GameStop Earnings: The Emperor Has No Clothes


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On Wednesday, GameStop (NYSE: GME) released its latest results report. Unsurprisingly, the company continued to fight mightily during its fiscal third quarter. As sales rebounded from a large pandemic-induced drop in 2020, GameStop’s losses widened further.

Management continues to insist that its turnaround strategy will drive significant revenue growth over the long term and earnings will follow naturally. However, with each passing quarter, it becomes more and more clear that GameStop does not have a credible path to profitability.

Income is picking up somewhat

GameStop posted net sales of $ 1.3 billion last quarter: up 29% year-over-year. However, this result was not as impressive as it seems.

First, GameStop’s third-quarter revenue topped $ 1.4 billion in 2019 and topped $ 1.9 billion a year earlier. In short, the gaming-focused retailer hasn’t really returned to growth. It has just recovered some of the drop in income from the previous year. In comparison, Best buy (NYSE: BBY) reported $ 11.9 billion in revenue in the last quarter: up 22% from two years earlier.

Second, the launch of new PlayStation and Xbox game consoles in late 2020 leads to an increase in short-term sales of gaming hardware. Between August and October – the period that corresponds to GameStop’s fiscal third quarter – gaming hardware sales in the United States jumped 59% year over year, according to NPD.

Likewise, GameStop’s hardware and accessories sales jumped 62% in the last quarter, accounting for almost all of the company’s revenue growth. In contrast, software sales fell 2% after falling 39% a year earlier.

The margin squeeze continues

While any kind of revenue growth is better than no revenue growth, gaming hardware tends to sell at very low margins. Historically, software sales have accounted for the bulk of GameStop’s gross profit.

Image source: Getty Images.

Thus, the radical change of mix towards the material leads to a drop in the gross margin. GameStop reported a gross margin of 24.6% last quarter, down from 27.5% a year earlier (and 30.7% the year before). As a result, gross profit only grew 15% year-over-year, well below the company’s 29% revenue growth.

Meanwhile, GameStop’s operating expenses have increased 17% year-over-year. This resulted in an increase in its operating loss to $ 103 million last quarter from $ 84 million in the prior year period, excluding asset sales gains. GameStop posted a net loss of $ 1.39 per share in the third quarter: much worse than the loss of $ 0.52 per share expected by analysts.

There is no “there” there

Granted, CEO Matt Furlong says GameStop’s massive losses are only part of a long-term strategy. On the company’s recent earnings conference call, which lasted less than 10 minutes, he said, “We believe revenue growth will translate into size and market leadership. Our long-term focus means we will continually prioritize growth and market leadership over short-term margins. “

However, revenue growth does not automatically translate into size and market leadership. Management’s pipe-dreaming strategy to increase revenue at all costs will only make GameStop’s losses worse.

In particular, the steps GameStop is taking to expand its assortment with consumer electronics such as televisions could lead to revenue growth, but at the expense of profits. GameStop will never have scale or market leadership in the general consumer electronics industry. For example, Best Buy is expected to generate over $ 50 billion in revenue this year, compared to under $ 6 billion for GameStop.

Ideally, GameStop will end up becoming a smaller, less profitable version of Best Buy. More likely, he will never find a sustainable business model and will continue to lose money and burn money indefinitely. Since you can invest in Best Buy – which is very profitable – at a valuation of $ 25 billion, owning stock in GameStop, which is losing money, at a valuation of $ 12 billion has no value. sense.

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Adam Levine-Weinberg has no position in the stocks mentioned. The Motley Fool owns and recommends Best Buy. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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