GameStop Investors Were Waiting for Good News — They Still Are

(Bloomberg) -- GameStop Corp.'s legions of meme-stock fans were primed to hear a new CEO confidently point the path forward. Instead, the struggling video-game retailer posted a wider-than-expected second-quarter loss, took no questions on a call with analysts and lost 11% of its market value in late trading.

After a more than 10-fold runup in the stock this year, the Reddit crowd's belief in GameStop's potential is running into the reality that a turnaround will take time and patience. Sales are improving and the company's debt is almost gone. But GameStop has reported red ink in six of the past eight quarters, including a loss of 76 cents a share in the latest period, wider than the 67-cent average estimate of analysts.

While GameStop started bleeding long before the Covid-19 pandemic hit, lockdowns didn't help. The company shuttered hundreds of stores amid falling sales and is now trying to compete even more directly with online retailing giant Amazon.com Inc.

“We are trying to do something that nobody in the retail space has ever done,” activist investor Ryan Cohen said in June when he was elected GameStop chairman. The retailer is increasing the number of products and services it sells, and is working to improve customer service and speed up deliveries. Cohen has already replaced the management team.

The chain, which appointed an Amazon executive as chief executive officer in June, said on Wednesday that sales in the fiscal second quarter rose to $1.18 billion, beating the $1.12 billion average of estimates. 

More than 22,000 people were on YouTube listening to company's quarter conference call, which lasted less than 10 minutes. Many had been waiting to hear more about new CEO Matt Furlong's plan to turn around the struggling chain. He spoke for roughly six minutes, reviewing developments over the past months but providing no strategy update. 

GameStop shares fell as much as 11% to $177 in extended trading after the call concluded. The stock was little changed for the day at the close in New York and has risen more than 10-fold this year.

90% Psychology

“This stock is 90% psychology/momentum and 10% fundamentals, so in many ways it doesn't matter what the quarterly results are,” Vital Knowledge's Adam Crisafulli said in a note. Retail traders on Reddit have been supporting the shares since last year, even though many Wall Street analysts believe the company is highly overvalued.

The larger-than-expected loss for the period ended July 31 was driven by higher-than-projected overhead, according to Michael Pachter, an analyst at Wedbush Securities. 

GameStop didn't address a Securities and Exchange Commission investigation disclosed last quarter, when the company said it received a request from the agency's staff for “voluntary production of documents and information concerning” trading in the stock and shares of other companies. The Grapevine, Texas-based retailer said at the time it didn't expect any adverse fallout from the probe.

In late June, GameStop sold 5 million shares of common stock, raising about $1.13 billion before commissions and related expenses. The company, which has paid off all of its long-term debt, is using the proceeds for general corporate purposes and to finance growth.

“Investors want to know how they plan to allocate their warchest of $1.7 billion,” said Doug Clinton, managing partner at Loup Ventures. “Although there might not be any plan grand enough to justify the current valuation.” 

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