GameStop (GME) Up 34.4% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for GameStop (GME). Shares have added about 34.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is GameStop due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

GameStop Posts Narrower-Than-Expected Loss, Sales Down Y/Y

GameStop posted dismal third-quarter fiscal 2020 results, with revenues declining year on year and missing the Zacks Consensus Estimate. Performance was affected by limited availability of hardware and accessories as the company continued to operate during the last few months of the seven-year-long current generation console cycle. Also, unplanned shifts of software titles as well as store closures were a drag. Moreover, this videogame retailer reported a loss in the quarter under review.

Q3 in Details

GameStop posted adjusted loss of 53 cents per share, narrower than the Zacks Consensus Estimate of a loss of 81 cents. However, the bottom line was wider than a loss of 49 cents reported in the year-ago quarter.  

Net sales amounted to $1,004.7 million, which missed the Zacks Consensus Estimate of $1,113 million and declined 30.2% on a year-over-year basis. The impact of operating during the last few months of the seven-year-long current generation console cycle and the subsequent limited availability of hardware and accessories was visible in the company’s top-line performance. Additionally, performance was hampered by the unplanned shift of software titles to the fourth quarter and into fiscal 2021. Furthermore, as part of the de-densification initiative, there were 11% fewer stores from the year-ago quarter’s levels. However, the company informed that part of the closed store sales was recaptured through transfer to neighboring locations and online. Further, comparable store sales in the reported quarter fell 24.6%.

At the end of the quarter, GameStop operated 5,048 stores globally, which is 607 fewer stores compared with prior-year quarter’s levels. During the third quarter, the company closed nearly 74 stores. The company is on track to close nearly 700 stores globally this fiscal. On a combined basis, the company plans to close nearly 1000 stores in fiscal 2019 and 2020.  

Notably, the company’s e-commerce business remained sturdy with sales surging 257% during the quarter under review. E-commerce sales were included in comparable store sales. Total e-commerce sales contributed more than 18% to total net sales during the quarter. Management highlighted that online sales gained from enhanced fulfillment capabilities including the initial roll-out of same-day delivery option to more than 2,000 stores. To further boost consumers’ shopping experience, the company enhanced search and navigation as well as post-purchase features. It also launched a new mobile app with improved features and flexible payment options.

By sales mix, hardware and accessories sales declined 24% to $413.4 million. While software sales fell 39% to $444.4 million, collectibles sales dropped 9% to $146.9 million.

Moving on, gross profit fell 38% year over year to $810.9 million. Gross margin contracted 320 basis points to 27.5% due to increased mix of lower margin hardware sales as well as higher freight costs and credit card processing fees stemming from increased penetration of e-commerce sales.

Adjusted SG&A expenses declined 21.8% to $359.7 million in the reported quarter. The company reported adjusted operating loss of $83.4 million, which was wider than the adjusted operating loss of $18.6 million in the year-ago quarter.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $445.9 million, short-term debt of $269.5 million, long-term debt of $216 million and stockholders’ equity of $332.2 million. As of Oct 31, 2020, the company reduced borrowings under its asset based revolving credit facility to $25 million.

Accounts payable were down 38% to $440.2 million compared with third-quarter fiscal 2019. The company ended the quarter with total inventory of $861 million, down 33%.

During the quarter, the company’s net cash flows used in operating activities amounted to $184.6 million. The company incurred capital expenditures of $15.1 million during the quarter. Management anticipates capital expenditures in the range of $60-$65 million during the fiscal.

Outlook

Owing to the uncertainty surrounding the coronavirus pandemic and its impact on the economy, management deferred from providing specific financial guidance for the fiscal year. We note that the company has been witnessing varying levels of store closures in its international operations, particularly in Europe. Management expects such temporary closures to continue in December and January.

Nevertheless, the company expects fourth-quarter performance to gain from new video console launch. As a result for the fourth quarter, the company expects to achieve positive comparable store sales and profitability. Markedly, during November, GameStop witnessed comparable store sales rise of 16.5%. Total net sales for the month amounted to $791.1 million, reflecting an improvement from $747.6 million reported in November fiscal 2019. Moreover, e-commerce sales surged 352% year over year in November.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -11.83% due to these changes.

VGM Scores

Currently, GameStop has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, GameStop has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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