On Wednesday, popular meme stock GameStop (GME 0.10%) released its second-quarter earnings report. It wasn't any better than the troubled retailer's first-quarter results. True, GameStop's sales are growing on a year-over-year basis -- thanks to some phenomenally easy comparisons -- but the company continues to lose money and has no clear path back to sustainable profitability.
Results bounce back, but not enough
GameStop generated $1.18 billion of revenue in the second quarter of fiscal 2021, up from $942 million a year earlier. That beat the average analyst estimate of $1.12 billion.
Nevertheless, this top-line performance wasn't impressive. First, sales declined sequentially from $1.28 billion in the first quarter. Second, GameStop's revenue fell 8% short of the $1.29 billion it generated in the second quarter of fiscal 2019. (Furthermore, 2019 was an awful year for the company. Second-quarter revenue totaled $1.5 billion in fiscal 2018.)
GameStop Revenue (TTM), data by YCharts. TTM = trailing 12 months.
GameStop's year-over-year sales recovery enabled it to reduce its losses. The company recorded a $51 million adjusted operating loss last quarter, compared to an $85 million adjusted operating loss in last year's second quarter.
More encouragingly, its loss also shrank, compared to fiscal 2019, when it posted an adjusted operating loss of $83 million in the second quarter. However, GameStop's adjusted loss per share of $0.76 was $0.10 worse than the analyst consensus.
In any case, GameStop remains far from breakeven. Moreover, the gaming-focused retailer has already cut its operating expenses by more than 20% over the past two years. This shows that GameStop can't just cut its way to profitability -- it needs higher sales at stronger gross margins.
Plunging software sales tell the real story
Making matters worse, GameStop reported this sluggish sales performance and quarterly loss despite the tailwind from the launch of new Sony and Microsoft gaming consoles late last year.
To be fair, the global semiconductor shortage has crimped the supply of gaming consoles. This has constrained GameStop's hardware sales to some extent. However, GameStop still reported hardware and accessories sales of $610 million last quarter, up from $555 million two years earlier.
Rather, software continues to be GameStop's main weakness. Software sales totaled just $397 million in the second quarter, plummeting 29% from $558 million in Q2 2019. While some gamers still prefer physical discs, more and more have opted for the convenience of digital downloads, cutting out middlemen like GameStop. All signs still point to GameStop's software sales being in terminal decline.
Image source: Getty Images.
Software sales have historically generated half or more of GameStop's gross profit. By contrast, hardware gross margins have averaged a paltry 12% or so. At that level, even an extra $300 million of hardware sales would have generated only $36 million in incremental gross profit last quarter -- not nearly enough to reach breakeven. In short, investors shouldn't have any illusions that further growth in hardware sales can return GameStop to profitability.
No evidence of a real turnaround plan
In recent months, GameStop has hired a new management team with a mandate to improve the company's e-commerce operations. Relatedly, it has made plans to open new fulfillment centers. The company has also started to expand its merchandise selection.
However, neither the new management team nor GameStop's high-profile chairman Ryan Cohen have offered any meaningful details about the company's future plans. With hardware sales coming in at very low margins and software sales cratering, GameStop's core business is dying. Perhaps the company has a secret turnaround plan -- but there's no evidence to support that assertion.
GameStop does have $1.7 billion of net cash on its balance sheet, as it has capitalized on its sky-high stock price by issuing more shares this year. That gives it plenty of time and money to develop and execute a new strategy.
On the other hand, GameStop currently carries a market cap of nearly $15 billion. That's far too much to pay for a company with $1.7 billion of cash, an unprofitable core business in terminal decline, and some vague plans to transform the business.
