Published , by Asif Khan
Published , by Asif Khan
If you heard a loud thud this afternoon, it might have been the sound of GameStop's stock crashing to a fourteen year low of $9.25 per share in after-hours trading. Things look very bad for the embattled video game retailer as their pivot to collectibles might not be enough to combat the secular headwinds of a brick and mortar retailer in 2019. The company lost $673 million or $6.59 per share in 2018, and they made that news ever harder to swallow for investors by announcing that they will not be able to provide earnings guidance for the upcoming year.
GameStop announced a very grim outlook for 2019:
"As a result of the strategic and financial alternatives review conducted in fiscal 2018, the company announced that it is embarking on a cost savings and profit improvement initiative designed to strengthen the organization for the future and support long-term improved financial performance and profitability. These initiatives include supply chain efficiencies, operational improvements, expense savings and pricing and promotion optimization. Based on initial estimates, which are preliminary and could change as the program is implemented throughout the year, the company is working to achieve annualized operating profit improvements of approximately $100 million. Given the timing of the program, the company expects minimal impact on fiscal 2019 results. Given the planned cost savings and profit improvement initiative and the announcement of a new CEO starting on April 15, 2019, the company is not providing annual earnings per share guidance at this time."
In the recently posted video game and tech stock chart analysis Game Trader feature, I pointed out that the stock (GME) had broken a 14 year downtrend. GameStop's stock now sits at its lowest levels since 2005 at $9.23/share. There is an actionable sell signal below $10.07/share, so it wouldn't be surprising to see more pain on the road ahead.
Beyond the troubling news that the company was unable to turn a profit with over $8 billion in sales is the fact that they provided no earnings guidance for their fiscal 2019. This company is in trouble and the pivot to collectibles appears to be too little too late. Collectibles revenue came in at $707.5 million for 2018, which is less than 10% of the company's overall revenue. Total sales at the company decreased 3.1% in 2018, and they were unable to turn a profit.
There is no sugar coating this. This is an awful earnings release and investors should steer clear of the company until it has any sign of profitability returning. The stock may appear nominally cheap with a share price below $10, but you can still lose 100% of a $9 stock. Looks like I was an idiot last year when I thought for one second that GameStop's stock might be cheap, but my book value investment thesis became impaired as soon as the company was unable to turn a profit.
I will be publishing an updated Game Trader financial analysis piece in which I will be downgrading GameStop to a Do Not Buy from a Buy rating. Please understand.
Full Disclosure:
At the time of this article, Asif A. Khan, his family members, and his company Virtue LLC had the following positions:
Long GameStop via GME call options