GME - Game Stop Corp

[IanBezek]

I just sold my GME for a 15% loss including dividends. Happy to get out on this decent M&A bump. Company has clearly been for sale for a year now and there hasn't been a rush by PE to buy it. Business is eroding, the mobility acquisition was really bad, and malls are dying faster than I anticipated when I put this position on (2017). GME is in a LOT of bad malls. With Bon-Ton and Sears dead and JCP likely following soon, hundreds of low-end malls are closing within a few years now.

[Foreign Tuffett]

9W holiday season results announced today. A close inspection of the press release reveals that it doesn't have sufficient info to enable true Y/Y comparisons. Market clearly likes that management reaffirmed adjusted EPS guidance. I'm significantly more circumspect, for the following reasons:

 

- Used/value segment Y/Y sales declines continue to accelerate. I continue to believe this segment is in secular decline.

 

- GME's accessories segment has been a huge beneficiary of the gaming headset boom. While these do have a tendency to break and need replacement, at some point the market is going to be saturated and growth will decline, or even halt entirely

 

- Growth in collectibles revenue is decelerating rapidly

 

- 2018 adjusted EPS guidance includes the Spring Mobile segment.

 

[Foreign Tuffett]

No sale. Looks like no one wanted to finance a buyout.

 

"GameStop’s Board has now terminated efforts to pursue a sale of the company due to the lack of available financing on terms that would be commercially acceptable to a prospective acquiror."

 

 

https://gamestop.gcs-web.com/news-releases/news-release-details/gamestop-concludes-process-pursue-sale-company

[5xEBITDA]

Geez, says something if Apollo/Sycamore can't figure out how to make this work. The '19 bonds look really good for safe ~9 month paper at 5.5%.

[Foreign Tuffett]

To paraphrase "The American Dream" Dusty Rhodes: If you're bad, and you know you're bad, don't repurchase your own shares. I think they should just dividend out their excess cash instead of doubling down on a business that is largely in secular decline.

 

https://gamestop.gcs-web.com/news-releases/news-release-details/gamestop-declares-quarterly-cash-dividend-announces-intent

[Foreign Tuffett]

Another poor earnings report. Declines in the pre-owned games business continue to accelerate. Yes, they have lots of cash on the balance sheet, but due to working capital seasonality much of that cash will be gone when they release Q1 2019 results.

 

http://news.gamestop.com/news-releases/news-release-details/gamestop-reports-fourth-quarter-and-fiscal-2018-results-and

 

I agree with the activists that they may be able to cut some corporate-level SG&A costs, but the stores are already run on minimal hours + GME already pays low wages, even by retail standards.

 

Finally, based on their "2019 Outlook" we can expect more disappointment. The problem, as I've mentioned previously in this thread, is that the core of their business is in structural decline. Yes, they can sell collectibles and other things in their stores, but many (most?) of their stores are so small that they quickly become "unshoppable" when you fill them with physical merchandise.

 

What they need to do is be more aggressive with store closings. There is a group of customers who still do the buy-trade-buy thing. GME needs to try migrate these customers to a significantly smaller store base. 

 

 

[valuedontlie]

A local investor near me had great success owning a nationwide movie distributor during the height of Blockbuster's struggles. The business pooped out cash and he sucked it dry by taking distributions and keeping overhead to the bone. Wound up being a phenomenal IRR by the time the business had to permanently close.

 

GME sort of interesting given the B/S isn't bad. These guys have wasted a ton of money in buying back stock and that should stop immediately. This business will eventually be game over.

 

That said, keeping costs low and adopting a slow-playing liquidation might entice me. Take a variable payout policy and distribute all cash back to shareholders every year until the whole thing goes kaput. Recognize it for what it is and stop trying to chase "growth"

 

Wishful thinking...

[Foreign Tuffett]

Two predictions for GME's earnings announcement after the market close:

 

1) Dividend will be cut, or even eliminated completely

 

2) The word "transformation" will be used liberally

[Ballerx]

If GME actually devises a strategy that's currently under work, they might reduce the dividend slightly or not at all, and guarantee that the dividend is well covered and that the company has no intention of further reducing the dividends. The stock will likely rise by 50% to compensate for the dividend yield, and financing through equities will be the cheapest form of financing GME will ever get under its current condition. Looks like a better bet than eliminating dividends, which is only a 150 to 160 million boost per year, probably not enough if they want to go all in for e-sports. At this point, it's probably "go big or go home".

[Foreign Tuffett]

Two predictions for GME's earnings announcement after the market close:

 

1) Dividend will be cut, or even eliminated completely

 

Dividend eliminated

 

2) The word "transformation" will be used liberally

 

Second sentence of the press release: "We believe we will transform the business and shape the strategy for the GameStop of the future"

 

http://news.gamestop.com/news-releases/news-release-details/gamestop-reports-first-quarter-fiscal-2019-results

[5xEBITDA]

I think the stock will continue to trade at a significant discount to its balance sheet due to a lack of confidence in management's strategy.

 

Points from the conference call I picked up on:

 

They do not plan to make any acquisitions. There was once a time (last year?) where the chatter was that GME was going to transform itself into a holding company of various retail concepts. When they sold the AT&T locations that went out the door. Management stated they plan to stay within the video game vertical. I'm not sure there is anything they can buy that will make a difference for them in that space.

 

They are re-evaluating the value proposition of their used game business for their customers. This was the biggest alarm bell for me. GME does not have pricing power on used video games, the only lever they can pull is to offer games at a cheaper price. I've previously written about my views on new video game pricing - it has to go down. They will have to sell used games at lower prices, I think gross margins on that business will be 500-1,000bps lower going forward. Can they make it up on volume? That is the hope, but losing that margin takes a huge chunk of your cash flow away.

 

Management said they want debt / EBITDA in the range of 1x - so is that a weird guide for ~$350-400mn EBITDA? Not great.

 

Buybacks are off the table. The dividend goes without saying, but so many people were hoping for a buyback. Literally handfuls of articles and hundreds of comments on SeekingAlpha hoping they were going to buyback like $100mn of stock this quarter? Crazy.

 

On the cost savings plan - first, I'm not sure why you needed to spend the money on getting opinions from three different consulting firms on this. But its a moot point. At the end of the day, the market does not care about higher EPS or free cash flow. Why? Because this is a business where the terminal value is in question. The stock price will not react to incremental EPS accretion from this cost savings plan if revenues, comps, and gross margins continue to decline. What does an extra $100mn get you? Maybe another year or two of cash burn, but its just kicking the can down the road. They're certainly not going to distribute it to shareholders.

 

This has been trading at a discount to book value for a long time, and the discount is only going to get greater. When cash makes up such a substantial % of your asset value, the discount is the markets way of telling you that the cash is not going to be there and management will destroy it.

 

I think the stock will be pretty volatile from here on out, it could be fun to trade on earnings but thats it.

[mwtorock]

i am not sure i understand the discount to Balance sheet. Book value is not really meaningful for a retailer. Even tangible book value does not work as store related fixed assets are not worth much. There is not much cash left after offsetting the long term debt. Maybe we can look at net net, but 500m market cap is still far away from a net net situation.

[5xEBITDA]

I agree with you, this isn't something you can look at on a NAV basis. Especially because after incorporating operating leases your residual value to equity is negative. Lots of chatter on this name has previously focused on the stock selling at a discount to tangible book, etc., but a big reason for that is because balance sheet cash is very seasonal.

[aws]

I'm surprised the borrow fee to short the stock is basically nothing even with 40% of the float short.  I was thinking there might be an opportunity like with SHLD to make some money betting the move to zero won't be overly quick by shorting very expensive puts, but there's no skew on puts without a high borrow fee.  Weird, considering stocks I've wanted to short with much lower short floats had much higher borrow fees.

[MrB]

I agree with you, this isn't something you can look at on a NAV basis. Especially because after incorporating operating leases your residual value to equity is negative. Lots of chatter on this name has previously focused on the stock selling at a discount to tangible book, etc., but a big reason for that is because balance sheet cash is very seasonal.

 

Fleshing this out further; it's all about discounted cash flows and book value is only relevant insofar it indicates cash flows. If I buy a company which only asset is a plot of land then the only use the stated book value has is insofar it turns out to be an accurate indicator of the cash flow when the land is eventually sold.

 

So the question to ask is what does book value tell me about future cash flows. In the case of a retailer in general and especially in this case book value is a poor indicator because a) stated book value v realizable book value (cash flows) is very different in the case of inventory, receivables, fixtures and fittings, etc and b) book value does not capture operating lease obligations properly.

 

So in some sense it's not about book value, but it's about the cash flows it generates. In the case of GME book value is a headfake.

 

[Castanza]

Anyone know if Burry still has his position? At the end of 2018 he still had 538k shares. I find it hard to believe he would still be holding, but it was also hard to believe that he bought in the first place....

 

I don't understand this company, their business model, future and how they manage to stay afloat. Revenue hasn't really decline too much since their peak in 2011. But cash flow continues down. And I simply don't see how they add any value to gamers. If Microsoft or Sony were to announce new consoles which didn't have disk readers you can imagine what that would do to $GME. I just don't see how his is sustainable with collectibles and console sales.

 

Someone convince me why I shouldn't short this company with 2021 LEAPS.

[5xEBITDA]

He grew his position by 20% b/w 1Q19 and 4Q18, actually.

[mwtorock]

Anyone know if Burry still has his position? At the end of 2018 he still had 538k shares. I find it hard to believe he would still be holding, but it was also hard to believe that he bought in the first place....

 

I don't understand this company, their business model, future and how they manage to stay afloat. Revenue hasn't really decline too much since their peak in 2011. But cash flow continues down. And I simply don't see how they add any value to gamers. If Microsoft or Sony were to announce new consoles which didn't have disk readers you can imagine what that would do to $GME. I just don't see how his is sustainable with collectibles and console sales.

 

Someone convince me why I shouldn't short this company with 2021 LEAPS.

 

With 50% short and price already below 5, the risk reward does not look like favor the short side to me. Even through puts or leaps, best/worst scenario outcome rate is 100%:100%.

[Foreign Tuffett]

If I were GME's CEO I would be exploring converting to this type of business model.

 

https://www.businessinsider.com/toys-r-us-will-open-stores-for-2019-holiday-season-2019-7

 

GME struggles to produce sufficient gross profits anywhere except its used games segment (which is in an increasingly rapid secular decline). However, many GME stores still get plenty of foot traffic.

 

Why do approach (for instance) ATVI and say "we'll charge you a flat rate and our stores will become highly cost-effective advertising and sales centers for your products. For the next 3 months the upcoming COD game will be recommended to every adult customer that enters one of our stores and our associates will attempt to upsell customers to collectors editions, etc."

[5xEBITDA]

Because ATVI / EA make more money from digital downloads and have zero incentive to boost sales to GameStop where they make lower margin on products and are already unhappy with their arrangement.

[Foreign Tuffett]

Because ATVI / EA make more money from digital downloads and have zero incentive to boost sales to GameStop where they make lower margin on products and are already unhappy with their arrangement.

 

While I agree with what you're saying, I think you are missing part of my point: It's about advertising, increased product awareness, and boosting sales in every channel. Product awareness and sales conversion are weaknesses of consumer-facing, fully digital business models. Having a meaningful physical presence can help.

 

Also, GaaS business models mean that publishers want to sell (or, in the case of F2P business models, have gamers download for free) an increasingly strong incentive to move as many copies of their games as possible. Why? Because, all else equal, more unit sales = more overall spending on DLC packs, loot boxes, and other digital horses***.

 

Would what I'm suggesting actually work? Probably not, but it's likely still a better plan than betting on e-sports.

[5xEBITDA]

Because ATVI / EA make more money from digital downloads and have zero incentive to boost sales to GameStop where they make lower margin on products and are already unhappy with their arrangement.

 

While I agree with what you're saying, I think you are missing part of my point: It's about advertising, increased product awareness, and boosting sales in every channel. Product awareness and sales conversion are weaknesses of consumer-facing, fully digital business models. Having a meaningful physical presence can help.

 

Also, GaaS business models mean that publishers want to sell (or, in the case of F2P business models, have gamers download for free) an increasingly strong incentive to move as many copies of their games as possible. Why? Because, all else equal, more unit sales = more overall spending on DLC packs, loot boxes, and other digital horses***.

 

Would what I'm suggesting actually work? Probably not, but it's likely still a better plan than betting on e-sports.

 

I agree that F2P = more volume needed, but I also don't think that the ATVIs of the world are going to be very quick to slash pricing on, say, COD to the extent they need more advertising to drive volume. If anything, the publishers have shown themselves to be very slow to adapt to this thing and I don't see them suddenly altering course and ripping off the band-aid on pricing so quickly.

 

[Foreign Tuffett]

After disparaging this company for years, I finally took a little nibble today @ $3.58. My reasoning is as follows: After adjusting for the recently completed tender offer AND excluding operating lease liabilities, the stock trades very close to NCAV, which is quite rare for a US-based retailer that isn't teetering on the verge of bankruptcy.

 

Konnichiwa GME, congrats on being one of the select few US companies that the market is valuing like a tiny Japanese dumpster fire.

 

 

[mwtorock]

Do you think the NCAV will shrink or grow? If it shrink, stock price would follow. I mean I like the balance sheet and the cheapness is very tempting, but it is hard for me to see the business turns around this year...

[Foreign Tuffett]

Do you think the NCAV will shrink or grow? If it shrink, stock price would follow. I mean I like the balance sheet and the cheapness is very tempting, but it is hard for me to see the business turns around this year...

 

It's probably going to shrink faster than....a.....certain part of the male anatomy in an ice bath.

 

I was able to sell the small position at > $3.70 this morning.