GameStop (the stock) and GameStop (the retailer) continue to be worlds apart

It may take more than one bad earnings report to pop this bubble...
Enlarge / It may take more than one bad earnings report to pop this bubble…

The last time GameStop announced its quarterly earnings, in early December, the stock market valued the video game retailer at about $1 billion. Following a worse-than-expected earnings report released Tuesday night, the company now has a market cap of just under $10 billion as of Wednesday morning.

Sure, that’s down roughly 18 percent from Tuesday’s closing price, and off roughly 44 percent from a January peak that saw the stock offering become a poster child for the retail investor-driven “meme stock” phenomenon. Still there’s not much in this week’s report to suggest that GameStop as a company is worth ten times as much as it was just three months ago, much less the higher valuations it briefly enjoyed in the interim.

Signs of a turnaround?

Overall, GameStop’s latest earnings report shows a company still struggling to turn itself around. For the full fiscal year, the company lost $215 million on net, improving on a net loss of just over $470 million the year prior. Net sales for the year were down over 21 percent, to $5.09 billion, a decline GameStop blamed in part on its “de-densification efforts” (i.e. closing nearly 700 stores). Even taking that move into account, though, sales for comparable stores were down 9.5 percent for the year.

But those results are perhaps not as bad as they could have been considering the global pandemic that forced most GameStop storefronts worldwide to close temporarily and which is still causing significant temporary store closures throughout Europe. The holiday quarter shows small signs of a turnaround as well; net income for that quarter was up to $80.5 million, compared to $21 million the year before, and quarterly comparable store sales were up 6.5 percent year over year.

That’s thanks in no small part to the launch of two new consoles this holiday season, an event that GameStop has long held would help in its fiscal turnaround efforts. “Console demand remains more robust than we can meet with supply from console makers and as a result, we continue to see sell-through rates for our console events in a matter of minutes,” GameStop CEO George Sherman said in an earnings call.

E-commerce sales were also up a whopping 191 percent for the fiscal year as a whole, now representing nearly 30 percent of GameStop’s total sales. That could be a sign of hope for investors who are excited about board-member Ryan Cohen’s plan to transform GameStop into an online sales powerhouse, as he did with his previous venture But the increased online sales could also just be a reflection of a year where many customers were wary of going into retail shops like GameStop during a pandemic, even when they were open.

Where do we go from here?

While GameStop’s latest earnings report hasn’t inspired confidence in analysts (none of whom recommend buying the stock at current prices), it hasn’t significantly dampened the exuberance of investors who still see the company as wildly more valuable than it was in December. Bad timing and insider-trading rules seemingly prevented GameStop from selling more stock to cash in on that healthy valuation increase in recent months, but it seems like the company might want to get on that particular gravy train in the near future.

“Since January 2021, we have been evaluating whether to… potentially sell shares of our Class A Common Stock… primarily to fund the acceleration of our future transformation initiatives and general working capital needs,” GameStop writes in a recent SEC filing. The board has currently authorized GameStop to raise $100 million through such a stock sales program, but the company says it’s considering increasing that limit as well.

In an earnings call that overloaded the company’s usual call-in capacity, GameStop broke from the norms by not taking questions from investors. Sherman instead used a prepared statement to gesture vaguely to GameStop’s “transformation” plans, using the word six times to discuss his outlook on the company. Those plans are focused on turning GameStop “into a customer-obsessed technology company that delights gamers” and involve “additional distribution options to improve delivery speed” and “expanded product offerings” in sectors including PC gaming, mobile gaming, and gaming TVs.

The introduction of former Amazon executive Jenna Owens as chief operating officer was also sold as “another important addition to our leadership team and our future transformation initiatives.”

Maybe those transformation initiatives will eventually pay off, and a current stock price that reflects a $10 billion GameStop will seem like a bargain in the near future. For now, though, the exuberance of the market for GameStop the stock and the bottom-line results of GameStop the corporation remain remarkably out of sync.