• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Stocks

GameStop Looks Like a Loser

Owning a retailer like GME that is wholly dependent on such a specialized market is a bad bet -- as confirmed by the company's second-quarter earnings miss.
By DAVE BUTLER
Sep 10, 2019 | 06:25 PM EDT
Stocks quotes in this article: WMT, AMZN, GME

GameStop  (GME) is not worth the risk.

Despite the promises of a strategic turnaround plan, I just don't see the upside with GameStop. The company is simply in the wrong place at the wrong time: There isn't any real barrier to entry on GameStop's business, and big-time retailers like Walmart (WMT) and Amazon (AMZN) don't have to work very hard to offer the kinds of gaming equipment that GameStop depends on.

And now the video game retailer has reported abysmal second-quarter results, with big declines in sales and profits. Because of the extremely low valuation of the shares, there has been some chatter about the potential upswing if the company could find a good quarter. While there is certainly always the possibility of a surprise bounce, I think there's too much risk with GameStop.

As part of its turnaround plan, the company has focused on building a stronger digital presence, but the current financial fallout makes me worry about what state the business could be in by the time that happens.

Financials: Off Target

Total sales decreased 14.3% to just under $1.3 billion. On a comparable basis, same-store sales decreased 11.6% year-over-year. The makeup of these sales declines was pretty much across the board. New hardware sales fell by a haunting 41.1%; though the company noted that the upcoming round of new consoles scheduled for 2020 tends to cause this type of trend. New software sales fell 5.3%, slightly offset by strength in Nintendo Switch titles. Sales of accessories fell 9.5%, pre-owned sales of used equipment -- including both software and hardware --dropped by 17.5%, and digital receipts fell 11.2%, thanks in part to poor title launches. That brought digital receipt revenues to $227.2 million.

The lone bright spot for GameStop was collectibles. Sales of collectibles increased by 21.2%, with strength both domestically and internationally. In all, the $171.8 million in collectibles revenue represented 13.4% of the company's total sales mix during the quarter.

It will come as no surprise that these sales declines resulted in some pretty significant losses during the second quarter. On an unadjusted basis, which includes asset impairment charges of $400.9 million, GameStop reported a net loss of $415.3 million, or $4.15 per diluted share. On an adjusted basis, GameStop reported losses of $32 million. That breaks down to a loss of 32 cents per diluted share. That's more than triple the $10.2 million loss reported last year.

Looking Ahead

Looking ahead to the full year, GameStop is expecting comp sales declines to be in the low teens, while adjusted earnings per share are expected to be $1.15 to $1.30 per diluted share. One has to wonder how bad this might get, especially on a generally accepted accounting principles -- or GAAP -- basis.

The company noted that by implementing its cost-saving and operating profit initiatives, it now expects improvements in annualized operating profit in excess of $200 million as opposed to the previous guidance of $100 million. For reference, GameStop has $429 million in operating losses in the first 26 weeks of 2019.

While cost cutting an operation can certainly be positive, there's not a ton here that indicates a clear path for GameStop to fix its sales woes. It can cut the parts of its brick-and-mortar business that are weighing it down, but based on the declines, that seems like a lot. As for the company's intent to become "the social/cultural hub for gaming," I'd say there's a pretty big order at this point.

The release of new game consoles next year definitely has the potential to give places like GameStop a nice boost in sales, but also gives that same potential to places like Walmart. With the shifting landscape of gaming, I don't like the risk of owning a retailer that is wholly dependent on such a specialized market, especially when large diversified retailers can also participate in that market.

The Books Are Suffering

The balance sheet is taking some pretty meaningful hits right now. While cash is up to nearly $425 million, total shareholder equity has declined rapidly. Total equity is now a little under $810 million vs. $2.1 billion a year ago. From an ultra value perspective, GME stock is trading well below book value with a market capitalization of $521 million. Depending on where aftermarket trading takes us on Wednesday morning, that figure could be even lower. While it might be tempting to have a stake in a balance sheet worth far more than the stock, one needs to consider what the next few quarters might do to that balance sheet.

I just plain old don't like the risk here. You have a company in an evolving industry, with massive exposure to the pitfalls of over expanded brick and mortar, and a turnaround plan that seems likely to take quite some time to be meaningful. In the mean time, the balance sheet is probably going to suffer further. I don't see the point of playing around with it unless you want to play a high risk game.

(Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells this stock, Learn more now.)

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Dave Butler had no position in the securities mentioned.  

TAGS: Entertainment | Earnings | Investing | Stocks | Digital Entertainment | Retail

More from Stocks

Doug Kass: It Is Time to Take Aim Against the Growing Bullish Sentiment

Doug Kass
Jun 10, 2023 1:49 PM EDT

Just as it was in rejecting the overwhelming negativity in late 2022...

Predicting Market Moves Is a Losing Bet. Here's What Works

James "Rev Shark" DePorre
Jun 10, 2023 10:00 AM EDT

Let's look at what separates great trading from bad.

FS Insight Weekly Roadmap

Tom Lee and the FSI Team
Jun 10, 2023 8:00 AM EDT

Stocks Officially Enter New Bull Market

Bulls Might Be Smiling, but They Should Also Be Guarded

James "Rev Shark" DePorre
Jun 9, 2023 4:17 PM EDT

This week was good for the bulls, but we have no promises the action will continue, and narrow market still haven't left us.

LD Micro Offers Lots of Big Opportunities

Jim Collins
Jun 9, 2023 1:40 PM EDT

Fresh off my trip to Los Angeles, I'm psyched about what's happening in the microcap names.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:45 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Bulls, Bears, and Market Predictions
  • 11:31 AM EDT CHRIS VERSACE

    We're Adding to a Position on Weakness

    Check out what's going on in the Action Alerts PLU...
  • 07:19 PM EDT CHRIS VERSACE

    AAP Podcast: This Company Is Not Going 'Solo'

    Listen in as I talk with the very diversified Solo...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2023 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login