- GameStop has pre-announced fiscal 1Q20 results, and the numbers do not look very encouraging.
- Comps ex-closed stores suggest that the collapse in revenues cannot be fully blamed on the COVID-19 crisis.
- Fun fact: GameStop has burned far less cash while being partially shutdown than as a fully-functioning retailer.
- Why bother buying GME, other than for the pure joy of gambling, with so many more compelling alternatives to it in the market?
- Looking for a helping hand in the market? Members of Storm-Resistant Growth get exclusive ideas and guidance to navigate any climate. Get started today »
GameStop (NYSE:GME) shareholders: brace for impact. The retailer has pre-announced fiscal 1Q20 results, and the numbers do not look all that good.
Global sales and comps are estimated to come in about one-third below year-ago levels. As a result, adjusted EBITDA will turn from a positive last year to a negative this time. Net loss of roughly $167 million suggests a sizable, negative EPS of $2.50 - although about 75 cents of it should be associated with a one-time charge for inventory obsolescence.
Worse than expected
Although the numbers above look awful on the surface, identifying the short-term impact of the COVID-19 crisis on GameStop's first-quarter results is important. In the retail space, Dollar General (DG) comes to mind: maybe 22% in positive comps will not be the new normal going forward, and neither will TJX Companies' (TJX) evaporating revenues.
During the quarter, several GameStop stores were closed, even though the company declared itself an "essential business" in order to remain open for a few extra days. But the following quote provides a clue as to how bad the period has been for GameStop, even after accounting for COVID-19 headwinds:
Excluding stores that were closed during the first quarter as a result of the COVID-19 pandemic, comparable store sales are expected to decline in the range of approximately 16% to 17%.
The sharp decline in comps ex-closed stores during a period when at-home entertainment should have thrived is worrisome. At the same time, I think the numbers also speak to the well-known challenges faced by the company prior to the pandemic. GameStop continues to suffer from the final few months of the console cycle and a secular shift towards streaming and mobile gaming.
Source: DM Martins Research, using data from company report
It was also interesting to note that cash flow from operations, while still negative, is expected to improve substantially this year. This is due to the company's "focus on optimizing the cash conversion cycle and carrying more efficient levels of inventory, which resulted in accounts payable at the beginning of fiscal 1Q20 being lower".
Yes, GameStop has burned far less cash while being partially shutdown than as a fully-functioning retailer.
Why play this game?
Since I wrote my most recent, bearish article on GameStop, the stock has climbed 14% from $3.60/share (granted, against a 22% gain in the S&P 500). But between then and now, shares (1) lost a third of their value in the last week of March, (2) doubled in the first few days of April, and then (3) fell by nearly 30% in the first half of May. Time the entry right, and an investor would have looked like a genius. Time it wrong, and a portfolio's returns would have been embarrassing for the rest of the year at least.
I certainly have fundamental reasons for not liking GameStop and its stock. However, what drives me further from it is not a "hot take" on the future of the company. Rather, it is the stock's erratic price behavior and all the distraction that comes with share ownership.
The graph above shows how hard it has been for an investor to deal with GME in the past year. Shares have consistently failed to reclaim 12-month highs, while bouncing all over the place. More important than the business prospects, the stock has been influenced by speculations on the gaming console cycle, drama at the Board of Directors, sky-high short interest, and the buying and selling of shares by a celebrity investor.
There are currently 2,800 names trading at the New York Stock Exchange. Why would I ever consider buying GME, other than for the pure joy of gambling, with so many more compelling alternatives to it in the market?
I use an approach that favors predictability of financial results and broad diversification when choosing stocks for my All-Equities Storm-Resistant Growth portfolio. So far, the small $229/year investment to become a member of the SRG community has lavishly paid off, as the chart below suggests. I invite you to click here and take advantage of the 14-day free trial today.
This article was written by
Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.
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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.
He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.
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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.
DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).
Analyst’s Disclosure: I am/we are long DG, TJX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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