GameStop Corp. (GME), a leading retailer of video game hardware and software products, is scheduled to deliver its fourth-quarter and full-year earnings report on Tuesday, March 26, 2024, after the market closes. Analysts expect EPS to increase 84.4% year-over-year to $0.30 for the quarter that ended January 2024.

However, GME’s fourth-quarter revenue is expected to decline 7.9% year-over-year to $2.05 billion. Also, the retailer fell short of analysts’ revenue estimates in the third quarter due to fierce competition and bleak videogame demand as consumers reduced their spending in an uncertain economy. High inflation and elevated borrowing costs led to uneven spending in the gaming industry.

GameStop reported revenue of $1.08 billion in the third quarter, compared to the consensus estimate of $1.18 billion. Further, the video game retailer’s losses narrowed as it posted a net loss of $3.10 million for the quarter, down from $94.70 million in the previous year’s quarter.

Besides, the retailer made considerable cost cuts during the quarter, lowering selling, general, and administrative (SG&A) expenses by 23.6% year-over-year to $296.50 million. The Board also approved a new investment policy, granting CEO Ryan Cohen authority over the company’s portfolio, enabling investment in equity securities.

“GameStop entered a new phase of its transformation during the second half of 2022,” GME said in its 10-Q filing. “As a result, GameStop is focused on three overarching goals: establishing an omnichannel retail experience, achieving profitability, and leveraging brand equity to support growth.”

Despite making progress in cost savings and profitability, GameStop may still have a journey ahead to reach its objectives, as noted by John Oh, an analyst at the global research firm Third Bridge. “Our experts have noted that despite all the store closures we’ve already seen, GameStop still likely has twice as many stores today than what is needed,” John Oh said.

“While the softness in Q3 sales was to be expected, our experts have said that the increasing market share losses to mass merchants and e-commerce giants such as Amazon will continue to be an uphill battle for GameStop,” Oh added.

Shares of GME have gained 11% over the past month to close the last trading session at $15.12. However, the stock has plunged 14.4% over the past six months and 34.3% over the past year.

Here’s what could influence GME’s performance in the upcoming months:

Deteriorating Financials  

GME’s net sales declined 9.1% year-over-year to $1.08 billion for the third quarter that ended October 28, 2023. Net sales from the Hardware and Accessories segment declined 7.6% from the prior year’s quarter, and net sales from the Software and Collectibles segment were 8.7% and 14.3% year-over-year, respectively.

Furthermore, the retailer’s gross profit decreased 3.4% from the year-ago value to $281.80 million. The company’s reported net loss and loss per share of $3.10 million and $0.01, respectively.

Impressive Historical Growth

Over the past three years, GME’s revenue has grown at a CAGR of 3.4%. Its tangible book value has improved at a CAGR of 56.1% over the same timeframe. In addition, the company’s total assets have increased at a CAGR of 6.6% over the same period, and its levered free cash flow has grown at a 70.3% CAGR.

Disappointing Analyst Expectations

Analysts expect GME’s revenue to decrease 11.8% year-over-year to $1.09 billion for the first quarter ending April 2024. The company is expected to report a loss per share of $0.05 for the ongoing quarter, compared to a $0.14 per share loss reported in the prior year’s period.

For the fiscal year ending January 2025, the company’s revenue and EPS are expected to decline 5.9% and 8% year-over-year to $5.20 billion and $0.12, respectively.

Mixed Profitability

GME’s trailing-12-month asset turnover ratio of 1.76x is 77% higher than the industry average of 1x. But its trailing-12-month gross profit of 24.10% is 32.7% lower than the industry average of 35.79%. The stock’s trailing-12-month net income margin of negative 0.14% compared to the 4.76% industry average.

Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of negative 0.65%, negative 2.17%, and negative 0.26% are lower than the industry averages of 11.49%, 6.04%, and 4.33%, respectively.

Mixed Valuation

In terms of forward EV/Sales, GME is currently trading at 0.73x, 41.5% lower than the industry average of 1.24x. Its forward Price/Sales multiple of 0.83 is 10.1% lower than the industry average of 0.93. However, the stock’s forward non-GAAP P/E and EV/EBIT of 120.96x and 75.76x are 675.26% and 447.7% higher than the industry average of 15.60x and 13.83x, respectively.

POWR Ratings Reflect Uncertainty

GME’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Quality and Value, consistent with its mixed profitability and valuation, respectively.

Within the Specialty Retailers industry, GME is ranked #36 out of 41 stocks.

Beyond what I have stated above, we have also given GME grades for Stability, Sentiment, Growth, and Momentum. Get all GME’s POWR Ratings here.

Bottom Line  

GME’s third-quarter earnings results missed analysts’ revenue estimates on smaller-than-expected loss. The company further attributed the decline in its SG&A expenses to ongoing cost reduction initiatives, including a significant reduction in labor-related and consulting service costs.

In the latter part of 2022, GameStop shifted its focus toward three core objectives: enhancing omnichannel retail expertise, achieving profitability, and leveraging brand equity for growth. However, a key hurdle for the company lies in attaining profitability mainly through cost reduction strategies rather than sales growth.

Over the past year, the specialty retailer has taken steps such as closing several European stores and optimizing its inventory to cut costs, positively impacting its bottom line. However, despite making some progress in cost savings and profitability, GME still has a long way to go before reaching its goals.

Given GME’s poor financials, mixed valuation and profitability, and bleak near-term prospects, it could be wise to wait for a better entry point in the stock.

Stocks to Consider Instead of GameStop Corp. (GME)

Given its uncertain short-term prospects, the odds of GME outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Specialty Retailers industry instead:

Betterware de Mexico, S.A.B. de C.V. (BWMX)

Next plc (NXGPY)

Destination XL Group, Inc. (DXLG)

To explore more A and B-rated retailer stocks, click here.

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GME shares rose $0.19 (+1.26%) in premarket trading Tuesday. Year-to-date, GME has declined -13.75%, versus a 9.69% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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