Shares of GameStop Corp. GME declined roughly 6.5% during the after-market trading session on Jun 9. This downside can be attributed to dismal first-quarter fiscal 2020 performance on account of the coronavirus outbreak that compelled the company to close majority of its stores. The videogame retailer reported a loss and continued to grapple with soft top-line performance. Net sales not only missed the Zacks Consensus Estimate for the sixth quarter in row but also declined year over year. Comparable store sales results also disappointed.
Shares of this Zacks Rank #4 (Sell) company have fallen 10.3% in the past six months compared with the industry’s decline of 19.3%.
Let’s Delve Deeper
It’s quite obvious that this Grapevine, TX-based company bore the brunt of temporary store closures that were undertaken to check the spread of COVID-19. GameStop had shut all its U.S. stores — a total of 3,526 effective Mar 22. Notably, roughly 65% of stores were providing limited curbside pickup.
In fact, even in the last six-weeks of the quarter almost 48% stores were completely non-operational globally, while roughly 42% stores were offering limited curbside delivery option. Nevertheless, all stores in Australia, which represents about 10% of the total store count, remained open. Notably, higher demand stemming from the region resulted in comparable store sales growth of 35%.
To mitigate the impact of this biological catastrophe, GameStop enhanced omni-channel capabilities to meet customer orders through curbside pick-up. It comes as no wonder that the company is focusing on lowering discretionary spending, improving liquidity and maintaining favorable inventory position. The company intends to allocate resources in high value strategic projects that can produce sturdy cash flow. Further, the company remains well poised to capitalize on the likely increase in hardware and software sales courtesy of the introduction of several new software titles and next generation consoles in the later of the year.
Considering aforementioned initiatives and expected trajectory of the business, management anticipates to generate positive adjusted EBITDA for fiscal 2020. However, management cautioned that challenges encountered in the first quarter will persist in the second quarter.
GameStop is making every effort to improve performance. It is exiting loss-incurring businesses and closing underperforming stores. During the quarter, the company closed a net total of 181 stores. Moreover, the company remains focused on expanding high margin product categories. The company also plans to augment store experience, enhance digital capabilities and improve engagement with vendors and partners. Further, the company is enhancing omni-channel features such as “Buy Online Pick Up In Store.”
GameStop Corp. Price, Consensus and EPS Surprise
GameStop Corp. price-consensus-eps-surprise-chart | GameStop Corp. Quote
GameStop posted adjusted loss of $1.61 per share, narrower than the Zacks Consensus Estimate of loss of $1.76. Notably, the company reported an earnings of 7 cents in the year-ago period. Lower net sales hurt the company’s bottom line.
Net sales of $1,021 million declined 34% year over year thanks to soft comparable store sales performance, store closures and adverse currency fluctuations. The top line also lagged the Zacks Consensus Estimate of $1,030 million.
We note that consolidated comparable store sales fell 17% excluding stores that were closed during the quarter as a result of the pandemic. Including the impact of stores, which were closed for the majority of the quarter, comparable stores sales plunged approximately 30%. This followed a decline of 26.1% and 23.2% in the preceding two quarters. Management notified that comparable store sales for the month of May have slid approximately 4%.
Notably, the company’s e-commerce business remained sturdy with sales up 519% during the quarter under review. E-commerce sales soared more than 1,000% during the six weeks when stores were temporarily closed to customer access. The momentum gained continued in the month of May as well with e-commerce sales up more than 1400%. Total e-commerce sales grew to more than 50% of total sales during the quarter under review.
By sales mix, hardware and accessories sales declined 21.8% to $513.1 million. This is reflective of store closures. While software sales fell 43.1% to $417 million, collectibles sales decreased 42.5% to $90.9 million. The company pointed that only few new software titles were launched during the quarter.
Moving on, gross profit fell 40.1% year over year to $282.4 million. Again, gross margin contracted 270 basis points to 27.7% owing to the increased mix of hardware compared with the year-ago period.
Adjusted SG&A expenses declined 16% to $381.2 million in the reported quarter. However, as a percentage of net sales, the metric deleveraged 800 basis points to 37.3%. The company reported adjusted operating loss of $98.8 million against adjusted operating income of $17.5 million.
Other Financial Aspects
GameStop ended the quarter with cash and cash equivalents of $570.3 million (reflecting $135 million drawn under its revolving credit facility), current portion of long-term debt of $417.2 million and stockholders’ equity of $435 million. Accounts payable were down 53.7% to $212.1 million. The company ended the quarter with total inventory of $654.7 million compared with $1,149.1 million in the prior year. During the quarter, the company incurred capital expenditures of $6.6 million. Management expects capital expenditures of roughly $43 million during the fiscal year.
As of Jun 3, the company had reduced its outstanding borrowings under the facility to about $100 million. In fact, by the end of second-quarter fiscal 2020 management envisions to hold nearly $575-$625 million as total cash and liquidity on the back of its efficient working capital management efforts.
Store Reopening On Track
With restrictions to curb the coronavirus outbreak being lifted, GameStop is reopening stores globally. In this regard, almost 85% of the company’s stores located in the United Sates were reopened by the end of May for limited customer access or curbside delivery. Meanwhile, 90% of the company’s stores were operational once again in international markets.
However, in the wake of the recent social unrest in the United States, the company had to close roughly 100 stores that were earlier reopened. Out of these, management expects 35 outlets to be closed for the foreseeable future due to severe damage inflicted.
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