Growth Stocks: GameStop

In its latest report, GameStop (GME.US) posted what can only be called a really strong quarter at a time when sentiment about the business was incredibly negative. Cost reduction initiatives are working and the company is benefiting from strong industry demand on the hardware (computer components) side. Its collectibles business continues to expand, and management expects to make further improvements this year. The company's long-term prospects are still dubious and even keep the shadows, but at present GameStop has caught up.

March 21 was a fantastic day for shareholders of videogames retailer GameStop. After announcing financial results that beat both broad and broad expectations for the last quarter of the company's fiscal 2022, the company's shares rose, trading around 45% up in after-hours markets. This increase certainly serves as a relief for those who have buy GME stocks. In addition, the move demonstrates that management is making some headway in improving the company's operations.

A very welcome surprise for investors

GameStop shares soared about 45% in after-hours trading on March 21 and opened 50% higher the following session after the company announced financial results covering the final quarter of the fiscal year 2022 of its business.

We at XTB watched the useful information in the news that echoed the results and heavily leveraged the fundamentals to provide additional fuel for the share price. But above all, for the income. During the quarter, the company's sales were $2.230 million. Although this is still 1.2% lower than the $2.25 billion the company reported a year earlier, it beat the $2.18 billion in revenue that analyst consensus was anticipating.

GME Interval D1. Source: xStation

Digging into the numbers, we found some pretty fascinating results. On the downside, the company's software revenue, long thought to be the most important in determining the company's potential, actually declined on a year-over-year basis. Revenue of $670.4 million was 14.7% lower than the $785.9 million reported just a year earlier. The general trend here is not surprising, but its magnitude was. After all, in the three months that made up the last quarter of the year for the business, software sales in the video game industry fell just 3.5% year-on-year.

Source: SEC EDGAR Data

On the bright side, a couple of developments were noted. Most of the company's business includes selling its own hardware and accessories. Revenue of $1.240 million surpassed the $1.190 million reported a year earlier. That translates to a year-on-year increase of 4.6%. This is not a surprise. In December of last year, for example, when sales reached their highest level in the last quarter, hardware sales increased 16% over the previous year. This offset a 1% drop in software sales and a 2% drop in accessory revenue.

At the same time that revenue increased in this period, so did the collectibles for the company category. Total sales of $313.2 million came in 12.1% above the $279.3 million reported just a year earlier. This is an area of the business where management has expressed interest in continuing to grow, not only in the short term but also in the long term. But because it still represents only a small portion of the company's total sales, it's not exactly that significant right now.

Source: GameStop

While there's no denying that the company's reported revenue figures were a welcome surprise from investors, the biggest surprise had to have been the bottom line. Earnings per share came in at $0.16. That's much better than the -$0.49 per share loss the company reported a year earlier and easily beat the -$0.18 per share loss analysts were expecting. In other words, the company went from generating a net loss of -$147.5 million in the last quarter of 2021 to generating a profit of $48.2 million during 2022. If the analysts had been correct, the loss Net income from the business would have been around $54.2 million in the last quarter.

Source: SEC EDGAR Data

It is true that the increase in income helped the company. But that alone wasn't enough to push the company into a net profit position. During this time, the company was able to see its gross profit margin increase from 16.8% to 22.4%. We also know that the company's selling, general and administrative costs improved, from 23.9% of sales to 20.4%. In its shareholder presentation, the company commented on the great effort to turn in the direction of cost reduction last year. This pivot added headcount reductions as the company streamlined operations and focused on achieving efficiencies across its ecosystem. And to make things even better, management said they are also "aggressively" focused on improving efficiency and cutting costs this year. This includes cost reduction initiatives in Europe. Other goals outlined by management include pushing for full console allocations to meet customer demand, further leveraging its renewal capabilities, and continuing to build out the collectibles and toy category in which the company has been wildly successful.

A movement of the company that has been key was the reduction in inventories. At the end of the last quarter, the company had inventories worth $682.9 million. Down from the $915 million reported just a year earlier. Inflated inventories have become common in retail businesses over the last year or so. So it's good to see the company making progress in this regard. Holding inventory is expensive, and if the company can do the same with less, the end result, early stockholders, would be a more efficient company that can generate stronger returns.

Source: SEC EDGAR Data

Other company profitability metrics followed a similar trajectory. The operating cash flow, for example, went from negative $110.3 million to $338.2 million. If we adjust for changes in working capital, it would have gone from negative $122.5 million to $59.6 million. And during that same period of time, the EBITDA of the business went from negative $-126.9 million to $82.5 million. An absolute and resounding change in trend.

In the graph above, we see that the results experienced during the last quarter of the year were, for the most part, a continuation of what the company already communicated for 2022 in its closing report for 2021. Sales fell, but the final performance It has also improved remarkably after one year. It is also very important to note that the company has cash on top of debt totaling $1.350 million. This gives the company a great flexibility in today's environment.

Conclusions

It is indisputable that GameStop has definitely done well in improving its operating business. In the short term, the company is benefiting greatly from strong demand for hardware (computer components) as well as its growing business in collectibles ("Funko" figures or dolls, among others). The hardware side is cyclical and periodic in nature due to the frequency with which new consoles are released and it should not be a problem to have underbilled.

However, the consideration of "meme stock" still hovering over the name of GameStop, something that prevents traditional investors or those less influenced by social networks from seeing its potential on a basis or having an interest in placing their trust in the company.

Despite this, we must also acknowledge that recent developments have been positive and that if the company continues with these developments, there is a chance that the ship could turn around.

Dario Garcia, EFA
XTB Spain