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GameStop (GME) Q2 Loss Wider Than Expected, Stock Declines

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Shares of GameStop Corp. (GME - Free Report) declined roughly 10.9% during the after-market trading session on Sep 9. This downside can be attributed to dismal second-quarter fiscal 2020 performance on account of the coronavirus outbreak that compelled the company to close its stores on a temporary basis. The videogame retailer reported wider-than-expected loss and continued to grapple with soft top-line performance. Comparable store sales results were also disappointing.

Nonetheless, management highlighted that it remains focused on strengthening balance sheet, prioritizing allocation of resources to areas that generate solid cash flow, lowering expenses, optimizing inventory, and creating and expanding digital ecosystem. GameStop registered an outstanding increase in global e-commerce sales and a significant reduction in SG&A expenses during the quarter. Also, it saw an improvement in cash position at quarter-end.

CEO, George Sherman, said “While the ongoing pandemic continues to create a somewhat uncertain environment in the short term, we are very pleased by the consumer response at GameStop to the few recent video game product introductions and we believe we are ready, with expanded service and payment options, to handle the expected surge in demand and participate in a very significant way in the console launches later this year.”

Shares of this Grapevine, TX-based company have surged 68.2% in the past three months compared with the industry’s rally of 37.1%.

GameStop Corp. Price, Consensus and EPS Surprise

GameStop Corp. Price, Consensus and EPS Surprise

GameStop Corp. price-consensus-eps-surprise-chart | GameStop Corp. Quote

Q2 Performance

It is quite obvious that GameStop bore the brunt of temporary store closures that were undertaken to check the spread of COVID-19. This Zacks Rank #3 (Hold) company posted adjusted loss of $1.40 per share, wider than the Zacks Consensus Estimate of loss of $1.27 and a loss of 32 cents reported in the year-ago period. Lower net sales hurt the company’s bottom line.

Net sales of $942 million surpassed the Zacks Consensus Estimate of $938 million but declined 26.7% on a year-over-year basis. The impact of operating during the last few months of the seven-year-long current generation console cycle and the subsequent limited availability of hardware and accessories was visible in the company’s top-line performance. Management also informed that owing to the temporary closure of stores, total operating days fell approximately 13% year over year. Furthermore, as part of the de-densification initiative, there were 10% fewer stores versus the year-ago quarter. However, the company informed that about 40% of closed store sales were recaptured through the transfer to neighboring locations and online.

At the end of the quarter, GameStop operated 5,122 stores globally, which is 602 fewer stores compared with the prior year. The company remains track to close roughly 400-450 stores globally this fiscal year. At the end of August 2020, the company had substantially all of its worldwide locations open to limited customer access or curbside delivery.

We note that comparable store sales fell 12.7%, adjusting for fewer operating days on account of store closures owing to the ongoing pandemic.

Notably, the company’s e-commerce business remained sturdy with sales up 800% during the quarter under review. This followed an increase of 519% in the preceding quarter. Total e-commerce sales represent more than 20% of total net sales during the quarter under review. Management notified that enhanced fulfillment capabilities helped recapture about 73% of sales through stores open for limited curbside pickup during the quarter under review. Notably, 90% of all buy online pick up in-store orders were fulfilled within 24 hours.

By sales mix, hardware and accessories sales declined 20.4% to $441.6 million. While software sales fell 30.8% to $386.5 million, collectibles sales decreased 34% to $113.9 million.

Moving on, gross profit fell 36.8% year over year to $252.2 million. Again, gross margin contracted 420 basis points to 26.8% owing to the increased mix of hardware sales, which carry a lower gross margin.

Adjusted SG&A expenses declined 24.3% to $336.9 million in the reported quarter. However, as a percentage of net sales, the metric deleveraged 120 basis points to 35.8%. The company reported adjusted operating loss of $84.7 million wider than the adjusted operating loss of $45.8 million in the year-ago period.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $735.1 million, short-term debt of $221.3 million, long-term debt of $215.9 million and stockholders’ equity of $352.3 million. As of Aug 1, 2020, the company reduced borrowings under its asset based revolving credit facility by $100 million to $35 million.

Accounts payable were down 30.4% to $256.4 million compared with second-quarter fiscal 2019. The company ended the quarter with total inventory of $474.6 million, down 50%.

During the quarter, the company generated $192.8 million in cash flow from operations and $181.9 million in free cash flow. The company incurred capital expenditures of $10.9 million during the quarter. Management anticipates capital expenditures of roughly $55-$60 million during the fiscal year.

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