GameStop (NYSE:GME) just added an exclamation point to an argument made by activist investor Michael Burry that there will be no catalyst for growth for the video game retailer until the 2020 to 2021 console upgrade cycle begins.

However, its second-quarter earnings report also seemingly negated Burry's second assertion about the company -- that it should immediately begin buying back $237 million worth of stock to inflate its earnings per share. GameStop's top and bottom-lines results were so much worse than analysts expected that the video game retailer just might want to preserve its cash for the leaner times to come.

A teenager playing online video games on a desktop computer

Online gaming is causing GameStop's business to wither away. Image source: Getty Images.

Bad news all around

GameStop reported revenue of $1.29 billion, 14.3% below the $1.50 billion it recorded in the year-ago period and also short of analysts' consensus prediction of $1.34 billion. Losses also widened considerably, going from $25 million ($0.24 per share) last year to $415 million ($4.15 per share) this time around. A large chunk of that was due to a goodwill writedown, but even on an adjusted basis, the $0.32 per share loss was far worse than the $0.21 per share loss Wall Street anticipated.

That disappointing performance led management to revise its full-year outlook downward. It now expects comparable-store sales will tumble by low-teen percentages for the year, compared to its previous forecast of a drop of 5% to 10%. GameStop will also reduce its capital expenditures from their previously planned $100 million to $110 million range to a $90 million to $95 million range, as it plans to close as many as 200 underperforming stores this year. Although management says an amazing 95% of its 5,700 stores worldwide are profitable, it will "de-densify" the chain to increase their profitability even further. 

CFO James Bell told analysts on the earnings conference call that while the announced closures were opportunistic, "we are applying a more definitive analytic approach, including profit levels and sales transferability that we expect will yield a much larger tranche of closures over the coming 12 months to 24 months." That means investors can expect a dramatic increase in store closings to come.

Share counts will not fall appreciably

Management also said it will engage in prudent buybacks as the occasion arises. However, it's not going to smash its piggy bank to splurge on its stock, even though after Tuesday's earnings report, GameStop shares are down almost 13% as of this writing, trading under $4.50 per share.

After GameStop eliminated its dividend in June and implemented cost-saving strategies that it now asserts can save it $200 million a year -- twice what it previously expected -- a big stock buyback that does nothing to help the underlying business isn't going to win back investors.

At least collectibles continue to perform

Lest investors think the report contained nothing but bad news, GameStop's collectibles business continues to grow -- though it was the only segment that posted gains in the quarter. Collectibles sales rose 21.2% to $171 million, making it a larger business than video game accessories, where revenues dropped 9.5% to just under $170 million. Year to date, accessories still edge out collectibles in size, but only by $40 million, meaning if trends continue, the latter will be a bigger business for the full fiscal year and may even surpass hardware, which suffered another weak quarter.

Hardware sales plunged 41.1% in the second quarter and now account for just 13.7% of total revenue. The current console cycle is coming to an end, which would naturally cause sales to drop, but compounding the problem for GameStop, Bell said, is that Microsoft, Sony, Nintendo, and other manufacturers "confirmed the launch [of new machines] earlier than they have in the past. We anticipate that this will lead to much lighter title slate through the rest of 2019 and early 2020."

So although software sales were down 4% due in part to the lack of a hot new title like Red Dead Redemption 2 -- the biggest release in 2018 -- matters will only get worse as developers prepare for the new consoles. And revenues from the chain's largest segment, used video games, tumbled 17.5% to $373 million.

Whistling past the graveyard

CEO George Sherman remains convinced that he and his team can turn GameStop around via the four pillars of the "compelling new strategic vision" that was launched after he took over the top spot earlier this year. 

However, when even a new round of console upgrades might not deliver the hoped-for results, it just might be game over for GameStop.