Michael Burry's GameStop Tumbles on Weak Comp Sales Outlook

'Big Short' investor-backed company reports worse comp sales decline in second quarter Continue reading... Read More...

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Shares of GameStop Corp. (NYSE:GME), a company that "The Big Short" investor Michael Burry (Trades, Portfolio) urged to complete its $237.6 million share repurchase in August, plunged in aftermarket trading as the company offered weaker comparable sales guidance for the second half of 2019.” data-reactid=”11″>Shares of GameStop Corp. (NYSE:GME), a company that “The Big Short” investor Michael Burry (Trades, Portfolio) urged to complete its $237.6 million share repurchase in August, plunged in aftermarket trading as the company offered weaker comparable sales guidance for the second half of 2019.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="For the three months ended Aug. 3, the Grapevine, Texas-based company reported net loss of $415.3 million, or $4.15 in loss per share, compared with net loss of $24.9 million, or 24 cents in loss per share, in the prior-year quarter.” data-reactid=”12″>For the three months ended Aug. 3, the Grapevine, Texas-based company reported net loss of $415.3 million, or $4.15 in loss per share, compared with net loss of $24.9 million, or 24 cents in loss per share, in the prior-year quarter.

Company reports higher comp sales decline and higher net loss

GameStop Chief Financial Officer Jim Bell said that although the sales declines during the quarter were “consistent” with historical trends observed toward the end of the hardware cycle, total net global sales of $1.286 billion declined approximately 14.35% from second-quarter 2018 sales of $1.501 billion. Comparable sales declined 11.6% during the quarter, worse than the 10.3% decline for the quarter ending May 3.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Net loss based on generally accepted accounting principles included asset impairment charges of $400.9 million, or $3.82 per diluted share, primarily related to the impairment of goodwill. Excluding the impairment charge and other items, the adjusted net loss of 32 cents per share still underperformed the consensus estimate of 22 cents per share.” data-reactid=”41″>Net loss based on generally accepted accounting principles included asset impairment charges of $400.9 million, or $3.82 per diluted share, primarily related to the impairment of goodwill. Excluding the impairment charge and other items, the adjusted net loss of 32 cents per share still underperformed the consensus estimate of 22 cents per share.

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On the heels of lower comp sales over the past two quarters, management predicts comparable sales for full fiscal 2019 to decline in the low teens, worse from the previous guidance of a 5% to 10% decline.

Company updates capital allocation plan

Having terminated its dividend on June 3, GameStop completed a modified Dutch auction tender offer to purchase 12 million shares of common stock at $5.20 per share for an aggregate cost of $62.4 million, excluding fees and expenses. The company, which has approximately $237 million remaining in its existing share repurchase authorization, trimmed its long-term debt to $419.1 million, down $49.8 million from first-quarter end and bringing the year-to-date net paydown of debt to $401.7 million.

Shares tumble in aftermarket trading, Burry voices his concerns

Although shares closed at $5.09, up approximately 6.93% from Monday’s close of $4.76, shares of GameStop tumbled over 15% in aftermarket trading. At around $4.30 per share, the stock is trading $1.15 from its 52-week low of $3.15 and $1 from its 10-year minimum price-sales valuation of $3.30.

Known for his “Big Short” investment prior to the 2008 financial crisis, Burry said in an Aug. 16 letter to GameStop’s board of directors that his firm, Scion Asset Management, took an activist stance worth 2.75 million shares and lobbied for the company to complete the remaining $237.6 million share repurchase in full with cash on hand. Burry estimated that GameStop has over $480 million in cash, which is enough to complete the share repurchase and still be able to invest in the business and pay down debt.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Burry also mentioned that GameStop's low stock price suggests shareholders are grappling with concerns the company did not leverage its "elite position" in the gaming universe as the "new paradigm" formulated over the past five years. Amazon.com Inc. (NASDAQ:AMZN), a holding of Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), bought Twitch in 2014 and GameSparks in 2017, while GameStop bought and then sold its wireless store assets.” data-reactid=”91″>Burry also mentioned that GameStop’s low stock price suggests shareholders are grappling with concerns the company did not leverage its “elite position” in the gaming universe as the “new paradigm” formulated over the past five years. Amazon.com Inc. (NASDAQ:AMZN), a holding of Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), bought Twitch in 2014 and GameSparks in 2017, while GameStop bought and then sold its wireless store assets.

GuruFocus lists several warning signs for GameStop, including a weak Piotroski F-score of 3, declining revenues, contracting profit margins and poor earnings quality based on its Sloan ratio. GameStop’s operating margin of 3.47% and three-year revenue per share growth rate of -2.6% are near a 10-year low and underperform over 70% of global competitors.

See also

Burry’s $94 million equity portfolio contains 10 stocks as of June-quarter end, with four new positions in FedEx Corp. (NYSE:FDX), Alphabet Inc. (NASDAQ:GOOG), Cardinal Health Inc. (NYSE:CAH) and Alibaba Group Holding Ltd. (NYSE:BABA). The fund’s top two holdings, Western Digital Corp. (NASDAQ:WDC) and Cleveland-Cliffs Inc. (NYSE:CLF), occupy 12.71% and 12.54% of the equity portfolio.

Disclosure: No positions.

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This article first appeared on GuruFocus.