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GameStop’s Q1 Losses Widen Despite Higher Sales
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GameStop’s Q1 Losses Widen Despite Higher Sales

Story Highlights

Despite higher sales, GameStop’s losses widened in the fiscal first quarter due to increased supply chain costs and growth investments. The company is gearing up for the launch of its NFT marketplace in the second quarter.

Shares of video game retailer GameStop (NYSE: GME) were volatile in the pre-market trading session on Thursday, June 2, in reaction to mixed results for Q1 FY22 (ended April 30, 2022). GameStop has been struggling to adapt to a changing business landscape, in which gamers prefer downloading games or streaming them online rather than buying physical versions at a retail store.

GameStop’s Q1 FY22 adjusted loss per share widened to $2.08 from $0.45 in the prior-year quarter despite better-than-anticipated sales. Analysts were expecting a much lower adjusted loss per share of $1.16.  

Widely considered as the first meme stock, GameStop shares are down almost 19% year-to-date (as of June 1).

Q1 in Detail

GameStop’s Q1 FY22 sales grew nearly 8% year-over-year to $1.38 billion, ahead of consensus estimate of $1.33 billion. Higher sales from Software and Collectibles categories more than offset the decline in sales from Hardware and accessories.

GameStop attributed its top-line growth to the demand for recent gaming software on Sony (SNEJF) and Microsoft’s (MSFT) platforms, the continued strength in the Nintendo gaming product lines, and growth in the company’s PC gaming products. Gaming hardware sales were adversely impacted by supply chain constraints and weak consumer demand.

Losses widened in the quarter as gross margin declined by 420 basis points due to higher freight costs, increased inventory reserves, and a shift to lower margin categories. Q1 profitability was also impacted by increased investments associated with company’s transformation.

Transformation Efforts

GameStop has been transforming itself from a “decaying brick-and-mortar retailer into a technology-led organization,” according to Matt Furlong, GameStop’s CEO.

GameStop is focused on enhancing its e-commerce presence, exploring opportunities in the cryptocurrency space, NFTs (Non-Fungible Tokens), and Web3 gaming verticals.  

In May, the company launched GameStop Wallet, a digital asset wallet that allows gamers and other users to store, send and receive cryptocurrencies and NFTs across decentralized apps. The wallet will enable transactions on the company’s new NFT marketplace, which is scheduled to be launched in the second quarter.

Wall Street’s Take

Ahead of Q1 results, Wedbush analyst Michael Pachter reiterated a Sell rating on GameStop, citing valuation concerns and continued cash burn.

Pachter pointed out that GameStop shares “remain at levels that are completely disconnected from the fundamentals of the business due to ongoing support from eager retail investors.”

Pachter feels that GameStop’s NFT marketplace and wallet might not become the preferred solution for console and mobile gamers.

Based on only one recent review, that of Pachter, GameStop scores a Moderate Sell consensus rating on TipRanks. The average GameStop price target of $30 implies potential downside of 75.29% from current levels.

Conclusion

GameStop continues to invest heavily in its transformation into a company with a strong a e-commerce presence and exposure to emerging technologies. However, growth investments and supply chain woes are eating into the company’s profits.

GameStop will have to show continued improvement in its sales and profitability to regain credibility among investors and Wall Street analysts. However, given a challenging macro landscape, it might be a tough road ahead for the company.  

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