GameStop shares rise 11% as Meme stock posts unexpected profit

GameStop stock has enjoyed a bit of a resurgence this year.

GameStop (NYSE:GME) stock was on the move Wednesday after the company reported a third quarter earnings surprise.

The video game retailer reported revenue of $860 million, which was 20% lower than the same quarter a year ago. Revenue also fell short of analysts’ consensus estimates of $887 million.

However, GameStop recorded higher earnings than expected, generating $17.4 million in income for the third quarter. That’s significantly better than the $3.1 million loss in the same quarter a year ago. On an adjusted basis, GameStop took in $26.2 million in the quarter, or 6 cents per share, up from $1 million last year.

Analysts had projected adjusted earnings of -3 cents per share, so the results far exceeded expectations.

Investors were pleased, as the stock price jumped as high as 11% on Wednesday to around $30 per share. Year-to-date, GameStop stock is up about 70%.

Meme-stock-a-palooza

GameStop, the video game retailer that was founded in 1980 as Babbage’s and became GameStop in 1999, is more known as a meme stock these days.

Most are familiar with GameStop stock’s meteoric rise by almost 700% in 2021 during the meme stock craze. A massive short squeeze sent the stock price up to more than $480 per share, pre-stock split. By the end of 2022, the stock had lost half of its value and by April of 2024 it was down to around $10 per share, post-stock split.

There have been two primary catalysts for GameStop this year. One is the reemergence of “Roaring Kitty,” or Keith Gill, a key figure in the 2021 meme stock rally. Gill posted some cryptic memes last spring indicating he was back in the game. This sent GameStop stock soaring, briefly, to about $48 per share in May. It has settled back down since but is still up some 70% YTD.    

Expense reductions and store closures

The other catalyst has been GameStop’s financials. GameStop sold 45 million shares back in May to raise $933 million in capital after the stock price spiked.

In the third quarter, the company sold another 20 million shares in September, raising about $400 million. It has helped GameStop increase its cash and equivalents to $4.6 billion, up from $909 million a year ago, to invest back in the business.

GameStop has also cut back on expenses, which involved the closure of almost 300 stores last year, reported MSN. That is why the year-over-year revenue numbers were down.

In its third quarter 10-Q filing released Tuesday, GameStop indicated more closures are on the way. Management said the company was undergoing a portfolio optimization review of its more than 4,000 stores to identify more stores for closure based on factors like store performance and market conditions.

“While this review is ongoing and a specific set of stores has not been identified for closure, we anticipate that it may result in the closure of a larger number of stores than we have closed in the past few years,” the 10-Q said.

Some of the closures will be international, as GameStop is winding down operations in Germany, with store operations scheduled to end by the end of the year. In Italy, the company just sold off GameStop Italy. And last year it ended store operations in Ireland, Switzerland, and Austria.

These moves and other cost-containment measures allowed GameStop to reduce expenses by 5% in the quarter to $262 million. It also lowered its cost of sales to 70% of net sales, down from 73% a year ago. Through the first three quarters, expenses are down 12% year-over-year to $848 million while the cost of sales is 70.5%, down from 74.9% the previous year.

Ultimately, the expense reductions allowed GameStop to generate higher earnings in Q3.

What’s next?

Whether or not GameStop continues to be favored by meme stock investors remains to be seen. But as far as the business goes, management is trying to turn things around.

In the Q3 10-Q, the company reiterated its strategic plan to be the leading destination for games and entertainment products both online and in stores. This involves increased product availability across all channels, faster fulfillment, improved customer service, and leveraging its brand recognition and store network.

The company will also continue to focus on cost containment, including closing underperforming stores, to operate more efficiently and improve profitability

While Q3 had some positive results, analysts don’t see a lot of upside. Given the changes underway, and in light of the recent stock runup, investors might be want to sit on the sidelines for now and see how things play out.