GameStop Needs To Prove It's Playing For Keeps

Meme stock mania is certainly not the same it was a year ago. On the same day GameStop Corporation (NYSE: GME) reported its revenue contracted and its loss narrowed YoY in its fiscal first quarter, shares have plummeted more than 20% in extended trading after the gaming company revealed in a filing it fired CEO Matthew Furlong without providing a reason for his termination. Ryan Cohen has been appointed as the new executive chairman.

The Remake Of The Gaming Game

Even the gaming scenery is evolving. As sales of video games continue falling from month to month, there’s the promise of cloud gaming, one that remains unfulfilled after already a decade of development. GameStop has intense competitors in this game, no other than titans themselves, Microsoft Corporation (NASDAQ: MSFT) and Sony Group Corporation (NYSE: SONY). Sony was among the first players to enter the field, and its CEO Kenichiro Yoshida admits of still being technically difficult. This is also a difficult challenge for even Microsoft who rattled the gaming industry with its intention to purchase Activision. Although Microsoft got blocked from UK regulators, the regulatory response has been mixed as EU regulators cleared the purchase on the basis of Microsoft alleviating the concerns. All in all, Microsoft still has a shot at cementing its dominance on this front, as the deal would make the tech titan the third biggest in gaming by revenue, behind Tencent and Sony. Despite the difficulties and Microsoft’s bet, Sony is not giving up on its attempt to remake the gaming industry.

GameStop’s First Quarter Highlights

For the quarter that ended on April 29th, GameStop generated revenue of $1.24 billion, which is a drop compared to last year’s comparable quarter when revenue amounted to $1.38 billion. The resulting net loss amounted to $50.5 million or 17 cents per share, which is an improvement from last year’s Q1 when it amounted to $157.9 million, or 52 cents a share, showing that management is doing a good job at lowering costs. Selling, general and administrative expenses were lowered from $452.2 million in the year-ago quarter to $345.7 million for the quarter. Transactions costs from restructuring efforts amounted to $14.5 million and GameStop warned of further transaction charges in the undergoing quarter.

Although European sales expanded 26.2% YoY, revenue in the U.S. Canada and Australia tanked 16.4%, 18.5% and 8.9%, respectively. The drop was contributed to currency fluctuations, fewer significant gaming title launches and soft sales in pre-owned software and hardware and collectibles where the company has the potential for long-term growth. The collectibles unit contracted from last year’s Q1 when revenue amounted to $220.9 million to $173 million it generated during this year's first quarter.

Firing Of The CEO

The decision to part ways with Furlong comes only months after GameStop reported its first quarterly profit in two years which is when Furlong got behind the wheel to execute the company’s turnaround. The ex Amazon.com Inc (NASDAQ: AMZN) executive was supposed to equip the gaming retailer to compete with Microsoft, Sony and even Walmart Inc (NYSE: WMT). On the same day the decision was announced, Furlong also resigned from the company’s board which now has five members. Without a comment, the filing simply stated the company is making efforts to both stabilize and optimize its core business, as well as achieve sustained profitability through efficient capital allocation, and therefore believes Mr. Cohen’s leadership will further unlock value over the long-haul. Cohen’s investment firm, RC Ventures, currently owns a 11.9% stake in GameStop.

All in all, if sales of video games continue to fall, management needs to continue lowering costs so GameStop can remain in the game. But if GameStop wants to play for keeps, it will need to show more of that long-term value creation.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.

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This article GameStop Needs To Prove It's Playing For Keeps originally appeared on Benzinga.com

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