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Why Is GameStop (GME) Up 8.7% Since Last Earnings Report?

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A month has gone by since the last earnings report for GameStop (GME - Free Report) . Shares have added about 8.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is GameStop due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

GameStop Reports Wider-Than-Expected Q2 Loss

GameStop Corp. reported second-quarter fiscal 2019 results, wherein both the top and the bottom line not only missed the Zacks Consensus Estimate but also came below the prior-year reported figures. The trimming of fiscal 2019 comparable-store sales forecast further added to woes. The video game retailer also guided fiscal 2019 earnings that came below the consensus mark and suggests year-over-year decline.

The Grapevine, TX-based company 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.

Nonetheless, management is undertaking strategic endeavors to bring the company back on track. These involve cost containment efforts, optimization of inventory, focusing on high margin product categories and rationalizing store base worldwide. The company also plans to augment store experience, expand and redesign PowerUp Rewards loyalty program, enhance digital capabilities and improve engagement with vendors and partners. The company’s long-term target is to create $1 billion e-commerce business.

Further, the company is exiting loss making businesses and closing underperforming stores. The company remains on track to shutter 180-200 underperforming stores worldwide by the end of current fiscal year.

Q2 Performance

GameStop’s adjusted loss from continuing operations came in at 32 cents a share wider than the Zacks Consensus Estimate of a loss of 22 cents. The reported figure also fared unfavorably with a loss of 10 cents incurred in the year-ago period. Net sales declined 14.3% (or 13.1% on a constant currency basis) year over year to $1,285.7 million hurt by soft comparable store sales performance, 195 store closures since the second quarter last year and adverse currency fluctuation. The top line fell short of the Zacks Consensus Estimate of $1,368 million, marking the third consecutive miss. We note that consolidated comparable store sales fell 11.6%, following a decline of 10.3% in the preceding quarter.

By sales mix, new video game hardware sales declined 41.1% to $175.6 million. This is reflective of announcements for next generation console launches in 2020. New video game software sales fell 5.3% to $285 million. The growth in Nintendo Switch software titles was more than offset by sluggishness in new title launches. 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. Video game accessories sales fell 9.5% to $169.6 million.

Moreover, digital receipts tumbled 11.2% to $227.2 million attributable to weaker title launches, while digital sales fell 9.7% to $36.3 million. Nevertheless, Collectibles sales surged 21.2% to $171.8 million in the reported quarter on account of double-digit growth in both domestic and international stores. This was the 15th straight quarter of growth.

Moving on, gross profit fell 15.1% from year-ago quarter to $399.1 million, while gross margin contracted 30 basis points to 31%, stemming from markdown activity associated to the wind down of thinkgeek.com business. SG&A expenses increased 4% to $459.3 million in the reported quarter. The company reported adjusted operating loss of $45.8 million against an adjusted operating income of $1.5 million reported in the year-ago period.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $424 million, up nearly $151.2 million year over year. Moreover, the company had net receivables of $122.4 million, long-term debt of $419.1 million (down from $819.2 million in the year-ago period) and shareholders’ equity of $809.7 million at the quarter end. During the quarter under review, the company lowered debt burden by $49.8 million. This brings the year-to-date debt reduction to $401.7 million. During the quarter, the company incurred capital expenditures of $23 million. Further, management expects to incur capital expenditures in the band of $90-$95 million during fiscal 2019. Management expects to generate adjusted free cash flow of $225-$250 million during the fiscal year. Under its recently concluded modified Dutch auction tender offer, the company repurchased 12 million shares for an aggregate amount of $62.4 million. The company has roughly $237 million remaining under the existing share repurchase program.

Outlook

GameStop has undertaken cost-savings and operating profit improvement initiatives. This strategy aims at strengthening the organization and aid financial improvement and profitability in the long term. Its efforts in this regard include supply chain improvements, operational enhancements, cost cutting, pricing and promotion optimization. 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. The company now expects fiscal 2019 adjusted earnings in the band of $1.15-$1.30 per share, the mid-point ($1.225) of which is lower than the prior-year figure of $2.14.  Management now envisions comparable store sales to decline in the low teens compared with the prior projection of a 5-10% decrease.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -76% due to these changes.

VGM Scores

At this time, GameStop has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise GameStop has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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