Game Stop: Operating At A Considerable Decrease

Gaming retailer GameStop (NYSE: GME) reported strong revenue growth in the first quarter of fiscal 2022 on Wednesday afternoon. Shares of GameStop soared 10 percent on Thursday on the announcement.

However, GameStop’s sales increase was not spectacular, and it came at a great cost. Despite management’s demand that investors focus solely on sales growth, the company’s escalating losses and cash outflow are bad news for shareholders.

Another period of the moderate revenue increase was seen in the most recent quarter.

As the gaming specialist started to recover from the COVID-19 epidemic, GameStop’s sales increased by 18.1% in fiscal 2021. However, revenue growth had already slowed down by the fourth quarter, with year-over-year sales up just 6.2%.

The last quarter saw the continuation of this pattern. The first quarter of fiscal 2021 saw net sales rise by 8% to $1.38 billion. The majority of GameStop’s growth was fueled by an increase in software sales of $86 million in only one year. Collectibles sales at GameStop were up significantly as well, although they remain the company’s smallest product category.

Although GameStop’s income has increased, it is still significantly below pre-pandemic levels. In the first quarter of 2019, the firm recorded net revenues of $1.55 billion, compared to $1.79 billion in the same period last year. A third of fiscal 2019’s software sales were down in the first three months. As a result, compared to 2018 and 2019, the retail industry is expanding.

The deterioration of the margins is continuing.

Even more concerning is the fact that GameStop’s bottom line continues to be severely squeezed. Since last year’s quarter, gross margin has dropped to 21.7 percent, down from 25.9 percent. In the first quarter before the pandemic, GameStop was averaging a gross margin of roughly 30%.

Because of the ongoing margin erosion, GameStop appears to be “buying” sales growth by cutting its markups to unsustainable levels. GameStop’s gross margin will be unprofitable as long as sales remain below pre-pandemic levels and labor costs continue to rise.

To add insult to injury, GameStop has increased its expenditures dramatically in order to stimulate sales. As a result, the company’s operating loss grew to $154 million in the most recent quarter, up from $41 million in fiscal 2021. In addition, the company lost $300 million in cash.

Mirror, mirror, on the wall.

Managers continue to trumpet the recent launch of a GameStop crypto wallet and the imminent launch of a new NFT marketplace, despite GameStop’s main company hemorrhaging cash.

Last year, GameStop became a meme stock favorite because of moves like these. The GameStop NFT idea, on the other hand, seems to be a desperate effort at catching on to the hottest craze at the moment. In recent months, the value of crypto and NFTs have plummeted, following in the footsteps of other equally volatile investments. There has been a dramatic decrease in the number of people interested in NFTs as a result of the bubble burst.

Although it may seem like a certainty, this does not indicate that GameStop’s NFT marketplace will collapse. Nonetheless, it seems to be more of a diversion than a game-changer.

Don’t go there!

Gaming retailer GameStop raised approximately $1.7 billion in the first half of 2021 by selling extra stock. That money has already been spent, and the firm has nothing to show for it.

Just over $1 billion in unrestricted capital is available to GameStop at the moment, so the retailer has space to move. A financial crisis might occur shortly if the company’s losses continue to deepen and its cash burn increases. Even if GameStop manages to survive, its $10 billion value is unlikely to be met. Now that’s a bad sign for GameStop’s stock.