Persistently viewed by investors as a value trap, GameStop (GME) is still defying all odds. The company sells games online and through physical stores. But the deterioration in sales from physical stores is exaggerated. Just as Best Buy (BBY) reported strong results, GameStop also reported revenue growth in the first quarter.
GameStop earned $0.63 a share on revenue of $2.05 billion, beating consensus estimates by $0.12 a share and $110 million, respectively. Instead of rewarding the company, markets sold the stock. GME fell ~6 percent on May 26. The stock now pays a dividend yielding generous 6.8 percent. Unfortunately, the stock could fall more in a day than the dividend paid in a year.
Comparable gross profit comparables for stores open for over a year fell 19 percent. Last year, GME opened and acquired new stores. This required incremental SG&A whilst older store costs fell. Still, GameStop forecast 40% of its operating earnings coming from nonphysical gaming. The hardware growth, likely from sales of Xbox, PlayStation, and Nintendo Switch, will offset the higher costs.
Takeaway
GameStop’s single-digit P/E suggests the stock is inexpensive. Higher hardware sales will lift profits. A mix towards higher-margin products in Q1 will continue to help the company beat consensus estimates.
