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GameStop Q3 Earnings Preview: Will GME Stock's Freefall Continue?

Christopher Vargas

GameStop GME is set to report its third quarter report after the closing bell on Tuesday, December 10. GME stock has been in a freefall in 2019 and investors have sold the stock into one of its lowest valuations in the past 10 years at around 6.9X its forward earnings, which is well below the industry average of 13.5X forward earnings.

Wall Street has largely dumped the stock because digital marketplaces have started to displace the brick-and-mortar chain. GameStop’s upcoming Q3 report will dictate the momentum the company brings into the holiday season, which it desperately needs to capitalize on.

Financial Declines Steepen

Expectations for the video game retailer were already low going into its past second quarter report, but the company’s Q2 performance still managed to surprise some, after sales dropped 14.3%.

Weakened demand across the retailer's hardware and software offerings, including its pre-owned games segment, caused the downturn. The declines in demand in its pre-owned games is especially detrimental to GameStop as it is its most profitable segment. Comparable store sales fell 11.3% in the second quarter as well.

To make matter worse, GameStop CFO James Bell stated “We expect a percentage decline of comparable same-store sales for 2019 to be in the low teens, which includes a difficult comparable-sales challenge from last year.”

The consumer shift towards the online marketplace for video games is a big factor in the decline. But the decline in hardware sales is largely due to the upcoming release of next generation consoles.

Microsoft MSFT and Sony SNE confirmed the timeline of their newest game consoles earlier this year, which is set for the 2020 holiday season. GameStop management said that the announcement came earlier than expected and has caused a pullback in video game and console purchases as consumers await the next generation of gaming.

Outlook 

As part of its turnaround plan, GameStop actively cut its costs in the latter half of Q2 and saw its expenses drop by 4% in the quarter.

Management is now ramping up its cost cutting efforts through a wide variety of moves that includes reducing inventory, closing underperforming stores, and revamping the digital sales channel. GameStop executives forecast the expense managing initiatives will improve the firm’s margins despite the sales declines.

GameStop management has also tried to slash debt, bolster its gross profit margin, and decrease its capital spending. Plus, the firm plans to reduce its sales footprint, especially in markets that have more than one GameStop location. It also plans to refresh its inventory so it can focus on higher margin items like accessories and collectibles.

Our Q3 consensus estimates call for earnings to plunge over 91% to $0.06 per share and for net sales to fall 22.6% to $1.61 billion. US sales are projected to drop 20.2% to about $1 billion and comparable store sales are anticipated to decline 12.8%.

Q4 will be a pivotal quarter for GameStop as the holiday season will be included in the report. Our Q4 estimates forecast sales to come in at $2.8 billion for an 8.62% drop and for earnings to slip 3.45% to $1.40 per share.

Looking ahead to the next fiscal year, estimates predict GameStop’s sales will decline only another 2.8%. However, its bottom line is projected to tumble 18.18% to $0.90 per share.

Bottom Line

GameStop’s stock has been pummeled because the company has not convinced investors how it will address the ongoing consumer shift to buying video games digitally. While management has employed some aggressive restructuring plans that have seen some success, GameStop doesn’t seem poised to grow anytime soon.

GameStop has had its earnings estimates revised lower across the board, helping earn the stock a Zacks Rank #5 (Strong Sell).

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