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Is it Wise to Retain GameStop After Stock's Latest Setbacks?

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GameStop Corp. (GME - Free Report) , one of the renowned names in the video game industry, has been grappling with sluggish sales at its stores owing to consumers’ inclination toward buying games and gaming consoles from e-retailers or downloading or streaming games online.

Certainly, this Grapevine, TX-based company is looking at all avenues to improve its performance, and is hopeful of a turnaround based on the strategic endeavors it recently announced. GameStop has undertaken cost-savings and operating profit improvement initiatives. Management now aims at achieving annualized operating profit improvement of more than $200 million. The company had earlier projected the same to be around $100 million.

However, these efforts will take time to reap benefits. For now, it is struggling to find place in investors’ good books. Shares of this Zacks Rank #3 (Hold) company have lost approximately 24% in the past three months, against the industry’s growth of 2.8%. The stock came under pressure following its second-quarter fiscal 2019 results. We note that the company’s top line and the bottom line missed the Zacks Consensus Estimate and fell year over year. Since the outcome of the results, the stock has tumbled 14.5%. (Read: GameStop Stock Down on Wider-Than-Expected Q2 Loss)

All these triggered a downward revision in the Zacks Consensus Estimate. We note that estimates for fiscal 2019 and fiscal 2020 have moved south by 29 cents and 60 cents to $1.21 per share and 90 cents per share, respectively, over the past 30 days. This downward revision is attributable to the company’s soft guidance for 2019.

Reasons for GameStop’s Distress

GameStop has been struggling with dismal top line performance for a while now. During the second quarter, net sales declined 14.3% year over year due to soft comparable store sales (comps) performance, 195 store closures since the second quarter last year and adverse currency fluctuation.

Also, the company’s consolidated comparable store sales performance has been disappointing. Comps fell 11.6% during the second quarter, following a decline of 10.3% in the preceding quarter. Moreover, management now envisions fiscal 2019 comparable store sales to decline in the low teens compared with the prior projection of a 5-10% decrease.

In addition, GameStop’s pre-owned business has been depicting dismal trends for a while due to the launch of fewer titles, decrease in physical software sales, muted demand owing to digital access to older titles and fewer promotions offered to customers. During the second quarter, Pre-owned and value video game products sales came in at $373.1 million, down 17.5% year over year owing to declines across both hardware and software.

Can Strategies Provide Cushion?

GameStop is undertaking cost containment efforts, optimization of inventory, focusing on high margin product categories, rationalizing store base and lowering debt. Also, the company plans to augment store experience, expand and redesign PowerUp Rewards loyalty program, enhance digital capabilities and improve engagement with vendors and partners. Its long-term target is to create $1 billion e-commerce business.

Also, persistent growth in collectibles’ sales bodes well. During the second quarter, collectibles’ sales increased 21.2% on account of double-digit growth in both domestic and international stores. The company believes that it has solid potential for sustained growth in this business.

In sync with this, it is on track with making improvements in the physical video game retail business model. Further, the company plans to augment technology and data analytics capabilities.

However, we believe that aforementioned efforts will take time to yield results and win back investors’ confidence. That said, the current dismal performance remains a trouble for the company.

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Burlington Stores, Inc. (BURL - Free Report) has a long-term earnings growth rate of 15.9% and a Zacks Rank #2 (Buy).

Target Corporation (TGT - Free Report) has a long-term earnings growth rate of 7.1% and a Zacks Rank #2.

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