Video game retailer GameStop Corporation (GME), the signature meme stock, had previously been riding some short-term momentum. However, that has since leveled out, and the company has been making progress in right-sizing its business by slashing its inventory levels and reworking its cost structure.
Moreover, the company is undergoing a transitional period by halting its e-commerce efforts and focusing on its brick-and-mortar locations. Furthermore, GME makes changes to its rewards program. Also, GME stock might get a significant boost if there is a ban on short selling.
GME is expected to release its fiscal 2023 first-quarter report on June 7. The quarterly report should show reflect the drastic measures the company has been undertaking to achieve considerable profitability this year.
Let’s discuss the catalysts that could send GME’s stock price to fresh heights:
Favorable Fourth-Quarter Earnings
For the last fiscal year’s fourth quarter, the video game retailer posted its first quarterly profit in two years and surpassed analysts’ expectations for revenue. Its aggressive cost-cutting measures and strong demand for video game hardware in the holiday quarter helped the company become profitable.
For the quarter that ended January 28, 2023, GME reported a profit of $48.20 million, or $0.16 per share, compared to a loss of $147.50 million, or $0.49 a share a year earlier. Adjusted earnings of $1.16 a share beat analysts’ projections of a loss of $0.13 per share.
For the fourth quarter, the company’s net sales dropped slightly to $2.23 billion from $2.25 billion in the year-ago quarter. However, the figure was higher than analysts’ estimates of $2.18 billion.
The video game company had been working vigorously to steer itself back to profitability and partially got there by slashing its inventory levels and costs. Its selling, general, and administrative expenses were $453.40 million for the quarter, or 20.4% of sales, compared to $538.90 million, or 23.9% of sales, in the year-ago period.
Like many retailers, GME struggled with supply chain delays that left the company with a backlog of inventory after it previously tried to meet strong demand. Based on its fourth-quarter balance sheet, the company had $682.90 million in inventory, down from $915 million a year ago.
Furthermore, GME has been trying to improve its cash balance as a part of its revival strategy. The company’s cash and cash equivalents for the quarter were $1.39 billion.
“GameStop is a much healthier business today than it was at the start of 2021,” CEO Matt Furlong said on a call with analysts. “We have a path to full-year profitability.”
Shifted Focus from E-Commerce to Brick-And-Mortar Sales
Ryan Cohen took over GME in 2021, aiming to transform the struggling video game retailer into an e-commerce juggernaut. Unfortunately, the company’s e-commerce sales failed to take off. GME’s losses widened, and Cohen’s new online-sales executives resigned.
As a result, GME began cutting costs. The company canceled plans to build additional warehouses, closed a new e-commerce customer-service center, and laid off many corporate employees hired under the management of Cohen. Also, according to former GME executives and analysts, Cohen miscalculated what customers were prepared to pay through its website and app.
“Quarter after quarter we were unsuccessful with new ventures,” commented Ted Biribin, GME’s former employee. “If something didn't work, senior leadership would go onto something else very quickly.”
GME’s CEO, Matt Furlong, stated in an internal memo last year, “Our stores, in particular, are a differentiator that will help us maintain direct connectivity to customers and position us to have localized order fulfillment capabilities across more geographies. While we continue evolving our ecommerce and digital asset offerings, our store fleet will remain critical to GameStop’s value proposition.”
GameStop is poised for solid growth as the company has stopped focusing on e-commerce sales. Consequently, the company can now provide more support for its 4,400 brick-and-mortar stores. GME also introduced an initiative to motivate the company’s staff.
Last year, the company announced an “improved compensation” scheme for its brick-and-mortar video game store’s most senior employees. For Assistant Store Leaders and Senior Guest Advisers, the compensation comes as an undisclosed rise in their hourly pay. For Store Leaders, it comes in the form of $21,000 worth of GME stock (vested for three years) on top of their regular pay, coupled with “the opportunity to earn additional compensation every quarter by hitting goals for performance-based equity grants.”
GME’s focus on physical stores resulted in the company reporting a quarterly profit for the first time in two years. For the full fiscal year 2022, expenses were reduced by more than $100 million.
GME’s Membership Program Getting a Huge Makeover
GME offers incentives to members of its rewards program to secure customer loyalty. To that end, the company is seemingly making significant changes to its customer loyalty program. The existing PowerUp Rewards membership will have its name changed to GameStop Pro, with the price going up from $15 per year to $25.
GameStop Pro will access some special perks through this new program. Among other incentives, members will get bigger discounts on collectibles, pre-owned games, GameStop brand gear, clearance items, and more. GameStop Pro is expected to roll out on June 27, with existing memberships being phased out as they come up for renewal.
GME’s revised customer loyalty program could enhance profitability and growth for the company.
Prohibition on Short Selling Could Send GME To New Highs
The practice of short selling has come under increased scrutiny amid the recent banking turmoil. Short selling is a well-known strategy in which financial traders bet that the price of a stock will go down. Short sellers largely profited from the banking crisis by borrowing shares they expected to fall and repaying the loan for less later to pocket the difference.
In March 2023, Wachtell, Lipton, Rosen & Katz, a law firm known for representing large companies in mergers and against attacks from hedge funds, called on U.S. securities regulators to restrict short sales on financial institutions. Also, the calls from Capitol Hill and elsewhere to prohibit short-selling have gotten louder lately.
With more regulators and lawmakers ramping up their calls for an outright ban on short selling, investors should prepare for potential legal changes. As traders anticipate this possibility, GME stock could get squeezed higher quickly. The r/WallStreetBets crowd might start a massive short squeeze in anticipation of a potential short-selling ban.
How Should Investors Approach the Stock
The stock has risen 33.5% year-to-date, beating the 11.5% gain in the S&P 500 index. Moreover, shares of GME have gained 20.1% over the past month and 32.1% over the past three months.
As investors think the company can pull off a successful business turnaround, GME stock has risen recently. The video game retailer has essentially pivoted its focus to brick-and-mortar sales instead of e-commerce sales with an eye on improving profitability. The shift already resulted in its first quarterly profit in over two years.
Moreover, the revised customer loyalty program, GameStop Pro, is a smart move that could bolster the company’s top-line results in 2023. At the same time, a potential ban on short selling could prompt a massive final squeeze for GME stock. Now, all eyes are on GME’s first-quarter fiscal 2023 earnings, to be released on June 7, after the market close.
Over the past few years, stock traders and price chasers have targeted GME, but sensible investors should avoid emotional trades and monitor the company’s financial and operational progress.
Investors could also keep tabs on the buying activity of GME’s insiders. After all, if the company’s insiders express their confidence through share purchases, that is probably a positive sign for the stock. Director Larry Cheng recently purchased 5,000 shares of GME worth about $114,000. Following this purchase, Cheng now owns a total of 44,088 shares.
While many strong forces propel GME, investing in the stock still involves a high level of risk. Investors should continue to expect GME stock to remain volatile (with a 24-month beta of 1.90), and it is not appropriate to pour their entire account into this one stock.
Though it is advisable to take a small position in GME stock, as it may be on the cusp of a breakout, and the share price is likely to shoot higher in the near future.
