Please ensure Javascript is enabled for purposes of website accessibility

Why GameStop Stock Cratered 15% at the Open Today

By Reuben Gregg Brewer – Sep 10, 2020 at 11:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The video game retailer reported earnings after the close on Wednesday and investors were far from pleased. Here's why.

What happened

Shares of video game retailer GameStop (GME 11.37%) dropped as much as 15% in early trading on Sept. 10. There's no question about what moved the stock: The company reported earnings after the close on Wednesday and the story wasn't a pleasing one.

So what

During the second quarter GameStop reported a top-line sales decline of nearly 27% compared to the same quarter of 2019. There were a number of reasons given for the drop, including the impact of COVID-19-related store closures. However, also noted was a 10% reduction in the company's store base as a part of its "de-densification" strategy and the fact that current game consoles are near the end of their lifespans. Gamers tend to hold off on purchases when new consoles are soon to be released. And yet, despite these headwinds, GameStop still managed to beat Wall Street's top-line expectations.   

A man looking at a line crashing through the floor beneath him

Image source: Getty Images.

The problem is that the bottom line result missed analyst targets by a wide margin. GameStop's adjusted loss came in at $1.40 per share, materially worse than the loss of $0.32 in the same span of 2019. More to the point, the red ink was below the consensus estimate of a loss of $1.27 per share. GameStop also noted in its second-quarter earnings conference call that it would be increasing its store closure plans by another 100 locations or so in 2020, with more potentially on tap in 2021. That doesn't bode well for revenue and earnings in the near term and could easily offset any benefit from a new game console cycle. Investors were understandably downbeat on the news.  

Now what

GameStop is working through a difficult overhaul as it looks to shrink its footprint and deal with the increased impact of online sales, which is a particular headwind in the video game space. On some levels GameStop is seeing notable success (online sales were up 800% in the second quarter and made up 20% of overall sales), but with a material legacy store base, management appears to still have a lot of work ahead of it before its business revamp is complete. The increase in store closings is evidence of this fact. Conservative long-term investors are probably better off waiting until further progress has been made in the company's turnaround effort.   

Reuben Gregg Brewer 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.

Stocks Mentioned

GameStop Stock Quote
$24.79 (11.37%) $2.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.