GameStop Corp. (NYSE: GME) reported second-quarter revenue of $790.2 million, down 18.7% from a year ago but comfortably above Wall Street’s $756.9 million estimate, while adjusted EPS came in at $0.27, matching consensus.
At first glance, this looks like a business losing ground, especially with the company selling nearly $200 million less than it did in the same quarter last year, but GameStop somehow turned that smaller sales base into $160.2 million of operating income, more than twice what it produced a year ago and its highest second-quarter operating profit in company history.
That is the unmissable part of this report. More so because GameStop may be discovering that the business it needs to become is considerably smaller than the one it spent decades building.
The Collectibles Shift Is Doing More Than Replacing Lost Game Sales
GameStop’s collectibles business grew 57% to $356.3 million in the quarter, taking its share of total sales to 45.1%, up from 23.4% a year earlier, while the company’s traditional video-game business contracted sharply.
Quite remarkable change for a company that spent most of its history making money from people buying video games, consoles and used games, but I wouldn’t call the collectibles growth a success story just yet because trading cards, toys and other merchandise can be a very different business from the one GameStop is leaving behind.
The reason I’m paying attention is that this shift was already visible in Q1, when collectibles accounted for 41.8% of revenue, meaning Q2 didn’t create the trend; it accelerated it.
If GameStop can keep moving sales toward collectibles while cutting the costs attached to its shrinking legacy business, the company could end up with a much different earnings profile from the one investors have historically associated with the name.
And that gives us something much more useful to watch than the revenue decline itself: whether GameStop can keep growing profit even as the old business gets smaller.
Make More Money From Less Revenue
There is a reason I don’t want to hang the entire argument on GameStop’s $298.7 million net income, because nearly $238 million of the quarter’s earnings came from the company’s investment in eBay while the retail business itself produced $160.2 million of operating income, and that gives us a cleaner way to see whether the turnaround is actually happening inside the stores rather than on the balance sheet.
The improvement in the core business is hard to dismiss when gross margin rose to 42.2% from 31.4% a year earlier and SG&A fell by $31.7 million, even as revenue declined. GameStop also generated $174 million in adjusted EBITDA, compared with $75.7 million last year.
That changes how I read the shrinking sales base. GameStop isn’t replacing every lost video-game dollar with a collectibles dollar. It is changing what kind of dollars make up the business, cutting expenses around the old model while putting more weight behind the category that is growing.
For the full year, management has now raised its adjusted EBITDA outlook to more than $650 million, up from the previous target of $600 million.
If the company can keep producing that kind of operating leverage while collectibles take up an even larger share of the business, the old revenue comparisons will become less useful for judging what GameStop is worth.
The $238 Million Question Sitting Inside GameStop’s Profit
GameStop’s $298.7 million net profit looks impressive until you separate the retail business from the investment gains that helped produce it, because the company’s $4.9 billion eBay position generated a large mark-to-market benefit during the quarter while a $75 million loss on its digital assets moved in the opposite direction.
That makes the $160.2 million of operating income more useful for judging what actually happened to GameStop’s business, and the number becomes even more interesting when you remember that the company generated only $66.4 million in operating income in the same quarter last year.
I think investors need to keep those two stories separate as they look at what Ryan Cohen is building, because GameStop now has a retail operation whose economics are changing underneath it and an investment portfolio capable of moving the reported bottom line by hundreds of millions of dollars in a single quarter.
The eBay investment may eventually become an important part of the GameStop story, particularly after Cohen’s failed attempt to acquire the company, but the retail business has to prove that it can stand on its own first.
The Chart Still Has Work To Do
GME’s earnings may have given the business a reason to be taken more seriously, but the stock chart has not made the same argument yet, with shares closing at $18.89, below the 20-day moving average at roughly $19, the 50-day at $20.21 and the 200-day at $22.17.
The pattern is also difficult to call bullish after the sharp break from the $22–$23 range in August, which sent GME toward $18 before this week’s small recovery. The stock is trying to stabilize around those lows, but until it can reclaim the 20-day and then the 50-day averages, I would treat this as a bounce inside a damaged chart rather than the beginning of another sustained move higher.
There is a level I would watch closely: $22–$23, where the stock spent much of June and July consolidating before breaking lower. A move back through that zone would put GME above its 50-day average and within striking distance of the 200-day, giving the fundamental turnaround a much more convincing technical backdrop.
If GME can hold these lows and start reclaiming $20.20–$20.30, I’d be looking to get long, with $22–$23 as the next real test; for me, that’s the trade worth watching because the fundamentals are finally giving this beaten-down chart something to work with.
