The carnage at GameStop (GME) continues as the stock has seemingly taken on falling-knife characteristics. When last we left the story, GameStop not surprisingly had eliminated what at the time was a rather lofty 19% dividend. This move came along with the announcement of better-than-expected first-quarter earnings (seven cents a share versus a three-cent expected loss), but shares were hammered nonetheless, down 36% on June 5.
It has been no picnic since then as GME shares have tumbled another 19%. That decline is despite the completion of a modified Dutch tender auction last month in which GameStop bought back 12 million shares, or 11.7% of the Class A shares outstanding, for $5.20 a share, a price that was at the low end of the expected purchase range of $5.20 to $6 a share. Just two weeks later, GME closed Thursday at $3.98.
GameStop did take some steps to shore up its balance sheet last quarter, paying down $350 million in debt out of its massive year-end cash hoard of $1.6 billion. By the end of the first quarter, cash levels had fallen to $543 million, or about $5.30 per share. Debt stood at $469 million, down from year-end levels of $821 million. (Those who take a look at the company's first-quarter balance sheet will notice a jump in property, plant & equipment and liabilities; that is primarily the result of an accounting standard change that recognizes operating leases on the balance sheet as both an asset and liability.)
Where GameStop heads from here should be interesting. With GameStop still fairly heavy on the debt side, we don't know where cash will stand when the company reports second-quarter results. One could assume that it will be lower given the $62.4 million spent on the Dutch tender auction and consensus estimates of a 20-cent quarterly loss, but cash flow is its own animal with many moving parts, especially in retail.
Consensus earnings estimates of $1.65 a share for next year imply a forward price-to-earnings ratio of less than 2.5, and the cash drain of dividends is gone. Still, this is a tough retail environment and the markets have little to no patience for brick-and-mortar specialty dinosaurs these days. But adding intrigue to the story is the massive amount of short interest, with 65% of the float sold short.
Markets are simply not rewarding deep-value stories these days, especially those that may be value traps in disguise. GameStop is still just too ugly at this point, even for me.