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Analysts Debate If GameStop Can Power Back Up

Jayson Derrick

GameStop Corp. (NYSE: GME) reported third-quarter results highlighted by a notable earnings miss, a 30% drop in sales and a downward revision to 2019 guidance.

The stock reacted sharply to the downside and analysts debated how much power is left in the retailer's life bar.

The Analysts

Benchmark analyst Mike Hickey maintains a Sell rating on Gamestop's stock with an $3 price target.

Credit Suisse analyst Seth Sigman maintains at Underperform, price target lowered from $6 to $5.

Wedbush analyst Michael Pachter maintains at Outperform, $8 price target.

GameStop Management Is 'Confused'

GameStop's disappointing quarter was accompanied with yet another reduction to its outlook, Hickey said. There's reason to believe this weakness will remain over the next few quarters as industry trends are not favorable. Specifically, the current console generation is set to expire soon while digital distribution of games "cements its grip" on purchases.

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Management is not only guilty of being "confused" but "distant from market realities," the analyst wrote in a note. The company's outlook is merely an "update to the GME eulogy" and a "sad acknowledgement of their looming expiration."

GameStop's 'Shocking' Guidance

GameStop's quarter was not only "very weak" but serves as a reminder the company faces both cyclical and structural pressures, Sigman said. Comps in the quarter fell 23.2% and sales trends decelerated across every category except preowned -- which was still down 13.3%.

Management's "shocking" guidance revision suggests third-quarter trends will be similar in the fourth quarter, if not worse. However, part of the poor guidance could be attributed to a negative impact of certain title delays into 2020.

Meanwhile, GameStop bought back $116 million worth of its stock in the quarter, which Sigman said is "confusing" as EBITDA was down 95% year-over-year.

"Looking out, not only is it difficult to see how results will improve in a new cycle (after all, the last cycle didn't seem to stimulate enough software/pre-owned), but what happens between now and then is more concerning," the analyst wrote.

GameStop Could Be 'Back On Track' Next Year

GameStop fell well short of expectations, but Pachter said that can be attributed to broader industry trends. Specifically, NPD data showed a 28% decline in hardware and software sales ahead of the launch of new Sony (NYSE: SNE) PlayStation and Microsoft (NASDAQ: MSFT) Xbox consoles in late 2020. Management's revised outlook also reflects this weak near-term demand ahead of the gaming console launch.

Looking forward, Pachter said GameStop can right-size its store base of 5,000 units to better reflect lower demand and the company can better manage inventory and operating expenses to remain profitable "for the foreseeable future." This will allow the company to start addressing its $419 million debt balance at $40 million per quarter and repay or refinance its debt balance before it is due in March 2021. At that point, the "short thesis begins to deteriorate."

Price Action

GameStop's stock traded lower by 19% to $5.28 per share at time of publication.

Latest Ratings for GME

Date Firm Action From To
Dec 2019 Maintains Neutral
Dec 2019 Maintains Underperform
Sep 2019 Maintains Sell

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