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UPDATE 5-GameStop may cash in on Reddit rally with share sale; stock down after hours

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March 23 (Reuters) - GameStop Corp said on Tuesday it may sell new shares as the U.S. video game retailer that led the Reddit rally of “meme stocks” looks to take advantage of a more-than-800% surge in its stock price since January.

Shares of the brick-and-mortar retailer gyrated after hours and were last down around 14%, adding to a loss of over 6% during the regular trading session.

GameStop commented on the potential share offering in a regulatory filing for fourth-quarter earnings which showed a return to profitability, with 175% growth in e-commerce sales.

The company reported a dip in quarterly net sales, which missed analysts’ expectations, and a decline in gross margins.

Grapevine, Texas-based GameStop’s shares have skyrocketed this year as retail traders bet against Wall Street hedge funds that had shorted the stock. The company’s valuation surged as high as $34 billion, more than Best Buy Co Inc.

Retail investors eagerly awaited the earnings report and the earnings call with analysts hit full capacity at least 45 minutes before it was due to start, forcing some to livestream the event on YouTube or Twitch.

Denizens of Reddit’s popular WallStreetBets forum have celebrated GameStop’s rallies and exhorted one another to hold onto the shares when they have dropped.

Many on the forum were disappointed after GameStop did not provide an outlook to justify its outsized valuation, and the stock’s losses deepened immediately after the presentation concluded.

GameStop executives did not take questions on the call.

“Why is everyone disappointed?,” wrote Reddit user adithya_chittem. “I honestly felt the fundamentals have gotten much stronger. Why is everyone freaking out?”

Many market pundits have urged GameStop to take advantage of its vastly increased share price to sell new shares to fund its turnaround.

However, the company decided it was restricted under U.S. financial regulations from selling shares because it had not yet updated investors on its earnings, Reuters reported last month.

This was despite GameStop having already registered with the U.S. Securities and Exchange Commission (SEC) in December to sell $100 million worth of stock through an at-the-market offering (ATM).

“Since January 2021, we have been evaluating whether to increase the size of the ATM program and whether to potentially sell shares of our Class A Common Stock under the increased ATM Program during the course of fiscal 2021, primarily to fund the acceleration of our future transformation initiatives and general working capital needs,” GameStop said in a regulatory filing.

“’We have been evaluating whether to increase’ is not a firm statement that they intend to issue any stock, but it at least says they are considering doing so,” noted Wedbush analyst Michael Pachter, adding he thought “they are getting overly conservative legal advice, and I think they should sell stock at current levels to firm up the balance sheet.”

Company executives may announce a stock offering and allow themselves leeway to cancel it if the market reaction is too negative, said Sanjai Bhagat, Professor of Finance at the University of Colorado.

Top shareholder and board member Ryan Cohen, the billionaire co-founder of online pet supplies retailer Chewy Inc, is trying to transition GameStop into an e-commerce juggernaut challenging big-box retailers Target and Walmart , and technology firms such as Microsoft Corp and Sony Corp.

Turnaround supporters say that the U.S. gaming market, estimated at $41.3 billion at the end of 2020 by data analytics firm Newzoo, has plenty of room for an online company that better understands gamer needs and can sell products from $120 gaming mice to customized, water-cooled PCs costing thousands.

Still, Cohen faces an uphill battle as more consumers move to downloading games digitally or streaming.

Since his arrival, the company has seen two top executives depart, including chief financial officer Jim Bell. It said on Tuesday it appointed former Amazon executive Jenna Owens as Chief Operating Officer in March.

GameStop said it would boost the speed of delivery services, expand product offerings and hire people experienced in e-commerce. The company notched a ninth straight quarterly decline in overall sales, but investors were encouraged by a nearly three-fold jump in global e-commerce sales in 2020.

Net sales fell to $2.12 billion. Analysts on average had expected $2.21 billion, according to IBES data from Refinitiv.

Adjusted net income rose to $90.7 million, or $1.34 per share, from $83.8 million, or $1.27 per share, a year earlier.

Reporting by Tiyashi Datta and Uday Sampath Kumar in Bengaluru; Additional reporting by Noel Randewich in Oakland, Calif.; Writing by Joshua Franklin; Editing by Sriraj Kalluvila, David Gregorio and Sonya Hepinstall

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