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GameStop's Past 3 Months Performance Dismal: Here's Why

Zacks Equity Research

Shares of GameStop Corp. GME have been struggling on the bourses. This Zacks Rank #3 (Hold) company has increased 1.1% in the past three months, underperforming the industry’s growth of 26.5%. In fact, the stock price decreased 15% in the past one month against the industry’s growth of 5.7%.

The Grapevine, TX-based company, which used to be one of the prominent players in the video game industry, has been grappling with sluggish sales at its stores owing to consumers inclination toward buying games and gaming consoles from e-retailers or downloading or streaming games online. This is quite evident from its dismal performance in the third quarter of fiscal 2019 that compelled management to revisit its fiscal view.

Management now expects adjusted earnings of 10-20 cents per share versus prior estimate of $1.15-$1.30. Consequently, the Zacks Consensus Estimate for the ongoing quarter and fiscal 2019 has moved down by 25% and 87.3% to $1.05 and 14 cents, respectively, in the past 30 days.



 

Factors Deterring the Stock

GameStop has been struggling with dismal top-line performance for a while now. During the third quarter, net sales declined 25.7% year over year due to soft comparable store sales (comps) performance, store closures and adverse currency fluctuation.

Also, the company’s consolidated comparable store sales performance has been disappointing. Comps fell 23.2% during the second quarter, following a decline of 11.6% in the preceding quarter. Moreover, GameStop now envisions comparable store sales to decline in high teens compared with the prior projection of a low teens decline.

In addition, GameStop’s pre-owned business has been depicting dismal trends for a while due to the launch of fewer titles, decrease in physical software sales, muted demand owing to digital access to older titles and fewer promotions offered to customers. During the third quarter of fiscal 2019, pre-owned and value video game product sales came in at $344.2 million, down 13.3% year over year owing to declines across both hardware and software.

Can Strategies Provide Cushion?

GameStop has been undertaking strategic endeavors to be back on track. These involve cost containment efforts, optimization of inventory, focus on high margin product categories and store base rationalization worldwide. The company also plans to augment store experience, expand and redesign PowerUp Rewards loyalty program, enhance digital capabilities and improve engagement with vendors and partners. Moreover, it is focusing on lowering debt load.

The company is exiting loss-incurring businesses and closing underperforming stores. It expects to shut around 230-250 underperforming stores worldwide by the end of the current fiscal year. Also, GameStop is on track to wind down operations in Denmark, Finland, Norway and Sweden amid weak industry trends. It also announced a series of partnerships to boost presence in the gaming industry and widen customer reach. In sync with this, the company has undertaken partnerships with Complexity Gaming, Infinite eSports as well as Entertainment and Envy Gaming among several others.

However, we believe that aforementioned efforts will take time to yield results and win back investors’ confidence. That said, the current dismal performance remains a trouble for the company.

3 Stocks to Consider

Target Corporation TGT has a long-term earnings growth rate of 7.5% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boot Barn Holdings, Inc. BOOT delivered positive earnings surprise of 22.7%, on average, in the trailing four quarters. It currently sports a Zacks Rank #1.

Best Buy Co., Inc. BBY has a long-term earnings growth rate of 8.7% and a Zacks Rank #2 (Buy).

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