In a demonstration of how beaten-up shares can rally on modestly positive news, video games retailer GAME Digital (GMD), a flop since floating on the Main Market in 2014, shoots 11.2% higher to 25.9p on Thursday.
The catalyst is a solid Christmas trading update delivered amid a challenging retail landscape and giving confidence in full year forecasts with further cost savings also being targeted.
SOLID SEASONAL SHOWING & CASH IN THE COFFERS
GAME Digital’s group like-for-like sales increased 2% over the 7 weeks to 5 January, reflecting growth in higher margin new software releases as well as licensed merchandise and accessories over Christmas.
UK like-for-likes declined ever so slightly (off 0.3%) over Christmas while Spain generated a much stronger showing, like-for-likes moving 4.8% higher.
Investors are also reassured by the news net cash amounted to £96m as at 5 January, buoyed by strong working capital management and with GAME Digital not having to dip into its borrowing facilities over the peak period.
BLACK FRIDAY BOOST
Management of the retailer-turned-eSports venue organiser also highlights a good Black Friday performance, supported by high levels of exclusive product sales and targeted promotions. CEO Martyn Gibbs comments:
‘Despite a challenging retail climate, the group traded solidly over the Christmas period, with encouraging like-for-like sales in both territories. The group successfully delivered growth from exclusives, higher margin categories and our specialist customer offer over the Black Friday event, which all contributed to a pleasing margin outcome and helped to offset the continued, managed decline of pre-owned.’
Total sales were down 0.5% over the 7 weeks, reflecting the impact of circa 30 UK store closures since this time last year. Encouragingly, progress continues with the rationalisation of the UK cost base and management expects to realise further significant savings in the current year to July 2019.
As Gibbs explains: ‘We are working closely with landlords to manage down the fixed costs of operating our store portfolio and produce ongoing efficiencies.’
BELIEF IN ‘BELONG’
Almost a year into GAME Digital’s collaboration with Mike Ashley’s Sports Direct (SPD), a significant shareholder in the group, the roll-out of BELONG, its leisure experience bringing video gaming to high streets and shopping centres, remains a key strategic objective for both parties.
Two new BELONG arenas opened during the first 23 weeks of the financial year and GAME remains focused on identifying new and larger locations for future roll-out.
THE ANALYSTS’ VIEW
‘Taking into account the solid UK performance plus robust sales growth in Spain, growth in higher-margin categories and ongoing cost savings over the peak period, we leave our forecasts unchanged,’ says Edison Investment Research analyst Kate Heseltine, looking for a narrowing in pre-tax losses from £3.5m to £2.2m this year ahead of a £1.2m deficit in 2020.
‘GAME Digital has made significant inroads into its cost transformation programme. Full year 2019 will benefit from annualised cost savings of £6m delivered in the second half of 2018, in addition to lease renegotiations, payroll and other efficiencies.’
Liberum Capital enthuses that ‘group trading margin improved year-on-year over peak. In the UK, cost saving initiatives continue to bear fruit, which provides support to our near-term forecasts. Confidence in the long-term potential of the BELONG arenas remains and we are hopeful of an acceleration in the roll-out over the second half.'
