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GameStop (GME) Down 11.6% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
American Airlines (AAL) possesses the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

It has been about a month since the last earnings report for GameStop (GME). Shares have lost about 11.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is GameStop due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

GameStop Posts Q4 Earnings Miss, Provides Soft View

GameStop posted dismal fourth-quarter fiscal 2018 results, with the top and the bottom line missing the Zacks Consensus Estimate and declining year over year. Performance was hit by sluggishness at pre-owned video game as well as lower sales of new video game hardware and software. Also, the additional 53rd week in 2017 led to an unfavorable year-on-year comparison.

To top these, the company provided an unimpressive sales and comps view for fiscal 2019. Bottom-line view for the first quarter of fiscal 2019 is also unimpressive. For the first quarter of fiscal 2019, the company expects the bottom line in the bracket of breakeven to a loss of 5 cents. Further, management stated that it does not expect to generate profits in the first half of fiscal 2019.

Nevertheless, management has embarked on a new savings initiative with the motive of boosting financial competency in the long run.

Q4 Performance

In the quarter under review, adjusted earnings per share fell almost 16.7% year over year to $1.45 and lagged the Zacks Consensus Estimate of $1.59.

Net sales declined 7.6% (down 6.2% on a currency-neutral basis) year over year to $3,063 million. Moreover, the top line missed the Zacks Consensus Estimate of $3,284 million. Sales were adversely impacted by lower sales of pre-owned video games and new softwares. Moreover, an unfavorable year-on-year comparison stemming from an extra week in fiscal 2017 was a drag.

Consolidated comparable store sales (comps) inched up 1.4%. The uptick can be attributed to a 3.4% increase in the United States, countered by a 2.9% decline internationally. Strong hardware and software sales were the primary drivers behind comps increase in the United States.

By sales mix, new video game hardware sales declined 9.8% to $761.3 million. Higher sales of Nintendo Switch were more than offset by declines in sales of Xbox One X as well as adverse impacts from the 53rd week in fiscal 2017.

New video game software sales fell 7.8% to $961.4 million, thanks to earlier launch of key titles and adverse impacts from the 53rd week in fiscal 2017.

Pre-owned and value video game products sales were $521.6 million, down 21.3% year over year due to soft hardware and software performances.

Nevertheless, video game accessories sales jumped 18.8% to $389.3 million, backed by strong headset and controller sales. Also, digital receipts grew 4.7% to $432.5 million and digital sales increased 6.5% to $ 65.4 million. Collectibles’ sales rose 3.1% to $268.8 million, buoyed by continuous growth in the domestic and international collectibles business.

Moving on, gross profit fell 7.1% to $2,308.1 million compared with year-ago quarter’s figure. Moreover, gross margin contracted 170 basis points (bps) to 24.4%, stemming from lower pre-owned sales and margins. The metric was also weighed by lower margins from new video game hardware and software as well as mix shifts across different categories.

SG&A expenses dipped almost 1% to $1,888.6 million in the reported quarter. Adjusted operating income declined approximately 27.8% to $223.7 million and adjusted operating margin contracted nearly 200 bps to 7.3%.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $1,624.4 million, up nearly $770 million year on year. This was backed by gains from the divestiture of Spring Mobile, which was completed on Jan 16, 2019.

Also, the company had net receivables of $134.2 million, net long-term debt of $471.6 million and shareholders’ equity of $1,336.2 million at quarter end.

On Mar 4, 2019, management declared a quarterly cash dividend of 38 cents per share, which was paid on Mar 29, 2019 to shareholders of record as of Mar 15, 2019.

Further, the company currently has $300 million under its share repurchase authorization.

Guidance

In sync with the strategic and financial review conducted in fiscal 2018, the company commenced with a savings and profit augmenting initiative to support its long-term objectives. The initiative includes efforts such as building efficiency across supply chain and optimizing expenses. Further, the company expects to achieve annualized operating profit growth of around $100 million on the back of the program. Considering the timing of this initiative, it is likely to have minimal impacts on GameStop’s performance in fiscal 2019.

Since the savings initiative is currently on track, the company has not provided any earnings projection for fiscal 2019. However, it expects sales and comps for the fiscal to decline in the range of 5, respectively. Also, management expects adjusted income tax rate of nearly 27%.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -1233.33% due to these changes.

VGM Scores

Currently, GameStop has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise GameStop has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.



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