gamestop (GME -4.38%)
Second Quarter 2022 Earnings Call
September 07, 2022, 5:00 p.m. Eastern time
- Comments prepared
- Questions and answers
- Call the participants
Good afternoon, and welcome to GameStop’s Q2 2022 Earnings Conference Call. Please note that certain statements made during the call constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Act of 1995, as amended. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from segment to segment. These risks and uncertainties are described in the company’s earnings press release and its filings with the SEC.
Today’s forward-looking statements are made as of the date of this call, and the company undertakes no obligation to update any forward-looking statements. I will now turn the call over to GameStop CEO Matt Furlong.
Matt Furlong — Executive Director
Thank you and good afternoon everyone. I want to start by reiterating our deep appreciation for the unparalleled enthusiasm, passion and support of our shareholders. As we work to transform GameStop, these continue to be unique tailwinds for us, ones that we always recognize and value. I also want to take this opportunity to thank everyone in the organization for bringing continued focus and intensity to our mission, particularly during an active Q2 that represented a transitional quarter for us.
Before I cover the specific initiatives and results for the quarter, I want to provide a high-level update on where we’ve been and where we want to go as our transformation progresses. When our board began to turn around early last year, GameStop was saddled with significant debt, decaying systems, limited employee depth, and a host of other issues. That’s why we spent the second half of 2021 and the first half of 2022 making up for years of underinvesting in modernizing the business. The result is that we now have a more diversified product catalog, a strengthened fulfillment network, an improved technology stack and e-commerce presence, and a strengthened corporate infrastructure.
Thanks to these enhancements, including our implementation of SAP, we can begin to focus on a new set of priorities including achieving profitability, launching proprietary products, leveraging our brand in new ways, and investing more in our stores. During the second quarter, we took steps to support each of these new priorities. Regarding the search for profitability in the coming quarters, we resized corporate expenses and personnel after a period in which the company had hired more than 600 new people. These actions, combined with the elimination of extraordinary expenses in the first quarter, contributed to a 14.3% reduction in selling, general and administrative expenses.
We’ve done this while improving our eCommerce experience and reducing free shipping for customers from one day to three days. We will maintain a strong focus on cost containment and continue to promote an ownership mindset throughout the organization. On the product front, our enhanced technology capabilities allowed us to follow the launch of our digital wallet with the launch of our new marketplace that allows gamers, creators, collectors, and others to buy, sell, and trade NFTs. The launch of our NFT marketplace supports GameStop’s pursuit of long-term growth in the cryptocurrency, NFT, and Web3 gaming verticals, all of which we hope will be increasingly relevant to future collectors and gamers.
When it comes to rich partnerships, we’ve been actively exploring opportunities to strengthen GameStop’s offerings and increase brand visibility. We are building on the momentum established by our previously disclosed partnerships with organizations like Immutable X and Loopring, either through new relationships supporting our trading business, the blockchain group, or both. The deal we just announced with FTX is a byproduct of our commerce and blockchain teams working together to establish something unique in the retail world. Lastly, when it comes to investing in our stores, we implemented an enhanced compensation model for the US.
store leaders. Each of these store leaders is awarded a $21,000 time-based capital grant awarded over three years, as well as the opportunity to earn additional compensation each quarter through a performance-based capital grant . Collectively, we are increasing hourly pay for certain store employees. These steps were taken to help us improve the retention and recruitment of quality, passionate talent.
When we think about the GameStop of the future, we expect our stores to help us maintain direct connectivity with customers and keep order fulfillment capabilities localized to more geographies. That’s why, even as we continue to evolve our e-commerce and digital asset offerings, storage will remain a critical piece of the company’s value proposition. Taken together, we believe the above steps can help us deliver profitability in the coming quarters and deliver additional long-term revenue growth. Let me now turn to our second quarter financial results.
Net sales were $1.136 billion in the quarter, compared to $1.183 billion in the prior year second quarter. Sales attributable to new and expanded brand relationships remained strong. It’s also worth noting that sales attributable to collectibles, which is a segment we intend to grow in long-term, were $223.2 million in the quarter, compared to $177.2 million in the second quarter of the year. previous. Selling, general and administrative expenses were $387.5 million or 34.1% of sales, compared to $378.9 million or 32% of sales in the second quarter of last year.
As noted, we had a strong reduction in selling, general and administrative expenses on a sequential basis compared to the first quarter of this year, and we are taking additional steps to reduce selling, general and administrative expenses going forward. We reported a net loss of $108.7 million or $0.36 per diluted share, compared to a net loss of $61.6 million or $0.21 per diluted share in the prior year second quarter. There were no significant one-time transformation transactions or related costs during the period. Returning to balance.
We ended the quarter with cash and cash equivalents of $908.9 million. We continue to maintain a sizeable cash position even as we invest in inventory to maintain strong stock levels and mitigate the full impact of persistent supply chain issues. At the close of the second quarter, we had no loans under our ABL facility and no debt other than a low-interest unsecured term loan associated with the French government’s response to COVID-19. Total liabilities compared to the second quarter of last year were reduced by $237.8 million.
Capital expenditures for the quarter were $20.5 million, $7 million more than the second quarter of last year, reflecting investments in our technology and business systems. We anticipate that capital spending will remain modest. In the second quarter, cash flow from operations was an outflow of $103.4 million, compared to an outflow of $11.5 million during the same period last year. Inventory was $734.8 million at the end of the quarter, compared to $596.4 million at the end of the second quarter of the prior year.
In terms of perspective, we are not providing formal guidance at this time. However, it is worth noting that our continued engagement with key vendors is positioning us to receive a stronger supply of next-gen consoles in the coming months. I want to end by reinforcing that we are working towards something unprecedented in our industry, transforming a traditional brick-and-mortar retailer into a technology-driven organization that meets customer needs through storefront, e-commerce properties in both digital marketplaces. and new online communities. Our journey to become a more diversified and technology-focused business obviously carries risks and will take time.
That said, we think GameStop is a much stronger business than it was 18 months ago. I’ll leave it there for this quarter. We expect to drive further progress in the third quarter. Thanks.
Questions and answers:
Duration: 0 minutes
Matt Furlong — Executive Director
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