Beleaguered video games seller GAME Digital (GMD) has blotted its copybook yet again. Another profit warning has triggered another share price slump, down 30% on Friday to 23.25p. The share price was at 354p at the end of 2014.
Earnings before interest, taxation, depreciation and amortisation (EBITDA) for the year ending 29 July will be ‘substantially below previous expectations’ according to an unscheduled trading update, GAME blaming continued tough trading on the UK high street as well as less supply of the Nintendo Switch console into the UK than hoped for.
Console constraints
Increasingly tough high street conditions and a squeeze on consumer spending are hurting GAME Digital, though Nintendo Switch console and software supply constraints are at the heart of the latest warning.
GAME had been pinning its second half hopes on bumper consumer demand for the console, which encouragingly ‘has been, and remains, very strong, however the level of supply to the UK market has been lower than expected.'
Sales have also been curtailed by continued softness in GAME’s core Xbox and PlayStation markets, with slippage of the release date of a major title a factor.
All this means that second half GTV (Gross Transaction Value), GAME’s preferred top-line metric given an increasing proportion of digitally-derived sales, will grow by just 5-6%, significantly south of Canaccord Genuity’s 12% estimate.
Additional downgrades
The broker believes today’s news implies a £20m downgrade to EBITDA estimates to around £8m and will translate into annual losses of around £4m versus its previous forecast of an £8m pre-tax profit.
Shares has doggedly stuck to our bearish stance on GAME since its 2014 stock market return, no fans of its poor earnings quality with sales lumpy and linked to console and software release schedules. Subsequent disappointing financial results, earnings downgrades and a dismal share price performance have validated our sceptical stance.
Bulls will point to a Spanish business which ‘continues to trade strongly’ and is on track to achieve record sales this year, as well as further movement on a UK turnaround plan including cost cutting initiatives and improving supplier deals.
GAME is also trying to become a multi-channel retailer including live gaming. It’s new in-store gaming arenas, now trading out of 12 UK locations under the BELONG banner, are also progressing well and the company is 'exploring new funding arrangements to enable acceleration of the roll-out'.
Canaccord Genuity’s retail sage Sanjay Vidyarthi writes: ‘The GAME management team is positioning the business well strategically, aided by an average lease length of just 1.2 years and the BELONG concept. As so often though, the carpet has been pulled from under their feet by market factors out of their control.'
‘The company maintains its view that full year 2018 should be a stronger year as Nintendo supply improves and the new Xbox comes to market. There is also a stronger pipeline of software. At this stage, it is clearly difficult to plot the trajectory of any recovery.'
