GameStop (GME) reported first-quarter results on Wednesday night. The company also remade its C-Suite. That news was all, in my opinion, positive.
There was also something not exactly positive: The SEC has requested information regarding trading activity around the stock, though GameStop did state that this query is not expected to negatively impact the company.
All of this is so interesting, yet not my key takeaway from last night.
My key takeaway? GameStop is solvent. Period. Now, the work of taking the business in a new direction, which has already begun, can accelerate.
Before we dig in, readers should know that I bought some GME Wednesday night after the shares sold off, and then bought some more Thursday morning as the shares fell even more.
This is a position that I see more as a trade than an investment. For now.
The Quarter Reported
Net sales increased 25.1% from the year-ago period to $1.277 billion. Gross margin hit the tape at 25.9%, down 180 basis points from a year earlier, but slightly above the 25.8% that Wall Street had on their mind.
GameStop's net loss amounted to $66.8 million, for a GAAP loss of $1.01 per share. This is an improvement over a net loss of $165.7 million, or a loss of $2.57 per share in first quarter 2020. After adjustments, the company reported a loss of $0.45 per share, which easily bested expectations.
As mentioned above, GameStop is solvent. Don't forget, this report covers the period ending May 1... and on April 26, GameStop raised $551.7 million through the issuance of 3.5 million shares of common stock.
On April 30, GameStop completed an early redemption of $216.4 million in principal amount of its 10% Senior Notes due in 2023. These notes had been indeed the company's long-term debt load in its entirety. Got me? GameStop has no long-term debt on the balance sheet. None, nada. What they do have is $694.7 million in cash and cash equivalents topped off with another $57.4 million in restricted cash.
Out of the woods? Not exactly. There's still that $570.9 million in merchandise inventories that, just guessing by the nature of the gaming business, may or may not be worth $570.9 million as they try to sell it off. That merchandise would counter well $561.8 million in accrued and other current liabilities.
This makes the company's quick ratio extremely questionable. The current ratio will look OK based on this balance sheet. Ex-inventories, though, and oh that's right, there's no long-term debt to service. There is roughly $48 million in short-term debt, and operating lease liabilities that I am sure the new management team will work to reduce.
Bottom line: The stock has been overvalued thanks to the "meme stock" hype as much as the aggregate short interest, which at last count was still roughly 29% of the float. That much is true.
The fact is that this is not the "crappy" company that it has been made out to be. GameStop has been aggressive in taking advantage of some good fortune, and properly using that "found money" to address the balance sheet.
Now, it's time to evolve the business.
Meet the Team
Not only was former Chewy (CHWY) CEO and co-founder Ryan Cohen elected as Chairman, which was broadly expected, but the company turned to two veterans of Amazon's (AMZN) run to e-commerce glory for help. Matt Furlong, formerly head of Amazon's Australian business, has been named Chief Executive, while Mike Recupero, former CFO of Amazon's North American consumer business, will take on that role for GameStop.
If you expected a lot from the call last night, you were disappointed. The call was short, if not sweet, and was run by outgoing CEO George Sherman. There were no questions and answers. GameStop offered no forward guidance.
Now, it's time for Cohen and his Amazonian hires to transform the company into an e-commerce hub for gamers. Can they? Do they have a plan? The only plan we see is that it may sell another 5 million shares. I think that there is a plan, but that the team had to be assembled. Is that good or bad for the stock price? Know what? I'm not that smart.
Thoughts
As I write, the share price has dropped to roughly $275. Thursday morning, five star (TipRanks) Wedbush analyst Michael Pachter reiterated his "Underperform" rating on GME, while increasing his target price to $50 from $39. Baird analysts Colin Sebastian and Dalton Kerr have been sharply critical of this lack of detail.
For me, this remains a day-trading vehicle. No emotion. No feelings. No HODL-ing. Pure mercenary. We're in, we're out. All smallish. All based on what the chart signals. Not likely to go overnight with a position. Definitely not holding anything over a weekend. That said, I'm kind of a fan.
(Amazon is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN? Learn more now.)
