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GameStop's Q3 Was Just as Bad as You Thought It Would Be

No one should have expected GameStop's (NYSE: GME) third-quarter earnings report to contain any good news, as there are no catalysts for growth, and yet since mid-August the video game retailer's stock has doubled in value.

Now that its earnings are out and they're just as bad as imagined, the market seems shocked -- shocked! -- at the outcome, as investors sent GameStop's stock 20% lower in after-hours trading.

Image source: Getty Images.

An immovable force

GameStop reported third-quarter currency-adjusted revenue tumbled 24.7% to $1.4 billion as hardware sales plummeted over 45%, software sales were cut by a third, and both accessories and pre-owned games were each down 13% for the period.

Once again, the only segment that grew was its collectibles business: Sales increased just over 4% from last year. And GameStop has to be really upset Disney (NYSE: DIS) made a rare miscalculation about the popularity of its new Star Wars TV series, The Mandalorian, because there are no Funko (NASDAQ: FNKO) POP "Baby Yoda" action figures available for Christmas. The figurine is available for pre-order, but it won't be shipped till the spring.

GameStop has had a long-standing relationship with Funko and its POP figurines are a big part of the retailer's collectibles business, so this segment could reasonably see a nice, well, pop itself in the fourth quarter if demand for the Baby Yoda dolls is as great as many believe.

GameStop's got no game

Take note, though: CEO George Sherman warns the retailer's more important game console business doesn't look hopeful for the immediate future as the useful life of existing game systems winds down.

He said the cause of GameStop's dismal earnings was "the unprecedented decline in new hardware sales seen across the market as the current generation of gaming consoles reach the end of their lifecycle and consumers delay their spending in anticipation of new hardware releases."

Worse, he doesn't see the retailer's fortunes improving until the fourth quarter of 2020 when the newest models from Microsoft and Sony get launched.

More bad news to come

GameStop's declining fortunes led the company to report an adjusted loss of $0.49 per share for the quarter, a 180-degree reversal from the $0.49-per-share adjusted profit it recorded in last year's Q3. Analysts had expected a profit of $0.11 per share.

Guidance for the year was also lowered. Comparable-store sales, which plunged 23% in the quarter -- double the rate of decline in Q2 -- are now expected to fall by high-teen-percentage rates for the year, worse than its previous expectation of a low-teen-percentage decline.

GameStop also expects its capital expenditures for the year to be in a range of $80 million to $85 million, some $10 million lower than it forecast last quarter, which itself was down from prior expectations of more than $100 million.

The video game retailer does still expect to report a full-year adjusted profit, but the guidance for $0.10 to $0.20 per share is a far cry from the $1.15 to $1.30 per share it forecast just three months ago.

Burning the furniture to heat the house

Although GameStop will likely be able to hang on until the new game consoles hit the market because it did pay down over $400 million in debt over the past year, almost cutting it in half, it also decided to squander $115.7 million to repurchase 22.6 million shares this quarter at an average price of $5.11 per share.

While that was undoubtedly a sop to activist investor Michael Burry, who was agitating for GameStop to buy back stock so investors could make a quick profit, it did nothing to improve the retailer's business and simply had it spending cash it needs to conserve.

It did, however, allow GameStop to inflate its earnings, because as bad as the per-share loss was this quarter, it would have been much worse if it hadn't reduced its outstanding shares by more than a third.

The company touted the move as "opportunistically returning excess capital to shareholders," but when the company is facing headwinds, it might not be the best use of limited financial resources.

A bleak forecast

There was no reason for GameStop's stock to rise like it did over the past few months, as there was never any hope of improvement, and the third-quarter report shows there was reason to be skeptical. Now investors have been put on notice a recovery is unlikely until late next year.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney, long January 2021 $85 calls on Microsoft, and short January 2020 $130 calls on Walt Disney. The Motley Fool has a disclosure policy.


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