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Why Is GameStop (GME) Down 17% Since Last Earnings Report?

Zacks Equity Research
·4-min read

A month has gone by since the last earnings report for GameStop (GME). Shares have lost about 17% 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 the most recent earnings report in order to get a better handle on the important catalysts.

GameStop Q4 Earnings Miss Estimates, Sales Decline Y/Y

GameStop posted fourth-quarter fiscal 2023 results, delivering lower-than-expected earnings per share and revenues. While the top line declined year over year, the bottom line compared favorably with the year-ago quarter’s reported figure.

Q4 in Details

GameStop posted adjusted earnings per share of 22 cents in fourth-quarter fiscal 2023 compared with the Zacks Consensus Estimate of 25 cents per share. The company reported an adjusted earnings per share of 16 cents in the prior year quarter.

GME reported net sales of $1,793.6 million, which missed the consensus estimate of $2,000 million. Also, the metric decreased 19.4% from $2,226.4 million reported in the year-ago fiscal quarter. Lower sales across all the categories contributed to soft sales.

By sales mix, hardware and accessories sales fell 11.9% to $1.09 billion from $1.24 billion reported in the year-ago quarter. Software sales were $465.3 million, down 30.6% from $670.4 million in the year-ago quarter. Sales in the collectibles unit declined 25.4% to $233.7 million compared with $313.2 million reported in the year-ago quarter.

Margins

Gross profit decreased 16.1% to $419.2 million from $499.8 million in the year-ago fiscal quarter. We note that gross margin expanded 100 basis points (bps) year over year to 23.4% in the quarter under review.

Adjusted selling, general and administrative (SG&A) expenses declined 20.8% to $358.9 million from $452.9 million reported in the year-ago quarter. As a percentage of net sales, SG&A expenses were 20%, down 30 bps from 20.3% reported in the year-ago period.

The company’s adjusted operating income was $60.3 million in the reported quarter. It had reported an adjusted operating income of $46.9 million in the prior-year fiscal period. We note that the adjusted operating margin increased 130 bps year over year to 3.4% in the fiscal fourth quarter.

Adjusted EBITDA was $88 million against an adjusted EBITDA of $82.5 million in the prior-year quarter. Adjusted EBITDA margin increased 120 bps year over year to 4.9%.

Other Financial Aspects

GameStop ended the fiscal fourth quarter with cash and cash equivalents of $921.7 million, net long-term debt of $17.7 million and stockholders’ equity of $1.34 billion. Net merchandise inventory was $632.5 million at the end of the reported quarter compared with $682.9 million at the close of the same quarter last year.

During the 53-week period that ended Feb 3, 2024, the company used cash flow from operations of $203.7 million against an outflow of $108.2 million during the same period last year. Free cash flow during the same period was a negative $238.6 million. Capital expenditures in the 53 weeks amounted to $34.9 million.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

The consensus estimate has shifted -100% due to these changes.

VGM Scores

At this time, GameStop has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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. It's no surprise GameStop has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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Zacks Investment Research