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GameStop notches first profit in 2 years, sending stock price soaring

GameStop shares are surging after the struggling video game retailer reported its first profitable quarter in two years. 

In early trading the company's stock soared 46% to $25.70. The Texas-based retailer on Tuesday reported a net profit of $48.2 million for the fourth quarter ending on Dec. 31, compared with a loss of $147.5 million in the year-ago period, according to a regulatory filing

In 2021, GameStop's stock price shot up to more than $300 after retail investors congregating on Reddit and other online forums joined forces to snap up the shares, partly in defiance of Wall Street firms and short-sellers that had written off the game vendor. Other so-called meme stocks also surged, including shares of Bed Bath & Beyond, theater-chain AMC Entertainment and BlackBerry.

Cost cuts buy time

GameStop's balance sheet improvements follow the company's moves to overhaul its business strategy in 2022, GameStop CEO Matthew Furlong said in a call with analysts.

"We pivoted last year to cut costs, optimize inventory and focus on enhancing the customer experience," he said. "The upshot of all this change is evidenced in our results this quarter."

GameStop cut costs by reducing its headcount in a series of layoffs last year and by closing some of the chain's European stores, an initiative the company will continue to pursue, Furlong said.

Those cost-cutting measures should help the retailer conserve cash and give it more time to find new ways of driving growth, Wedbush Securities analysts Michael Pachter and Nick McKay said in a report.

"The lower cost structure lessens the risk of ongoing losses," they wrote. "As such, GameStop's $1.4 billion of net cash should last it several more years as its management seeks new ways to revive a declining business."

In recent years, GameStop has experienced declining sales amid an industrywide pivot to video game streaming and digital downloads. Before reporting a profit in its most recent quarter, the company had posted seven straight quarterly losses. 

Over the long haul, however, GameStop still faces significant challenges as the the gaming industry shifts.

"Longer term, the company cannot save its way to prosperity as new-gen hardware sales inevitably cool off and physical sales of video games continue on their multi-year downward trajectory, with that negative momentum buoyed by the growing appeal of mobile and subscription offerings for gamer hours and dollars," Pachter and McKay said.

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