GAME issues profit warning as Switch stock dries up

Updated: GAME says it will deliver profits this year that are 'substantially below previous expectations'.

The company cites a continued softness in its core Xbox and PlayStation business, and a disappointing level of supply of Nintendo Switch hardware. As a result, its share price has taken a severe drop of almost 30%, taking it to 23.25p, the lowest level it has been so far.

GAME delivered disappointing results for the first half of its financial year. Profits fell almost 27%, with the retailer citing a lack of major releases and disappointing performance of key games, including Call of Duty: Infinite Warfare. However, it was bullish about the second half of the year thanks to the early performance of Nintendo Switch.

But with Switch stock failing to materialise, and PlayStation 4 and Xbox One sales continuing to slowdown, GAME has not seen the improvement it had hoped for. The firm says it still expects to see Group GTV (Gross Transaction Value) growth of 5 to 6% in its second half, but that is also below what was expected.

"In our half year results announcement on 29 March 2017, we stated that we expected the challenging trading environment faced in the UK retail market in the first half to continue into the second half of the financial year," the company said in its update. "We also stated that we anticipated an overall positive sales performance in the second half of the year, underpinned by the successful launch and continued consumer demand for the Nintendo Switch console, as well as further progress across our other UK sales initiatives, although this positive momentum would be highly dependent on stock availability of Nintendo Switch.  

"Consumer demand for Nintendo Switch has been, and remains, very strong, however the level of supply to the UK market has been lower than expected. These lower levels, combined with the continued softness in our core Xbox and PlayStation markets, have impacted sales. The Group still expects to deliver positive Group GTV2 growth in the second half of approximately 5 to 6%, however this is below our previous expectation.  As a result, we now expect Adjusted EBITDA for the full year to be substantially below previous expectations."

The company has attempted to strike a note of optimism in its update. It believes Nintendo Switch will now benefit the firm in its next financial year as more stock arrives. Its next financial year, which will end in July 2018, will also see growth in the UK and Spanish software markets (the two territories in which GAME operates), the retailer believes. This will be boosted by the likes of Red Dead Redemption 2 and a general stronger line-up for Xbox One and PS4. Xbox One X will also arrive during that financial year.  

GAME added: "Looking forward, we continue to be encouraged by the positive consumer reception of Nintendo Switch in both of our geographic markets. This demand is helping to strengthen the outlook for our next financial year and we expect to benefit from both greater Nintendo Switch hardware supply as well as the strong interest that is building for Microsoft's new Xbox One X console.  Furthermore, we expect to see growth returning to the UK and Spanish software markets in our next financial year, benefiting from a stronger line up of new releases on Xbox, PlayStation and Nintendo.

"The Board is pleased with the progress achieved on the Group's key growth initiatives. In particular, we continue to be encouraged by the initial performance of our new in-store gaming arenas, now trading out of 12 locations, under the Belong banner. As a result, the Group is exploring new funding arrangements to enable an acceleration of the roll-out of this new initiative.

"The Group continues to actively implement its UK action plan, encompassing improved supplier arrangements, enhancements to the customer experience, further operational progress including cost reduction programmes and disciplined cash management. Significant efforts are being made on reducing fixed and variable costs across the Group's UK retail footprint, where we have over 220 lease events to manage by the end of 2018."  

Despite GAME's confidence, investors weren't so sure, with stock falling for both GAME and GameStop post-E3.