On Wednesday evening, meme stock original GameStop (GME) released the firm's second quarter financial performance. To put it bluntly, the quarter kind of stunk. The firm continues to lose money, continues to burn cash, and continues to watch sales decline over time.
Yet, has been trading Thursday. Is it the 19.9% of the float still held in short positions? Is it the new direction under semi-new management as the firm tries to evolve? Let us explore.
For the three month period ended July 30th, GameStop posted GAAP EPS of a loss of $0.36 on revenue of $1.136B. The EPS number, though representative of a net loss of $108.7M (a sixth consecutive quarterly loss), did manage to beat Wall Street.
The sales print however fell short of expectations and shows a year over year contraction of 3.4%. Gross profit dropped 12.1% to $282.2M, as gross profit margin dropped from 27.1% to 24.8%. This took the firm's operating income/loss from $-58M a year ago to the $-107.8M it printed at for this quarter.
Business Lines
- Hardware and Accessories drove revenue of $596.4M (-2.2%), while increasing to 52.5% of sales (from 51.5%).
- Software drove revenue of $316.4M (-20.2%), while decreasing to 27.9% of sales (from 33.5%).
- Collectibles drove revenue of $223.2M (+26%), while increasing to 19.6% of sales (from 15%).
GameStop launched an NFT (Non-Fungible Token) marketplace this past July, so that does not really impact these results. This is where Chairman Ryan Cohen of Chewy (CHWY) fame and perhaps Bed Bath & Beyond (BBBY) infamy and CEO Matt Furlong, who comes by way of Amazon (AMZN) are taking the company. The NFT marketplace is only open at this time for beta testing.
Along that line, GameStop also disclosed a new partnership with crypto/digital asset exchange FTX. Apparently, the two firms will cooperate in expanding the digital exposure of the stores' retail customers. FTX gift cards are expected to be sold at GameStop retail locations.
Balance Sheet
GameStop ended the quarter with a net cash balance of $908.9M, down from $1.72B a year ago. Inventories stand at $734.8M, up from $596.4M at the end of the previous second quarter. This took current assets down to $2.019B from $2.657B 12 months ago. Current liabilities are also lower (-21.9%), at $932.4M from a year ago. This leaves the firm's current ratio at a robust 2.16. That is a strong number. Even with the obvious cash burn, the current ratio is only down from 2.22 a year ago.
Inventories could pose a problem. The firm states that the build in this space was intentional, but of course inventory valuations must be seen as suspect this year. Sans the entry for inventory valuation, the firm's quick ratio comes to 1.37. This ratio may be down from 1.73 a year ago, but anything above one is considered for most firms to be healthy and for retailers to be almost exceptional. GameStop's current financial situation (not necessarily the business) is far stronger fundamentally than most market watchers realize.
Total assets add up to $2.8B. The firm does not pad that number by placing any value on intangible assets. There is no entry for "goodwill." Total liabilities less equity stands at $1.344B. Long-term debt? $32.1M. No joke, and that's down from $47.5M 12 months back. GameStop could pay off the firm's long-term debt-load 28 times over out of cash and get change back. There are a lot of firms out there that investors think are "real" firms that can not even come close to matching the quality of this balance sheet.
My Thoughts
I am not sure that the firm's retail business can evolve enough to eventually become significantly or sustainably profitable. Clearly. Management has done a tremendous job taking advantage of the firm's status as a meme stock to raise capital, pay down debt and market itself to outside partners. Analysts that follow the stock - there aren't many - do not expect the firm to be any more profitable in 2024 than they are this year.
That said, there is no quit in this team and they do have obvious talent. In fact, the firm just announced a new compensation model for US store leaders that includes additional pay for sales leaders based on performance as well as increased hourly wages for some store employees. These guys have certainly not surrendered on the firm's heritage in retail despite moving toward what they expect to be a different kind of GameStop in the future.
Readers can see that GME has traded in a range spanning from $20 to $47.50 this year. The stock has moved of late toward the lower bound of that range. I can see trading GME, trying to game the still large short position or the algorithmic momentum that occurs when the meme crowd gets going. I can not see investing in GME for the long-term until I see more in the way of the evolution of the collectibles and NFT businesses.
That said, it would be foolish to scoff at those who do speculate here. This management team does have a clue, and that balance sheet? It's simply pristine. GameStop will be here next year and probably for years after that. If I were to get long, I would try to see if this morning's pop fades and see if something closer to $20 could be had. On the resistance side, all three of our key moving averages line up between $31.75 and $34.50.
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