GME - Game Stop Corp

[hobbit]

This looks absurdly undervalued..volatility in market might price it even lower..very interesting

[Foreign Tuffett]

My basic take on my the market is pricing this at a very low multiple of 2017 results:

 

* lots of operating leverage + declining core business (physical video game sales, particularly used games)

* console video game publishers and the two largest OEMs (Sony and Microsoft) would probably like to see GME fade away entirely

* questionable if their core business has terminal value.

* weak 2018 guidance

 

This might bounce at some point due to the undemanding valuation, but I think there's a good possibility that it continues to be a value trap long term.

 

[Foreign Tuffett]

My basic take on my the market is pricing this at a very low multiple of 2017 results:

 

* lots of operating leverage + declining core business (physical video game sales, particularly used games)

* console video game publishers and the two largest OEMs (Sony and Microsoft) would probably like to see GME fade away entirely

* questionable if their core business has terminal value.

* weak 2018 guidance

 

This might bounce at some point due to the undemanding valuation, but I think there's a good possibility that it continues to be a value trap long term.

 

Another possibility is a private equity take out. Apollo bought Redbox in 2016, I could see them being interested in GME at the right price.

[Nell-e]

Could be the next Radio Shack

[kab60]

I Thing Apollo is a likely suitor at the right price, but Redbox was a much better setup (and I talked with an Apollo guy who said it hs been a good investment). Redbox just needed sensible capital allocation (milk for cash), operating leverage was low and Coinstar was downside protection. GME has high operating leverage  (though short leases are a big plus), and it might be a donut eventually (no terminal value). If one considers investing, ask yourself if you'd be interested without the dividend yield.

[Foreign Tuffett]

One last thought on GME. Specifically, why I think the market is being basically rational in pricing it at a very low multiple of TTM results.

 

The below link is to a 2013 article. The gist of the article is that, in the lead up to the Xbox One's release, Microsoft backed off from implementing multiple design features that would have severely restricted the console's ability to play used game discs.

 

https://www.polygon.com/2013/6/19/4446060/xbox-one-drm-used-games-online-restrictions-180

 

Much has changed in the past 5 years, nearly all of which makes it much less likely that the console OEMs will have to back down next time. Internet speeds are, on average, faster. More importantly, the proportion of console video games that are purchased in digital only form has gone from very low (near zero?) in 2013 to ~35% today. While there is a vocal minority of gamers that remain adamant in favoring physical games due to the ability to resell or trade them in, it seems fairly clear that they aren't going to be able to hold back the tide much longer.

 

While nothing has been announced, the next gen Xbox and Playstation consoles will probably launch in 2020. If, as seems likely, they heavily eliminate or restrict used games, either by not having disc drives and/or via DRM software, GME's core "circle of life"* and used games businesses will be crushed. What's the correct price for GME shares if its core business has only nominal value 3 years from now?

 

* Circle of Life is the phrase GME's uses for its basic business model of (1) gamers buying a new game (2) later exchanging that (now used) game disc in towards the purchase of another game (3) repeat ad infintum. The idea is to encourage frequent visits to GME stores via allowing gamers to easily monetize games they're bored with.

[doughishere]

Im a gamer......currently play about 15 hours of pubg a week, never touched fortnight but watch it on twitch occasionally.

 

 

Why should I buy my next game from gamestop? any pc game ive been getting ive downloaded via steam or from the developer(think starcraft 2 and whatever app blizzard has, ps4 console store or xbox live store or what ever the current equivalent of those are). if i get a new console....dont really see myself doing that but lets say I do get a new nintendo(i believe there are people that do that) why would I choose GME over amazon or walmart or meijer or any other place(ebay, any other online store) bestbuy.....why as a gamer would i go to gamestop?

 

 

i would honestly rather "invest" in an item at the fortnight Item Shop item than in gme.....so why should I go to gamestop for my games? If im a 12 year old kid why would I have my mother drive me to a game stop instead of the other mentioned places?

 

my point is is that GME is like 15th on the list of places I would go to...if I was getting a new released consol....lets just say i wanted to "wait in line" opening day like all the other fanboys....why go to GME 1st?

[pcm983]

anyone following post deal today?

 

700mm for mobile biz which is ~700mm of sales.

 

U.S. remainco looks like 4bn of RR sales and maybe ~100mm of RR Op Profit.

 

remaining TEV looks lik 1.25bn, with likely lower debt profile

[Foreign Tuffett]

anyone following post deal today?

 

700mm for mobile biz which is ~700mm of sales.

 

U.S. remainco looks like 4bn of RR sales and maybe ~100mm of RR Op Profit.

 

remaining TEV looks lik 1.25bn, with likely lower debt profile

 

- Capital structure starts to look much better once this transaction closes. Obviously they have lots of operating leases, so there's hidden leverage. New accounting rules mean that this leverage won't be hidden for long.

 

- Management has hung a "for sale" sign up. Disposing of Spring Mobile makes the company a more palatable acquisition target

 

- The single most important metric to watch is their "pre owned and value video games products" segment gross profit. Historically it has been their cash machine, but it's facing secular challenges.

[actuary]

anyone following post deal today?

 

700mm for mobile biz which is ~700mm of sales.

 

U.S. remainco looks like 4bn of RR sales and maybe ~100mm of RR Op Profit.

 

remaining TEV looks lik 1.25bn, with likely lower debt profile

 

Remainco rr op profit is much higher than that, right? 2017 operating earnings excl tech brands was ~$450 million.

 

Even after the pop yesterday, this thing looks cheap as dirt. Deal appears excellent as the market was not valuing this segment anywhere near 7x ebitda. Hopefully a sign of good capital allocation to come.

 

Good probability pe guys take this out before commoners can benefit too much, similar to OUTR. We'll see how much backbone the board has...

 

Regarding the used/value games, it's interesting to look back at the media narrative from a decade ago. We can argue about the tail left from here, but it seems clear the tail has been longer than most were expecting years ago. So what is the appropriate "base rate" for a forecast? Also thinking Mr. Market overestimates the operating leverage... all those units and short leases give much flexibility, and they have a good track record of managing down the unit count.

 

It will be interesting to see how much they benefit this holiday season from no toys r us.

 

If this isn't taken out and they can do substantial repurchases around this price and the core business continues to run off at controllable pace, this should be a multibagger over the next couple years. Meanwhile you clip the 11% div yield at this price, and there is no reason to consider cutting after the Spring sale.

 

[actuary]

 

Good probability pe guys take this out before commoners can benefit too much, similar to OUTR. We'll see how much backbone the board has...

 

 

Really interesting analysis. What happened with OUTR?

 

Sold to Apollo at around 2x the low but still way too cheap. Good thread on here...

[writser]

Tempted to agree it seems cheap. In their earnings press release (last page) they give operating earnings / segment (adjusted for impairments etc.):

 

2016: technology brands segment adjusted EBIT 90m. Total adjusted EBIT 618m (15%).

2017: technology brands segment adjusted EBIT 76m. Total adjusted EBIT 535m (14%).

2017 h1: tech brands adjusted EBIT: 33.4m. Total adjusted EBIT: 145m (23%).

2018 h1: tech brands adjusted EBIT: 31.5m. Total adjusted EBIT: 91.3m (35%).

 

So the sold segment was relatively small (to be fair it had way better margins than the rest). Last 6 months look very bad but the business is seasonal so I find it hard to draw a conclusion about the 6 month results of the remainco. What's left is obviously not a quality business but the company is pro-forma more or less debt free, assuming the operating leases don't turn out to be disastrous liabilities and with a market cap of $1.4b you buy the remainder at a ~2.5x EV/ 2017 EBIT multiple. Company has also consistently generated a boatload of free cashflow the last few years (~$400m / year the past five years).

 

Thing for me is that I find it hard to judge future declines in sales and even harder to judge the influence this decline will have on profitability / cashflow generation. I remember looking at this 4 years ago and thinking that it was cheap as well. I don't want to be the sucker buying Sears in 2012 .. Still, if you buy this at 2.5x 2017 EV/EBIT and 5x 2017 FCF or something like that it seems cheap even if you factor in a substantial decline.

 

Painful to see how they basically took on 800m of debt to buy back shares at $30 - $40 a few years ago and now with shares at $10 they lack the cash / guts to buy back more and start selling assets ..

[5xEBITDA]

Pretty disappointed in the decision to sell the Tech Brands division. Weakness in this segment and subsequent impairment was primarily due to changes in the commission structure which emphasized DirectTV sales. That backfired and they've changed the structure back to how it was. Because GME was, I believe, the largest third-party operator of AT&T stores they actually had negotiating leverage against AT&T. I think the only AT&T-owned stores that did better than GME were the locations in Manhattan. Very valuable business in the right hands.

 

I think selling this business dashes any hopes of a private equity buyout as well. It would've been very easy for a buyer to acquire GME and then carve-out Tech Brands in a transaction similar to this if they had wanted to. Now, there are not any hidden assets that can be unlocked.

 

Why would PE want to own this business now? All you have is the legacy game business which, in my opinion, does not have terminal value (including used games). Video game publishers hate the fact that GME exists because they want distribution to be 100% digital, and they also do not get any margin on used games. Publishers and platform providers are looking at ways to vertically integrate their positions in the value chain even more than what they currently are, and getting rid of the GME relationship is a high priority.

 

What we'll have to see now, probably on the earnings call, is what management decides to do with the $700mn they're getting for Tech Brands. I'd prefer the Company pay down debt with these proceeds, but they are not required to by their indenture. I think the risk of management blowing it doing something stupid is pretty high. I've heard some suggestions that they will try to acquire their way into other high quality, non-Amazonable retail businesses and transform into more of a holding company, but if that was the plan then why sell Tech Brands in the first place? They definitely had cash to acquire other businesses without it. 

[Ahab]

My two cents on this company is that the core business is in terminal, irreversible decline. Think Blockbuster or Hollywood Video. Back in middle school, I used to love going to Gamestop on the weekends. This was when nearly all videogames were only on disc and when it was still hard to find certain titles used online. Today, I haven't bought a game from Gamestop in nearly five years. If I absolutely have to get a disc, I  buy it on Amazon or Ebay. Otherwise, I just download games from Playstation Network. Bottomline, I think Gamestop's business will fall off the cliff sooner rather than later.

[gfp]

I don't follow this stock or invest in retailers, generally speaking, but thought I would post that I have just done business with them for the first time and it might anecdotally contribute to some upside surprise if others are like me.  I purchased a physical copy of an Xbox One game - Red Dead Redemption 2 - for my Son which in it's "Ultimate Edition, Physical disc" form is a Game Stop exclusive.  This title is a fairly new release and has sold extremely well - so if others are like my son and want a physical copy of the ultimate edition, which includes some extra gobbledygook (can you tell I'm not a game player?), GameStop could have a positive holiday surprise.  I also purchased the Xbox One version of Grand Theft Auto 5 because I am told my Son only has the Xbox 360 version and it remains a popular game with him and his friends.

 

Kids these days... Spoiled rotten

[Foreign Tuffett]

Up significantly today on strong estimated industry-wide Black Friday sales + Merrill (which has been very bearish) upgrading to neutral.

 

 

[Foreign Tuffett]

Just released earnings; stock is down significantly after hours.

 

As I mentioned in a previous post, I think the single most important metric for GME is their "pre owned and value" segment gross profit. This clocked in at a -14.3% Y/Y decline this Q. The declines in this segment, which until this FY were manageable, are looking increasingly dire.   

 

 

 

 

 

 

[5xEBITDA]

Not surprised with the guidance cut...probably should've been anticipated after EA/ATVI this Q.

 

Good to see Tech Brands post a strong Q after they got a couple wrinkles ironed out. Tech gross profit, as a % of total, is nearly as big as pre-owned games (20% vs. 24%) and made up a quarter of total operating earnings for the Q. I'm not sure how much of the guide cut is weakness in video games vs. exclusion of tech brands going forward.

 

Of course the SS is pushing for share buybacks. I can't see how that makes any sense at this point. The focus needs to be on diversifying into another business line, but I'm concerned they'll try to reinvest into the video game business.

 

I'm sure what is likely to happen is the Company will buy something else, and then retain the ~$450mn cash on their balance sheet in order to refinance their debt. I don't think they'll be able to refi at an affordable rate without having a substantial amount of cash on their balance sheet, so it doesn't make sense for people to think they'll announce a big buyback or other form of shareholder return until thats wrapped up.

 

$350mn 2019 bond is due next October, so that is clearly the next thing to take care of here.

 

 

[Foreign Tuffett]

Just released earnings; stock is down significantly after hours.

 

As I mentioned in a previous post, I think the single most important metric for GME is their "pre owned and value" segment gross profit. This clocked in at a -14.3% Y/Y decline this Q. The declines in this segment, which until this FY were manageable, are looking increasingly dire. 

 

To follow up on this, I think the most telling exchange on the CC was the below:

 

"Anthony Chukumba

 

I had one question and one follow up. In terms of my primary question, I thought you said something interesting in terms of the weakness in used and that you specifically mentioned that digital access to older title is hurting your pre-owned software sales growth. Is that a more recent phenomenon because I know if I recall historically, new sales is really tied to the inventory. If you had the inventory you could sell it. And so, I'm just wondering how recent of a phenomenon this is?

 

Shane Kim

 

We are seeing more of the impact of that in recent months and it does have to do with how customers can get some of those older titles, the very inexpensive titles that you can get through either subscription memberships or online in a pretty heavily discounted mode."

 

Playstation Now and Xbox Live Game Pass (among other things) are cannibalizing GME's best segment by providing access to loads of older titles for an affordable monthly rate. The value proposition is obvious: pay ~$20 per used game, or pay ~$20 per month for access to 100+ games, with more games being added regularly. 

 

There's not much that GME can do about the above. It's trying to pivot towards collectibles, but has been hamstrung by a thoughtless merchandising strategy that has loaded the stores up with mountains of cheap trinkets. What they need is a more curated assortment that acknowledges the realities of small box retail.

 

 

[Jurgis]

Playstation Now and Xbox Live Game Pass (among other things) are cannibalizing GME's best segment by providing access to loads of older titles for an affordable monthly rate. The value proposition is obvious: pay ~$20 per used game, or pay ~$20 per month for access to 100+ games, with more games being added regularly. 

 

I think you are right in general.

 

From a very casual gamer dumpster diving value investor point of view though, ~$20 per month is not as good as ~$20 per used game, since a game can last couple months.

 

But then we are getting free games on Xbox Gold, which has fewer than 100+ games, but still mostly enough. Plus one or two discounted games either directly through Xbox store or through Amazon/etc.

 

None of this is good for GME.

[Ahab]

To me the elephant in the room for Gamestop (as a young guy and casual gamer), is that the ways people are purchasing games are fundamentally changing. First, it has taken a while, but download speeds have gotten pretty good. You can download the next Call of Duty or Madden in under an hour. I don't need to leave my house and go to the mall to make an impulse video game purchase like I had to in the 8th grade. Secondly, Amazon or Ebay fulfill basic functions in this retail category quite well. I can get pretty much any title new or used shipped quickly to my door. Third, as digital delivery becomes more and more common, Gamestop will continue to lose the buyers and sellers of used discs which allow it to generate a generous profit. Thus, I don't see a moat in terms of game price, game selection, or purchasing convenience. I think GME is a value trap, although there is a debate to be had about the speed of the decline and corresponding capital allocation. My mind is always drawn to a low multiple, but in this case I have Blockbuster and Hollywood Video for reference. There is a Greenblatt lecture in which one of his guests discusses the machinations of the video rental industry (i.e rollups and PE activity) and it was amusing to read this past summer because none of those companies are around any more. On an investment basis, disruption ultimately overwhelmed an attractive purchase price.

[Foreign Tuffett]

Up strongly today on WSJ article on continuing talks with Apollo and Sycamore. Deal "could be announced by mid-February."

 

 

 

 

 

[Ahab]

I thought I'd share these videos I came across on Youtube. Obviously, the musings of disgruntled former employees should be taken with a grain of salt. At the same time, it seems like Gamestop has alienated a sizeable number of gamers. The thing that jumped out at me from these videos and others I have watched about the company is their reliance on questionable sales tactics to make a buck.

 

[Foreign Tuffett]

I thought I'd share these videos I came across on Youtube. Obviously, the musings of disgruntled former employees should be taken with a grain of salt. At the same time, it seems like Gamestop has alienated a sizeable number of gamers. The thing that jumped out at me from these videos and others I have watched about the company is their reliance on questionable sales tactics to make a buck.

 

 

I actually think that the plethora of highly viewed YouTube videos with "Gamestop" in the title argues for GME's continued relevance, albeit only weakly. There are several ex GME employees that make video after video on the company because that's the only way that they can keep their channels alive.

 

More generally, at $16 GME is, IMO, a buyout play. If you feel that a transaction will happen, then you may want to own it. If you don't think a transaction will happen, then you probably don't want to own it.

[Ahab]

I think you are probably right that the fact that so many people still talk about Gamestop implies at least some continued cultural relevance. However, many of the Youtuber's trashing the company primarily focus their channel's content on game reviews & playthroughs. At the same time, the occasional video trashing Gamestop is always good for lots of comments, likes and clicks. Anecdotally, I feel that the ire many gamers are expressing towards Gamestop is not a good sign for the company's already limited moat.

 

In regards to buyout news, nothing to add. Hope it happens for the sake of current shareholders.