GameStop’s new CEO, George Sherman, says the company “is in a tough place” and “needs to make some changes” to keep up with the video game industry.
GameStop’s total global sales dropped 14.3% to $1.3 billion in the second quarter, the company reported Tuesday. Hardware declined 41.1%, while software sales dropped 5.3%, as Nintendo Switch titles grew. The net loss was $415.3 million.
“We’re at the end of the console cycle,” Sherman told CNN Business Wednesday. “Gaming as an industry could not be stronger … it’s us that needs to pivot. It’s GameStop that needs to make some changes.”
Although the video game industry as a whole is growing, physical sales of video games, one of GameStop’s mainstays, have fallen over the past ten years, according to the NPD Group, a market research company. Video game console sales of the PlayStation 4 and Xbox One X are also drying up, as Sony (SNE) and Microsoft (MSFT) tease new consoles for next year.
As part of its cost-saving plan, GameStop said it will close 180 to 200 underperforming stores by the end of this fiscal year, which ends in February 2020.
“That’s part of brick-and-mortar retail today,” said Sherman. “Part of being a good retailer is you’re not trying to hold onto every store.”
The company also had two rounds of layoffs in August, one of which eliminated 120 staff positions and fired at least six journalists from its gaming publication, “Game Informer.” Sherman said these were planned changes.
“If you look at the trend of sales over the last several years, selling general administrative costs didn’t move with sales. So we had a cost structure we had to address,” he said. “We found [it] unpleasant but we needed to do it.”
The company said it has no further plans for layoffs.
Before assuming the role in April of GameStop’s CEO, the company’s fifth leader since November 2017, Sherman worked in executive roles at retailers Best Buy (BBY), Target (TGT) and Home Depot (HD). He said his past experiences give him “a good view of how things are done at the basic level” and “best practices that can be deployed here.”
The company’s challenge is maintaining a steady stream of traffic in its stores.
“The gaming business is a bit of a hits business. We get traffic in our stores when there’s a new release,” said Sherman. “We’re trying new store formats like competitive gaming inside stores…that’s not seasonal. That’s not driven by releases.”
GameStop is going to lean into turning its stores into a social and cultural “hub for gaming,” he said. That could mean bringing gamers into the stores to compete together in esports.
Analysts appear to be optimistic that GameStop can weather this storm.
“GameStop’s fate has long been tied to the alleged demise of console gaming,” said Joost van Dreunen, co-founder of SuperData, a Nielsen company that analyzes the video game industry. “I have no doubt that Microsoft, Sony and Nintendo continue to look to GameStop as an integral part of their marketing and sales strategy over the next few years.”
Joe Feldman, a senior managing director of research and analyst with brokerage firm Telsey Advisory Group, points out that as video games improve their graphics and 8K resolution games are introduced, the digital file sizes will be so massive that physical copies will be preferable.
Games for the next generation of consoles “will be amazing, but also very large in terms of memory, causing downloads to take a long time and storage capacity could fill quickly,” he said.
GameStop predominantly relies on selling physical copies of video games, which made up 22.2% of its sales in the the most recent quarter. The company could benefit if physical copies become more convenient to use than digital copies.
But technology is a double-edged sword for GameStop. With further advances, 5G and cloud streaming could make streaming video games through the cloud more viable. That could spell trouble for physical hardware — and, by extension, GameStop.
For now, Sherman said GameStop will monitor cloud gaming, which is still a small fraction of the industry.
“We make no bones about it, the next three to four quarters from a sales standpoint will be a difficult one [sic], as that is the very end of the console cycle,” said Sherman. “But we’re bullish on a rebound.”