Why GameStop Is Struggling Despite Strong Holiday Sales

GameStop Corp. (NYSE: GME) shares took a step back on Friday after the video game retailer issued an update for its 2017 holiday season. While video game sales were strong during this period, there was another update that some might have overlooked but that is causing shares to tumble.

According to GameStop, total global sales for the holiday period were $2.77 billion, a 10.6% increase compared to the 2016 holiday period. Also, total comparable store sales increased 11.8%, growing 13.7% in the United States and 7.9% internationally. Worldwide omnichannel sales increased 21.5%.

So it wasn’t such a bad year for video games. Dan Dematteo, interim CEO, added:

We are pleased with our sales performance during the important holiday period, driven by strength in the Nintendo Switch and Xbox One X, and a solid increase in our collectibles business. Our results demonstrate our customers’ enthusiastic response to new products and our ability to execute on strategically targeted promotions.

Although video games were strong, Technology Brands sales were not. This segment decreased 18.6%, driven by the limited availability of the iPhone X and changes made by AT&T to the compensation structure in 2017.

Looking at the 2017 full-year guidance, GameStop expects to see EPS toward the middle of its previously issued guidance range of $3.10 to $3.40. Also, the company expects full-year comparable store sales to increase between 4% and 6%.

However, this guidance excludes any year-end impairments and store closing charges, as well as any tax effects related to the recently enacted tax reform legislation. And this is where it gets dicey.

According to GameStop:

The Company expects to record non-cash impairment charges in the range of $350 million to $400 million, primarily related to its Technology Brands business. The impairment charges are primarily due to the negative impact of a longer upgrade cycle for new mobile devices and the changes made by AT&T to the compensation structure in 2017. The charges do not affect the Company’s cash flows or liquidity position.

In simpler terms, GameStop is losing out because consumers are not upgrading their phones as frequently as expected. Also worth pointing out is that GameStop is AT&T’s largest retail partner, owning more than 1,400 branded AT&T stores.

Shares of GameStop were last seen down about 11% at $17.75, with a consensus analyst price target of $20.95 and a 52-week range of $15.85 to $26.68.