What happened
Shares of video game retailer GameStop (GME 2.56%) 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.
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.
