GameStop stock is surging after earnings, but there's a clear problem
It was not a clean fourth quarter for GameStop, despite the outpouring of investor affection.
GameStop stock was up 35% as of the close on Wednesday after the company posted its first quarterly profit in two years. The stock is the number one trending ticker on the Yahoo Finance platform.
GameStop's net profits tallied $48.2 million, a major swing from a net loss of $147.5 million a year ago.
At the same time, however, the company's sales fell 1.2% from the prior year to $2.23 billion amid continued pressure on software sales and more closed stores. Sales for 2022 dropped 1.4% year-over-year to $5.93 billion.
That suggests that GameStop's bottom line surprise was primarily fueled by a push from CEO Matt Furlong to slash costs throughout the organization after several ugly earnings prints.
Furlong sounded keen to keep sacking employees and watching the bottom line closely as he works to juice profits and the stock price.
“Looking ahead, we're aggressively focused on year-over-year profitability improvement while still pursuing pragmatic long-term growth," Furlong said in his now-trademark abbreviated earnings call late Tuesday. "We're taking a number of steps in fiscal year 2023 to improve our efficiency and support these overarching goals. These include continuing to cut excess costs, including in Europe, where we have already initiated exits and partial winds downs in certain countries."
Furlong added that "we expect to continue to incur transformation charges in the first quarter of 2023, as we aggressively cut costs."
Cost cuts of this magnitude are unlikely sustainable longer-term. At some point GameStop will have to figure out a way to grow sales if it wants to drive consistent profits. The video game retailer has tried to do this under Furlong by increasing the amount of collectables it sells — even inking a partnership with failed crypto platform FTX — to no avail.
Wall Street is aware of the reality of the situation.
"The early signs on costs are encouraging, and expect profitability again in 4Q23, but want to see the leverage in the non-holiday quarters before modeling full-year positive EBITDA, currently at -$62 million for FY2023, a -1.0% margin up from -3.2% in 2022," Jefferies analyst Andrew Uerkwitz wrote. "While the multiple sits below peers in digital commerce, gaming, and retail, our valuation is based on higher risk of market slowdown, slowing core growth assumptions, and lack of clarity into the success of revenue investment initiatives."
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email firstname.lastname@example.org
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