GameStop (NYSE:GME) will likely release results for the quarter ending Jan. 31 during the first week of March or the early part of the second week. It needs to post stellar figures in order for GME stock to rebound from its recent terrible performance.
For example, in the last three months, the stock has fallen quite dramatically from its peak on Nov. 22 at $247.55. As of the morning of Feb. 28, it is down to $118.15, or down 41% from the peak price.
But this is after GME stock had drifted as low as $93.52 on Jan. 27, or 62% off of its peak price. Moreover, even at today’s price of $118.15, GameStop is still down 20% year-to-date (YTD) from $148.39 where it closed on Dec. 31.
Where Things Stand with GameStop’s Cash Flow
The bottom line is that investors want to see GameStop produce positive free cash flow (FCF). For example, in the nine months ending Sept. 30, GameStop’s 10-Q shows that Cash Flow from Operations (CFFO) was negative $324 million.
But after deducting $40.7 million more in capex spending, GameStop’s FCF is a loss of $364.7 million. In other words, GameStop has burnt through $364.7 million in the last 9 months.
Moreover, it has nothing to show for this wasteful loss. And on top of that this $365 million FCF loss represents 9.7% (almost 10%) of its $3.76 billion in sales for the last 9 months.
To make matters worse, the latest earnings release points out that GameStop lost most of this money in the latest quarter.
Click to Enlarge
This can be seen in the table that the company provided, which is on the right. It shows that for the Oct. 31 quarter, GameStop burnt through $306.2 million in FCF or 84% of the total $364.7 million loss for the last 9 months.
In other words, GameStop’s cash burn is accelerating. This likely is the result of store closings, inventory write-downs or fire sales, and heavier capex spending.
It also implies that the annual cash burn is over $1.2 billion. This could use up most of GameStop’s $1.45 billion in cash and restricted cash. If that happens, GameStop would have to raise more capital, either debt or equity or a mixture of both.
This would not only hurt GME stock but destroy the idea that the company is in a turnaround. An equity raise would likely be very expensive and dilutive to shareholders.
Getting Costs Under Control
So analysts will be looking very carefully at how GameStop’s turnaround plan is going and how expensive it is compared to its cash resources. If cash burn is not as high as during the last quarter, there is some hope that GameStop will not have to raise more equity or debt.
The problem is management talks about becoming a “larger” business — as if it needs to go on an expansion or acquisition binge. That makes no sense here. It needs to get profitable, reduce its overhead and store count costs and make a transition to more of a non-bricks and mortar company.
Otherwise, it could go the way of Blockbuster, which eventually went out of business through bankruptcy.
For example, in the last quarter ending Oct. 31, 2021, its GAAP operating loss was $103.7 million. Its adjusted net loss was even worse at a negative $105.4 million.
Moreover, its adjusted EBITDA was negative $79.8 million. That measures earnings without certain non-cash deductions. And for the nine months, its operating loss was negative $227.7 million.
This shows that management has to get a handle on its cash burn and operating losses.
What To Do
Most analysts are still very negative on GME stock. The average price target of four Wall Street analysts who have written on GME stock in the last three months is $56.00. This implies the stock could drop 53% below today’s price.
These analysts are likely going to look at the company’s free cash flow performance during the next quarter. If it continues to show massive outflows, don’t expect to see their price targets rise. That could be a detrimental event for GME stock.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.