GameStop (GME 1.35%) shares have crushed the market since the beginning of the COVID-19 pandemic, as retail investors rallied behind the popular meme stock. But as with many other meme stocks, GameStop stock's surge wasn't supported by improving fundamentals. In fact, the underperforming gaming retailer's results continued to weaken in 2020 and 2021.
This trend continued last quarter. On Thursday, GameStop reported very modest sales growth for the fourth quarter of fiscal 2021 and posted a huge loss. In other words, the gaming retailer still hasn't made any tangible progress toward a turnaround.
Another awful quarter
Most of the U.S. retail industry made a strong recovery from the worst of the COVID-19 pandemic during 2021. By contrast, GameStop continued to lose money throughout the year, despite getting a significant tailwind from the release of a new generation of PlayStation and Xbox gaming consoles in late 2020.
Q4 was arguably GameStop's worst yet. Revenue reached $2.25 billion, up 6.2% year over year and up 2.7% compared to Q4 of fiscal 2019. However, gross margin tumbled to just 16.8%, vs. 21.1% in Q4 2020 and 27.2% in Q4 2019.
As a result, the company racked up a stunning $167 million operating loss ($161 million excluding asset impairments) and an adjusted loss per share of $1.86. On average, Wall Street analysts had expected a profit of $0.84 per share. For the full year, GameStop lost nearly $400 million and burned nearly $500 million of cash.
This performance was particularly alarming because Q4 is typically the most profitable part of the year for GameStop. Even in the midst of the pandemic, GameStop posted an adjusted operating profit of $29 million in Q4 of fiscal 2020. Before the pandemic hit, the company routinely posted Q4 adjusted operating profits of over $100 million.
Is the revenue recovery meaningful?
GameStop's new management team has argued that it should be judged primarily by the company's long-term sales growth. As such, CEO Matt Furlong specifically highlighted that revenue exceeded pre-pandemic levels for the first time last quarter.
Image source: Getty Images.
Investors shouldn't be impressed. In Q4 2018, sales totaled $3.06 billion. Q4 revenue plummeted 28.4% to $2.19 billion the following year. Management and investors attributed that to a spending slowdown ahead of the upcoming PlayStation and Xbox console releases in 2020.
Now, GameStop should be capitalizing on the corresponding surge in demand for new gaming consoles, along with software and accessories. Just getting sales back to slightly above the level of Q4 2019 -- but more than 25% below Q4 2018 -- is no accomplishment at all, especially when it has come at such a high price with respect to profitability.
Too many excuses
During GameStop's earnings call -- which consisted of a roughly 10-minute monologue by Furlong, with no opportunity for questions -- the new CEO attributed GameStop's big loss to supply chain issues and other temporary operational headwinds associated with the pandemic. Furlong said the company is willing to lose money in the near term to improve customer service and bolster brand loyalty.
However, GameStop is failing at the fundamentals of retail: selling goods at a big enough markup to make a profit. Operating expenses jumped by $120 million year over year last quarter, but even if expenses hadn't increased at all, the company still would have lost money.
With each passing quarter, it appears less likely that GameStop's core retail business will ever return to profitability. The company is diversifying by launching an NFT marketplace and striking new partnerships in this vein, but success is far from guaranteed. GameStop has no clear competitive advantage in this space other than (perhaps) brand nostalgia.
GameStop stock started falling back to earth a few months ago and has lost more than half of its value since Thanksgiving. Given the company's dreadful bottom-line results and cash burn, the stock is likely to continue heading lower in the years ahead.
