GameStop (GME 29.07%) gained a lot of notoriety in 2021 for its part in the meme stock frenzy that occurred in the first half of that year. But that overheated retail investor interest eventually waned and the stock price is now down about 73% from highs reached in January 2021. Beyond trading activity, the company has struggled to adjust to changing consumer behavior, and losses are mounting on the bottom line.
When GameStop reports Q4 earnings on Thursday, March 17, investors will want to hear from management that its business has been put on a more sustainable footing.
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GameStop is struggling to stop losses on the bottom line
In its most recent quarter ended Oct. 30, GameStop generated revenue of $1.3 billion. That was up from $1 billion in the same period the year prior. GameStop's revenue cratered by 22% in 2020 when it had to temporarily shut its doors to in-person shoppers. That said, the start of the pandemic was not the beginning of GameStop's troubles.
The company's sales have been steadily decreasing for several years. GameStop has adapted slowly to changing consumer behavior. The bulk of its business is buying and selling physical copies of games, a troubling business model when digital sales are expanding. The trend is unlikely to reverse as physical and digital copies of games are typically priced the same. That leaves the consumer a choice: Buy your game online from the comfort of your home, or travel to your nearest GameStop store to purchase an identical copy. For most gamers, the choice is clearly in favor of the digital copy.
In 2012, GameStop earned revenue of $9.5 billion. In 2019, even before the effects of the pandemic, sales had fallen to $8.3 billion. The company is on pace for far less than that in 2021. In the nine months ended on Oct. 30, sales reached $3.8 billion. The company has not been able to cut costs fast enough or to the magnitude of the declining revenue to balance the income statement. As a result, GameStop has lost $234 million on the bottom line so far in fiscal 2021.
When the company reports fourth-quarter and full fiscal year results on March 17, investors will want to see a clear path to sustainable operations. Given how mismatched the business model is with where the consumer is heading, one of the more likely options is aggressive cost-cutting and store closures. However, it does not look like management is taking that route -- it is instead investing in new offices in technology hubs to attract more talent.
What this could mean for GameStop investors
Analysts on Wall Street expect GameStop to report revenue of $2.22 billion and earnings per share (EPS) of $0.84. If the company meets those projections, it would be an increase of 4.4% on revenue and a decrease of 37.31% on EPS from the same period a year ago.
It's apparent that minor increases in growth will not be enough to turn things around. More importantly, investors will be curious to hear more about how management plans to stop the losses on the bottom line.
