On Wednesday afternoon, GameStop (GME 2.56%) announced that sales continued to grow in the first quarter of fiscal 2022, following years of revenue declines. Investors seemed pleased with the news, as GameStop stock jumped 10% on Thursday.
However, GameStop's revenue growth wasn't particularly impressive, and it came at great expense. And while management has been urging investors to focus exclusively on revenue growth, the company's widening losses and cash burn are bad news for shareholders.
Another quarter of modest revenue growth
GameStop's revenue jumped 18.1% in fiscal 2021 as the gaming specialist began to recover from the COVID-19 pandemic. But by the fourth quarter, revenue growth was already tailing off, with sales up just 6.2% year over year.
Image source: Getty Images.
This trend continued last quarter. Net sales totaled $1.38 billion, or 8% higher than in the first quarter of fiscal 2021. Software sales increased $86 million year over year, accounting for the bulk of GameStop's growth. GameStop also posted strong growth in collectibles sales, but that merchandise category remains its smallest by far.
While it's nice to see sales rising rather than falling, GameStop's revenue remains well below pre-pandemic levels. The company reported net sales of $1.55 billion in Q1 2019 and $1.79 billion in Q1 2018. Software sales in particular have fallen by a third relative to the first quarter of fiscal 2019. By contrast, the broader retail sector is booming compared to 2018 and 2019.
Margin erosion continues
Even more ominously, GameStop continues to face severe pressure on its profitability. Gross margin fell to 21.7% last quarter, down from 25.9% a year earlier. Before the pandemic, GameStop was averaging gross margin of around 30% in the first quarter.
GameStop Gross Profit Margin (TTM), data by YCharts. TTM = trailing 12 months.
The ongoing margin erosion makes it appear that GameStop is "buying" its sales growth by reducing its markups to unsustainably low levels. With sales still far below pre-pandemic levels and labor costs on the rise, GameStop has no shot at making money with gross margin at these levels.
Making matters worse, GameStop has dramatically increased spending as part of its effort to boost revenue growth. As a result, the company's operating loss widened to $154 million last quarter, compared to $41 million in the first quarter of fiscal 2021. And the company burned over $300 million of cash.
Smoke and mirrors
While GameStop's core business is bleeding cash rapidly, management continues to tout the recent introduction of a GameStop crypto wallet and the upcoming launch of a new NFT marketplace.
Moves like these made GameStop a meme stock darling last year. But today, GameStop's NFT plan looks like a desperate attempt to latch on to the latest fad. Like other similarly risky assets, crypto and NFTs have plunged in value in recent months. The popping of the speculative bubble has contributed to a big drop in interest in NFTs.
This doesn't necessarily mean that GameStop's NFT marketplace is doomed to fail. But it looks more like a distraction than a game changer for the company.
Stay away
In the first half of 2021, GameStop capitalized on its surging stock price to raise nearly $1.7 billion by selling additional shares. However, the company has already burned through nearly half of that sum, with little to show for it.
For now, GameStop has room to maneuver, with just over $1 billion of unrestricted cash on hand. But with losses widening and cash burn continuing at a high rate, the company could face another cash crunch a couple of years down the road. Even if it manages to survive, GameStop has little chance of living up to its $10 billion valuation. That makes GameStop stock a bad bet for long-term investors.
