This quarter didn’t tell us much on GME. The headline was fine, a small revenue and EBITDA beat. Revenue accelerated 50bps to +25.6% against a tougher comparison despite the company having a 9% reduction in the store fleet. These are impressive revenue trends given the constraints from limited console supply. The company is managing costs with SG&A dollars down 21% vs 2019 with revenue down 8%. That cost management is offsetting some of the gross margin pressure that is likely driven by higher hardware mix and online mix, though gross margin expanded 34bps this Q, improving on a 2-year basis vs 1Q, but still nearly 400bps below 2019 levels. CFFO was -$11.5mm negatively impacted by some inventory build and prepaid tax outflows, the company credited inventory build to investments to drive sales growth, likely category expansion into PCs and electronics, as well as better in-stocks. GME finished the quarter with just under $1.8bn in cash on the balance sheet to deploy towards its growth initiatives.
The conference call was very short, about 7 minutes of prepared remarks from new CEO Matt Furlong making his conference call debut, and there was little detail provided on strategy. We’re not surprised given it followed the outline of the last two ‘post Ryan Cohen’ calls, but were hopeful to hear more. Clearly Cohen wants to keep the strategic details close to the chest for now, which makes sense. Only publicly known investments were discussed like category expansion across consumer electronics, collectibles, and toys, as well as previously disclosed infrastructure investments like the new coming Reno DC, the operational York, PA fulfillment center, and the Florida call center. The CEO did share the two core long term goals that have “unified leadership” of delighting customers and delivering value for stockholders. The call and message feel was very Amazon like, perhaps to be expected with many of the new senior execs coming from Amazon.
We think the new team at GME has a lot of ideas on creating value for the highly engaged consumer base that is global gamers. The plan is much more than assortment and fast shipping. This afternoon the AMC CEO was reported to have said there is some sort of partnership with GME coming, whatever that is, it’s likely a drop in the bucket vs the total GME opportunity. We outlined our thoughts on what GME might pursue in our Black Book in July GME | The Business Transformation Crystal Ball (Replay Link: CLICK HERE). GME is just starting the transformation, there is significant value opportunity in the right plan and right execution. We won’t see the full potential of current business model EPS power until consoles are in ready supply, and the business will likely have evolved adding new value creators by then. We remain Long GME.
