Revenue beat, growing 6% YY slowing from 29% last Q, accelerating 200bps on the 2 year trend. Growth was driven mainly by the US, up 10% YY despite store count down 5%. Margins were atrocious though with gross margin down 436bps, against an easy compare, while SG&A stepped up $120mm YY growing 28% vs 3Q. We know the company is investing but that type of SG&A ramp was unexpected. The company is not giving much detail in commentary around business trends. If we had to deduce the reason for the margin results this Q it would be a combination of mix shift to lower margin items like hardware, supply chain and freight costs to get product to the customer, higher online penetration driving shipping and credit card costs up, competitive pricing and costs to keep the customer happy, plus ramping SG&A around new growth initiatives, several of which are not creating revenue yet. Did we expect this much margin pressure this quarter? No, but the company has been clear that its focus is turning a business that was losing relevance with the consumer into one that is gaining relevance. It is investing to win share and drive revenue growth. It has not made any promises or given any guidance on what to expect for trending margins. The 4Q results, high investment level, and lack of detail around puts and takes or forward expectations means the fundamental results for GME over the coming quarters now have a massive range of possible outcomes. The market might view this as bearish, and it probably should in macro Quad4, but the model is being transformed. It’s almost like a young private growth company from an analytical perspective. Bad profits now to create the opportunity for share and larger profits in the future. Modeling is big picture and more annually focused vs any quarter to quarter certainty. We’re ok with that, but it means the stock will likely be driven by the business evolution, new initiative momentum, customer wins, and developing profit drivers as opposed to NTM earnings. On that front, management noted the NFT marketplace is expected to launch by 2Q22, and the company added 1.4mm paying PowerUp Rewards Pro members, up 32% YY. So it is winning back some real gamer customers that are willing to pay for membership.
On the call management reviewed the changes that all happened in fiscal 2021:
- installed a new management team comprised of technology veterans and introduced a more equity-focused executive compensation structure to increase alignment with stockholders
- refreshed the Board with stockholders and individuals who possess records of value creation, while reducing individual director compensation
- ended relationships with high-priced external consultants who were costing the company millions of dollars per year
- hired hundreds of new individuals with e-commerce, operations and technology experience, while eliminating many redundant and unnecessary roles
- recapitalized the company's balance sheet after raising approximately $1.67 billion in capital
- expanded the product catalog to seize more market share in areas such as PC gaming, personal electronics and virtual reality
- invested in the fulfillment network by standing up new facilities on the East Coast in York, Pennsylvania, and on the West Coast in Reno, Nevada
- invested in systems and tech stack after years of decay and neglect
- invested in U.S.-based customer service and established a new facility in South Florida
- invested in a dedicated blockchain team and new capabilities to drive the development of initiatives such as our NFT marketplace, expected to launch by the end of the second quarter; noting significant long-term potential in the more than $40 billion market for NFTs.
That’s a lot accomplished in less than a year. We outlined our take on the long term investment case and management’s business transformation in our deep dive black book in January. A valuation framework summary is below. For a replay of the call: CLICK HERE. Over the near term macro/market factors (bearish GME) likely drive this name more than fundamentals, but as we move out of macro Quad 4 later in 2022 there is a good chance we get incrementally bullish on this name.
