Why GameStop Stock Is Plummeting

GameStop (NYSE:) stock plummeted in after-hours trading on Tuesday after the video game retailer posted earnings results that fell short of estimates.

The stock had fallen some 18% from its $15.50-per-share closing price on Tuesday, tumbling to about $12 per share in pre-market trading on Wednesday. It began moving a little higher after Wednesday’s opening bell but was still down by about 14% on Wednesday morning, trading at just over $13 per share.

Let’s examine what drove the sell-off.

Sales Drop, but Cost-Cutting Keeps GameStop Profitable

GameStop’s revenue for its fiscal fourth quarter missed estimates by a fairly wide margin. Net sales were down 19% year over year in the quarter to $1.8 billion, while gross profit after deducting the cost of sales tumbled 16% to $419 million. Analysts had expected $2.05 billion in sales.

However, GameStop’s net income rose 31% to $63 million or 21 cents per share, as it was able to reduce selling, general and administrative expenses by 21% to $359 million. However, that earnings result still came up short of earnings estimates.

For the full fiscal year, the retailer’s sales fell 11% to $5.3 billion, but its net income was $6.7 million, up from a $313 million net loss in fiscal 2022. The net income gains for the fourth quarter and full year stem from a cost-reduction plan that has enabled GameStop to remain profitable in the face of plunging sales figures. That has included staff reductions and store closures.

At the end of fiscal 2023, there were 4,169 GameStop stores, including 2,915 in the U.S., according to the 10-K. At the end of 2022, there were 4,413 stores, including 2,949 in the U.S. Thus, most of the closures have been international, with the highest number in Europe.

Its headcount has dropped precipitously too, as GameStop had 8,000 full-time workers and 13,000 to 18,000 part-time workers at the end of 2023. At the end of 2002, it had 11,000 full-time workers and 14,000 to 27,000 part-time workers, so there have been substantial staff cuts.

Investors and analysts are concerned about whether or not GameStop’s current financial position is sustainable and if it can keep cutting costs to offset sales declines.

No Outlook or Earnings Call

GameStop did not hold an earnings call with analysts on Wednesday, nor did it offer guidance or an outlook for 2024, which doesn’t inspire a lot of confidence. However, there was a lot of information in its 10-K, where it outlined its risks — mainly, downloadable games.

“The current consoles from Sony (NYSE:), Nintendo, and Microsoft (NASDAQ:) have facilitated download technology,” GameStop management stated in the filing. “Downloading of video-game content to the current-generation video-game systems continues to grow and take an increasing percentage of new video game sales. If consumers’ preference for downloading video-game content in lieu of physical software continues to increase, our business and financial performance may be adversely impacted, and these companies now sell consoles that only take downloadable games, not the physical games that GameStop sells.

To compete, the retailer knows it must respond to these changes and better understand customers’ preferences.

“It may take significant time and resources to respond to these technological changes and changes in consumer preferences. Our business and results of operations may be negatively impacted if we fail to keep pace with these changes,” management warned.

Analyst Lowers Target

Analysts at Wedbush and Baird noted these challenges in their post-earnings research notes, with Wedbush lowering its price target and reiterating its Sell rating.

“An increasing mix of digital downloads is hurting physical retail, and there is simply no reason to go to the store if a consumer can just order a game and download it immediately,” Wedbush analyst Michael Pachter said, according to Reuters.

“Revenues are highly unlikely to rebound unless management figures out a way to drive store traffic. I suspect that they will keep trimming costs to generate breakeven or better, but it is inevitable that their sales will decline to an unsustainable level.”

The stock is cheap with a price-to-sales ratio of 0.83, but there doesn’t appear to be a lot of upside potential unless GameStop makes some major changes so that it can compete in this new environment.