GameStop (NYSE:GME) investors aren't looking for much good news from its upcoming earnings report. COVID-19 shopping pressures have likely kept customer traffic low even as the video game retailer reopened its stores. Those challenges are being amplified by the industry's switchover to a new generation of gaming consoles, which traditionally creates a tough selling environment in the months leading up to the move.

Yet GameStop may have some positive comments to make about its cost cuts, cash flow, and profitability. And investors will be focused on the chain's outlook for the critical holiday shopping season ahead. With that bigger picture in mind, let's look at the key trends to watch when GameStop announces second-quarter results on Wednesday, Sept. 9.

Two kids playing console video games.

Image source: Getty Images.

More sales declines

Demand for at-home entertainment soared in the fiscal first quarter during pandemic-related lockdowns. GameStop took advantage of some of this spike, with e-commerce sales jumping over 500%. But executives said the bigger boost started showing up just as the quarter closed. Sales in early May were especially strong, management said back in June.

We'll find out on Wednesday whether those positive trends held up for most of the quarter. Investors are expecting a modest growth rebound, with sales declines improving to about 22% compared to the prior quarter's 34% slump.

Financial updates

Most of the good news the retailer had for shareholders last quarter revolved around its finances, and this week's report should bring more of the same. GameStop slashed its inventory heading into Q2, which should give it flexibility to bring in new software and hardware products without risking big writedown charges or price cuts. Keep an eye on gross profit margin for an indication that this strategy is working. That metric fell only slightly in Q1, down to 28% of sales from 30% a year ago.

CEO George Sherman and his team predicted that GameStop will maintain positive operating cash flow this quarter, and investors will be looking for the company to deliver on that promise on Wednesday.

Looking ahead

The growth challenges are mounting for GameStop and now include COVID-19-related consumer demand shifts away from specialty and mall retailers, the continued transition toward digital game sales, and a pullback in spending as gamers prepare for new console releases. Add a potentially sharp recession to that mix, and it's clear there's a high risk profile for any investment in this stock.

However, GameStop indicated back in early June that it plans to break even on adjusted profitability this year despite having closed most of its locations for nearly two months. Achieving that target would give management some valuable flexibility to attack growth niches like hardware, accessories, and e-commerce through the early stages of the next generation of consoles. Its status as the go-to place to buy Nintendo Switch products suggests it can do the same for the other hardware set to hit the market in the second half of 2020.

But it could be several quarters before investors can reasonably expect the chain to return to steady sales growth. In the meantime, GameStop needs to put its finances in order so it can survive another fiscal year of tough selling conditions.