GameStop expects new PlayStation 4, Xbox One, and other hardware sales to drop 10% in 2016

GameStop doesn’t share Wall Street’s confidence about its outlook for fiscal 2016.

The world’s largest gaming-focused retailer announced that it expects to earn somewhere between $3.90 and $4.05 per share this year. Analysts were expecting something closer to $4.09. GameStop’s core business of selling video games and consoles is the big reason the company isn’t predicting big things for fiscal 2016. During a conference call with shareholders yesterday, GameStop’s executive team indicated that the retail outlet is expecting new hardware sales to drop around 10 percent year-over-year at its stores. The company also expects new game sales to decline between 5 percent and 10 percent. The worldwide gaming market is $99.3 billion annually, and GameStop has established an impressive share of that console section of that business. But it now looks appears that more of the total revenue spent has migrated from dedicated platforms like PlaySttion 4 and Xbox One to mobile and free-to-play games on PC.

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Both Sony and Microsoft seem to realize that they are selling consoles to a smaller overall audience, which is they are both reportedly working on upgrading their current systems. PlayStation 4 and Xbox One updates could enable those manufacturers to sell slightly improved, more expensive consoles to the same people who already own the current hardware. At the same time, Microsoft is pushing toward mobile and PC gaming with its Universal Windows Platform; and Sony announced its ForwardWorks PlaySation mobile gaming division yesterday.

Other reasons for GameStop’s predicted decline in sales comes from ongoing drag due to older platforms like the PlayStation 3 and Xbox 360 as well as a portable-gaming business that is fading out. You can likely credit smartphones and tablets with expediting the demise of both last-gen systems and handhelds, as people seem happy gaming on their iPads as opposed to buying an Xbox 360 on the cheap or a 3DS.

R.W. Baird analyst Colin Sebastian points out a few other reasons for drop in sales.

“GameStop’s Q1 and 2016 revenue and EPS forecasts were below consensus expectations,” Sebastian explained in a not to investors. “Although, in our view, that’s not a surprise given a light release slate in Q1, lower hardware price points, and expected ongoing headwinds in new console product sales.”

Sebastian was one of the few analysts to accurately predict GameStop’s guidance. While Wall Street’s average was high, he came in at $4, which is right in the meat of the retailer’s expectations.

The analyst’s point about lower hardware price points is key. Sony and Microsoft has dropped the price of their consoles repeatedly. Most recently, Microsoft clipped another $50 off the Xbox One (temporarily), so it was selling for $300. That means that even if Microsoft is selling the same number of systems, everyone in the chain is making a lot less money. This goes back to the possibility of new PS4 and Xbox One iterations. Upgraded systems that play the same games in better visual fidelity could sell at $400 to $500 again.

But despite the state of console gaming, Sebastian thinks that the real story of GameStop is outside of that space.

“While the focus of GameStop’s Q4 report will likely center on light guidance, we believe the ‘bigger picture’ is ongoing revenue and profit diversification, even as GameStop protects or even increases market share within video games,” he wrote.

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