Why GameStop stock is plummeting

game stop (NYSE:GME) shares tumbled in after-hours trading Tuesday after the video game retailer reported earnings results that missed expectations.

The stock is down about 18% from Tuesday’s closing price of $15.50 per share, and fell to about $12 per share in pre-market trading Wednesday. It started moving a little higher after Wednesday’s open, but was still down about 14% on Wednesday morning, trading at just over $13 per share.

Let’s take a look at what drove the sell-off.

GameStop maintains profitability through declining sales and cost cuts

GameStop’s fiscal fourth-quarter earnings missed expectations by a significant margin. Net sales for the quarter fell 19% year-over-year to $1.8 billion, and gross profit before selling expenses fell 16% to $419 million. Analysts expected sales to reach $2.05 billion.

But GameStop’s net income rose 31% to $63 million, or 21 cents per share, as it cut selling, general and administrative expenses by 21% to $359 million. However, the performance still fell short of expected performance.

For the full fiscal year, the retailer’s sales fell 11% to $5.3 billion, but net income was $6.7 million, up from a net loss of $313 million in fiscal 2022. The increase in net income for the fourth quarter and full year comes from expenses. – A downsizing plan that allows GameStop to remain profitable despite plummeting sales. This includes staff cuts and store closures.

As of the end of fiscal 2023, there were 4,169 GameStop stores, including 2,915 in the United States, according to its 10-K. At the end of 2022, it had 4,413 stores, including 2,949 in the United States. Most lockdowns have therefore been overseas, with the highest numbers in Europe.

GameStop’s headcount also decreased sharply, with 8,000 regular workers and 13,000 to 18,000 irregular workers by the end of 2023. At the end of 2002, the number of regular workers increased to 11,000 and the number of irregular workers increased to 14,000 to 27,000. So we drastically reduced our staff.

Investors and analysts are concerned about whether GameStop’s current financial position is sustainable and whether it can continue to cut costs to offset declining sales.

No outlook or earnings announcement

GameStop didn’t hold an earnings call with analysts on Wednesday and didn’t provide any guidance or outlook for 2024, which didn’t inspire much confidence. However, there was a lot of information in the 10-K explaining the risks, primarily downloadable games.

“Current consoles from Sony, Nintendo, and Microsoft have promoted download technology,” GameStop executives said in the filing. “Downloads of video game content to current-generation video game systems continue to grow and represent an increasingly larger percentage of new video game sales. If consumers’ preference to download video game content instead of physical software continues to increase, our business and financial performance could be adversely affected and these companies may only be able to download downloadable games rather than the physical games currently sold by GameStop. The console is for sale.

To compete, retailers know they need to respond to these changes and better understand customer preferences.

“Responsive to these changes in technology and consumer preferences can require significant time and resources. “Failure to keep pace with these changes could have a negative impact on our business and operating results,” management warned.

Analysts lower target

Analysts at Wedbush and Baird noted these issues in a post-earnings research note, with Wedbush lowering its price target and repeating a Sell rating.

“The rise of digital downloads is hurting physical retail, and if consumers can order a game and download it instantly, there’s absolutely no reason to go to the store,” Wedbush analyst Michael Pachter said. “Unless management finds a way to drive store traffic, there is little chance that sales will rebound. “While we expect to continue to cut costs to achieve above break-even, it is inevitable that revenues will decline to unsustainable levels.”

The price-to-sales ratio is cheap at 0.83, but the upside does not seem to be large unless GameStop makes major changes to enable it to compete in the new environment.