This tactic could improve GameStop's performance, analyst says

By James Rogers

GameStop's second-quarter sales fell more than 30% year over year

GameStop Corp.'s long-term strategy is in the spotlight after the videogame retailer reported second-quarter results this week that saw sales fall more than 30% year over year.

While GameStop (GME) reported a surprise quarterly profit, the company's shares took a dive, ending Wednesday's session down 12% to register their biggest daily percentage decline since June 17, when they fell 12.1%. The company also disclosed an at-the-market stock offering of up to 20 million shares after reporting second-quarter results Tuesday. The stock is down 1.3% Thursday.

"GameStop's disappointing [second-quarter] results underscore ongoing challenges to the company's retail business model," Baird analyst Colin Sebastian wrote in a note released Wednesday. "Moreover, we have limited confidence in GameStop's ability to restore growth or improve profitability; however, a smaller store footprint with a modernized consumer experience could help improve performance."

Related: GameStop stock sinks after sales fall, 20 million share stock offering

"While retail shareholder dynamics are seemingly the only support to valuation and liquidity, bulls could also point to hardware and expected release of ['Grand Theft Auto VI'] next year as catalysts," Sebastian added. "With ongoing business model concerns, we cannot recommend buying the stock at these levels."

In a filing with the Securities and Exchange Commission late Tuesday, GameStop said it will continue to focus on cost containment, including closing underperforming stores, as it looks to operate with increased efficiency. The company has initiated a comprehensive review of store portfolio optimization, it said, which involves identifying stores for closure based on factors including an evaluation of current market conditions and individual store performance. "While this review is ongoing and a specific set of stores has not been identified for closure, we anticipate that it may result in the closure of a larger number of stores than we have closed in the past few years," the company said.

"GameStop announced accelerated store closures with its earnings, but with no replacement strategy in sight, management indirectly indicates that it is no longer beholden to shareholder interests," Wedbush analyst Michael Pachter wrote in a note Wednesday.

Related: GameStop price target cut as analyst cites retailer's lack of strategy

GameStop said it had been cutting jobs when it announced fourth-quarter results in March. The videogame retailer did not say how many employees have been affected by its headcount reduction.

As of Feb. 3, GameStop had a total of 4,169 retail stores, according to a filing. This number is down from 4,413 on Jan. 28, 2023.

-James Rogers

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09-12-24 1520ET

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