GameStop (GME) Sinks as Q4 'Miss' Prompt a Downgrade, Co. Considers Selling Additional Shares as New COO Joins From Amazon

March 24, 2021 8:32 AM EDT
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Price: $159.92 -2.78%

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Shares of GameStop (NYSE: GME) plunged over 14% in pre-open Wednesday after the video game retailer reported weaker-than-expected Q4 results as it ponders selling stock to the market at the currently elevated prices, which it says is being driven by a "short squeeze."

The company said it made a profit of $1.34 per share for the fourth quarter ending January to miss by a cent on the $1.35 expected from the Street. Revenue also missed as it came in at $2.12 billion while analysts were calling for $2.21 billion.

The fourth-quarter represents the most important quarter for the company as the holiday shopping season yields high transaction volumes. Same-store sales rose 6.5% in the quarter while digital sales exploded 175%.

“Our execution led to a profitable fourth quarter that included a 6.5% comparable store sales growth, a 175% increase in global E-Commerce sales and a $92.6 million reduction in SG&A. The past year also saw us take steps to accelerate our de-densification efforts and streamline our store footprint, leverage our retail locations to provide same-day delivery and curbside pickups, and continue to enhance our suite of E-Commerce platforms. We also added important experience to our board by appointing several new directors with backgrounds in corporate finance, E-Commerce and technology and subsequently established a strategy-focused committee to accelerate our transformation,” said George Sherman, CEO of the company.

The company didn’t offer any guidance and it refused to take questions in the earnings call. However, it said that February sales gained 23% compared to a year-ago period.

“As we look ahead, we are excited by the opportunities that are in front of us as we begin prioritizing long-term digital and E-Commerce initiatives while continuing to execute on our core business during this emerging console cycle. Our emphasis in 2021 will be on improving our E-Commerce and customer experience, increasing our speed of delivery, providing superior customer service and expanding our catalogue,” Sherman added.

In a separate press release, GameStop announced that Jenna Owens will join the company as of the next week. She will act as a Chief Operating Officer (COO) and joins from Amazon, where she held the position of “Director and General Manager for Distribution and Multi-Channel Fulfillment.”

Neda Pacifico and Ken Suzuki will also join the company to become a “Senior Vice President of E-commerce” and “Vice President of Supply Chain Systems,” respectively.

Furthermore, GME said it is considering a possible shares sale. The company is weighing whether to increase the size of ATM offering or sell shares under the program.

“Net proceeds from sales of our shares of Class A Common Stock under the ATM Program are expected to be used for working capital and general corporate purposes, which may include funding our ongoing digital-first growth strategy and product category expansion efforts,” the company said in a statement.

Following a miss on profit and revenue states, and a lack of guidance, Wedbush analyst Michael Pachter moved to downgrade the stock to “Underperform” from “Neutral”, but it raised the price target to $29.00 per share from the prior $16.00 to reflect “excellent execution by current and former management.”

“GameStop is well-positioned to be a primary beneficiary of the new console launches, and we remain quite optimistic that it will return to profitability by FY:21. The high-profile sustained short squeeze seen in recent months, however, has spiked the share price to levels that are completely disconnected from the fundamentals of the business. At the current share price level, we believe that a downgrade of the shares to UNDERPERFORM is warranted,” Pachter wrote in a note.

BofA analyst Curtis Nagle is “skeptical” of GME’s efforts to address its long-standing issue of digital disintermediation. He was also not impressed by little detail on a turnaround plan as the Q&A session was banned during the call.

“Given the continuation of very challenged results for GME, change is needed and soon. Steps have been taken including new board members and senior management with digital experience (including former CHWY CEO and founder Ryan Cohen). However, very little detail on a plan was given on GME 4Q’s call (and Q&A was barred) aside from high level points on product line expansion for “adjacent” gaming categories, better customer experience, tech and fulfilment,” Nagle said in a memo sent to clients.

The analyst, who rates GME as “Underperform” with a PT of just $10.00, also took note of fading non-fundamental factors - e.g. Reddit WSB crew.

“We continue to be very skeptical on GME’s efforts to address its long standing issue of digital disintermediation and the fact that it’s core market in new and pre-owned physical console gaming is shrinking at a rapid pace. GME also called out leveraging its existing digital assets like its PowerUp rewards program but this has seen declining engagement for years,” he concluded.

While most analysts have price targets far below the current market price of ~$157, Jefferies analyst Stephanie Wissink stood out from the crowd by raising her price target to $175 from the prior $15 this morning. The analyst maintained a 'Hold' rating.

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