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Is GameStop Played Out?

GameStop, once the most dominant player in the video game industry, may be on the verge of defeat. In the face of disappointing recent earnings, some investors wonder whether the retailer is crashing like a Super Mario Kart.

Last week, GameStop said its fourth-quarter sales fell 7.6% to $3.1 billion compared to the same period a year earlier. The company revenue from accessories, including controllers and headsets, grew 18.8%, but sales on pre-owned video games and hardware fell 21.3%.

Meanwhile, GameStop’s quarterly loss widened to $187.7 million from $105.9 million.

GameStop did not respond to a request by Fortune for comment.

Challenges Abound

A shopping mall staple, GameStop was once the go-to for top games and hardware, but that’s no longer the case. Because of popular digital titles like Fortnite, gamers now have more options to choose from, including buying games through their consoles and smartphones.

Also, with a few mouse clicks, Amazon and Walmart conveniently ship consoles, including the Nintendo Switch and Xbox One, to gamers within days.

At one point, GameStop hoped collectibles could revive its struggling business. It began revamping its stores by dedicating more floor space to figurines, T-shirts, and other game-related products.

The strategy didn’t work, analysts say.

GameStop then tried its hand at operating technology brand stores, like Apple-focused retailer Simply Mac and mobile seller Spring Mobile. But those attempts were unsuccessful.

Wedbush analyst Michael Pachter told Fortune that the risks GameStop took to diversify over four years largely failed.

He said GameStop spent all of its free cash flow between 2014 and 2018 “trying to make tech brands and collectibles work.” According to Pachter, GameStop’s tech brands business generated 50% of its total investment in the divsion and collectibles is behind by 30% of its total investment in that division.

Meanwhile, GameStop’s core business, which includes video games and game-related hardware sales, has been in free fall. In its fiscal year 2019 guidance on Tuesday, GameStop said it expected sales to drop up to 10%.

GameStop’s woes aren’t as unique, as many brick-and-mortar retailers are trying to find their footing in an increasingly competitive digital landscape. But some have found a footing.

Rivals, including Best Buy and Target, have thrived by making online investments and by improving the ability of online shoppers to pick up their orders in stores, in an effort to fight purely online retailers. Others, like Toys ‘R Us and the soon-to-be-defunct Payless ShoeSource, have failed.

GameStop, at least so far, has similarly struggled.

Last year, GameStop flirted with putting its business up for sale. Ultimately, in January the company announced it couldn’t find a suitable buyer—even after selling Spring Mobile for $700 million— and said it would try fixing its problems.

Shareholders took notice. A year ago, the company’s stock was around $13 a share compared with $9.96 today. Four years ago, its shares were at $40 to $50.

Opportunities Ahead or Game Over?

In a note to investors this week, Baird Equity Research analyst Colin Sebastian said GameStop’s future doesn’t appear promising. The retailer has “cloudy near-term and longer-term outlooks” that “warrant ongoing caution,” he said.

GameStop acknowledges its woes but believes it can bounce back. GameStop COO and CFO Rob Lloyd said in a statement he hopes the retailer can “leverage our powerful brand” to drive growth. Similarly, GameStop’s executive chairman Dan DeMatteo added that the company’s recent hiring of longtime retail executive George Sherman as CEO could help spark profits.

DeMatteo said one initiative will include “an intense focus” on the core gaming business and collectibles. Additionally, GameStop said it would also retire $350 million in debt and cut $100 million in costs.

Sebastian, the Baird Equity analyst, called those moves “positive.” He’s also “encouraged” by GameStop’s plan to reduce costs.

In other words, they think it’s not game over—yet.

Pachter, the Wedbush analyst, agrees. He told Fortune that as long as game companies sell consoles and physical game discs, GameStop, at worst, could still have “several years to consolidate stores and keep their costs in line with revenues.”

His comments, however, came after Google announced a new service, called Stadia, last month that will allow players to access popular video game titles through streaming. Stadia, and a planned rival from Apple, could eliminate the need for game players to buy physical discs and consoles.

Those services, slated for release later this year, are simply concepts for now. While Pachter, the Wedbush analyst, believes a digital-only gaming world threatens GameStop, he also thinks it’s “unlikely” the industry and consumers will abandon physical discs anytime soon.

Despite GameStop’s all-in approach, Pachter argues that the retailer’s best move might be controversial and unpopular: moving away from the public markets.

“They really can’t do anything other than [to] go private, slash costs and try to milk the franchise,” the analyst said.