So far, GameStop (NYSE:GME) has been one of the top-performing stocks this year. On Friday, a list released by the global index provides revealed it would join the FTSE Russell 1000 Index of large-capitalization stocks while AMC Entertainment Holdings Inc.(NYSE:AMC) will remain in the Russell 2000 after both companies saw billions of dollars added to their market values amid frenzied rallies since 2021 began. Shares of the meme stock skyrocketed in January. Sales rose 25% in the fiscal first quarter as the company focuses on e-commerce and tries to stage a turnaround under the helm of Amazon.com (NASDAQ:AMZN) executive Matt Furlong.
The gaming company declined to provide a forecast for the year. It only revealed that sales momentum has continued into the second quarter. The company’s first-quarter earnings report that was released earlier in June highlighted its ongoing decline. It is no surprise considering that software has always been the centerpiece of its business model, and software sales have plunged by 46% over the past two years.
GameStop did its best to paint its Q1 performance in the best possible light by showing sales increased 25% YoY to$1.28 billion, despite a 12% reduction in its store count and continued store closures in Europe. Adjusted net loss shrank by more than 80% YoY to $29.4 million or $0.45 per share, beating the average analyst estimate.
Yet downward spiral was the elephant in the room two years ago, and the retailer earned a small profit on $1.55 billion of revenue during the same quarter. That performance was evaluated very poorly. If we look at an even bigger picture, GameStop’s first-quarter revenue has plunged nearly 30% over the past three years, and more importantly, the retailer has swung from being solidly profitable to solidly unprofitable.
This year, GameStop is benefiting from the launch of the new Sony Group Corporation (NYSE:SONY)-owned PlayStation and Microsoft Corporation (NASDAQ:MSFT)-owned Xbox consoles, a tailwind that only occurs once every seven years or so. Those console launches helped GameStop grow its sales of hardware and accessories by 37% YoY last quarter.
By contrast, software sales fell by nearly 5% from last year’s already-depressed level, reaching $398 million. If we combine the last two years, GameStop’s software sales have plunged by 46%. In other words, they are eroding, and this will make it extremely difficult for the retailer to return to profitability as these sales generated more than half of its gross profit.
Less than 10% has been contributed by new hardware, which sells at notoriously thin margins.
It shouldn’t be surprising that GameStop continues to lose share within this shrinking market as consumer demand has steadily shifted toward digital downloads in recent years. Meanwhile, higher-traffic retailers are telling a different story. Best Buy (NYSE:BBY) recently reported that sales surged 36% YoY last quarter. Moreover, the growth in its consumer electronics giant’s entertainment segment, which includes gaming hardware, software, and accessories, has significantly outpaced the retailer’s overall growth over the past two years.
Staging A Turnaround Is The Strategy Ahead
GameStop hired two Amazon veterans as its new CEO and CFO as it embarks on a turnaround strategy partially fueled by a Reddit-inspired stock rally. However, new management and a new strategy cannot change the fundamental realities threatening the business, such as software sales shifting to digital downloads. Moreover, hardware sales will be even less profitable in an e-commerce format, translating to higher credit card fees and shipping costs for the struggling retailer.
On one side, the stock rally allows GameStop to raise huge sums of cash by selling stock. This will allow it to stay in business for a long time, even if it never returns to profitability. But, under any scenario, both Amazon and Best Buy are light years ahead of GameStop in e-commerce, and both have massive resources at their disposal, all of which give GameStop little chance of catching up. By its looks, the genuine turnaround for the business (as opposed to the stock) seems far-fetched.