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GameStop (GME) Up 3.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for GameStop (GME - Free Report) . Shares have added about 3.4% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important drivers.

GameStop Reports Wider-Than-Expected Q3 Loss

GameStop reported dismal third-quarter fiscal 2019 results. In the quarter, the top and the bottom line missed the Zacks Consensus Estimate and fared unfavorably compared with prior-year quarter’s figures. Investors’ sentiments were hurt by management’s trimmed outlook for fiscal 2019 earnings, comparable-store sales and adjusted free cash flow.

The Grapevine, TX-based company’s performance was hurt by sluggish store sales due to customers delaying console purchases until the launch of generation nine consoles from Sony and Microsoft by the end of 2020. Also, a shift to digital download as well as streaming of games continues to be a headwind. Unfortunately, management expects this trend to persist in the fourth quarter of fiscal 2020.

Nevertheless, the company is exiting loss-incurring businesses and closing underperforming stores. Management expects to shut around 230-250 underperforming stores worldwide by the end of fiscal 2019. Also, GameStop is on track to wind down operations in Denmark, Finland, Norway and Sweden to counter the weak industry trends.

Q3 Performance

GameStop’s adjusted loss from continuing operations came in at 49 cents per share against the Zacks Consensus Estimate of earnings of 6 cents. The reported figure also compares unfavorably with adjusted earnings from continuing operations of 49 cents per share in the year-ago period.

Net sales declined 25.7% year over year (24.7% on a constant-currency basis) to $1,438.5 million thanks to soft comparable store sales performance, store closures and adverse currency fluctuations. Moreover, the top line lagged the Zacks Consensus Estimate of $1,613.9 million, marking its fourth consecutive miss.

We note that consolidated comparable store sales fell 23.2%, following a decline of 11.6% in the last reported quarter. The downside was caused by low transactions, partially offset by improvement in units per transaction for new hardware and software video game.

By sales mix, new video game hardware sales declined 45.8% to $189 million. This is reflective of announcements for next generation console launches in 2020. New video game software sales fell 32.6% to $485.9 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 $344.2 million, down 13.3% year over year. The downtick was caused by declines across both hardware and software. Video game accessories sales fell 13.4% year over year to $156.5 million.

Moreover, digital sales fell 18.5% to $37 million. Nevertheless, Collectibles sales rose 4.3% to $161.2 million in the reported quarter owing to consistent growth in domestic and international stores. This marked the 16th straight quarter of upside.

Moving on, gross profit fell 21% from year-ago quarter’s figure to $441.1 million. However, gross margin expanded 190 basis points to 30.7%, driven by margin expansion in all video game categories.

SG&A expenses declined 2.5% to $451.8 million in the reported quarter. As a percentage of net sales, the metric increased to 31.4% from 23.9% reported in the prior-year quarter. The company reported adjusted operating loss of $18.6 million against an adjusted operating income of $69.6 million reported in the year-ago quarter.

Other Financial Aspects

GameStop ended the quarter with cash and cash equivalents of $290.3 million, down $158.3 million year over year. Moreover, the company had net receivables of $145.7 million, net long-term debt of $419.4 million (down from $471.2 million in the year-ago quarter) and shareholders’ equity of $617.1 million at the quarter end.

During the quarter, the company incurred capital expenditures of $20 million. Further, management expects to incur capital expenditures in the band of $80-$85 million during fiscal 2019. Management now expects to generate adjusted free cash flow in the range of $200-$220 million during the fiscal year. Earlier, GameStop anticipated the metric in the range of $225-$250 million for the same period.

Under its recently-concluded modified Dutch auction tender offer, the company repurchased 22.6 million shares for an aggregate amount of $115.7 million during the quarter. The company has $67.8 million shares remaining under the existing repurchase program.

Outlook

GameStop now envisions comparable store sales to decline in high teens compared with the prior projection of a low teens decline. Also, the company now expects fiscal 2019 adjusted earnings in the band of 10-20 cents per share, which suggests a decline from $2.14. Earlier, management anticipated adjusted earnings per share of $1.15-$1.30 for fiscal 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -25.18% due to these changes.

VGM Scores

Currently, GameStop has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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. Notably, 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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