With few exceptions, GameStop's (GME 1.24%) earnings reports have been packed with bad news for over a year. The company took shareholders along for a protracted flirtation with taking itself private while keeping temporary placeholders in its CEO position. These big-picture questions occurred against the backdrop of worsening trends in the core video game business even as the retailer's push into consumer tech failed.
Thankfully, GameStop now has a solid management team in place and is working on an aggressive recovery plan. However, investors still don't have much to look forward to when the company reports its third-quarter results on Tuesday, Dec. 10.
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Sales slump
GameStop discontinued its practice of issuing quarterly sales guidance back in 2018, but all signs point to soft revenue results this week. The chain's fiscal second quarter report showed worsening comparable-store sales trends with an 11.6% slump compared to 10.3% in the first quarter.
Management said things will likely get worse on this score before they get better. In fact, comps are predicted to fall in the "low teens" percentage range for full-year 2019, CFO James Bell told investors in September.
That slump is due to several negative industry trends, including the shift to online video game spending, the lack of a comparable title to match Take-Two Interactive's blockbuster Red Dead Redemption 2 launch in 2018, and the normal pullback in hardware demand during the year before new game console releases. Those issues, plus the company's divested consumer tech businesses, should lead revenue to land at roughly $1.62 billion, according to Wall Street estimates, compared to $2.08 billion a year ago.
Cost cuts
GameStop's gross profit margin held steady last quarter, but that wasn't especially good news. Collapsing demand for new hardware, its lowest-margin niche, helped offset modest declines in areas like pre-owned games and accessories to protect profitability. Even after adjusting for its $400 million goodwill charge, GameStop's adjusted loss worsened to $32 million from $10 million in the prior-year period.
The sales pressures should continue to hurt earnings this quarter, but investors might get some better news on cost cuts. CEO George Sherman and his team have been cleaving inventory and closing underperforming stores to add flexibility to their rebound strategies. That efficiency initiative started in earnest this past quarter, so investors are eager to find out how it's progressing.
Winning trust
The consumer retailer's broader challenge is to win back investor trust after a brutal track record over the past two years. Its pivot into new sales niches was a bust, and GameStop issued a long string of what turned out to be overly optimistic outlooks. Together, these issues rocked shareholder confidence and helped the stock plummet over 50% in 2019.
Reversing that slide won't happen until the retailer can find a path back to sales growth in an industry that's under fire. But before GameStop can hope to accomplish that rebound, it first needs to show investors that management has a firm grasp on industry trends and on their opportunities to improve operating results. That process starts with the retailer reaching its 2019 goals and articulating achievable targets for 2020.
