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GameStop Still Expects to Earn a Profit This Year

By Demitri Kalogeropoulos – Jun 18, 2020 at 9:45AM

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The video game retailer might get a sales boost from new game and hardware releases over the next few months.

Investors had conflicting expectations heading into GameStop's (GME -2.24%) first-quarter earnings results. Its stores were closed to customer traffic during COVID-19-related shutdowns, after all. On the other hand, demand for video games and accessories spiked as millions of people sought home entertainment options.

The retailer's executives detailed those challenges and opportunities in a conference call with investors this past week. Below, we'll look at a few highlights from that presentation by CEO George Sherman and his team.

A young man wearing a headset and playing console video games.

Image source: Getty Images.

Switch wins

We believe we sold more Nintendo Switch consoles than any other retailer or e-commerce business globally in the first quarter.
-- Sherman

GameStop closed essentially all of its selling channels in a few markets but kept digital fulfillment going in the U.S. That e-commerce division was a major bright spot, rising over 500% in Q1, and helping the chain improve sales.

Management said comparable-store sales were trending at a 3% increase before the pandemic hit and pushed that figure down to a 17% drop. And curbside pickup helped GameStop boost market share. Executives see that trend continuing into the near future because it has access to more inventory than most of its peers. "We are able to leverage our unique buy-sell-trade competitive advantage to supplement hardware demand from customers," Sherman said.

Software demand

For those new release titles that did launch, we experienced strong growth, far exceeding our expectations. The increased demand for gaming and entertainment has turned good title releases into great title releases as customers seek entertainment options.
-- Sherman

GameStop posted a brutal 40% decline in software sales, but management said that slump was mostly due to a weak release pipeline that was made even worse by publishers pushing highly anticipated releases out of the first quarter.

The games that did launch in the period beat executives' demand projections, and they attributed that spike to many more consumers looking to stay entertained around the home.

Looking for a strong finish to the year

Disciplined management of inventory and working capital continues to manifest itself in the balance sheet and is key to providing us the necessary liquidity and financial flexibility to manage the current environment, as well as support the upcoming inventory investments in new software titles and new generation of consoles and the associated accessories upcoming in the third and fourth quarter.
-- CFO Jim Bell

GameStop's 43% inventory decline was the standout metric in its earnings report, especially considering that three-quarters of its store base was closed for much of the quarter. That drop was a consequence of a sharp purchasing pullback in the early days of the pandemic and it improved the retailer's financial position in several ways, including by supporting cash flow, working capital, and the percentage of cash that converted directly into earnings.

While that strategy arguably left GameStop in a weak inventory position just as it is reopening its store base, management thinks it was worthwhile for the extra flexibility it provided. The chain now has plenty of resources available to direct toward the most popular software titles and next-generation console hardware through the rest of the fiscal year.

GameStop isn't offering any sales forecast for the second quarter, which means shareholders still have no good idea of when to expect its slump to end. But its efficiency gains are paying off, and the chain is still on track to announce positive adjusted earnings for 2020.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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