GameStop became a cause for the Reddit meme-stock community, due partly to people's blind faith in Chewy.com Founder Ryan Cohen and partly to people misunderstanding its business.
The videogame retailer has a favorable balance sheet, flexible leases, and enough cash to pivot from the slowly ending retail-store software business.
Yes, the company needed saving, but it was more a question of how it would pivot to a new business model once most game sales moved to digital download than it was how to rescue it from an immediate crisis. A couple of years ago, GameStop (GME) was at a crossroads with choices to make about how to remain viable.
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But the meme stocks/Reddit crowd never understood the actual business in play here, where the company figuring out how to become profitable was possible but some massive turnaround was much less likely.
Cohen, of course, who is chairman of GameStop, loves to talk about nonfungible tokens and other big-ticket ideas, but his words mean little, and the company's numbers suggest that survival remains a realistic goal while wild success does not.
None of this stopped the Hold on for Dear Life GameStop crowd from seeing that the company turned a profit in its most recent quarter and taking that as a huge sign that the plan is working. All profits, however, are not the same, and this one is more a numbers game than a recurring trend.
Image source: TheStreet
GameStop's Profit Isn't Real
On its way to oblivion, Sears had a couple of quarters where it reported a profit. One came when it sold the Craftsman brand and another when it took a major tax credit because the value of its name had eroded so much.
Both quarters were technically profitable, but if you make $100,000 selling your kidney, you realize pretty quickly that you're only getting cash, not creating a business model.
That's sort of what happened with GameStop, which reported a $48.2 million profit for the quarter, compared with a $147.5 million loss in the year-earlier quarter. That sounds good, but the truth lies in a comment the company made in its earnings news release that it tried to sell as a positive.
"Inventory was $682.9 million at the close of the period, compared with $915 million at the close of the prior year's fourth quarter, reflecting the company’s ongoing focus on maintaining a healthy inventory position," GameStop shared.
What that means is that the company sold roughly $233 million in inventory to make a slight profit. It didn't replace that inventory, and while it wants to be inventory-light, selling off your inventory and not replacing it is a game you can play for only so long.
This Might Be a Good Sign For GameStop
It's fine to sell off your inventory to fund current operations if you use the added time that cash buys you to change your business model.
Sears did not do this. It sold its biggest assets in order to keep the lights on for a few more months. GameStop CEO Matt Furlong continues to stress that that's not what's happening at his company.
"GameStop is a much healthier business today than it was at the start of 2021," he said during the chain's fourth-quarter-earnings call. "We have considerable cash on hand, negligible debt, streamlined inventory, and a path to full-year profitability. Our plan is to use this strong positioning to continue delivering a unique customer experience and long-term stockholder value."
Again, it's important to note that Furlong remains focused on survival not some sort of massive redemption that justifies the faith of the Reddit crowd.
GameStop has done a lot well. It has effectively no debt and about $1.2 billion in cash on hand. That buys it time to figure out what it can sell that might actually be long-term profitable. The company isn't there and its CEO knows that.
"And with respect to an outlook, we're not delivering guidance at this time. We want stockholders to judge us on our results instead of our words," he said. "In closing, there is still significant work ahead of us, and we are focused on building from this quarter's progress rather than reflecting on our gains."
GameStop has a chance to remain a viable concern. That's impressive, but it's hardly worth the social-media victory lap being taken by people who largely bought into the company because strangers and memes told them to.
GameStop may not be Sears, but it still has very large questions that neither Furlong nor Cohen have answered.
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