RapidRatings Chairman and CEO James Gellert joins Yahoo Finance Live assesses GameStop’s outlook after the retail chain’s latest earnings miss, its brick-and-mortar strategy, and potential economic pressures blowing against the meme stock heading into 2023.
SEANA SMITH: Let’s take a look at GameStop, the stock now trading to the downside following its most recent results. Earnings and revenue both missing expectations. GameStop reporting a wider-than-expected loss. Net sales off 8 and 1/2% from a year ago. Software sales declining 19% year-over-year.
For more on this, we want to bring in James Gellert, RapidRatings Chairman and CEO. James, it’s great to see you again. So the stock kind of flipping between positive and negative territory here after-hours. I guess, your initial reaction from this report because when you take a look at the misses, obviously doesn’t set us up too well heading into 2023.
JAMES GELLERT: Seana, good to be with you again. And I agree. The fact that it was trading positive, even for a minute or two, was a bit surprising and probably just says that some of the meme investors haven’t completely been destroyed by crypto losses yet because that’s really the only supporting base that they’ve got. These numbers are disappointing. They are worse than estimates.
I expect we’ll continue to see a lot of pressure on the company for the balance of the year but all through next year. Most importantly, though, these numbers don’t change the narrative of this business. The underlying financial health of GameStop is weak, and it is not improving. And they have not been able to articulate a changed or a better business model than what they’ve been trying to do. And in fact, they’re probably taking steps backwards.
DAVID BRIGGS: Do layoffs change the fundamentals of this company? And if not, can anything?
JAMES GELLERT: Yeah, Dave, I don’t know. Certainly, the layoffs help in the sense that when you look at the cost base of the company, they’re just spending too much money for what they’re achieving from an operational perspective. So cutting costs has an opportunity to help them. But let’s face it, the only real, solid, good story here is that they’ve got $900 million in cash. And that buys them a longer fuse life.
At RapidRatings, we evaluate it by looking at the financial health, which is a one-year measure looking forward at default risk. And GameStop is rated at 39. In the last 20 years, 90%– more than 90% of companies that have failed have been rated 40 and below. So it’s right in that zone.
From a core health perspective, which gets to your question of the cost base, we look out two to three years to understand how efficiently the operations are run at a company and how well it’s able to generate returns or be on the way to generating returns based on the assets and the capital employed that it has. And we have them rated as a 23. And these have been precipitously declining for quite a number of years.
So from a core fundamental health and a financial health shorter-term perspective, there’s really not a lot good to say here about GameStop other than the fact that they’ve got enough cash to keep going for a while, for a couple of years, because they’ve got de minimis debt. If you don’t have a lot of debt, it’s not a lot to default on, but that doesn’t mean you’re building a good business.
SEANA SMITH: Yeah, certainly a lot to be a little bit wary of. James, in terms of your channel checks, what you’ve been seeing so far this holiday season when it does come to GameStop’s actual business, any indication there just in terms of how this quarter is shaping up?
JAMES GELLERT: Doesn’t appear to be all that good. But I think they’re struggling with the same problems that they’ve been struggling with for a long time, which is not a lot of people are going into bricks and mortar stores to buy software. They’re not buying disks. They can buy online.
And the digital strategy for GameStop really hasn’t worked very well. And in fact, their leaning into crypto and their alliance with FTX has been a complete failure for all of the– for a lot of obvious reasons. But I think retail, in general, is struggling this quarter. It is going to continue to struggle. And if my 16-year-old’s view is any indication, GameStop’s got an awful lot of work to do or he’s not going back.
DAVID BRIGGS: And as you pointed out, the stock doesn’t always trade on the fundamentals of the company. But let’s talk about the broader decline in gaming. Do you expect that to continue into ’23?
JAMES GELLERT: Well, ’23 is going to be interesting because we will see a slightly better supply chain sort of efficiency level than we saw in ’22. Those who support GameStop say that some of the pent-up demand for buying software came from delayed orders of consoles. We’re seeing slightly better throughput in supply chain but a lot of challenges coming up along the way, not just from sort of residual pandemic problems, but the geopolitical disruption, particularly in the Ukraine. But– but also, all of the challenges in China are putting a tremendous amount of additional potential strain on supply chains.
And then the last point is we’ve got a lot of small companies and private businesses that are upstream in supply chains that are under incredible financial pressure right now due to inflation and capital markets, credit access problems that are coming down the pike. So I think all of those are going to ultimately create a continued difficulty for the software industry, but certainly for GameStop being at the very front end of the retail of that business.
DAVID BRIGGS: And quickly, James, with the caveat that you will not, what could you hear in the call that might change your perspective on GameStop?
JAMES GELLERT: The strategy. They just need to be able to articulate some direction for the business that doesn’t feel like a punt. And the crypto strategy was a punt, and it didn’t work. And they really have to be able to articulate how they are going to increase the efficiency and the core health of the business going forward or people will just start to focus on how quickly that cash is burning down.
And remember, the $1.1 billion they raised in the middle of 2021 was riding on the highs of the meme stock bubble, and they were able to bring in liquidity. If that hadn’t happened or if they needed that cash again today, I don’t know that they’d be able to raise it.
SEANA SMITH: All right, lots of questions here when it comes to GameStop. James Gellert, always great to have you. Thanks so much for breaking down that earnings report for us.