GameStop Q4 Earnings Preview: Structural Issues Will Continue To Hurt Investors

GameStop Q4 Earnings Preview: Structural Issues Will Continue To Hurt Investors

Justin Sullivan/Getty Images News On Thursday, March 17th, after the market closes, the management team at GameStop ( GME ) is due to report financial performance covering the final quarter of the company’s 2021 fiscal year. This earnings release caps off a tumultuous year for the enterprise, as a wave of speculation caused shares to bounce all over the place. In some respects, this volatility helped existing shareholders, not only because it increased the company’s share price but because it allowed management to raise significant amounts of much-needed cash at attractive terms. Although it is possible that the company will report robust financials covering the fourth quarter of its 2021 fiscal year, analysts are anticipating a weakening year over a year. Add on to this the company’s continued deterioration, and investors would be wise to remain cautious in the days ahead. GameStop – Low expectations for a poor company

Throughout 2021, I wrote a number of articles covering GameStop and its prospects. The most recent one of these was published on December 10th of 2021. In that article, I said that more pain for existing shareholders was warranted because shares of the business were still drastically overpriced. Although the firm had reported some positive performance relative to the year prior, a lot of this was driven by a temporary increase caused by new console releases. What mattered most to the company, its software sales, actually declined compared to the same time one year earlier. At the end of the day, I rated the company a ‘Strong Sell’, indicating that significant downside was likely. Since then, my assessment has been correct. While the S&P 500 has exhibited downside of 10.9%, investors in GameStop would have seen a loss of 51.2% through today. The further back you go, the greater the disparity between the market return and GameStop’s. For instance, from an article published in June of last year, shares have dropped by 67%, coming in far worse than the 1.7% decline seen by the S&P 500 over the same window of time.

How the market will react when management reports financial results for the final quarter of 2021 is anybody’s guess. However, there will be tremendous pressure on the business to beat what are already fairly low bars of performance. For instance, the general consensus on Wall Street is that the company will report earnings per share of $0.76. That compares to the $1.34 the business reported one year earlier. That said, for the full year, the expectation is that financial performance would be slightly better, with a loss per share of $1.76 coming in slightly better than the $2.14 experience in 2020.

In the past, management indicated that strong console sales would continue for the foreseeable future. If this is the case, then it’s not unreasonable to anticipate revenue rising for the final quarter of 2021 relative to the same quarter one year earlier. However, new console sales generate lower margins and the company has been experiencing weakness when it comes to software sales. Investors should view any strength on the console side to be temporary in nature, while the decline in software sales, if it persists, as a longer term issue for the business. Only if this trend reverses itself should investors start to become slightly optimistic. Author – SEC EDGAR Data If software sales don’t show some improvement or stabilization at a minimum, that would likely represent only one of multiple structural issues for the enterprise. Another problem is that management has been closing physical retail locations at the company for years . Back in 2015, for instance, the company had 6,227 retail locations in operation. That number has decreased each year since, dropping to just 4,816 by the end of the firm’s 2020 fiscal year. That has been instrumental, combined with mixed but generally worsening comparable store sales, in driving revenue and profits for the company down. Author – SEC EDGAR Data Revenue has declined from $9.02 billion in 2015 to just $5.09 billion in 2020. Investors would be right to point out that the 2020 fiscal year might not be fully comparable because of the COVID-19 pandemic. That doesn’t change the fact that revenue has been trending in a negative direction for several years now. In any retail environment, a decline in revenue can have a significant impact on profitability because of the high fixed costs said retailer must overcome in order to become profitable. That is why the company went from generating operating cash flow, on […]

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