fiscal year that ended on January 28, two periods that saw significant declines in sales.

During the fourth quarter, total global sales were down 13.6% year-over-year to $3.05 billion. The company blames its slow holiday sales period on "weak sales of certain AAA titles and aggressive console promotions by other retailers on Thanksgiving Day and Black Friday," likely in reference to the $250-and-extra-freebie offers at places like Target and Best Buy. New hardware sales were down 29.1% for the quarter. Software sales also took a hit, both new (19.3%) and pre-owned (6.7%). GameStop also lamented weaker-than-expected sales during its last earnings report.

Two areas that did see growth during the quarter were collectibles (up 27.8% to $212.4 million) and its Technology Brand business (up 43.9% to $256 million). The latter is attributed to store growth, while collectibles were "driven by strong sales of Pokemon-related toys and apparel."

For the full year, sales were down 8.1% to $8.61 billion. However, 35.9% of the business's adjusted operating earnings came from non-physical gaming businesses. That's up from 24.5% during fiscal 2015.

"GameStop's transformation continued to take hold in 2016, as our non-gaming businesses drove gross margin expansion and significantly contributed to our profits," CEO Paul Raines said in a press release. "Meanwhile, the video game category was weak, particularly in the back half of 2016, as the console cycle ages. Looking at 2017, Technology Brands and Collectibles are expected to generate another year of strong growth, and new hardware innovation in the video game category looks promising."

GameStop's stock has been on the decline as of late, and it appears to be performing poorly in after-hours trading following the release of today's earnings. After closing out the day at $23.96 (down from a recent high of $26.52 in February), it now sits as $21.92. Gross margins for the company also reached a record high.

The retailer has a conference call with investors scheduled for today at 2 PM PT. We'll report back with anything of note it shares.