GameStop (NYSE:GME) stock plummeted in after-hours trading on Tuesday after the video-game retailer posted earnings results that fell wanting estimates.
The stock had fallen some 18% from its $15.50-per-share closing price on Tuesday, tumbling to about $12 per share in pre-market trading on Wednesday. It began moving somewhat higher after Wednesday’s opening bell but was still down by about 14% on Wednesday morning, trading at just over $13 per share.
Let’s examine what drove the sell-off.
Sales drop, but cost-cutting keeps GameStop profitable
GameStop’s revenue for its fiscal fourth quarter missed estimates by a reasonably wide margin. Net sales were down 19% yr over yr within the quarter to $1.8 billion, while gross profit after deducting the fee of sales tumbled 16% to $419 million. Analysts had expected $2.05 billion in sales.
Nevertheless, GameStop’s net income rose 31% to $63 million or 21 cents per share, because it was able to scale back selling, general and administrative expenses by 21% to $359 million. Nevertheless, that earnings result still got here up wanting earnings estimates.
For the total fiscal yr, the retailer’s sales fell 11% to $5.3 billion, but its net income was $6.7 million, up from a $313 million net loss in fiscal 2022. The online income gains for the fourth quarter and full yr stem from a cost-reduction plan that has enabled GameStop to stay profitable within the face of plunging sales figures. That has included staff reductions and store closures.
At the tip of fiscal 2023, there have been 4,169 GameStop stores, including 2,915 within the U.S., based on the 10-K. At the tip of 2022, there have been 4,413 stores, including 2,949 within the U.S. Thus, many of the closures have been internationally, with the very best number in Europe.
Its headcount has dropped precipitously too, as GameStop had 8,000 full-time staff and 13,000 to 18,000 part-time staff at the tip of 2023. At the tip of 2002, it had 11,000 full-time staff and 14,000 to 27,000 part-time staff, so there have been substantial staff cuts.
Investors and analysts are concerned about whether or not GameStop’s current financial position is sustainable and if it could actually keep cutting costs to offset sales declines.
No outlook or earnings call
GameStop didn’t hold an earnings call with analysts on Wednesday, nor did it offer guidance or an outlook for 2024, which doesn’t encourage loads of confidence. Nevertheless, there was loads of information in its 10-K, where it outlined its risks — mainly, downloadable games.
“The present consoles from Sony, Nintendo and Microsoft have facilitated download technology,” GameStop management stated within the filing. “Downloading of video-game content to the current-generation video-game systems continues to grow and take an increasing percentage of latest video game sales. If consumers’ preference for downloading video-game content in lieu of physical software continues to extend, our business and financial performance could also be adversely impacted, and these firms now sell consoles that only take downloadable games, not the physical games that GameStop sells.
To compete, the retailer knows it must reply to these changes and higher understand customers’ preferences.
“It could take significant time and resources to reply to these technological changes and changes in consumer preferences. Our business and results of operations could also be negatively impacted if we fail to maintain pace with these changes,” management warned.
Analyst lowers goal
Analysts at Wedbush and Baird noted these challenges of their post-earnings research notes, with Wedbush lowering its price goal and reiterating its Sell rating.
“An increasing mixture of digital downloads is hurting physical retail, and there may be simply no reason to go to the shop if a consumer can just order a game and download it immediately,” Wedbush analyst Michael Pachter said, based on Reuters. “Revenues are highly unlikely to rebound unless management figures out a solution to drive store traffic. I believe that they’ll keep trimming costs to generate breakeven or higher, however it is inevitable that their sales will decline to an unsustainable level.”
The stock is affordable with a price-to-sales ratio of 0.83, but there doesn’t look like loads of upside potential unless GameStop makes some major changes in order that it could actually compete on this recent environment.