GameStop Misses Q3 2023 Revenue Estimates As Cohen Secures Ability To Invest Company Cash As He Wishes

GameStop (NYSE: GME), the video game retailer, reported weak third-quarter financial results this week, missing quarterly revenue estimates as competition in the gaming industry intensified, and consumer spending faced headwinds in an uncertain economic climate. The company’s pivot to a more online-focused model encountered obstacles, with increased market share losses to mass merchants and e-commerce giants like Amazon.

The Q3 results, the first since top investor Ryan Cohen assumed the role of CEO and chairman in late September, saw GameStop’s revenue come in at $1.08 billion, falling short of estimates at $1.18 billion, according to analysts polled by LSEG. The shares declined nearly 3% in extended trading following the announcement.

Sticky inflation and high borrowing costs have impacted spending in the gaming sector, with major players like Take-Two Interactive Software also presenting underwhelming forecasts. Third Bridge analyst John Oh commented on the challenges, stating, “While the softness in Q3 sales was to be expected, the increasing market share losses to mass merchants and e-commerce giants such as Amazon will continue to be an uphill battle for GameStop.”

Despite the revenue miss, GameStop managed to post adjusted breakeven earnings per share, surpassing estimates of a loss of 9 cents. The company’s expenses saw a nearly 24% decrease to $296.5 million.

CEO Ryan Cohen, who initially aimed for an aggressive shift towards e-commerce, adjusted plans and emphasized brick-and-mortar stores, doubling down on cost-cutting measures.

GameStop’s financial highlights for Q3 FY2023 include a 9.1% year-on-year decline in revenue to $1.08 billion, a non-GAAP loss of $0 per share, and a 93.2% decrease in Free Cash Flow to $11.1 million. The company’s gross margin (GAAP) improved from 24.6% to 26.1%.

The mid-sized retailer faces challenges in a competitive landscape but maintains financial stability, with a market capitalization of $4.55 billion, over $909 million in cash on hand, and near break-even free cash flow margins.

Despite the revenue dip, GameStop exceeded analysts’ EPS expectations and outperformed gross margin estimates. However, the market response was lukewarm, with the stock down 2.6% post-reporting, trading at $14.45 per share.

Looking ahead, Wall Street analysts anticipate relatively flat revenue for GameStop over the next 12 months. The company, with its substantial cash reserves, remains cautiously optimistic, suggesting potential investment in stocks with a recently approved new investment policy.

The big story for the quarter however is that the board has approved a new policy, whereby Cohen will be permitted to invest the firms excess cash into equities. Even worse, unlike a traditional hedge fund, Cohen will be allowed to at times invest in the same companies that GameStop invests in. With this permitted, it effectively enables Cohen to “front-run” an investment prior to GameStop investing, or potentially offers a means for Cohen to get out of an illiquid position, if he so wishes.

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