Nobody expected video game retailer GameStop (NYSE:GME) to report good results in the first quarter. Caught amid the low-sales tail end of a console cycle, the slow death of brick-and-mortar retail stores, and the COVID-19 pandemic, sales and earnings were always going to fall. But the fiscal discipline GameStop mustered in order to make it through the coronavirus shutdowns might actually carry the company through to the next-generation console launches for the holidays.

Weak sales, terrible earnings

GameStop's first-quarter sales fell 34% year-over-year to $1.02 billion. Hardware revenue dropped 21% lower, buoyed by strong demand for the Nintendo (OTC:NTDOY) Switch console, while sales of software and collectibles decreased by more than 40% each. Adjusted earnings swung from a profit of $0.07 per diluted share to a net loss of $1.61 per share. This was worse than expected, falling short of Wall Street's estimates across the board.

But all was not lost. GameStop burned just $55.9 million of free cash in this quarter, far better than the year-ago period's $683 million of negative free cash flow.

At the end of the quarter, GameStop had $584 million of cash equivalents on hand -- up from $514 million at the start of the reporting period, thanks to a net $135 million drawdown of revolving credit facilities. The cash reserves were so robust, GameStop paid back $35 million of the revolver credit before June 3.

A hand picks up a nickel between the cushions of a brown couch.

Image source: Getty Images.

Cash-conserving wizardry

The company achieved this by throttling its supply chains. Three months of reduced restocking orders left GameStop with a 43% leaner inventory balance compared to the year-ago quarter. At the same time, accounts payable added up to $212 million at the end of the quarter. GameStop's accounts payable debts hadn't landed below $300 million since the summer of 2005.

"[The accounts payable reduction] is directly related to our ability to leverage a flexible supply chain and reduced purchase orders around the world at the very onset of the viral pandemic, thus not creating a liability drag on the business or on cash flows," CFO Jim Bell said on the earnings call. "Effective and efficient inventory management, including improved inventory turns, continues to be a significant area of focus for us, and is a key driver of the further improvement in working capital efficacy."

You can call it strangling the store restocking pipeline or you can call it efficient inventory management. Either way, GameStop is burning less cash than you'd expect in this period of weak top-line sales. The suspended dividend policy conserved another $40 million of GameStop's cash this quarter. The lights just might stay on until the holiday season comes around with those all-important console launches.

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