GameStop Diversifies Away From Games with Comic Books

GameStop (NYSE: GME) recently announced that it would start selling comic books in about 40 of its namesake and ThinkGeek stores in a test program. That represents a mere sliver of the video game retailer’s 7,216 stores, but it could help the company diversify away from its core gaming market, which is being disrupted by digital downloads.

In a statement, GameStop called the effort a “small launch” that would complement its growing collectibles business. It also stated that if the effort was successful, it would “consider rolling out” comic books in additional stores. Could this strategy help GameStop, which lost 65% of its market value over the past three years, finally recover?

Image source: GameStop.

Why GameStop thinks it can sell comics

GameStop expects its revenue to dip 2% to 5% this year as its comparable store sales post a flat to 5% decline. Digital downloads will continue to disrupt GameStop’s sales of new and used software, and unfavorable year-over-year comparisons to the launch of the Nintendo Switch last March will exacerbate the pain.

GameStop’s decision to sell mobile devices through its Technology Brands unit also didn’t work out, since consumers are now purchasing fewer smartphones. That was a costly mistake, since GameStop bought over 500 AT&T (NYSE: T) Mobility stores to support that business.

The only bright spot in GameStop’s business is its Collectibles unit, which sells gaming-related gifts and novelties. Its Collectibles revenue rose 24.4% annually to $142.2 million last quarter, and accounted for 7% of its top line. However, that growth couldn’t offset the weakness of GameStop’s other businesses, and its total revenue still tumbled 5.5% to $1.93 billion — missing estimates by $30 million.

GameStop believes that it can potentially grow its Collectible business with comic book sales. That might seem like a sound idea — Marvel and DC comic movies are generating big box office revenues, and there’s a significant overlap of gamers and comic book fans.

But it could also be a mistake

Unfortunately, many brick-and-mortar comic book shops went bankrupt in recent years, for several significant reasons. First, fewer readers collect comic books as valuable “collectibles” since the speculative bubble burst in the 1990s. Instead, more readers buy the digital versions or wait for storylines to be collected in trade paperbacks.

Image source: ThinkGeek.

Meanwhile, Disney‘s (NYSE: DIS) Marvel movies are hot, but its comic books aren’t. A series of PR controversies, disappointing and confusing storylines, and high-profile departures alienated many readers last year. DC Comics, which is now owned by AT&T, also undercut Marvel with cheaper comic books — but the move hurt retailers more than its main rival.

US comic sales in the direct market tumbled 10% in 2017 according to Diamond Distribution. Many comic book shops, squeezed by sluggish sales and rising wages, folded under the pressure. A Phoenix-based video game retailer, Desert Sky Games, notably halted sales of its comic books in late 2016, declaring that the market was in “free fall.”

Therefore GameStop could have a tough time selling comics at its stores. Yet during a recent interview with io9, GameStop consumer products chief Clint Walker said that selling comics in its stores was a “very natural adjacency,” and aligns with the retailer’s goal of “being the fast fashion in pop culture.” Walker also declared that the Marvel brand represented GameStop’s “biggest opportunity.”

The bottom line

I’m not saying that GameStop’s sales of comic books will flop. But the effort faces a tough uphill battle; traditional comic book stores are, ironically, dying out, even amid the surging popularity of comic book movies.

If GameStop plays its cards right, it might leverage the strength of its collectibles business to sell some comics. If it doesn’t work, this will merely join its list of odd experiments — which include a mobile gaming unit, which it sold last year, and a game publishing division, which has only published four games to date.

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Leo Sun owns shares of AT&T and Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool owns shares of GameStop and has the following options: short July 2018 $14 calls on GameStop. The Motley Fool has a disclosure policy.

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