Investing Lessons [Advanced]
GameStop Q3 17 Earnings — Glad Going Against The Crowd Was Right
Chris From RWOA.io, Re-ThinkWealth Content Expert
22 November 2017
Almost all the articles in the universe were going against GameStop for these past few months. But I was still rooting for it as you can see from my last article here.
In Seeking Alpha alone, many articles are putting down the company. Just one day before the earnings report on 20 November 2017, an article titled GameStop: Unsustainable Sales Growth Despite Diversification by Kathy Zhang was released.
On 3 November 2017, the host of a popular tv program called “Mad Money” Jim Cramer said “I am concerned about GameStop. I have to tell you if they’re going to sell EA down and they’re going to sell Activision Blizzard down… It’s going to be a very digital holiday season, and to me, that means that’s bad for GameStop, so I’m going to have to say don’t buy.”
Now, on 21 November 2017 after the market closes, here are the earnings result summary for GameStop Q3 17:
- Earning are at $55.1M vs. $50.8 M last year
- Earnings year or year (Y-o-Y) growth at 8.5%
- Earnings per share (EPS) is at $0.54 vs. $0.49 last year vs. analyst estimate of $0.43
- EPS (Y-o-Y) growth at 10.2%
- Revenue is at $1.99 B vs. $1.96B last year
- Revenue (Y-o-Y) growth at 1.5%
Here are more details on from reading the earnings call transcript:
- Paul Raines had a recurrence of his previously disclosed medical issue. Dan DeMatteo is the interim CEO.
- Dan DeMatteo has been part of GameStop leadership team for 25 years. He was their COO from 1996 to 2008 and served briefly as CEO from 2008–2010.
- The gaming (hardware sales grew nearly 9% and new software up more than 5%) and collectibles category (up 27% from last year) was the star performer this quarter.
- Technology brands result lagged expectations due to a later release of Apple’s iPhone X. In the next quarter, the focus is on maximizing the sales of iPhone X and managing cost to drive profitability.
- They plan to drive further growth into collectibles by capturing more market share through offering exclusive products and a greater assortment of items.
- They are very confident with the experienced team they have and with the momentum in the video game segment. Overall, they will be focused on executing their various holiday sales plan well heading into the holiday season.
- Their video game store has been reduced by 18, and no they have 3,869 video game stores in the U.S. and 1,985 internationally. They closed 3 technology brands stores and now had 1,506. They opened 3 collectible stores in the quarter and now have 102 worldwide.
- Their PowerUp rewards program continues to grow 25% over the prior-year quarter. This is a paid membership, and these customers shop nearly 3.5 times more often than the average shoppers.
- During Q3 17, they also launched a new super premium members program called the PowerUp Elite Pro which is sold for $30 a year. It already has 0.5 million members, and these customers are projected to average 20 purchase occasions a year.
- They have the leading Nintendo Switch hardware and software market in the U.S. and most of their international markets. Even new software grew by 5.4%.
Here are more details from the Q&A section of the earnings call:
- 25% of their stores have already been turned to GameStop plus format which is a 50–50 combination of games and collectibles. What is interesting here is that despite lesser space to put video games, they actually see an increase in video games sales. This got to do with the new types of customers that these products bring into GameStop — meaning that maybe they did not buy video games before and when they came in to buy collectibles and signed up for their loyalty program, GameStop can market these people video games later as well.
- They are continuing to focus on giving dividends to return capital to shareholders.
- Adding debt to the company to buy shares would be an unlikely option for them.
Based on my last article here, I said that their focus on the collectibles and technology is a step in the right direction because even though in 2016 these segment only accounted for 15.2% of their revenue, but it accounted for 36.9% of their total operating earnings.
Their margins in collectibles grew from 36.3% to 38.1%. I also like the fact that their collectibles team managed to secure the first mover advantage to market line of products from the Pokemon Group (first company in America to do that outside of Japan). Hence, GameStop is the only retailer in America to feature these classic characters from Pokemon. This is an important aspect that will drive foot traffic further to GameStop retail shops.
Their omnichannel strategy in their collectibles segment is doing well too by growing 71.4% year to date.
“As you recall, we have a robust omnichannel system that combines ship-to-home from either our warehouses or our stores and buy online pick-up in-store. We also have web in-store that provides an endless aisle of both GameStop and ThinkGeek products and we recently added buy online ship to store. All of this is wrapped in our PowerUp Rewards program to provide a consistent experience across all channels.” — Tony Bartel, COO
What am I going to do now
Armed with these new updates from Q3 17 earnings — which is encouraging — I will stick with my plan of selling GameStop when it is in the range of $20.5-$27. My average cost for GameStop is around $20.
I will stick to my thesis in this investment which is not supposed to be a long-term holding — but more of a cigar butt investment.
Which means that despite the pre-market rally of 7.59% for GameStop, I will not sell it just yet.
Although the technology segment lagged this quarter, I am highly encouraged by their diversification efforts leading to growth in their collectibles segment — and surprisingly, their games segment too.
The management team has been doing well so far leveraging on their strength — their retail stores through their omnichannel strategy and effective partnerships (such as the one with Pokemon) for their collectibles segment.
So far, I am satisfied with holding GameStop, and this cigar butt investing thesis might even turn into a turn around play with new information coming in, in time to come.
Read the full earnings call transcript on GameStop here.
Disclosure: I am long on GameStop (NYSE: GME)
Disclaimer: The information provided is for general information purposes only and is not intended to be a personalized investment or financial advice.
Important: Please read our full disclaimer.
Thank you for your time reading! 🙂
If you liked this article, please share it | I write for my readers, you. It would mean a lot for others to read this as well.
If you want to be personally mentored by me to be a profitable stock investor, learn more about the RWOA.io Online Mentorship Program by clicking here.
Investing Lessons [Advanced] Here's My Opinion on Bitcoin Chris From RWOA.io, Re-ThinkWealth Content Expert 8 December 2017 What is Bitcoin? Bitcoin is a currency that was founded/discovered pretty recently in 2009 by a person (still unknown) using the alias Satoshi...
Investing Lessons [Advanced] Re-examining GameStop as a cigar butt stock investing opportunity Chris From RWOA.io, Re-ThinkWealth Content Expert 9 November 2017 Earlier this year on 12 May 2017, I wrote an article on GameStop indicating that it is a cigar butt...
Investing Lessons [Beginners] Valuation Ratios - The Basics Bryan Wang, Re-ThinkWealth Content Expert 28 October 2017 There are two basic forms of valuation ratios - enterprise value multiples, and equity value multiples. What is the difference? Equity value is...
Investing Lessons [Advanced] Determining Value: Why Price Is Meaningless, and Multiples are Informative Bryan Wang, Re-ThinkWealth Content Expert 23 September 2017 One of the typical responses people give when talking about stocks is..."What's the price?" In the...
Subscribe to our Awesome Community
And join our Investors Family
A Happy environment for all to share and learn investment knowledge with one another, guided and mentored by Chris Lee Susanto.