GameStop earnings: The Emperor has no clothes

then wednesday, Jim Stop (NYSE: GME) The latest earnings report has been released. Not surprisingly, the company continued to struggle strongly in the third fiscal quarter. While sales rebounded from the significant decline caused by the pandemic in 2020, GameStop losses widened further.

Management continues to insist that its turnaround strategy will result in meaningful long-term revenue growth and that profits will naturally follow. However, with each passing quarter, it becomes increasingly clear that GameStop does not have a reliable path back to profitability.

Revenue recovering somewhat

GameStop reported net sales of $1.3 billion last quarter: up 29% year over year. However, this result was not as impressive as it might seem.

First, GameStop’s third-quarter revenue exceeded $1.4 billion in 2019 and topped $1.9 billion a year earlier. In short, a retailer that’s really focused on games is no longer growing. It just recovered some of the revenue decline last year. for comparison, best buy (NYSE: BBY) It posted $11.9 billion in revenue last quarter: a 22% increase from the previous two years.

Second, the launch of new PlayStation and Xbox game consoles in late 2020 boosted game console sales in the short term. Between August and October — the period that corresponds to GameStop’s fiscal third quarter — US game console sales rose 59% year over year, according to the NPD.

Similarly, sales of GameStop devices and accessories jumped 62% last quarter, accounting for nearly all of the company’s earnings growth. By contrast, software sales fell 2% on top of its 39% decline the year before.

The margin crisis continues

While any kind of revenue growth is better than no revenue growth, gaming consoles tend to sell at very low margins. Historically, software sales made up the bulk of GameStop’s total revenue.

Two adults and a child sitting on a sofa holding video game controllers.

Image source: Getty Images.

Thus, a dramatic shift in the mix towards hardware leads to lower gross margin. GameStop reported a gross margin of 24.6% last quarter, down from 27.5% the year before (and 30.7% the year before). As a result, gross profit increased only 15% year over year, which is significantly below the company’s revenue growth of 29%.

Meanwhile, GameStop’s operating expenses are up 17% year over year. That increased its operating loss to $103 million in the fourth quarter from $84 million in the same period last year, excluding asset sale gains. GameStop posted a third-quarter net loss of $1.39 per share: much worse than the $0.52 loss per share analysts had expected.

There is no ‘there’ there

Sure enough, CEO Matt Furlong claims that GameStop’s massive losses are just part of a long-term strategy. During the company’s recent earnings call – which lasted less than 10 minutes – he said: “We believe revenue growth will translate into volume and market leadership. From there, volume and market leadership will translate into greater free cash flow over time. Our long-term focus means we will give Constantly prioritizing growth and market leadership over short-term margins.”

However, revenue growth does not automatically translate into volume and market leadership. Management’s unconventional strategy to increase revenue at any cost will exacerbate GameStop’s losses.

In particular, GameStop’s moves to expand its portfolio with consumer electronics products such as televisions may lead to some growth in earnings, but at the cost of profits. GameStop will never have the volume or market leadership in general consumer electronics. For example, Best Buy is set to generate more than $50 billion in revenue this year, compared to less than $6 billion for GameStop.

In a best-case scenario, GameStop will end up as a smaller, less profitable version of Best Buy. Most likely, you will never find a sustainable business model and you will continue to lose money and burn money indefinitely. Given that you can invest in Best Buy – which is very profitable – at a valuation of $25 billion, owning shares in money-losing GameStop at $12 billion doesn’t make sense.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. He owns the Motley Fool and recommends Best Buy. Motley Fool has a disclosure policy.

The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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