Analyst invokes Jim Morrison to describe unraveling at videogame retailer GameStop

GameStop Corp. shares were slammed again on Wednesday, as analysts weighed in on another weak quarter that prompted one to invoke Jim Morrison to describe the continued unraveling of the videogame retailer.

“Journey we more into the Nightmare,” the lyric from The Doors’ “An American Prayer,” is how Benchmark analyst Mike Hickey began his latest note on GameStop GME, -16.82%, as the stock tumbled another 20%.

The company’s third-quarter loss posted late Tuesday was wider than expected and revenue fell short of expectations. Guidance for the full year included the expectation for a decline in same-store sales in the high teens, compared with a Street consensus for a decline of just 0.3%.

“Our third quarter results continue to reflect the prevailing industry trends, most notably the unprecedented decline in new hardware sales seen across the market as the current generation of gaming consoles reach the end of their life cycle and consumers delay their spending in anticipation of new hardware releases,” said George Sherman, GameStop chief executive, in a statement.

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Hickey said he expects continued weakness for several quarters “as the console generation expires and digital distribution cements its grip on player purchase behavior”.

“Management appears confused and distant from market realities, only providing another update to the GME eulogy; a sad acknowledgment of their looming expiration, in our view,” Hickey wrote in a note to clients, reiterating his sell rating on the stock.

Credit Suisse analysts led by Seth Sigman agreed, homing on the deterioration in gross profit, despite some progress on costs. Profit deteriorated across every business line, Sigman wrote in a note, reiterating his underperform rating on the stock, the equivalent of sell, which he has held since January.

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“Looking out, not only is it difficult to see how results will improve in a new cycle (after all, the last cycle didn’t seem to stimulate enough software/pre-owned), but what happens between now and then is more concerning,” said Sigman. “Guidance for 2019 was lowered to a shocking level and there seems to be little if any near-term visibility.”

GameStop shares have fallen about 56% in 2019, as the S&P 500 SPX, +0.05% has gained 25%, as the retailer continues to struggle to become relevant in the videogame market, where its customers are no longer buying physical games when they can download them at home. Its pre-owned business, selling older games second hand, is also struggling as more titles become available digitally.

In June, the company scrapped its dividend in an effort to conserve cash, sending the stock down 35% in a single session to mark its worst-ever one-day selloff.

Sigman said the news that the company had resumed buying back stock in the summer was “confusing.” The company said it has repurchased more than a third of its outstanding shares since July, and spent $115.7 million on buybacks in the quarter at an average price of $5.11 per share. The company had $419.4 million of long-term debt at quarter-end.

“Most cash flow is generated in Q4,” he wrote. “Why buyback another $116mn in Q3?”

Still, one house stuck with its more bullish appraisal of the company’s performance. Wedbush analysts led by Michael Pachter said the 2020 refresh will get GameStop back on track.

“GameStop can shrink its 5,000 store base to accommodate lessening demand, and we believe that the company can adjust its inventory and operating expenses to remain profitable for the foreseeable future,” the analysts wrote in a note.

Wedbush is the only bank on FactSet to rate the stock as outperform, the equivalent of buy, and has an $8 price target that is about 45% above its current price. The average rating remains hold.

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