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Why GameStop (GME) Stock Plummeted 40% Despite Earnings Beat

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GameStop (GME - Free Report) released its Q1 earnings report after the closing bell Tuesday. The company’s reported earnings did come out at $0.07 per share, beating the Zacks Consensus Estimate that called for a loss of $0.02 per share. However, the stock plummeted because its revenue fell short of expectations.

GameStop’s total global sales fell 13.3% to go along with a reported 10.3% same-store sales decline.  The company’s new hardware sales saw a decrease of 35% due to the decrease in demand for Xbox1 and PS4 consoles. The company’s struggle with hardware sales came despite the Nintendo Switch’s strong performance. GameStop’s CFO Rob Lloyd stated that consumers were postponing their hardware purchases in anticipation of the release of next generation consoles by Microsoft (MSFT - Free Report) and Sony (SNE - Free Report) . In the modern age of streaming, companies eliminate the need to go out to retail stores to purchase products which have been plaguing the retail industry as a whole for years. Software sales also decreased by 4.3% as a result of slower new releases.

On top of all that, GameStop elected to get rid of its quarterly dividend in an attempt to stabilize the company’s balance sheet and use the financial breathing room to revitalize the company. GameStop pausing their quarterly dividend could be a sign the company was close to defaulting on debts. Furthermore, the dividend cut also shows just how detrimental weakening quarterly sales were. The company’s decision to halt its quarterly dividend is projected to save GameStop about $157 million, which could aid the company with its debts of nearly $500 million.

GameStop also faces stiff competition in the world of game streaming, from companies like Google (GOOGL - Free Report) and Microsoft. In addition, the company expects its full year sales to fall between 5% and 10%. If GameStop were to turn things around, it would need to establish itself in the digital market, according to Benchmark analysts.

Although things seem grim for GameStop going forward, the company has surpassed the Zacks Consensus EPS estimates twice in the last four quarters. The company’s EPS represented an earnings surprise of 450%, and GME can expect a spike in hardware sales when next generation consoles are released. Popular new games expected to be released at the end of the 2019 should also provide a spike in software sales.

The financial flexibility gained from the elimination of the company’s dividend could provide the company the opportunity to further venture in the digital gaming landscape. GameStop’s price performance over the last 10 years was around or above the retail consumer electronics market, with its peak year in 2013 where it was an industry juggernaut. After the start of 2016, things took a turn for the worse for the company, marking the start of its downward trend; shares plunged after its fiscal 2019 first quarter earnings release, and year-to-date, GME is down roughly 60%. GameStop must attempt to adapt to the changing gaming landscape if it wishes to stay afloat.




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