Please Remember That GameStop Is Not a Good Company

[ad_1]

The obvious problem with GameStop (NYSE:GME) is that it sells physical video game discs out of thousands of stores in a world where games are increasingly going digital. The pandemic has made the situation much worse as would-be video game buyers pivoted hard toward digital downloads and buying games online.

To be fair, GameStop’s online sales have soared as demand for video games shot up during the pandemic. Third-quarter e-commerce sales jumped over 250%. The problem is that sales overall have fallen off a cliff. Total sales dropped over 30% in the third quarter, and comparable store sales were down nearly 25%.

New game consoles are helping – GameStop’s comparable store sales rose about 5% over the nine-week holiday period as shoppers snapped up Sony and Microsoft‘s latest systems. But GameStop makes very little money selling new game consoles. What makes GameStop work is its used games business, and that business has been in decline for a long time.

A game over screen.

Image source: Getty Images.

The fundamental problem

GameStop used to report sales of used games separately from sales of new games. The company changed its reporting scheme in March of last year, lumping those two categories together and dropping per-category gross margin reporting entirely. When a company changes how it reports its results, you can be almost certain that it’s trying to hide something.

READ:  Should You Buy REITs in Your Roth IRA?

That something in this case is the continued deterioration of the used games business. This change is notable because selling used games is far more profitable for GameStop than selling new games or new game consoles.

The last time GameStop reported under its old reporting scheme, the third quarter of 2019, the pre-owned and value video game products category carried a gross margin of 42.7%. That compares to a gross margin of 23% for new video games and just 11.3% for new video game hardware. Used games generated more gross profit than new games and new hardware combined.

Used game sales were down 13% in that quarter, adding to a long streak of sales declines that started in 2016. The big problem for GameStop is not just that games are going digital. The big problem is that there’s no such thing as a used digital game. The concept of used video games is disappearing as gamers turn to downloads and subscription services, and GameStop’s thousands of stores just don’t work without that high-margin category.

In the last quarter GameStop reported results under its old reporting scheme, new video game hardware and software carried a weighted gross margin of 19.7%. Mega-retailer Walmart reported a gross margin of 23.9% in 2019. You see the problem. A high-volume store like Walmart can thrive on low gross margins. A small video game store in some second-rate mall cannot.

READ:  There's Still a Lot of Growth Ahead for Connected TV

GameStop’s network of thousands of small video game stores is doomed in a world where used games sales continue to collapse, even if the accelerated shift to digital downloads and e-commerce during the pandemic isn’t permanent. New game consoles won’t save GameStop.

GameStop is trying to transform itself, but the time to do that was probably five years ago, not now. If the plan is to just sell what it sells in its stores online, that’s probably not going to work. GameStop can cut costs all it wants, but that’s not how you turn around a retailer, that’s how you drag out its demise.

There was a bull case, however weak, for GameStop back when the stock was trading in the doldrums last year involving a successful transformation and a decent balance sheet. But with an epic short squeeze pushing GameStop’s market capitalization above $20 billion, the odds of GameStop being a good investment today rounds to zero.

This is a crazy stock market. Be careful, and please remember that GameStop is not a good company.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

READ:  Forget Sundial and Zomedica: These Are the Unstoppable Stocks to Buy Now



[ad_2]
View more information: https://www.fool.com/investing/2021/02/01/please-remember-that-gamestop-is-not-a-good-compan/

Xem thêm bài viết thuộc chuyên mục: investing

Related Articles

Leave a Reply

Back to top button