Why Is GameStop (GME) Down 13.6% Since Last Earnings Report?

A month has gone by since the last earnings report for GameStop (GME). Shares have lost about 13.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is GameStop due for a breakout? 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 drivers.

GameStop's Q2 Loss Wider Than Estimates, Sales Rise

GameStop reported second-quarter fiscal 2021 results. posted an adjusted loss of 76 cents per share, which was wider than the Zacks Consensus Estimate of a loss of 42 cents. In the year-ago quarter, the company reported an adjusted loss of $1.42.  

Net sales amounted to $1,183.4 million, which surpassed the Zacks Consensus Estimate of $942 million and increased 25.6% on a year-over-year basis. Management highlighted that the company was able to achieve top-line growth despite a 9% decline in store base, owing to strategic de-densification strategy and continued store closures across certain international markets due to the COVID-19 pandemic. We note that the company has been undertaking appropriate investments to boost digital capabilities and product offerings. These are likely to have aided the company’s performance.  

By sales mix, hardware and accessories sales increased 38% to $609.6 million. Software sales rose 2.6% to $396.6 million and collectibles sales surged 55.6% to $177.2 million.

Gross profit increased 27.2% year over year to $320.9 million, while gross margin expanded 30 basis points (bps) to 27.1%.

Selling, general and administrative (SG&A) expenses amounted to $378.9 million, up 8.8% year on year. As a percentage of sales, SG&A expenses contracted 700 bps. Further, adjusted SG&A expenses (after adjusting severance, divestitures, transformation and other costs) went up 10.5% year on year to $372.3 million. As a percentage of sales, adjusted SG&A expenses contracted 430 bps to 31.5%, driven by store reopening after widespread shutdowns due to the pandemic in the year-ago quarter.

The company’s adjusted operating loss amounted to $51.4 million in the reported quarter. It had reported an adjusted operating loss of $84.7 million reported in the prior-year quarter.

Adjusted EBIDTA loss came in at $29.5 million compared with adjusted EBIDTA loss of $62.4 million in the prior-year quarter.

Other Financial Aspects

As of Jul 31, 2021, GameStop had cash and restricted cash amounting to $1.78 billion. Cash and cash equivalents were $1,720.4 million. The company ended the quarter with no net short-term debt (including the current portion of long-term debt). Net long-term debt consisted only of $47.5 million worth low-interest loan associated with the French government’s pandemic response. Compared with second-quarter 2020 levels, the company’s debt levels were down $424.7 million. Stockholders’ equity was $1,852 million.

In the second quarter, cash flow used in operating activities was $11.5 million compared with an inflow of $192.8 million in the year-ago quarter. This was largely due to the investments in inventory. Negative free flow for the 13-week ended Jul 31, amounted to $25 million.

Capital expenditures in the second quarter amounted to $13.5 million, bringing the year-to-date investments to $28.2 million.

Other Notable Updates

In June this year, GameStop had completed the sale of 5-million shares of its common stock through its ATM Offering program. It generated net gross proceeds of nearly $1.1 billion. The company intends to continue using the proceeds for accelerating its transformation efforts as well as for general corporate purposes and strengthening the balance sheet. As a result of the ATM Offering, the company now has total shares outstanding of approximately 75.9 million.

The company’s refreshed board has been undertaking prudent measures to boost customers’ experience as well as provide higher returns to shareholders. The company has been progressing well with fortifying infrastructure and technology capabilities. In this context, it is on track with adding more talented individuals across the organization with expertise in e-commerce, UI, UX, operations and supply chain. The company is also focused on competitive pricing, expensive selection and fast shipping.

Further, the company is continuing to expand its fulfillment network. The company entered into a lease for a 530,000-square feet facility in Reno, NV, which is expected to be in operation this year. Prior to this, the company entered into a lease for a 700,000-square feet facility in York, PA. This facility began shipping orders during the second quarter. Owing to these expansions, the company’s fulfillment network spans across both coasts of Continental U.S. Management informed that the company has entered into a lease for a new customer care center in Pembroke Pines, FL, as it continues to build out customer care operations in the United States. Apart from these, the company is striving to expand the product catalog by adding new products and leading brands across electronics, collectibles, toys and more.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -41.94% due to these changes.

VGM Scores

Currently, GameStop has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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