The shares of GameStop ( GME) fell sharply in price in after hours trading on Wednesday evening. I have seen the shares trading with a $20 handle this morning, down a rough 22% since the closing bell. The reason why is easy to see: GameStop reported a lousy quarter, fired the CEO, reduced the size of the board and named Ryan Cohen to the post of executive chair.
Then ... it didn't hold a conference call. That alone is possibly among the most unprofessional corporate developments I have seen.
I know that GameStop has made a habit of avoiding post-earnings conference calls, but when those earnings come with massive changes to the C-Suite? C'mon, man.
First, the earnings. For the fiscal first quarter, which ended April 29, GameStop posted an adjusted loss per share of $0.14 (unadjusted EPS: $-0.17) on revenue of $1.237 billion. Not only did sales fall short of expectations while contracting 10.1% year over year, but bottom line performance missed consensus as well.
Adjustments were made for European restructuring costs, severance expenses and stock-based compensation. These European costs are expected to continue into the current quarter.
On the bright side, as revenue was contracting 10.1%, the cost of that revenue decreased 12.1% to $949.8 million, slowing the decrease in gross profit to $287.3 million (-3.8%) as gross margin printed at 23.2%, up from 21.7% a year ago. Operating expenses decreased by an impressive 23.6% to $345.7 million, taking the firm's operating income / loss "up" to -$58.4 million from the year-ago print of -$153.7 million. After interest and taxes are accounted for, the firm's net income / loss improved from -$157.9 million to -$58.4 million.
Musical Chairs
When the music stops, someone is left out of the game. GameStop announced that Ryan Cohen had been elected as executive chairman effective immediately and that CEO Matthew Furlong had been terminated. Cohen's responsibilities will include capital allocation, and management oversight.
The board also appointed Mark Robinson as general manager and principal executive officer, effective immediately. Robinson will now be responsible for administrative matters, corporate development, and legal affairs as well as oversight over all executive officers excluding the executive chair. The board will be reduced from six to five members with the departure of Furlong.
Fundamentals
For the period, operating cash flow printed at -$102.7 million, as it spent $9.1 million on capital expenditures, resulting in free cash flow of -$111.8 million, which while still awful, was a big improvement from the year ago period (-$314.7 million).
Moving on to the balance sheet, GameStop ended the quarter with a cash position of $1.31 billion as inventories dropped to $759.5 million. This took current assets to $2.255 billion. Current liabilities add up to $1.32 billion, putting the firm's current ratio at a healthy looking 1.71. Even sans the inventory valuation, the firm's quick ratio stands at 1.13, which is probably healthier than folks who do not follow the stock expected.
Total assets amount to $3.07 billion. The firm smartly included no entry for either goodwill nor any other kind of intangible asset. Total liabilities less equity comes to $1.799 billion that includes just $26.3 million in long-term debt that is really just one low-interest, unsecured term loan associated with the French government's response to Covid-19.
The cash flows might rot, but this balance sheet is in good shape and strong enough to carry the company for a little bit if Cohen can unscrew the business.
My Thoughts
The problem is in the business. Video games and video game consoles are not what they once were. The non-fungible token craze has come and gone and stayed gone. With those businesses in decline, GameStop has tried to move toward software delivery of entertainment platforms and collectibles. It is going to have to find a way to grow one or more of these businesses while continuing to expand margins as they have been doing with revenues in decline.
This stock is not some kind of joke to be lumped in with the other former "meme stocks." I do not like that the GME would report its quarter and remove its CEO without addressing the financial media. Perhaps Cohen felt that no good could come out of it. I don't see this stock taking off as it once did during the meme era. That said, as of May 15, short positions still composed 21.4% of the entire float.
Wall Street (what's left, only three analysts that I can find still follow this name) sees losses for the full year as well as for next year. Revenue generation is expected to continue to slow through next year. That balance sheet is strong though. I don't see them going away any time soon.
This stock can, in my opinion, be bought on this dip as long as the investor understands that this is pure speculation. Pure speculation with a strong balance sheet, meaning is that Cohen or whomever he names as Furlong's replacement, just has to find a business that works. Easier said than done. I will initiate a purchase on GameStock stock this morning after this article is public. 22% discounts don't happen every day in firms fundamentally built to take a gut punch and keep on walking.
