GameStop’s turnaround promised to fail

GameStop President Ryan Cohen and CEO Matt Furlong promise to transform the gaming retailer into one of operational excellence and amazing store experiences while capitalizing on new opportunities like crypto and NFTs.

More than a year into their collective and somewhat secretive leadership, the whole experiment is starting to look like a fiasco — confirming longstanding Wall Street concerns about the company’s business model, such as too many expensive physical stores in dying malls and a shift to digital gaming.

Not helping GameStop’s transformation efforts is a complete collapse of the burgeoning digital asset market that Cohen and Furlong had counted on (see: the collapse of the NFT market or GameStop’s strategic partnership with the now-defunct FTX).

The realities of the disappointing turnaround story were on full display in GameStop’s third-quarter earnings released Wednesday night. The damage came in two forms.

A logo of video game retailer GameStop in a store in Dusseldorf, western Germany, January 19, 2022. (Photo by INA FASSBENDER/AFP via Getty Images)

First, another appallingly poor quarter of the financials:

  • Net sales -8.5% yoy.

  • Sales are down in the Hardware/Accessories and Software businesses — these companies account for about 82% of GameStop’s sales this year so far.

  • Sales declined in the United States, Canada, Australia and Europe.

  • Gross margins unchanged year on year.

  • $95 million in adjusted operating loss. To date, GameStop has lost $354.9 million on an adjusted run basis.

  • Total cash flow was about $1 billion, down from $1.4 billion in the first quarter of last year.

The flip side – which is only now taking shape – is that GameStop is getting back the capital it’s investing to change the trajectory of its business in the long term. Pivot amounts to a complete turnaround after several ugly quarters that sent the volatile share price down 40% in 2022.

“Today, we are in the process of aligning the company’s costs with our ongoing needs after completing the most necessary upgrades to our systems, implementation capabilities, and overall basis,” Furlong said on another relatively short — 8-minute — earnings call. “A large portion of our cost reductions will stem from corporate headcount reductions that were made during the back half of this calendar year. In some cases, the people who helped us complete key initiatives were left alone and not replaced. In other cases, we’ve made the decision to cut parts organization or streamline it, as we can build on the work done over the past 18 months to work more efficiently.”

This fresh round of cost-cutting is a clear sign of GameStop’s decline, and an indication of whether you want the company to start showing some bottom line to investors (Cohen included) at the expense of any significant turnaround vision.

A person browses games on an XBox One Display at GameStop in Manhattan, New York, US, December 7, 2021. REUTERS/Andrew Kelly

A person browses games on an XBox One Display at GameStop in Manhattan, New York, US, December 7, 2021. REUTERS/Andrew Kelly

Furlong, a former Amazon executive, added that the company’s “two key priorities” will be “bringing profitability in the near term and driving long-term business growth.”

In other words, the video game retailer is breaking with a promise Cohen and Furlong made to reimagine GameStop. The GameStop faithful who still support the company would be wise to realize that the company’s equity era thesis is crumbling in real time.

Brian Suzy It is a comprehensive editor and Anchor at Yahoo Finance. Follow Suzy on Twitter @tweet and on linkedin.

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