Why Is GameStop (GME) Up 8.2% Since Last Earnings Report?

It has been about a month since the last earnings report for GameStop (GME). Shares have added about 8.2% 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’s Q4 Earnings Beat Estimates

GameStop Corp. reported a positive earnings surprise during fourth-quarter fiscal 2019, which follows a miss in the preceding two quarters. Further, management notified that it is experiencing a positive impact on its business due to the coronavirus outbreak.

However, we note that the company continued to grapple with dismal top-line performance. Net sales not only missed the Zacks Consensus Estimate for the fifth quarter in row but also declined year over year. Comparable store sales results also disappointed. Further, management highlighted that the company continues to witness temporary headwind related to lower current generation console hardware and software sales. This is due to customers delaying console purchases in anticipation of new platform launches expected in the later part of 2020.

Nonetheless, this Grapevine, TX-based company is trying all means to uplift performance. GameStop is exiting loss-incurring businesses and closing underperforming stores. The company began to wind down operations in Denmark, Finland, Norway and Sweden to counter the weak industry trends, and is likely to exit these markets by late July. The company is utilizing the proceeds from sale of non-core business units to lower debt burden.

Undoubtedly, GameStop remains focused on containing costs, optimizing inventory and expanding high margin product categories such as PC gaming accessories, private label and collectibles. The company also plans to augment store experience, expand and redesign PowerUp Rewards loyalty program, enhance digital capabilities and improve engagement with vendors and partners. The company is also augmenting omni-channel features such as “Buy Online Pick Up In Store.”

Notably, the company attained cost reduction of $130 million on an adjusted basis, lowered inventory by 31% that contributed to gross margin expansion and reduced debt load by $401 million during fiscal 2019. The company closed net 321 stores — inclusive of 333 closings and 12 openings — during fiscal 2019, and plans to close an equivalent number of stores or more in fiscal 2020.

Q4 Performance

GameStop’s adjusted earnings of $1.27 per share surpassed the Zacks Consensus Estimate of 84 cents. However, the quarterly earnings came below the prior-year adjusted figure of $1.45 per share. Net sales of $2,194.1 million declined 28.4% year over year thanks to soft comparable store sales performance, store closures and adverse currency fluctuations. Moreover, the top line lagged the Zacks Consensus Estimate of $2,363 million.

We note that consolidated comparable store sales fell 26.1%, following a decline of 23.2% in the preceding quarter. The downside can be attributed to lower traffic. The company also witnessed declines across all three categories namely, hardware and accessories, software and collectibles.

By sales mix, hardware and accessories sales declined 32.5% to $964.8 million. This is reflective of announcements for next generation console launches in 2020. Software sales fell 27.8% to $984.3 million owing to lower number of new title launches. Collectibles sales decreased 9.2% to $245 million due soft traffic.

Moving on, gross profit fell 20.2% year over year to $597.3 million. However, gross margin expanded 280 basis points to 27.2%, driven by mix shift to higher-margin categories and better inventory management.

Adjusted SG&A expenses declined 10.7% to $488.1 million in the reported quarter on account of cost reduction initiatives. However, as a percentage of net sales, the metric deleveraged 440 basis points to 22.2%. The company reported adjusted operating income of $109.2 million, down 46.1% from the prior-year quarter. Again, adjusted operating margin contracted 160 basis points to 5%.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $499.4 million, long-term debt of $419.8 million (down 49% year over year) and stockholders’ equity of $611.5 million. Accounts payable were down 64% to $380.8 million. The company ended the quarter with total inventory of $859.7 million, compared with $1,250.5 million in the prior year. During the quarter, the company incurred capital expenditures of $17 million.

During the quarter, the company bought back 3.5 million shares of worth $20.1 million. This brings the total repurchase activity to $199 million for 38.1 million shares for fiscal 2019. The company had roughly $101 million remaining under its share buyback authorization at the end of the fourth quarter.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -163.54% due to these changes.

VGM Scores

At this time, GameStop has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 this revision 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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