Wednesday popular meme stock GameStop (NYSE: GME) released its second quarter earnings report. It was no better than the struggling retailer’s first quarter results. Granted, GameStop’s sales are increasing year over year – thanks to some incredibly easy comparisons – but the company continues to lose money and doesn’t have a clear path to sustainable profitability.
Results bounce back, but not enough
GameStop generated $ 1.18 billion in revenue in the second quarter of fiscal 2021, up from $ 942 million a year earlier. This exceeds the average analyst estimate of $ 1.12 billion.
Nonetheless, this top-level performance was not impressive. First, sales declined sequentially from $ 1.28 billion in the first quarter. Second, GameStop’s revenue is 8% lower than the $ 1.29 billion generated in the second quarter of fiscal 2019. (Additionally, 2019 was a terrible year for the company. Second quarter revenue totaled $ 1.5 billion in fiscal 2018.)
GameStop’s recovery in year-over-year sales helped it cut losses. The company recorded an adjusted operating loss of $ 51 million in the last quarter, compared to an adjusted operating loss of $ 85 million in the second quarter of last year.
More encouragingly, its loss also declined from fiscal 2019, when it posted an adjusted operating loss of $ 83 million in the second quarter. However, GameStop’s adjusted loss per share of $ 0.76 was $ 0.10 worse than analyst consensus.
In any case, GameStop remains far from balanced. What’s more, the gaming-focused retailer has already cut operating expenses by more than 20% in the past two years. This shows that GameStop can’t just make its way to profitability – it needs higher sales with higher gross margins.
Soaring software sales tell the real story
To make matters worse, GameStop reported this weak sales performance and quarterly loss despite the tailwind of the news launch. Sony and Microsoft game consoles at the end of last year.
To be fair, the global semiconductor shortage has reduced the supply of game consoles. This has limited GameStop’s hardware sales to some extent. However, GameStop still reported hardware and accessories sales of $ 610 million last quarter, up from $ 555 million two years earlier.
On the contrary, software continues to be GameStop’s biggest weakness. Software sales totaled just $ 397 million in the second quarter, down 29% from $ 558 million in the second quarter of 2019. While some gamers still prefer physical drives, more and more have opted for the convenience of digital downloads, removing middlemen like GameStop. All signs still point to GameStop’s software sales in decline.
Software sales have historically generated half or more of GameStop’s gross profit. In contrast, gross margins for equipment averaged around 12%. At this level, even an additional $ 300 million in hardware sales would only have generated an additional $ 36 million in gross profit last quarter, which is nowhere near enough to break even. In short, investors should have no illusions that further growth in hardware sales can bring GameStop back to profitability.
No evidence of a real recovery plan
Over the past few months, GameStop has hired a new management team with a mandate to improve the company’s e-commerce operations. At the same time, it plans to open new distribution centers. The company has also started to expand its selection of merchandise.
However, neither the new management team nor GameStop’s high-profile chairman Ryan Cohen have provided meaningful details on the company’s future plans. With extremely low-margin hardware sales and cratered software sales, GameStop’s core business is dying. The company may have a secret turnaround plan, but there is no evidence to support this claim.
GameStop has $ 1.7 billion in net cash on its balance sheet as it has capitalized on its skyrocketing stock price by issuing more shares this year. This gives him a lot of time and money to develop and execute a new strategy.
On the other hand, GameStop currently has a market cap of almost $ 15 billion. That’s way too much to pay for a company with $ 1.7 billion in cash, an unprofitable core business in terminal decline, and vague plans to transform the business.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.Source link