GameStop Shares Slump as Pandemic Forces Changes

GameStop’s numbers offer some hope that the company can evolve.
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GameStop sales fell slightly as the retailer released earnings in the shadow of its Wall Street trading frenzy, WSJ reports.

Why It Matters: Company shares exploded during the r/WallStreetBets frenzy, but the reality is an industry-wide shift to e-commerce and digital products was already hurting GameStop. Covid-19-related closings only weighed on it further.

  • Formerly strong retailers such as Blockbuster and Borders succumbed to evolving trends.

But GameStop is pushing a new turnaround effort, with Amazon alum Jenna Owens as its new operating chief. The goal is to transform from a physical retailer to a technology-centric company.

  • CEO George Sherman described the plan as becoming a “customer-obsessed technology company that delights gamers” and plans to expand into gaming computers, gaming TVs, mobile gaming and more. All of that while “reducing its dependence on the console-gaming market, as well as improving customer service and warehouse management.”

Numbers To Consider:

  1. GameStop stock fell 6.6% to $181.75 on Tuesday.
  2. Q4 profit almost quadrupled to $80.5 million, partly because of an income-tax benefit.
  3. Sales decreased by 3% to $2.12 billion, with GameStop noting that it closed hundreds of stores over the past year and that e-commerce now accounts for roughly a third of its business.

What’s Next: In addition to a slew of hires, and Chewy co-founder Ryan Cohen joining the board, GameStop has said that it may sell shares to generate funds for its transformation, and other needs. But how much would be sold would depend on a few different things.

Justin Oh:

GameStop ($GME) is down big after reporting earnings yesterday. Here are some highlights:

  • Sales were $2.1 billion for the quarter, with 6.5% same-store sales growth and 175% e-commerce growth.
  • E-commerce now represents 34% of total sales versus 12% in Q4 2019. But this year we have the benefit of the console refresh cycle which could artificially inflate these numbers.
  • Q1 2021 is off to a great start and stores are seeing 23% growth in February. Sales are up 5.3% in February despite closing 12% of global stores since Q1 2020.
  • Adjusted EBITDA was positive $50 million after cost cutting measures and recovery, but still weak at 2.4% of sales.
  • GameStop announced the appointment of Jenna Owens, who’s held many senior roles at Amazon.com ($AMZN) including Director of Distribution and Fulfillment. 

The market might not have liked the following:

  • GameStop didn’t really report much color on their “transformation”, and only explained a focus on e-commerce and customer experience.
  • The departure of GameStop’s Chief Customer Officer and CFO.
  • The reminder that despite the $GME narrative, the fundamentals are still stuck in reality. It has $5 billion in revenues and no profits, yet is valued at $11 billion at $160 per share.

As a gut check, even at GameStop’s 6 year peak in 2016, it only had $9.3 billion in revenue and $819 million in profits. The current share price values the $GME at 13x EBITDA from its best year 6 years ago!

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