Stock on track for biggest one-day selloff since December of 2002 as Jefferies and Baird downgrade to neutral from buy
Shares of GameStop Corp. plunged Tuesday after the videogame and consumer electronics retailer said it has ended efforts to sell the company after its suitor was unable to secure financing at a rate that made business sense.
The stock GME, -27.23% was last down 27%, putting it on track for its biggest one-day selloff since December 19 of 2002, when it fell 30% in one day.
“GameStop’s Board has now terminated efforts to pursue a sale of the company due to the lack of available financing on terms that would be commercially acceptable to a prospective acquirer,” the company said in a statement.
Jefferies analyst Stephanie Wissink downgraded the stock to neutral from buy on the news and slashed her price target to $13 from $18, as the premium built into the stock on expectations for a deal has now vanished.
“On a fundamental basis, we expect GME will pursue accelerated store closures, cost reductions, and buybacks,” Wissink wrote in a note. “With a healthy balance sheet, the company has time; with a rapidly maturing lease structure, the company has flexibility. But with the market stripping the premium for a takeout, the upside case for the stock over the next 12 months is more limited.”
GameStop said it would continue to search for a permanent chief executive officer, and evaluate the optimal use of $735 million in proceeds from the sale of its Spring Mobile business. That deal closed on Jan. 16. The company may use the cash raised to pay down debt, fund share buybacks, reinvest in core videogame and collectibles businesses to drive growth, or opt for a mixture of all those things.
The retailer has been conducting a strategic review of its business for months as it struggles to sell physical games to customers who nowadays can simply download them at home. In its most recent quarter, GameStop swung to a loss of $488.6 million from a profit of $59.4 million in the year-earlier period. Revenue rose to $2.08 billion from $1.99 billion. But the stock sold off sharply after the company slashed forecasts for the fourth quarter.
Jefferies said the company could hedge the risk of declining software sales and the natural hardware cycle with growth in collectibles, peripherals and digital currency.
“Store & cost rationalization efforts could move the model forward, but are viewed as Ebitda recycling until scaled & proven effective,” the analyst wrote.
Baird analyst Colin Sebastien also downgraded the stock to neutral from its equivalent of buy, saying it sees few positive catalysts in the year ahead.
“We note the broader videogame industry faces tougher growth comparisons this year following a relatively strong 2018,” he wrote in a note. “In addition, the shift to digital downloads and in-game digital transactions is progressing at faster rates than the company originally anticipated.”
More ominous for GameStop, the rate of decline in its preowned business, a major contributor to cash flow and profit, has accelerated in each of the prior four quarters and is likely to again in the fourth quarter, said the analyst.
“We also expect more details this year on new streaming platforms and services from Google, Sony and Microsoft (among others), which could cast further uncertainty on the future of videogame retail,” he wrote.
Wedbush analysts led by Michael Pachter took a more bullish view of the news, saying he expects the company to focus squarely on what it can do for its shareholders. His advice would be to use proceeds of the Spring Mobile business sale to reduce debt by a significant amount and then renew efforts to find a CEO.
“The news has brought greater clarity into the future of the company, which should help with the CEO hiring process,” the analyst wrote in a note. “We expect GameStop to aggressively cut costs in 2019 and beyond, to pay its debt balance down to zero, and to increase its share repurchase program.”
GameStop currently has about $820 million of outstanding debt, $350 million of which comes due on Oct. 1 and carries a 5.50% interest rate. Paying that down would save the company the equivalent of 14 cents of per-share earnings and leave $385 million of proceeds that would cover the remaining $475 million of debt that matures in March of 2021. Those notes are even more expensive with an interest rate of 6.75%. Eliminating that debt would save about $32 million in annual interest costs, equal to 24 cents of EPS, he said.
Wedbush is sticking with its outperform rating on the stock, but lowered its 12-month stock price target to $15 from $18.
GameStop stock has fallen 33% in the last 12 months, while the S&P 500SPX, -0.15% has fallen 7.7% and the Dow Jones Industrial Average DJIA, +0.21% has fallen 7.2.%.