Here's How GameStop May Be Failing You

Margins matter. The more GameStop (NYSE: GME  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong GameStop's competitive position could be.

Here's the current margin snapshot for GameStop and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

GameStop

27.2%

6.8%

4.2%

Target (NYSE: TGT  )

29.9%

7.8%

4.3%

Best Buy (NYSE: BBY  )

25.0%

4.3%

2.3%

Sears Holdings (Nasdaq: SHLD  )

26.9%

0.4%

(0.4%)

Source: S&P Capital IQ. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where GameStop has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for GameStop over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 27.7% and averaged 26.5%. Operating margin peaked at 7.7% and averaged 7%. Net margin peaked at 4.5% and averaged 4%.
  • TTM gross margin is 27.2%, 70 basis points better than the five-year average. TTM operating margin is 6.8%, 20 basis points worse than the five-year average. TTM net margin is 4.2%, 20 basis points better than the five-year average.

With recent TTM operating margins below historical averages, GameStop has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at GameStop? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool owns shares of Best Buy and GameStop. Motley Fool newsletter services have recommended writing covered calls in GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2011, at 11:46 AM, Varchild2008 wrote:

    Did you take into consideration that Impulse a.d Spawn labs were acquired this year and thus your charts can not be trusted if not included?

    You wrote that most cases there arent a.y expenses a company can cut back on. That isnt the case here.

    Next year while there will be some expense in conducting an open beta of spawn labs, that is just the first 3 or 4 months of 2012. Meanwhile, the impulse integration expenses are done.

    Digital sales are starting to improve margins, so without any context to your statistics you don't have any analysis that is useable for me or anyone else invested in GME.

  • Report this Comment On October 16, 2011, at 6:24 PM, Varchild2008 wrote:

    I also don't like your analysis when you constantly refer to the highest point in your chart for a certain statistic as "PEAKED."

    Peaked implies there's no way one can expect it to go any higher in future quarters. If that's true, based on what persay? You don't base your term PEAKED on anything... Therefore, I assume you are using the term incorrectly.

    What you actually mean is that there are points where margins (gross, op or net) are at its highest and points at which they are at their lowest.

    Of course at no time do you provide context to explain why a statistic was at its highest point and why it is at its lowest point....

    Without context again...This is useless analysis.

  • Report this Comment On October 16, 2011, at 6:27 PM, Varchild2008 wrote:

    There's nothing here to make heads or tails out of why you chose to use a NEGATIVE headline.

    Your second to last paragraph:

    "With recent TTM operating margins below historical averages, GameStop has some work to do."

    Prior to that though you show that Gross Margins and Net Margins are above their historical levels.

    So how do we get, "Here's how Gamestop may be failing you" when we have 2 out of 3 cagtegories here where Gamestop is HELPING you??

    I'll take 2 out of 3 anyday when you can easily explain away the Operating Margin as a result of acquisition and integration and beta testing expenses with Spawn Labs and Impulse.

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