Nintendo’s Holiday Slump

The holiday season has come and gone; the presents opened and the resolutions made. However, Nintendo’s holiday is still not over as they have just recently released their earnings for December 31, 2015. And while I have written about Nintendo bouncing back back in 2015, now it looks like the company had a lackluster Christmas. So let us dive back into their earnings to see what’s going on

Sales declined from ¥442,920 million as of December 31, 2014 to ¥425,664 million as of December 31, 2015. This is a stark difference from the prior quarter where sales increased 19.1 percent year-over-year. So what happened. The two biggest changes since the holiday season prior was the lack of hit titles and the loss of the amiibo advantage.

Game Sales

When you compare the sales of games between the two time periods, it’s black and white.The 2014 holiday season was packed with hit titles including: Mario Kart 8, selling 4.77 million, Pokemon Omega Ruby and Alpha Sapphire, selling 9.35 million and Super Smash Bros for Wii U and 3DS selling 3.39 million and 6.19 million respectively. In total, Nintendo had 12 games that sold over 1 million during 2014, 8 games on the 3DS and 4 games on the Wii U. However, during 2015, Nintendo only had 9 games that sold over 1 million, five on the 3DS and four on the Wii U. Of these titles, on Animal Crossing: Happy Home Designer and The Legend of Zelda: Triforce Heroes were new. Even still, Triforce Heroes only sold 1.08 million which is exceptionally weak for a Zelda title. Games like Splatoon and Super Mario Maker picked up the slack selling 4.06 million and 3.34 million respectively. Splatoon is really the break out hit as the title was not only Nintendo best selling game this holiday season, it is a brand new IP. When you consider that sales for Triforce Heroes and Happy Home Designer were poor (with the latter selling far below Animal Crossing: New Leaf), it’s clear that Nintendo would greatly benefit from investing in new IPs.

While much can be said for Nintendo’s 2014 holiday season, blame must also be given to the lackluster 2015 holiday season. Both Splatoon and Super Mario Maker were released in previous quarters. Titles like Mario Tennis: Ultra Smash and Animal Crossing: amiibo Festival did not sell over 1 million units as evidence by their absence on Nintendo supplemental information. Furthermore, Yo-Kai Watch failed to perform in the West. Although no official numbers have been released, VGChartz has estimated the game selling only 110,000 in the US. The poor sales of the title may be due to the lack of “weird adult” interest (the same in Japan) as an author on Forbes points out. Both StarFox Zero and a new entry in the Legend of Zelda series were set to launch this holiday seasons, and their absence has made its mark on Nintendo’s sales. Were these titles to launch in the holiday season, Nintendo’s fortunes may have differed, yet these titles were pushed back beyond the fourth quarter (of Nintendo’s fiscal year). Thus, Nintendo’s year-end results may be dreadful.

In terms of hardware sales, the 3DS’s performance was Nintendo’s downfall. While Wii U hardware sales were comparable to the prior fiscal year, 3DS sales decline from 13.7 million as of December 31, 2014 to 11.6 million as of December 31 2015. Many of spoken of the need for Nintendo to release a new console, no one has spoken for Nintendo releasing a new handheld. It’s well understood that Nintendo’s business has been driven, and at times, saved, by their handheld devices. Although 3DS sales are stronger than Wii U sales (which amounted to 3.06 million), a slump in their handheld market can have a big impact on the earnings of the company.

amiibo

When I spoke about Nintendo’s earnings in 2015, I noted that amiibo were a big reason for Nintendo’s success. amiibo’s were responsible for half of the improvement in sales as of September 30, 2014. Of course, amiibo were first released during the 3rd quarter of 2014 and, as such, sales of amiibo are included in both 2014 figures and 2015 figures.

Nevertheless, 9.9 million amiibo were shipped during the third quarter, the most shipped during any quarter. So why were earnings still low. During the second quarter of 2015, 6.4 million amiibo were shipped, yet amiibos were not released at the end of the second quarter of 2014. However, during the third quarter of 2014, 5.7 million amiibo were shipped as compared to 9.9 million mentioned above. As a result, amiibo sales only increased by 4.2 million where during the second quarter, amiibo sales had a 5.7 million advantage. Although more amiibos were sold, the reduction in additional amiibo sales resulted in a compression in sales when compared across years.

But what about the Animal Crossing line, a line I said would have a big influence on future sales. As noted above, Animal Crossing: amiibo Festival, the main title for the new amiibo line, performed poorly. Looking at Amazon listings, the some of the amiibo are significantly marked down. Furthermore, there were significant supply constraints during year-end 2014. Nintendo did not anticipate the demand for the Smash Bros. amiibo line, but there doesn’t appear to be the same level of demand for the Animal Crossing amiibos. Based on the third quarter briefing, the best selling amiibo were typically from from the Splatoon line or the Super Smash Bros line. Only in Japan did any Animal Crossing amiibo break into the top ten: Isabelle and Digby.

President Tatsumi Kimishima noted that amiibo are bought primarily by collectors and Nintendo needs to find new ways to use them in conjunction with software. Although amiibo have sold well in the third quarter, sales mostly came from Splatoon and Smash Bros. The sales of amiibo will be dependent on future software. Nintendo will need to give consumers a compelling reason to purchase amiibo if sales are to stay strong.

Closing
Nevertheless, there is a silver lining to all of this. Despite a decline in sales, Operating profits increased by ¥10,881. Furthermore, December 31, 2014’s results included nonrecurring items, included ¥54,036 million in “other” which, as discussed in the last article, was Foreign exchange gains. When removed, Net Income increased from ¥5,479 million to ¥36,160 million. In the end, I don’t expect year-end 2015 to be better than 2014 given some of these factors. Also, with no hit game in the fourth quarter of 2015 (Star Fox Zero was pushed back to April), sales likely won’t pick up. That being said, download sales have improved since the prior year due, in part, to Super Smash Bros DLC. I expect DLC will be strong during the fourth quarter with the release of Corrin and Bayonetta. Nevertheless, if Nintendo really wants to reach their “Nintendo-like” profits, the company needs to create more hit games and really sell amiibo to consumers.