GameStop (GME 9.66, -0.44, -4.36%) is under pressure this morning after reporting Q4
(Jan) earnings and providing guidance last night. The JanQ results were a bit
messy as GME sold Spring Mobile, its AT&T Wireless resale business.
However, the stock is down mostly on some weak guidance for Q1 (Apr).
Adjusted EPS in JanQ fell 21% yr/yr to $1.60, which was actually a bit better than expected. However, revenues fell 7.6% yr/yr to $3.06 bln, which was below market expectations. It's possible that the Spring Mobile sale may account for some of the revenue shortfall as perhaps some analysts may have been waiting until this report to update their models.
On the positive side, same store comps came in at +1.4% (+3.4% increase in the US and -2.9% decrease internationally). In terms of why revenue declined but comps were up, it was the shift in the company's fiscal calendar for the 53rd week in fiscal 2017 and the timing of the Call of Duty launch.
The main problem with the report was the very weak guidance for Q1 (Apr) as GME sees EPS of $(0.05)-0.00, which is well below market expectations of a decent size profit. Also, there was downside guidance for FY19 as GME sees a FY19 revenue decline of 5-10%, which we compute as $7.46-7.87 bln, which is below market expectations, but not by too much. GME also guided to a FY19 same store comp decline of -10% to -5%.
GameStop is going through some rough times and some people have doubts about its survival. A big problem is that consumers are increasingly downloading games directly to their gaming console on the internet. The need to go to the store to buy games is fading away. GME also sells pre-owned video games, but that business is struggling as well. Another problem is that GME probably has too many stores. It currently operates over 5,800 stores across 14 countries.
GameStop hired a new CEO in March 2019: George Sherman (his first day is April 15). Most recently, Sherman served as CEO of Victra, the largest exclusive authorized retailer for Verizon Wireless. He also has extensive retail leadership at several top brands including Advance Auto Parts, Best Buy, Target, and Home Depot. Sherman brings significant experience working with other retailers that have undergone large, successful transformations.
GME has been undergoing a review of strategic and financial alternatives, which has now concluded. A key action from this was GME selling Spring Mobile at an attractive valuation, which allows GME to focus more on its global gaming and collectibles business. Additionally, GME is significantly reducing leverage through the retirement of $350 mln of outstanding notes. GME is also refining its strategic direction and several initiatives are under way to cut costs.
In sum, GameStop is facing some difficult times. We do like the background of the new CEO and he likely would not have taken the job unless he saw some turnaround potential. So that provides some hope, but time will tell if GME can right the ship.
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