GameStop shares tank despite earnings beat

Key Points
  • GameStop posted an earnings beat on a 3.8 percent increase in net growth.
  • The company will look to new business including collectibles and telecommunications to continue its growth.
  • CEO Paul Raines says the video game business is cyclical and these new ventures should help offset slow sales periods.
GameStop CEO: Bullish and optimistic about our future
GameStop CEO: Bullish and optimistic about our future

Shares of GameStop tanked in premarket trading Friday, a day after its earnings statement exceeded expectations.

The stock was down 8 percent shortly before the opening bell.

On Thursday, the company reported 3.8 percent net growth in the first quarter on the back of Nintendo Switch hardware sales and said established store sales increased 2.3 percent, despite Wall Street expectations that GameStop would post a decrease in sales.

So why the selloff?

For one, GameStop's net income decreased from $65.8 million in the year-ago quarter to $59 million. Also, Wall Street seems worried about the retailer's future guidance and delays of one popular game.

"While Q1 results exceeded expectations, management reaffirmed the original FY17 non-GAAP EPS guidance of $3.10-$3.40 and same-store sales -5.0% to flat Y/Y," Baird analysts said in a note Friday.

"Strong Switch sales through the rest of the year could provide a possible upside opportunity, although uncertainty around unit allocations from Nintendo limits visibility into 2H17 as console demand continues to outpace supply, along with a fluid release schedule."

Baird also pointed to a delay of the highly anticipated game "Red Dead 2" as a potential risk to GameStop's sales. New software sales declined 8.2 percent during the quarter.

GameStop thinks it has a plan to increase profitability moving forward.

"We've introduced new businesses into our portfolio," CEO Paul Raines said Friday on CNBC's "Squawk Box." "Collectibles is a new business. There's a lot of profitability that we're bringing into the business." GameStop said collectibles sales increased 39.1 percent to $114.5 million during the quarter.

Raines said a 93 percent increase in GameStop's omnichannel sales shows the company doesn't need as many dedicated locations to selling games as it once did.

"We're got a tremendous omnichannel experience you can buy online, pick it up in store," Raines said. "You can order it from home and have it shipped to a store. We have all kinds of ways to help you on ordering a product."

Raines said investors can expect GameStop to continue to move away from stores that are dedicated to selling games as it shifts its focus to telecommunications stores and collectible stores, such as the GameStop ThinkGeek store in New York City.