Must-See Analysis: Is GameStop (GME) a Buy, Hold, or Sell Ahead of Earnings Unveiling?

GameStop Corporation (GME), which primarily sells video games and gaming consoles, posted its fourth consecutive drop in quarterly revenue and missed analyst estimates for the first quarter of fiscal 2023 as consumers cut back on non-essential spending amid inflationary pressures and an uncertain economy.

The company reported first-quarter revenue of $1.24 billion, down nearly 10% year-over-year. Revenue missed analysts’ average estimate of 1.36 billion, according to Refinitiv. GME posted an adjusted loss of $0.14 per share, less than the expected loss of $0.17 per share.

The company is set to release its second quarter fiscal 2023 results on September 6, 2023, after the market’s closing. For GME to surpass Wall Street estimates, the company must report a lower-than-$0.14 per share loss or a year-over-year improvement of more than 60%.

Analysts expect the company’s revenue for the quarter to be $1.14 billion, up 0.5% year-over-year. The company failed to surpass the consensus revenue estimates in three of the trailing four quarters, which is disappointing.

The signature meme stock has been one of the most widely followed stocks on the market. The retailer has witnessed significant rallies in the past driven by retail investors’ interest, especially during the peak of the COVID-19 pandemic when the stock market was in the grip of meme mania.
However, this year, the stock has not performed as investors hoped it would. Shares of GME have plunged nearly 15% over the past month and more than 30% over the past year. But the stock has gained close to 7% year-to-date.

GME’s shares were boosted, with newly appointed executive chairman Ryan Cohen raising his ownership stake through his RC Ventures company. According to an SEC filing, the transaction happened on June 9, with Cohen paying $10 million for 443,842 GameStop shares. Cohen owns 36,847,842 shares of GME in total.
Here are the factors that could affect GME’s performance in the upcoming months:

Mixed Financials

For the first quarter that ended October 29, 2022, GME’s net sales decreased 10.3% year-over-year to $1.24 billion, and its gross profit came in at $287.30 million, down 3.8% year-over-year. Also, the company’s adjusted operating loss was $51.20 million for the quarter.
In addition, GME’s adjusted EBITDA loss stood at $29.40 million. The company reported an adjusted net loss and adjusted loss per share of $42.30 million and $0.14, respectively.

However, the company’s cost-cutting measures showed signs of working as its selling, general and administrative (SG&A) expenses reduced to $345.70 million, compared to $452.20 million in the previous year’s first quarter. Moreover, its cash and cash equivalents came in at $1.06 billion as of April 29, 2023, versus 1.04 billion as of April 30, 2022.

Major Executive Shake-Up

After reporting a decline in revenue and a narrowed loss in its first quarter, the company announced the leadership shake-up, terminating CEO Matt Furlong in June after serving GameStop for the past two years. The retailer also said that Ryan Cohen will see his role at GME change from chairman to executive chairman.

As executive chairman, he will be tasked with “capital allocation, evaluating potential investments and acquisitions, and overseeing the managers of the Company’s holdings,” according to the SEC filing.

Further, GameStop’s CFO Diana Saadeh-Jajeh, who resigned on August 11 after serving for about a year, marks the second high-profile exit in two months.

Crypto Wallet Take-Down

GME, once a giant among video game retailers, has witnessed its star fade for more than a decade. The struggling retailer hoped a bet on crypto would partially reverse its fall, launching a digital asset wallet in May 2022 that allows games and others to store, send, receive, and use cryptos and non-fungible tokens (NFTs) across decentralized apps within having to leave their web browsers.

However, last month, the company announced discontinuing its crypto wallets “due to the regulatory uncertainty of the crypto space.” The retailer will remove its wallets, which operate through iOS and Chrome extensions, from the market on November 1, 2023.

Mixed Historical Growth

Over the past three years, GME’s revenue declined at a CAGR of 0.9%. Its tangible book value increased at a CAGR of 43% over the same period. Also, the company’s total assets and levered free cash flow grew at 7.5% and 38.8% CAGRs over the same time frame, respectively.

Unfavorable Analyst Estimates

Analysts expect GME’s revenue to decline 3.7% year-over-year to $5.71 billion for the fiscal year ending January 2024. The company’s EPS is expected to remain negative for at least two fiscal years.

For the fiscal year 2025, analysts expect GME’s revenue to decrease 3% from the previous year to $5.53 billion.

Bottom Line

During the first quarter of 2023, GameStop witnessed a revenue drop and incurred losses due to the disappointing performance of new game releases. However, the company’s cost-cutting strategy resulted in lower expenses and improved cash.

While there could be a slight increase in net sales during the second quarter, and its loss might be narrowed, GME’s prospects look challenging.
Even though the company continues its transition from brick-and-mortar to a digital focus, there are no signs of meaningful improvement, with the primary reason being a weakness in its core business of trading physical video games, which has suffered a significant decline due to the gaming industry’s digitalization.

Also, GME’s hopes for cryptocurrencies to boost its financial position have been dashed since the company decided to discontinue its crypto wallet, citing regulatory uncertainty in the crypto space.

Meanwhile, investors could keep a close eye on GME’s expenses, reflecting the effectiveness of its cost-cutting strategy and the company’s growth as chairman Ryan Cohen temporarily stepped into the CEO role, reaffirming his commitment to GameStop’s long-term success.
Given GME’s relatively bleak financial performance and an uncertain near-term outlook, it could be wise to avoid this stock until its upcoming earnings release.

With Major Retail Stores Closing Down in 2023, What’s Next for These Stocks?

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically-free money like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement ten successive interest-rate hikes in a little over a year to take the Fed funds rate to a target range of 5% to 5.25%.

While the consumer price index only grew by 4% year-over-year, which is the slowest in 2 years, the picture wasn’t as optimistic when volatile food and energy prices were excluded. The core CPI was still 5.3% over the previous year, indicating that consumers still find their budgets stretched.
With the stash of stimulus cash fast dwindling, average American consumers have been forced to rein in their urge to splurge to prevent inflation from biting harder. The Survey of Consumer Expectations for April by the New York Fed showed that the outlook for spending fell by half a percentage point to an annual rate of 5.2%, the lowest since September 2021.

This further explains why even a 0.4% recovery in retail sales for April, after two consecutive months of decline, still fell short of Dow Jones’ estimate of 0.8%.

We had discussed earlier the implications of this slowdown for mid-tier retailers and the prospects of the retail industry vis-à-vis travel and hospitality.

Given the fact that legacy retailers such as Bed Bath & Beyond Inc. couldn’t be rescued (and has subsequently filed for Chapter 11 on April 23), and retailers are encouraging gamified shopping on Livestream, we will look at a few embattled retail stocks in the context of the accelerated pace of store closures with the ascent of online retail.

On May 26, the Illinois-headquartered integrated healthcare, pharmacy, and retailing company Walgreens Boots Alliance, Inc. (WBA) announced its decision to slash its corporate staff by about 10% in an effort to streamline operations.

The second-largest pharmacy store in the United States has been around since 1901. However, the financial hardships it has faced during the pandemic resulted in lost market share, which the retailer has begun clawing back with acquisitions of healthcare services operator VillageMD and urgent-care provider Summit Health and the launch of initiatives, such as drone delivery.

However, the empowerment of each store to serve broader areas more remotely has come at the cost of a reduction in the total number of locations. In October, the company announced a slew of store closures across states, such as New York, Kentucky, Florida, Massachusetts, and Colorado.

WBA’s stock has lost more than 22% of its value over the past six months, relative to an almost 9% gain for the S&P 500 over the same period.

Diversified health solutions company CVS Health Corporation (CVS) has been busy aligning itself with the pandemic-catalyzed trend of patients using digital technologies to manage their health. To this end, the retailer has acquired the well-known home healthcare agency Signify Health to further its medication delivery reach.

However, this reorganization has also been accompanied by store closures. While the economic stagnation caused by the pandemic caused CVS to lose over 20 stores towards the end of 2021, the company has since decided to proactively close 300 locations each year for the next three years as it hones in on digital strategy and implements a "new retail footprint strategy aligned to evolving consumer needs."

With the strategic realignment yet to bear fruit, store closures in Pennsylvania, North Carolina, Maryland, California, Florida, Texas, and Georgia, among other states, have also been accompanied by around 29% slump in CVS’ stock price, compared to 9% gain for the S&P 500.

The muted retail outlook discussed earlier has also been reflected in the first quarter earnings of Macy's, Inc. (M). Although the mid-tier retailer surpassed its earnings estimates for the quarter, a spring pullback has caused it to miss its revenue estimates and slash its top- and bottom-line guidance for the entire year.

Moreover, in February 2020, the retailer announced its three-year restructuring plan, pursuant to which it had decided to close 125 of “its least productive stores.” With closures in 2020, 2021, and 2022, M has, in the words of CEO Jeff Gennette, begun its ‘final stretch’ of store closures with four stores: one each in Los Angeles, California; Fort Collins, Colorado; Gaithersburg, Maryland; and Kaneohe, Hawaii.

Given the prevailing demand softness in the unfavorable macroeconomic environment, M expects sales of $22.8 billion to $23.2 billion for the year, down from a previous range of $23.7 billion to $24.2 billion, while expected earnings per share of $2.70 to $3.20 is a major reduction from the previous guidance of $3.67 to $4.11.

M stock has plummeted by around 24% over the past six months, compared to the S&P500’s 9% gain over the same period.
Games and entertainment retailer GameStop Corporation (GME) was at the center of an unprecedented hype created by retail investors on social media forums when money was practically free, and inflation was ‘transitory.’

The hype created by an army of amateur traders in 2021 had less to do with the fundamentals of the company and more to do with the excitement of trading and a desire to short-squeeze professional speculators who were betting against it.

With online gaming more a norm than an exception, GME, which has been around since the 1980s, has seen a dramatic decrease in sales, resulting in many stores closing down and the company’s decision to transition into an exclusively online retailer.

In the fiscal first quarter that ended April 29, GME reported revenue of $1.24 billion, down from $1.38 billion in the year-ago period. Sales in the United States, Canada, and Australia dropped by 16.4%, 18.5%, and 8.9%, respectively, compared to the year-earlier period. This coincided with CEO Matthew Furlong's sudden firing and Ryan Cohen's appointment as executive chairman.

Since many e-commerce platforms offer viable alternatives for purchasing merchandise and hardware sold by the company, it is unclear how GME, with its own platform and fleet of e-commerce stores, would be able to differentiate itself from other players in this space and find its path to profitability.

GameStop (GME) Stock Could Soar on June 7: Here’s What to Watch

Video game retailer GameStop Corporation (GME), the signature meme stock, had previously been riding some short-term momentum. However, that has since leveled out, and the company has been making progress in right-sizing its business by slashing its inventory levels and reworking its cost structure.
Moreover, the company is undergoing a transitional period by halting its e-commerce efforts and focusing on its brick-and-mortar locations. Furthermore, GME makes changes to its rewards program. Also, GME stock might get a significant boost if there is a ban on short selling.

GME is expected to release its fiscal 2023 first-quarter report on June 7. The quarterly report should show reflect the drastic measures the company has been undertaking to achieve considerable profitability this year.

Let’s discuss the catalysts that could send GME’s stock price to fresh heights:

Favorable Fourth-Quarter Earnings

For the last fiscal year’s fourth quarter, the video game retailer posted its first quarterly profit in two years and surpassed analysts’ expectations for revenue. Its aggressive cost-cutting measures and strong demand for video game hardware in the holiday quarter helped the company become profitable.

For the quarter that ended January 28, 2023, GME reported a profit of $48.20 million, or $0.16 per share, compared to a loss of $147.50 million, or $0.49 a share a year earlier. Adjusted earnings of $1.16 a share beat analysts’ projections of a loss of $0.13 per share.

For the fourth quarter, the company’s net sales dropped slightly to $2.23 billion from $2.25 billion in the year-ago quarter. However, the figure was higher than analysts’ estimates of $2.18 billion.

The video game company had been working vigorously to steer itself back to profitability and partially got there by slashing its inventory levels and costs. Its selling, general, and administrative expenses were $453.40 million for the quarter, or 20.4% of sales, compared to $538.90 million, or 23.9% of sales, in the year-ago period.

Like many retailers, GME struggled with supply chain delays that left the company with a backlog of inventory after it previously tried to meet strong demand. Based on its fourth-quarter balance sheet, the company had $682.90 million in inventory, down from $915 million a year ago.
Furthermore, GME has been trying to improve its cash balance as a part of its revival strategy. The company’s cash and cash equivalents for the quarter were $1.39 billion.

“GameStop is a much healthier business today than it was at the start of 2021,” CEO Matt Furlong said on a call with analysts. “We have a path to full-year profitability.”

Shifted Focus from E-Commerce to Brick-And-Mortar Sales

Ryan Cohen took over GME in 2021, aiming to transform the struggling video game retailer into an e-commerce juggernaut. Unfortunately, the company’s e-commerce sales failed to take off. GME’s losses widened, and Cohen’s new online-sales executives resigned.
As a result, GME began cutting costs. The company canceled plans to build additional warehouses, closed a new e-commerce customer-service center, and laid off many corporate employees hired under the management of Cohen. Also, according to former GME executives and analysts, Cohen miscalculated what customers were prepared to pay through its website and app.

“Quarter after quarter we were unsuccessful with new ventures,” commented Ted Biribin, GME’s former employee. “If something didn't work, senior leadership would go onto something else very quickly.”

GME’s CEO, Matt Furlong, stated in an internal memo last year, “Our stores, in particular, are a differentiator that will help us maintain direct connectivity to customers and position us to have localized order fulfillment capabilities across more geographies. While we continue evolving our ecommerce and digital asset offerings, our store fleet will remain critical to GameStop’s value proposition.”

GameStop is poised for solid growth as the company has stopped focusing on e-commerce sales. Consequently, the company can now provide more support for its 4,400 brick-and-mortar stores. GME also introduced an initiative to motivate the company’s staff.

Last year, the company announced an “improved compensation” scheme for its brick-and-mortar video game store’s most senior employees. For Assistant Store Leaders and Senior Guest Advisers, the compensation comes as an undisclosed rise in their hourly pay. For Store Leaders, it comes in the form of $21,000 worth of GME stock (vested for three years) on top of their regular pay, coupled with “the opportunity to earn additional compensation every quarter by hitting goals for performance-based equity grants.”

GME’s focus on physical stores resulted in the company reporting a quarterly profit for the first time in two years. For the full fiscal year 2022, expenses were reduced by more than $100 million.

GME’s Membership Program Getting a Huge Makeover

GME offers incentives to members of its rewards program to secure customer loyalty. To that end, the company is seemingly making significant changes to its customer loyalty program. The existing PowerUp Rewards membership will have its name changed to GameStop Pro, with the price going up from $15 per year to $25.

GameStop Pro will access some special perks through this new program. Among other incentives, members will get bigger discounts on collectibles, pre-owned games, GameStop brand gear, clearance items, and more. GameStop Pro is expected to roll out on June 27, with existing memberships being phased out as they come up for renewal.

GME’s revised customer loyalty program could enhance profitability and growth for the company.

Prohibition on Short Selling Could Send GME To New Highs

The practice of short selling has come under increased scrutiny amid the recent banking turmoil. Short selling is a well-known strategy in which financial traders bet that the price of a stock will go down. Short sellers largely profited from the banking crisis by borrowing shares they expected to fall and repaying the loan for less later to pocket the difference.

In March 2023, Wachtell, Lipton, Rosen & Katz, a law firm known for representing large companies in mergers and against attacks from hedge funds, called on U.S. securities regulators to restrict short sales on financial institutions. Also, the calls from Capitol Hill and elsewhere to prohibit short-selling have gotten louder lately.

With more regulators and lawmakers ramping up their calls for an outright ban on short selling, investors should prepare for potential legal changes. As traders anticipate this possibility, GME stock could get squeezed higher quickly. The r/WallStreetBets crowd might start a massive short squeeze in anticipation of a potential short-selling ban.

How Should Investors Approach the Stock

The stock has risen 33.5% year-to-date, beating the 11.5% gain in the S&P 500 index. Moreover, shares of GME have gained 20.1% over the past month and 32.1% over the past three months.

As investors think the company can pull off a successful business turnaround, GME stock has risen recently. The video game retailer has essentially pivoted its focus to brick-and-mortar sales instead of e-commerce sales with an eye on improving profitability. The shift already resulted in its first quarterly profit in over two years.

Moreover, the revised customer loyalty program, GameStop Pro, is a smart move that could bolster the company’s top-line results in 2023. At the same time, a potential ban on short selling could prompt a massive final squeeze for GME stock. Now, all eyes are on GME’s first-quarter fiscal 2023 earnings, to be released on June 7, after the market close.

Over the past few years, stock traders and price chasers have targeted GME, but sensible investors should avoid emotional trades and monitor the company’s financial and operational progress.

Investors could also keep tabs on the buying activity of GME’s insiders. After all, if the company’s insiders express their confidence through share purchases, that is probably a positive sign for the stock. Director Larry Cheng recently purchased 5,000 shares of GME worth about $114,000. Following this purchase, Cheng now owns a total of 44,088 shares.

While many strong forces propel GME, investing in the stock still involves a high level of risk. Investors should continue to expect GME stock to remain volatile (with a 24-month beta of 1.90), and it is not appropriate to pour their entire account into this one stock.
Though it is advisable to take a small position in GME stock, as it may be on the cusp of a breakout, and the share price is likely to shoot higher in the near future.