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Why Is GameStop (GME) Down 9.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for GameStop (GME - Free Report) . Shares have lost about 9.1% 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 Q2 Earnings Miss, Sales Beat Estimates

GameStop Corp reported mixed results in second-quarter fiscal 2018, wherein earnings lagged the Zacks Consensus Estimate while revenues beat. Moreover, both top and bottom lines fell year over year. Nevertheless, management reiterated its outlook for the fiscal.

In the quarter under review, adjusted earnings per share plunged 66.7% year over year to 5 cents. Further, it missed the Zacks Consensus Estimate of 8 cents after reporting three consecutive beats. Including a non-operating tax charge of 29 cents per share, the company recorded loss per share of 24 cents compared with earnings of 22 cents in the year-ago quarter.

Net sales declined 2.4% (down 2.9% on a currency-neutral basis) year over year to $1,646.7 million. However, the top line was above the Zacks Consensus Estimate of $1,602 million, after recording a miss in the last-reported quarter.

Let’s Delve Deeper

Consolidated comps dipped 0.5%, which can be attributed to a decline of 6.4% at international locations, somewhat offset by rise of 2.4% at domestic locations.

By sales mix, new video game hardware sales were up 20.1% to $298.3 million while new video game software sales dropped 18.5% to $300.9 million. Hardware sales were backed by the launch of Xbox One X as well as robust sales of the Nintendo Switch and PS4. The decline in software sales can mainly be attributed to the lack of meaningful title launches in the reported quarter.

Moreover, sales of pre-owned and value video game products were $452.1 million, down 9.9% year over year.

However, sales of video game accessories jumped 30% to $187.3 million. Also, non-GAAP digital receipts grew 15.3% to $255.9 million while GAAP digital sales declined 13.5% to $40.2 million. Further, Technology Brands sales were down 10.3% to $168.9 million.

Nevertheless, Collectibles sales rose 15.7% to $141.7 million, buoyed by the continuous expansion of licensed merchandise offerings, unique product offerings and strong growth in apparel.

Gross profit decreased 4.4% to $596.1 million, owing to lower net sales. Further, gross margin contracted 80 basis points (bps) to 36.2%.

SG&A expenses remained almost flat at $542.3 million in the reported quarter. Adjusted operating income plunged 40.5% to $21.6 million while adjusted operating margin contracted 90 bps to 1.3%.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $279.6 million, net receivables of $169.7 million, net long-term debt of $819.2 million and shareholders’ equity of $2,104.2 million.

On Sep 4, 2018, management declared a quarterly cash dividend of 38 cents per share, payable on Oct 2, 2018, to shareholders of record as of Sep 18, 2018.

For fiscal 2018, management maintained capital expenditure projection of $110-$120 million.

Guidance

Following the mixed quarterly results, GameStop reaffirmed its guidance for fiscal 2018. The company continues to expect fiscal 2018 sales decline of 6-2% and comps are expected to remain flat to negative 5%. For the fiscal, management continues to project earnings per share of $3-$3.35.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

Currently, GameStop has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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