Shares of video game retailer GameStop (GME 5.16%) fell sharply at the open of trading on Wednesday, dropping a painful 21% within the first 10 minutes of the day. The big news was the company's earnings release after the close on Tuesday. There was some good news and a fair amount of bad news.
On a GAAP basis, GameStop lost $0.29 per share in the third quarter, with an adjusted loss of $0.53. Red ink is never good, but in this case, the Wall Street consensus was looking for a loss of $0.85 per share. Beating estimates like that is usually considered a good thing, but in this case, investors were not impressed. That's partly because the company's roughly $1 billion in sales fell short of expectations. And, perhaps more important, the company clearly continues to struggle as it tries to adjust to changing customer shopping habits.
This was a problem before the coronavirus, as more and more video game content shifts to online distribution. The pandemic has simply made things worse -- fast.
GameStop is shrinking its footprint and pushing e-commerce (where sales increased over 250% in the quarter) as it works to adjust to the changing times. But with comparable-store sales down by a huge 25% or so in the quarter, it is clearly not making much progress with its legacy brick-and-mortar operations. Investors reacted by selling the stock.
GameStop has been a turnaround story for a while at this point. The recent quarter is a material hint that the retailer is still struggling to find its way. Only aggressive investors should be buying shares. Even then, the still-weak sales trends and swift market drop suggest you'll need a strong conviction about GameStop's future to stick around.