GameStop Enters 2020 On The Backfoot

As far as years go, 2019 will surely be remembered as an annus horribilis for video game retailer GameStop NYSE: GME. Having started the year out already down more than 70% from its decade high in 2013, shares closed out the year a further 65% lower.

The company’s Q3 earnings report from last month tells the story. EPS was slammed into the red even though Wall Street was expecting the company to report a profit. Revenue also registered an ugly miss and was down more than 25% year on year. Sales were down about the same amount, almost double the -13% decline that analysts were expecting. Tellingly, hardware sales alone were down 46% as the consumer trend towards the cloud and esports continues.

CEO George Sherman said as much when he remarked how their “third-quarter results continue to reflect the prevailing industry trends, most notably the unprecedented decline in new hardware sales seen across the market as the current generation of gaming consoles reach the end of their lifecycle and consumers delay their spending in anticipation of new hardware releases. With console makers set to introduce new and innovative gaming consoles late next year, we anticipate this trend to continue until the fourth quarter of 2020.”

Fighting The Good Fight

While shares opened with a 20% gap down the day after the report on December 10th, they’ve been able to consolidate somewhat in the three weeks since. Maybe it’s the case that when your stock is already trading down at all-time lows, there’s only so much damage yet another earnings miss can do.

To that end, it has to be said that the stock has been staging an impressive rally since August. Having briefly dipped below the previous all-time low from 2003 and with the RSI at 20, shares logged 7 straight weeks of gains and had effectively doubled in value by the time they released Q3’s number. Despite taking an immediate hit in the aftermath of that, they’ve traded relatively steady all things considered and are approaching an interesting inflection point. If a 25% fall in revenue year on year and a horrendous EPS miss aren’t enough to undo 7 weeks worth of gains then there must be more underlying bullish momentum than the multi-year chart alone suggests.

Management has been taking steps to restructure and reports in November suggested the company is exiting the Nordic region and shutting the 300 stores they currently operate there. This came after reports in September that the company was planning to close up to 200 underperforming stores around the world while in August the company laid off more than 100 people from their Texas headquarters.

Adapt or Die

As the videogame industry moves away from hardware consoles and hardware disks, those companies such as GameStop who are fundamentally tied to the industry must adapt or die. Bank of America remarked on the company’s struggles to successfully monetize the “new experiential and subscription initiatives such as eSports” while at the same time giving them credit for having the right management in place to turn the ship around. That being said, however, they did note it could be the second half of 2020 before we see them making any headway in this regard.

To this point, CEO George Sherman also noted in December’s report how that “despite the current top-line trends, we are pleased with the continued strong progress that we are making against our strategic initiatives as we transform GameStop for the future.  We remain on track to achieve our $200 million annualized operating profit improvement goal, by 2021 and we believe our strategic initiatives will enable us to achieve our long-term growth and profit objectives as we fully leverage our unique leadership position and brand in the video game space.”

It remains to be seen whether his positivity can be turned into reality but in the meantime, there’s plenty for investors to sink their teeth into.

Technical Analysis

Having traded sideways for more than two months whilst taking a beating from a dismal earnings report in the meantime, any kind of positive momentum could take shares up above the $7.00 level. The MACD on the daily chart supports this thesis with a bullish crossover imminent. On the weekly view, the MACD has also been running well since crossing over back in early September. To the downside, a break below $5.00 would surely spell trouble for the company as investors are likely to lose patience with waiting for the turnaround story.

It’s been a painful march lower for investors from the days when the stock was trading for more than $50 a share and despite putting in a good shift to close out 2019, the road ahead into 2020 is looking very steep.