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Even though GameStop (GME) made some progress toward achieving profitability through cost-cutting efforts, third-quarter sales fell short of analysts’ expectations and the company posted a narrow loss. GME is scheduled to release its fourth quarter earnings report today, so let’s dig into the fundamentals to determine if the stock is a smart buy. read more….
GameStop Corp. (GME), a leading retailer of video game hardware and software products, is scheduled to release its fourth quarter and full year earnings report after market close on Tuesday, March 26, 2024. Analysts expect EPS for the quarter ending January 2024 to be $0.30, up 84.4% year-over-year.
However, GME’s fourth-quarter revenue is expected to be $2.05 billion, down 7.9% year over year. The company’s third-quarter sales also fell short of analysts’ expectations due to intense competition and weak demand for video games, as consumers cut back on spending in an uncertain economy. High inflation and rising borrowing costs have led to uneven spending in the gaming industry.
GameStop reported third-quarter sales of $1.08 billion. In comparison, the consensus estimate was for him to make $1.18 billion. Additionally, the video game retailer’s net loss for the quarter was $3.1 million, narrowing its loss from $94.7 million in the year-ago period.
Additionally, the retailer made significant cost reductions during the quarter, with selling, general and administrative expenses (SG&A) down 23.6% year-over-year to $296.5 million. The board also approved a new investment policy that gives CEO Ryan Cohen more control over the company’s portfolio and allows him to invest in equities.
“GameStop entered a new phase of transformation in the second half of 2022,” GME said in its 10th quarter filing. “As a result, GameStop is focused on his three overarching goals: establishing an omnichannel retail experience, achieving profitability, and leveraging brand assets to support growth.”
Despite progress in cutting costs and improving profitability, GameStop may still have a long way to go to reach its goals, said John Orr, an analyst at global research firm Third Bridge. do not have. “Our experts note that even with so many store closures, GameStop likely still has twice as many stores as it needs.” said John Orr.
“While weak third-quarter sales were expected, our experts believe GameStop will continue to suffer from a widening loss of market share to mass retailers and e-commerce giants such as Amazon. “It’s going to be a tough battle,” Oh added.
GME stock has risen 11% over the past month, closing at $15.12. However, the stock price has fallen 14.4% in the past six months and 34.3% in the past year.
Here’s what could impact GME’s performance in the coming months.
worsening financial situation
GME’s net sales for the third quarter ended October 28, 2023 were $1.08 billion, a decrease of 9.1% from the same period last year. Net sales for the Hardware and Accessories segment decreased 7.6% year-over-year, and net sales for the Software and Collectibles segment decreased 7.6% year-over-year. Year-on-year comparisons for the segments were 8.7% and 14.3%, respectively.
Additionally, the retailer’s gross profit decreased 3.4% year-over-year to $281.8 million. The company reported a net loss of $3.1 million, or a loss per share of $0.01.
remarkable historical growth
Over the past three years, GME’s revenue has grown at a CAGR of 3.4%. Its tangible book value grew at a CAGR of 56.1% over the same period. Additionally, the company’s total assets increased at a CAGR of 6.6% over the same period, and leveraged free cash flow increased at a CAGR of 70.3%.
Disappoint analysts’ expectations
Analysts expect GME’s sales for the first quarter ending April 2024 to be $1.09 billion, down 11.8% year over year. The company is expected to report a loss of $0.05 per share in the trailing quarter, compared to a loss of $0.14 per share reported in April 2024. Previous year period.
The company’s revenue and EPS for the fiscal year ending January 2025 are expected to be $5.2 billion and $0.12, down 5.9% and 8% year over year, respectively.
various profitability
GME’s trailing 12-month asset turnover ratio was 1.76x, which is 77% higher than the industry average of 1x. However, its gross margin for the trailing twelve months was 24.10%, which is 32.7% lower than the industry average of 35.79%. The company’s net profit margin for the trailing twelve months was -0.14%, compared to the industry average of 4.76%.
Furthermore, the company’s ROCE, ROTC, and ROTA for the past 12 months were -0.65%, -2.17%, and -0.26%, which were lower than the industry averages of 11.49%, 6.04%, and 4.33%, respectively.
mixed evaluation
In terms of future EV/Sales, GS is currently trading at 0.73x, 41.5% lower than the industry average of 1.24x. The company’s forward price-sales multiple is 0.83, which is 10.1% lower than the industry average of 0.93. However, the company’s non-GAAP forward P/E and EV/EBIT are 120.96x and 75.76x, which are 675.26% and 447.7% higher than the industry averages of 15.60x and 13.83x, respectively.
POWR Ratings Reflect Uncertainty
GME’s mixed fundamentals are reflected in the POWR Rating. The stock has an overall rating of C, which equates to Neutral under our proprietary rating system. POWR ratings are calculated by considering 118 different factors, with each factor weighted to the best degree.
Our proprietary rating system also evaluates each stock based on eight different categories. The stock has a C grade for quality and value, consistent with its mix of profitability and valuation, respectively.
GME ranks #36 out of 41 stocks in the Specialty Retailers industry.
Apart from what we mentioned above, we also give GME grades for stability, sentiment, growth, and momentum. Get all POWR ratings for GME here.
conclusion
GME’s third-quarter results fell short of analysts’ sales forecasts as losses were lower than expected. The company further attributed the decrease in SG&A expenses to its ongoing cost reduction efforts, including significant reductions in personnel and consulting service costs.
In the second half of 2022, GameStop shifted its focus to three core objectives: strengthening its omnichannel retail expertise, achieving profitability, and leveraging brand assets for growth. However, the key hurdle for the company lies in achieving profitability primarily through cost-cutting strategies rather than sales growth.
Over the past year, the specialty retailer has taken steps such as closing several stores in Europe and optimizing its inventory to reduce costs, which have had a positive impact on its bottom line. However, despite making some progress in cost reduction and profitability, GME still has a long way to go to reach its goals.
Given GME’s poor financials, mixed valuation and profitability, and bleak short-term outlook, it may be wise to wait for a better entry point for the stock.
Stocks to consider instead of GameStop Corp. (GME)
Given the uncertain near-term outlook, the chances of GME outperforming in the coming weeks and months are in jeopardy. However, there are many peers with much better POWR ratings. So, instead, consider the following 3 A (Strong Buy) or B (Buy) rated stocks in the Specialty Retailers industry.
Betterware de Mexico, SAB de CV (BWMX)
Next plc (NXGPY)
Destination XL Group Co., Ltd. (DXLG)
Click here to explore more A- and B-rated retailer stocks.
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GME stock rose $0.19 (+1.26%) in pre-market trading on Tuesday. Year-to-date, GME has fallen -13.75%. In comparison, the benchmark S&P 500 index rose 9.69% in the same period.
About the author: Mangeet Kaur Bounce
Mangeet’s keen interest in the stock market led him to become an investment researcher and financial journalist. Using a fundamental approach to analyzing stocks, Mr. Mangeet seeks to help retail investors understand the underlying factors before making investment decisions.
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post Is GameStop (GME) a buy with profit in mind? It first appeared stocknews.com
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