GameStop Earnings Pull Back the Covers a Little Further on Its Turnaround

GameStop ( GME 30.72% ) knows what it did wrong in the past, but it’s a different company today than what it was even at the start of last year. And the video game retailer of tomorrow will be a much different company still.

That was the gist of GameStop’s fiscal fourth-quarter results, where the company finally confirmed what we all knew, which is the launch of a new non-fungible token (NFT) marketplace that it hopes to launch by the end of the second quarter. It will continue looking for new ways to make money, and with a war chest filled with almost $1.3 billion in cash and equivalents, expect to see the retailer make more investments in its technology and its future.

Image source: Getty Images.

Revenues grew, but expenses grew faster

GameStop generated $2.25 billion in revenue for the period, up from $2.12 billion last year and the first time its growth exceeded 2019 levels, as it cemented new partnerships while expanding others to take advantage of growth in PC and console gaming and accessories.

Yet the growth came at a cost. Sales were up 6% year over year, but costs surged at twice that rate. Selling, general, and administrative expenses rose 29% as well. The combined one-two punch resulted in GameStop recording an operating loss of $166.8 million versus an $18.8 million profit a year ago.

But even on a non-GAAP basis, the adjusted EBITDA loss of $126.9 million came in far below the $50.3 million profit it notched in the same quarter of 2020.

That had GameStop realizing it needs to do business differently. On the earnings call, CEO Matt Furlong said, “We’ve also had to change the way we assess revenue opportunities by starting to embrace, rather than run from, the new frontiers of gaming.” And one of those new frontiers is gaming NFTs.

The future of gaming is in tokens

It’s been almost a year since GameStop first hinted it was interested in getting in on cryptocurrencies, blockchain technology, and NFTs. It’s put out help wanted ads, set up a website, and called for creators to participate in a new NFT gaming platform and marketplace it’s developing. The latest earnings call offered the first bits of concrete confirmation the video game retailer is pursuing these efforts.

Furlong said GameStop sees “significant long-term potential in the more than $40 billion market for NFTs,” and it will continue to strategically embrace this new digital world with new offerings and targeted investments in blockchain gaming and cryptocurrency.

Once again, though, the retailer stopped short of providing any additional clarity or information on exactly what that entails.

GameStop limited its earnings call to just management’s prepared remarks and didn’t open the floor to questions. By controlling the script, it keeps everyone guessing.

Smiling person looking at glowing smartphone.

Image source: Getty Images.

Plenty of ballast to stay afloat

What many are wondering is just how long it can keep going like this. Its losses were brought on in large part by the ongoing pandemic, the flare-up of the omicron variant during the holiday season, and supply chain snarls. But it was also GameStop’s busiest quarter, and by its own admission, its best since the pandemic began. Despite that, the company is still generating losses — and significant ones at that.

Even so, GameStop smartly used its status as one of the early meme stocks to raise cash when its stock soared to ridiculous heights. The company has since paid off the bulk of its debt, and management has plans to raise more cash in 2022.

That means it has plenty of cushion to weather more than a few bumps in its efforts to build a new, different kind of video game retailer — whatever that means. And I’m still confident that of the many meme stocks that rose to prominence last year, GameStop has one of the best chances of pulling off a recovery.

It will still enjoy the benefits of the console upgrade cycle that began over a year ago and typically brings several years of increased sales with it. That should be enough time for GameStop to make strides with its turnaround strategy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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