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GameStop (GME) Closes 150 Stores As Videogame Industry Turns Digital

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The shift of consumer behavior has affected all retail industries. After some of the biggest retailers, such as J.C. Penny (JCP - Free Report) , Macy’s (M - Free Report) , Sears , and many others, reported nationwide store closures, GameStop (GME - Free Report) , the world’s largest video game retailer, is the next to join the list.

The Texas-based company reported its fourth quarter and fiscal 2016 earnings on Thursday. GameStop reported a positive earnings surprise for the fifth straight quarter; however, it also missed the sales estimates for the third consecutive quarter.

The company posted adjusted earnings of $2.38 per share, beating the Zacks Consensus Estimate of $2.29 per share. Revenues of $3.05 billion fell short of the Zacks Consensus Estimate of $3.12 billion. (For the complete report on GameStop’s Q4 earnings report, check out this Zacks article: GameStop (GME - Free Report) Tops Q4 Earnings, Stock Tumbles on Drab View)

GameStop’s stock tanked 16% on Friday and closed with the day at $20.70 per share after it announced that it plans to shutter at least 150 stores and expand nongaming business in earnings.

“As our non-gaming business drove gross margin expansion and significantly contributed to our profits,” said CEO Paul Raines. “Meanwhile, the video game category was weak, particularly in the back half of 2016, as the console cycle ages.”

The physical video game market was hit hard as a whole. GameStop’s competitor Best Buy (BBY - Free Report) also noted in its latest earnings report that video game sales were down. The decline in sales is most likely the result of consumers’ shift to buying games digitally.

Piper Jaffray (PJC - Free Report) analyst Michael Olson told TheStreet, “We’re seeing more games being sold digitally, as 25% of the games are sold as full-game downloaded.” He expects video game purchasing eventually will be “100% download and streaming,” with the increase of Internet speed and greater storage capacity on gaming consoles.

The moneymakers of GameStop also aren’t performing as well as it did. The new gaming consoles from Microsoft Corp. (MSFT - Free Report) and Nintendo Co. (NTDOY - Free Report) this year might not provide as much as they once did. The sales from reselling used games, which has better margins than for new games or hardware, have not been doing well either because of the rise of digital download that produces no physical disc to be swapped later.

For game publishers, the transformation to digital download is great news. The profit is more lucrative from full-game download than packaged games. Video game console makers also see this as a profitable trend for them. Both Microsoft and Sony (SNE - Free Report) introduced video game subscriptions, which allow users to pay a fee per month for unlimited access to games online.

While GameStop’s traditional moneymakers have been suffering, the company’s collectible store hopes to ligthen investors' worry. Their collectibles operation saw sales surge almost 60% in fiscal 2016 and is expected to increase another 30% to 40% for 2017. As of Jan 28, there are 86 collectible stores, and the company looks to open 35 more this year.

As the trend of full-download and e-commerce continues, GameStop’s legacy in video game brick-and-mortar business might soon be different.

GameStop is trading at $20.85 per share, up 0.72% on Monday. 

Interested in the video game industry? Check out the special edition of Zacks Friday Finish Line, where Editor Maddy Johnson and Content Writer Ryan McQueeney interview Andrew Chanin, the CEO of PureFunds, about investing in video games.

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