Specialty retailer GameStop Corp. (GME - Get Rating) is a game and entertainment products provider operating through its various stores and e-commerce properties. The company sells new and pre-owned gaming platforms, accessories, new and pre-owned gaming software, and in-game digital currency.

Last Wednesday, GME’s stock jumped in extended trade after the company announced its 4-for-1 stock split. The company’s shareholders are expected to receive a dividend of three additional shares of each of its class A common stock, which is expected to be distributed on July 21. The stock was set to start trading on a split-adjusted basis from the following day.

Over the past year, GME has declined 32.8% and 13.4% year-to-date to close its last trading session at $128.54. However, it has been up 4.1% over the past five days.

Here are the factors that could affect GME’s performance in the near term:

Bleak Financial Growth

For the fiscal first quarter ended April 30, GME’s net sales increased 8% year-over-year to $1.38 billion. However, gross profit decreased 9.6% from the prior-year quarter to $298.50 million. Adjusted net loss and adjusted loss per share rose 437.1% and 362.2% from the same period the prior year to $157.90 million and $2.08.

Negative Profit Margins

GME’s trailing-12-months gross profit margin of 21.53% is 41.4% lower than the industry average of 36.76%. Its trailing-12-months net income margin and levered FCF margin of a negative 7.73% and 9.37% are significantly lower than their respective industry averages of 6.52% and 3.25%.

The stock’s trailing-12-months ROE, ROTC, and ROA of negative 40.55%, 14.31%, and 15.11% compare with the industry averages of 16.95%, 7.16%, and 5.63%, respectively.

Unfavorable Bottom-line Growth Expectations

The consensus EPS estimates of a negative $1.51 and a negative $1.48 for the respective quarters ending July and October 2022 indicate a 98.7% and a 6.5% year-over-year decline. 

Street EPS estimate for the fiscal year 2023 of a negative $5.37 reflects a decrease of 17.8% from the prior year. Moreover, GME has missed consensus EPS estimates in each of the trailing four quarters.

POWR Ratings Reflect Bleak Prospects

GME’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

GME has a Value grade of F, consistent with its forward Price/Sales multiple of 1.51, 76.6% higher than the industry average of 0.85. In terms of its forward EV/Sales, it is trading at 1.44x, 33.9% higher than the industry average of 1.08x.

The stock also has a D grade for Growth and Sentiment, in sync with the bleak growth in its last reported quarter and unfavorable consensus estimates.

In the 46-stock Specialty Retailers industry, GME is ranked last.

Click here to see the additional POWR Ratings for GME (Momentum, Stability, and Quality).

View all the top stocks in the Specialty Retailers industry here.

Bottom Line

Although the stock gained after its stock split announcement, its bleak bottom line and negative profit margins are concerning. And with Wall Street analysts expecting a 45.5% potential downside in its stock price, I think the stock might be best avoided now.

How Does GameStop Corp. (GME) Stack Up Against its Peers?

While GME has an overall POWR Rating of F, one might consider looking at its industry peers, The ODP Corporation (ODP - Get Rating) and TravelCenters of America Inc. (TA - Get Rating), which have an overall A (Strong Buy) rating, and Murphy USA Inc. (MUSA - Get Rating) and Canadian Tire Corporation, Limited (CDNAF - Get Rating), which have an overall B (Buy) rating.

GME shares were trading at $128.59 per share on Monday afternoon, up $0.05 (+0.04%). Year-to-date, GME has declined -13.34%, versus a -18.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...

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