GameStop’s Q3 Earnings Preview: Is Profitability in Sight?

• Wall Street expects GameStop to report a considerable increase in earnings per share for the third quarter.

• GameStop's short-term focus is on achieving profitability, but to achieve that, the company must report a drastic cost reduction.

• It is estimated that the vast majority of GameStop shares are owned by retail investors.

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Previewing GameStop's Fiscal Q3 Earnings

We now have a date for GameStop's  (GME) - Get Free Report fiscal third-quarter (Q3) earnings. The video game retailer will report its results on December 7 after the closing bell.

Wall Street estimates that GameStop will report a non-GAAP (generally accepted accounting practices) loss per share of 28 cents, which would represent 20% year-over-year growth.

As for revenue, the video game retailer is estimated to report $1.35 billion, which would imply a growth of only 4% year over year.

As usual, GameStop is not expected to provide formal guidance for the next quarter, nor is it making room for questions and answers during its Q3 earnings call.

However, analysts are expecting management to comment on subjects such as the company's further dive into Web3 gaming.

On the Q2 earnings call, CEO Matt Furlong noted that, in Q3, the company would receive a better supply of next-generation gaming consoles from its key suppliers. This would be a positive.

In Q2, the gaming industry suffered from tough comps. Video game publishers, console makers, and chip makers reported a considerable drop in demand after the pandemic boom times. A return to demand would be a boon for the company.

And it's possible that GameStop has made significant strides in Q3 to transform from a legacy brick-and-mortar retailer into a technology-led organization. Initiatives such as revamped stores, e-commerce sales, and digital marketplaces may already reflect a more progressive quarter.

Could GameStop Have Reached Profitability in Q3?

Until a few months ago, management had been following a turnaround plan focused on strengthening the company's tech capabilities.

Now the narrative is different. As GameStop's management made clear last quarter, the current focus has shifted to achieving short-term profitability and drastically cutting costs.

"After spending a year strengthening our assortment, infrastructure, and tech capabilities, we're now focused on achieving profitability, launching proprietary products, leveraging our brand in new ways, and investing in our stores," GameStop’s CEO Matt Furlong said.

This change in focus is due mainly to the Federal Reserve's drastic changes in interest rates and the impact this has had on capital allocation. As mentioned by GameStop Chairman Ryan Cohen, in the current high-interest rate scenario, the value of short-term cash flows is much higher than that of long-term cash flows.

Also, as pointed out during the second-quarter earnings call, profitability will come through additional revenue growth and also through continued drastic cost-cutting.

"We continue to evolve our e-commerce and digital asset offerings, storage will remain a critical piece of the company's value proposition. Taken together, we believe the aforementioned steps can help us attain profitability in the coming quarters and produce additional revenue growth over the long term," said GameStop’s CEO on the Q2 earnings call.

Besides having reported a strong reduction in SG&A (selling, general and administrative expenses) from Q1 to Q2 in July, GameStop made dramatic cuts to its staff — including the resignation of its former CFO, Mike Recupero. Between late 2021 and mid-2022, the video game retailer had hired more than 600 employees.

Therefore, it is more likely that profitability will depend on how much costs GameStop managed to reduce in fiscal Q3 rather than extra revenue generated. And based on the loss per share forecast of 28 cents by Wall Street, it still won't happen this quarter.

Even though historically the third quarter is usually not profitable, it is encouraging that in Q2 there was a reduction in quarterly cash burn. GameStop reported a net loss of $109 million, a decline of 14.3% compared to Q1 that could be partially attributed to cost-adjustment initiatives through rightsizing corporate expenditures and headcount.

Even though profitability expectations in Q3 are still not the highest, there are hopes that further SG&A costs will be reduced. This may reflect a shrinking earnings-per-share (EPS) loss and paint a clearer picture that profitability will come soon.

What GameStop's Shareholders Are Actually Excited About

GameStop's stock certainly does not behave like regular stock.

Even though expectations regarding the company's financial and operational performance are key to movements in the stock, other data will be revealed in fiscal Q3 that GameStop shareholders are paying attention to.

Over the past few quarters, GameStop investors have been adopting a strategy of registering their shares directly through their transfer agent.

Using the Direct Registration System (DRS) allows shareholders to hold the stock without necessarily using a broker. One of the benefits of this system is that it reduces the availability of stock for short sellers to borrow. Unlike brokers, transfer agents cannot lend shares.

In theory, if enough shareholders register their shares with the transfer agent, short sellers should have great difficulty in borrowing shares for shorting GameStop or covering their short positions in case of margin calls.

Most GameStop shares (an estimated 67% of GME's float) are held by retail investors.

Interestingly, since the practice of direct registration has been incorporated by GameStop shareholders, the company has been disclosing the number of shares registered quarterly in its Form 10-Q.

At the end of July, there were about 71.3 million shares registered through DRS. With another four months having passed since then, this number is now likely to be even higher.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)