Investors have a few good reasons to follow GameStop's (NYSE:GME) upcoming earnings report. Its announcement on Tuesday will cover a period of maximum stress on the business as most of its stores were closed to shopper traffic due to COVID-19.
The video game retailer is also facing the predictable demand slump that happens right before major console upgrades from Microsoft and Sony. Add in management's response to a major challenge from activist investors, and you have all the elements of a potentially blockbuster earnings report. With that backdrop in mind, let's look at a few trends to watch in GameStop's announcement set for June 9.
The work-from-home lift
Wall Street isn't expecting much good news on the sales front, given that GameStop closed all of its stores in the U.S. beginning on March 22. That move contributed to a 24% slump in comparable-store sales, executives told investors in mid-April.
But GameStop might still have some positive trends to report on Tuesday. Sales jumped in the days leading up to stay-at-home orders as consumers stocked up on supplies that allowed them to stay engaged and entertained from their living rooms. We'll find out this week whether GameStop's industry focus helped it gain market share through that critical period. Keep a close eye on the chain's e-commerce sales channel, which had to do all the heavy lifting after most stores switched to curbside-pickup service only in March.
The pandemic store closures put pressure on GameStop's finances -- enough to force the company to make extraordinary fiscal moves like slashing salaries across the board and skipping rent payments to many of its landlords.
Management said in an April update that these shifts improved their liquidity, leaving just over $770 million of cash on the books after a month of disrupted business. GameStop said this total represented enough resources to navigate the COVID-19 closures, but we'll get more concrete data on this point on Tuesday. Look for the retailer to update shareholders on its capital spending, inventory management, and negotiations with landlords as key elements of its cash preservation strategies.
The recovery plan
Shareholders heard from GameStop several times over the last few weeks as management tried to convince them to reject a move by activist investors aimed at shaking up the board of directors. Management said in late May that the attempt is a "wasteful campaign" that would "jeopardize the board's ability to... create long-term value for stockholders." Hestia Capital Partners and Permic Capital Enterprise Fund have accumulated over 7% of GameStop's shares and are agitating for wholesale changes to the retailer's operating model and capital return plans.
Tuesday's report will represent management's last good opportunity to show its owners that management is on the right track before shareholders elect new board members on June 12. That pressure makes it likely that CEO George Sherman and his team will seek to put the latest operating results in a positive light ahead of the annual shareholders' meeting. That might be a challenge, though, given the large sales shortfall -- and ballooning net loss -- that GameStop is on pace to report for the quarterly period that ended on May 4.