What to Make of GameStop's Latest Report

In this episode of MarketFoolery, host Chris Hill is joined by Motley Fool analyst Maria Gallagher to discuss GameStop (GME 0.97%) falling 20% after a disappointing fourth quarter and a perplexing lack of guidance from management. Also, Adobe's (ADBE -0.99%) first-quarter results were as strong as guidance, and General Mills (GIS 1.22%) has a mixed third quarter but believes demand for food at home will continue to be strong. Plus, Maria shares which breakfast cereal is her favorite indulgence.

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This video was recorded on March 24, 2021.

Chris Hill: It's Wednesday, March 24th. Welcome to MarketFoolery. I'm Chris Hill. Joining me today from New York City, it's Maria Gallagher. Thanks for being here.

Maria Gallagher: Thanks so much for having me.

Hill: We've got consumer goods. We've got software. We're going to start with the stock of 2021 so far, and that is of course, GameStop. Unfortunately, all those people on Reddit buying shares of GameStop over the past few months were not also shopping at GameStop, because fourth quarter profits in revenue were lower than expected, shares down 22% this morning. Maria, you hate to see it.

Gallagher: You'd hate to see it. I was thinking about it this morning. I feel like it was only yesterday that I was here talking about their quarter three earnings, and it was right before I even really knew what WallStreetBets was, more than just a phrase that I had heard people toss around. Interestingly, the conference call yesterday, the CEO, George Sherman, didn't take questions. He didn't address any stock moves, he didn't address really any of that. He just talked about quarter four, the full year and it did miss estimates, like you said. Net sales were about $2.1 billion. It was a 12% decrease in the entire store base, so they closed 693 stores throughout the year. Their global e-commerce sales were up 175%. They represented 34% of net sales in quarter four versus 12% of net sales in quarter four of last year. There was a 6.5% increase in comp store sales in quarter four. For the full-year of 2020, their store sales were down about 9.5%. Net sales were about $5 billion, and global e-commerce sales increased 191%, which is about 30% of total net sales. 

I think it's an interesting thing to note, they closed almost 700 stores. They're trying to really streamline profitability. Their guidance is still suspended. They're focusing on e-commerce, expanding their product catalog, working with those new activist investors. They have some new additions to the management team. A new COO, a new CTO, as well as the departure of some of the management team. The CFO is leaving, as well as the Chief Customer Officer is leaving. At the end of the year, they operate 4,816 stores across the globe. So they still have a pretty massive store footprint. But I think you said it really well that the people who bought the stock were not also buying games at GameStop. So, it was not the best. I think that's why the stock is selling off a little bit more today.

Hill: On yesterday's show, Ron Gross and I talked about the management turnover with a couple of high-profile executives departing. You can look at that as they see the writing on the wall for the business. Their shares have increased dramatically and maybe they're just like, "I'm good, I'm out," or it could be powerful new leadership coming in, politely or impolitely showing them the door, saying, "Look, we have plans, you're not part of those plans." Either way, I really don't want to gloss over this, the fact that they didn't take any questions on the conference call really needs to be highlighted here, because this is now the business that is humming along. This is a business in, at a minimum, significant transition, and at most, turmoil. To give Wall Street analysts not only no guidance whatsoever, but to say, "No, we're not taking any questions," you leave them with no choice but to essentially look at all of the available information, make their own judgments. As one analyst said, and I'm paraphrasing here, based on what they've given us, their plans don't look any different from any other retailer on the planet.

Gallagher: Yeah, absolutely. I mean, it's pretty textbook at this point to say we're going to focus on customer experience. We're going to focus on a shift to e-commerce. We're going to focus on expanding our product catalog or making our product catalog more specific. You see these investors coming in, most of their board is now made up of activist investors. You see the hope that people can turn it around if they have more people with technology backgrounds and more people with e-commerce backgrounds within their board or within their management team. But it's hard for anyone to justify the valuation of GameStop over the past three months and the fact that they didn't acknowledge anything about it. 

Usually, we don't even want companies to talk about the stock price specifically, but I think this would be an exception in which I wish management acknowledged anything about it. Then on top of that, with absolutely no questions being answered, like you said, analysts are just saying, "Okay. Well, all our information says that this is a retailer that has not been doing well and now has some new activists, but we don't even know what the real plan is other than these generic plans that a lot of retailers have now." I'm not surprised by the downward momentum.

Hill: Adobe kicked off the fiscal year with a bang. First quarter profits were solidly higher than expected. Guidance for the current quarter and the fiscal year were strong. Shares of Adobe are flat today, but holy cow, they look like they are on fire right now.

Gallagher: Yeah. Adobe had a great quarter, like you said, it beat estimates. They raised their 2021 revenue target to $15.48 billion. They talked through 2020 shifting us from a world with digital to a digital-first world, which I thought was interesting. They also talked about how the Adobe Digital Index predicts that the pandemic has permanently boosted online spending by about 20%, and that 2022 will be the first trillion dollar year in e-commerce. That was really interesting. In terms of their quarter, their digital media segment was up 32%. Their Creative Cloud revenue showed strength in their Creative categories like Photoshop and increased demand for services like Adobe Stock photos. Their Document Cloud saw a 37% year-over-year growth with the demand for their scan app, their momentum for their e-signature, their Adobe Sign similar to a DocuSign. They had some really interesting wins in that segment with Bank of America, the Federal Aviation Administration, and Amazon. Then their Digital Experience segment revenue was up about 24%. They assisted with the digital modernization of the government agencies in all 50 U.S. states as state agencies and governments are revamping their websites. Adobe is really helping with that shift to digital, which I found pretty fascinating. 

They had some pretty interesting customer wins within that space as well. You saw wins with FedEx and Coca-Cola. There is another management retiring, CFO John Murphy is leaving. He's been with the company since 2017. It's not really a quick departure. They had really nice things to say about each other, the CFO and the CEO. It was an excellent quarter, there's strong growth ahead. I think it was really all positive signs for Adobe this quarter.

Hill: The stock is flat today, up 45% over the past year. You look at a longer chart with Adobe and it's just been this relatively steady up into the right. It's a $220 billion company. If you're looking at this company and you're thinking about buying a few shares, what is a reasonable expectation? Is it a continuation of that upward trend because it's a $220 billion company. This is not a small company. [laughs]

Gallagher: Yeah, it's not. I think with a company like Adobe, it has a track record, a proven management. I think you can expect it to expand on what it does, but do what it does really well. They have such a strong base that you can see it, I would imagine it continuing to keep going, keep steadily moving forward. It's beaten the market over three years, five years, 10 years. It's been a pretty solid performer and I wouldn't expect that to really change.

Hill: Shares of General Mills are down 4% after a mixed third quarter. Revenue looked pretty good, but profits were a little light. General Mills, they said they expect demand for food at home to be higher than it was pre-pandemic. I don't know, you look at the stock, it's not down dramatically, but there are definitely people who don't believe them.

Gallagher: Yeah. I was really excited to talk about General Mills. I think that these conference calls are really fun to read through, because you learn so many interesting tidbits about consumer behavior. I learned in the past year, the consumption of Haagen-Dazs was the biggest brand in their Asia segment, and that grew double-digits. But in the Middle East, the brand that grew the most was Betty Crocker. You see these really interesting things in consumer habits. 

In terms of what we think is going to happen in the next year, I think it's interesting to see, as people talk about people permanently shifting to working from home. I wonder how that will impact them if people are home more. They will be less likely to say, "Okay. I'm at the office. I don't feel like eating what I brought in. Let me switch and go somewhere else." They saw a 9% growth in their North American retail segment with that demand for food during the pandemic. They saw a 14% growth in pet, which I think is really what they're hoping will continue to drive through their Blue Buffalo, I think now just called the Blue Branding, which is the No. 1 brand for healthy food in both dog and cat food. They saw a little bit of a decline in convenience stores, an increase in Europe of about 15%, and a 12% increase in Asia and Latin America.

I wasn't surprised by any of this. I think it's steadily what you would expect. I think it's pretty interesting. They announced that they're planning to divest the European yield play business. They are working on accelerating their four pillars of growth and being as efficient as possible. Then, they are bringing back their share buybacks in this next quarter, and they did return to paying and increasing their dividend in the last quarter, so I think General Mills is another pretty steady-eddy, you know what to expect when you go into a conference call, and I don't think anything really jumped out to me as being overall too surprising.

Hill: No. It's definitely, if you're looking at your portfolio and you have space for consumer staples that are more steady, General Mills should certainly be on the watch list for that. Interesting that you mentioned what they're doing with yield play in Europe. Because they've got over 100 brands in over 100 countries. I am wondering if they need to, and maybe they are and just not talking about it because they're not close to the finish line with some of these deals if they're thinking this way, but I am wondering if that is a pathway to growth, we don't need so many brands, some of them are obviously doing better than other. The Blue Buffalo acquisition turned out to be a really smart one. It's not to say that they can't make more acquisitions, particularly in the pet segment, in the future, but I don't know; it just seems [laughs] like they have a lot of brands. If I were a shareholder, I would want them to be taking a pretty, not reckless, but just a pretty steady approach every quarter, every six months to saying, "Okay. Do we need to be selling off some of these brands?"

Gallagher: I think it's a super fascinating story, because you see some of these old brands that used to be really popular and as consumer habits shifted to more healthy eating and people going away from sugary cereals and all of these different aspects, I really respect how they pivoted their acquisition strategies of Annie's, then they saw a pet segment growing their acquisition of Blue Buffalo. I think that they have tried to lean into the consumer trends and make sure that their brands reflect consumer trends, while also strategically divesting from those brands that don't serve them the way they used to. I think that they've done a good job of it so far. I agree that I'm sure that there are more brands that they could divest and I think that they are planning to in the next five to 10 years, I think that the management team has been pretty strategic and forward-thinking in terms of acquisitions and divestitures. I don't know how to pronounce that word.

Hill: Yeah. That's it.

Gallagher: Perfect. [laughs] You know what I meant.

Hill: Before I let you go, you look through all their brands, I'm curious if you have, I don't want to say guilty pleasure, because I don't know that I believe in the concept of guilty pleasure. I guess I would put it this way. Is there something in the General Mills empire that is an occasional indulgence for you? Because I definitely have one.

Gallagher: Absolutely. I grew up eating cereal that was really healthy. My mom would only let us have just boring cereals no one liked. But once in a while we got to have Reese's Puffs. That felt like such a treat, still feels like such a treat if I can buy them for myself, so I would say, Reese's Puffs, No. 1 all the way. They have the best commercial, they have the best tasting cereal, and that's my go-to. What's yours?

Hill: For me, and I enjoy baking, and I'm pretty good at baking. But for me, every once in a while, going through the refrigerated section and I see that Pillsbury cookie dough, and it's just like, "Oh, you mean all I have to do is open this package and put these little blobs of dough on a baking sheet? I don't have to do anything else but that and then I'm going to have freshly baked cookies in 15 minutes?" I'm in.

Gallagher: That's amazing.

Hill: Again, not all the time, but every once in a while, just like on-hold, just almost like in case of emergency, break class. It's in the freezer, if I need it, it's there.

Gallagher: Perfect.

Hill: Maria Gallagher, great talking to you. Thanks for being here.

Gallagher: Thanks so much for having me.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.