It has been about a month since the last earnings report for GameStop (GME). Shares have lost about 12.8% 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’s Q4 Earnings Miss Estimates, Sales Down Y/Y
GameStop reported fourth-quarter fiscal 2020 results, with the top and the bottom line missing the Zacks Consensus Estimate. Moreover, revenues declined year on year, while earnings increased from the year-ago quarter’s level.
Performance during the quarter was affected by store closures, which were undertaken as part of the company’s de-densification efforts. Also, temporary store closures in Europe due to the COVID-19 pandemic were a drag on the company’s top line. Nevertheless, the company’s e-commerce platform has continued to remain sturdy. Management expects to keep gaining in its digital front. Additionally, management is encouraged by the strong start to fiscal 2021. Markedly, the company’s comparable store sales increased 23% in February 2021, backed by strength in global hardware sales. During fiscal 2021, the company intends to focus on strengthening e-commerce capabilities, enhance delivery speed, boost customer services as well as expand product catalogue.
Q4 in Details
GameStop posted adjusted earnings of $1.34 per share, which missed the Zacks Consensus Estimate of $1.46. The bottom line increased 5.5% from $1.27 reported in the year-ago quarter.
Net sales amounted to $2,122.1 million, which missed the Zacks Consensus Estimate of $2,242 million and declined 3.3% on a year-over-year basis. The company’s top-line performance was affected by 12% decline in store base, owing to strategic de-densification strategy. Moreover, a 27% reduction in store operating days in Europe, due to temporary store closures amid the pandemic was a drag on the top line. Nevertheless, comparable store sales (comps) in the reported quarter increased 6.5%.
Notably, the company’s e-commerce business remained sturdy with sales surging 175% during the quarter under review. E-commerce sales were included in comparable store sales. Total e-commerce sales contributed 34% to net sales during the quarter compared with contribution of 12% in the prior-year quarter. Results gained from increase in demand for consoles, as the company transitioned from generation eight to generation nine console gaming products.
By sales mix, hardware and accessories sales increased 20.5% to $1,162.7 million. Software sales fell 25.7% to $731.2 million, while collectibles sales dropped 6.9% to $228.2 million.
Moving on, gross profit fell 24.9% year over year to $448.6 million. Gross margin contracted 610 basis points to 21.1%. The downside was caused by mix shift toward lower margin console sales with respect to the launch of generation 9 consoles, higher freight costs and credit card processing fees stemming from increased penetration of e-commerce sales as well as increased promotional expenditures.
Selling, general and administrative (SG&A) expenses amounted to $419.1 million, down 18% from $511.7 million in the prior-year quarter. The company’s cost-optimization efforts aided this decline. Further, adjusted SG&A expenses declined 14% to $419.7 million in the reported quarter.
The company reported adjusted operating income of $28.9 million that fell 73.5% from $109.2 million in the year-ago quarter.
Other Financial Aspects
GameStop ended the quarter with cash and cash equivalents of $508.5 million, short-term debt of $146.7 million, long-term debt of $216 million and stockholders’ equity of $436.7 million. As of Jan 30, 2021, the company’s outstanding borrowings under its asset based revolving credit facility were $25 million, which were subsequently repaid on Mar 15, 2021. Following this repayment as well as the redemption of 6.75% senior notes due in 2021, the company had $48.5 million of short-term debt and $216 million of long-term debt remaining on its balance sheet as of Mar 15, 2021.
At the end of the fourth quarter, accounts payable were down 10.2% year on year to $341.8 million, while total inventory of $602.5 million was down 30%.
During fiscal 2020, the company’s net cash flows provided by operating activities amounted to $123.7 million. The company incurred capital expenditures of $60 million during fiscal 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -37.04% due to these changes.
Currently, GameStop has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, GameStop has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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