GME - Game Stop Corp

[Guest roark33]

Should be entertaining. Will be interesting to see how much stock they bought back of these past few months.

[Guest roark33]

Looks like GME will survive till the next console launch, no plans for any more stock buybacks, focused on the debt due in 2021, but dramatically reduced inventory, thus providing a significant liquidity boost.  Who knows what happens two years from now. 

[jckund]

Even suspending buybacks, it's looking less likely they will have a cash + liquidity safety net to cover the 2021 bond refinance.

 

$6.5B Revenue, $160M Adj. EBITDA for 2019... doing some quick calcs below. Assuming top line declines another 10% and in addition, they lose 1 month of revenue, we have $5.3B revenue.

 

Did quick calculations that assume they keep GM% constant (could argue this continues to slip), so $1.57B GM, cut opex by 50% in this 1 month period (so $1.5B Opex vs. $1.55B 2019 pre-rent) = $70M, less $250M rent (down from $300M in 2019 due to store closures)= -$180M... now assuming $100M D&A and $100M of opex reductions from ongoing initiatives that the CEO has outlined, we're virtually flat. This doesn't include any capex spend ($80-90M in recent years) or $25ish of interest expense. Maybe we cut capex in half, so we're looking at an operational shortfall of $75M all told. Who knows what happens with WC, but mgmt has done a good job paying down AP and rationalizing inventory, so maybe we're flat... though with 2020 console launches coming, I'd imagine an inventory build is needed here.

 

Either way, the above seems to be a best case and that results in a $75M shortfall + $420M of debt due is equal to their cash on hand today ($500M). They have $270M of revolver availability, but do you really want to draw on this to refi notes? Notes are trading at 70 today...

 

 

Update: Reading the 10-K, it appears $208M of cash is in foreign jurisdictions and won't be available for use in the US...

[Foreign Tuffett]

Even suspending buybacks, it's looking less likely they will have a cash + liquidity safety net to cover the 2021 bond refinance.

 

$6.5B Revenue, $160M Adj. EBITDA for 2019... doing some quick calcs below. Assuming top line declines another 10% and in addition, they lose 1 month of revenue, we have $5.3B revenue.

 

Did quick calculations that assume they keep GM% constant (could argue this continues to slip), so $1.57B GM, cut opex by 50% in this 1 month period (so $1.5B Opex vs. $1.55B 2019 pre-rent) = $70M, less $250M rent (down from $300M in 2019 due to store closures)= -$180M... now assuming $100M D&A and $100M of opex reductions from ongoing initiatives that the CEO has outlined, we're virtually flat. This doesn't include any capex spend ($80-90M in recent years) or $25ish of interest expense. Maybe we cut capex in half, so we're looking at an operational shortfall of $75M all told. Who knows what happens with WC, but mgmt has done a good job paying down AP and rationalizing inventory, so maybe we're flat... though with 2020 console launches coming, I'd imagine an inventory build is needed here.

 

Either way, the above seems to be a best case and that results in a $75M shortfall + $420M of debt due is equal to their cash on hand today ($500M). They have $270M of revolver availability, but do you really want to draw on this to refi notes? Notes are trading at 70 today...

 

Good thoughts. I agree that they are flying too close to the sun.

 

Gross margin was juiced this Q because after the poor holiday sales they pushed tech trades really, really hard. I don't think that is something that is sustainable.

 

https://www.polygon.com/2020/2/19/21132128/gamestop-employees-report-extreme-pressure-desperate-bosses

 

They didn't provide the traditional segment breakdowns this Q, so we can't see all the moving pieces.

 

Although they have never come out and explicitly said this, I think management's plan was to generate cash with store closing/liquidations. Historically GME store closings have typically been done in Q1. The issue right now is that customers can't actually enter the stores. I have no idea how you do a store closing sale when customers can't enter the store.

 

Finally, management's move to keep the store open as "essential" until the new Animal Crossing and Doom games were released disgusts me. The earnings press release stated that "millions of consumers look to GameStop for products that support remote and virtual work and learn settings."

 

You aren't fooling anybody! You sell video games mother*****! A minuscule fraction of sales are headsets that people intend to use to work remotely.

[Jurgis]

Finally, management's move to keep the store open as "essential" until the new Animal Crossing and Doom games were released disgusts me. The earnings press release stated that "millions of consumers look to GameStop for products that support remote and virtual work and learn settings."

 

You aren't fooling anybody! You sell video games mother*****! A minuscule fraction of sales are headsets that people intend to use to work remotely.

 

Are you calling video games non-essential products? People may die from boredom without Animal Crossing and Doom.

 

 

 

 

Why would anyone go to GameStop is beyond me though...  ::)

[RadMan24]

Finally, management's move to keep the store open as "essential" until the new Animal Crossing and Doom games were released disgusts me. The earnings press release stated that "millions of consumers look to GameStop for products that support remote and virtual work and learn settings."

 

You aren't fooling anybody! You sell video games mother*****! A minuscule fraction of sales are headsets that people intend to use to work remotely.

 

Are you calling video games non-essential products? People may die from boredom without Animal Crossing and Doom.

 

 

 

 

Why would anyone go to GameStop is beyond me though...  ::)

 

You would hope they could shop online?

[Spekulatius]

They should report earnings next week, will be really interesting to hear what they say on liquidity.

 

Earnings are tomorrow after the close, actually :)

 

I wouldn’t be too optimistic for this “essential” business:

https://www.bostonglobe.com/2020/03/27/business/gamestop-employees-wrap-your-hands-plastic-bags-go-back-work/?s_campaign=bdc:globewell:trending&s_campaign=bdc:globewell:trending

[thepupil]

With the bonds now trading 4800 over, I’m closing out my useless rhetoric short on which I made approximately $0 because I didn’t have the stones to short $100K notional with a $75K margin requirement. To be clear these bonds outperformed several of my longs (and probably didn’t  do that much worse than other shitty credits, but the HY index is only 900-1000 over, so they worked in that respect) over  this time frame and I’m not really bragging here; but I hope maybe someone out there gave them a go.

 

Was anyone able to borrow/short these in the $90’s? If so, are you holding pressing or covering?

[5xEBITDA]

I went short the bonds at ~99 in the fall and have since covered to free up some liquidity. They outperformed my expectation of trading down to 82 cents (+~1400bps) which would've brought them in line with other stressed retail credits at the time, although I still think the bonds are worth around 50 cents in a restructuring

[jckund]

I went short the bonds at ~99 in the fall and have since covered to free up some liquidity. They outperformed my expectation of trading down to 82 cents (+~1400bps) which would've brought them in line with other stressed retail credits at the time, although I still think the bonds are worth around 50 cents in a restructuring

 

How do you figure 50 cents? I've honestly been looking at these bonds in the 70 range, just having trouble mapping out recovery/rx situations. Not sure buying at 70 is enough upside, but I have to think this business is worth more than the $400m of debt.

[RadMan24]

I went short the bonds at ~99 in the fall and have since covered to free up some liquidity. They outperformed my expectation of trading down to 82 cents (+~1400bps) which would've brought them in line with other stressed retail credits at the time, although I still think the bonds are worth around 50 cents in a restructuring

 

Did you thank the Corona virus?

[thepupil]

Coronavirus caused CDX HY to widen by from 275 bps to 630 bps but GME widened from 500-900 to 4800, indicative of the weakness of the business / confidence therein beyond the general market of dicey credit.

 

CCC’s from the one benchmark I can find appear to be down 23% whereas GME’s bonds are down more.

 

He can thank the coronavirus, but it would be more approproate to thank his security selection or at the very least sector selection ( I see some M bonds down more); also because these were so short in duration, the risk reward was excellent as tightening offered very little upside.

[stahleyp]

How deep does Burry's research go? GME is his top listed position!

 

 

https://twitter.com/michaeljburry/status/1261356790219812864

 

 

 

[kab60]

I don't  understand why anyone would go long the equity. Secular decline plus fixed costs seems like such a sure zero. It reminds me of a very bad version of Outerwall (redbox and coinstar). There you had secular decline but also low fixed costs and an out in Coinstar, which was stable and both threw off a ton of cash. And even then lesson from that one was that when dealing with melting icecubes capital allocation and aligned interests is paramount (or just stay away from melting ice cubes unless it is something like Atlantic Power with contracted revenue).

[johnny]

How deep does Burry's research go? GME is his top listed position!

 

 

https://twitter.com/michaeljburry/status/1261356790219812864

 

 

boomer value investors excited that two different companies are going to be releasing new nintendos in the next year

[Guest roark33]

he has actually sold some since the end of the quarter, filed a 13D/A.  I suspect he was playing for the epic short squeeze, which may just not have been that epic. 

[Foreign Tuffett]

he has actually sold some since the end of the quarter, filed a 13D/A.  I suspect he was playing for the epic short squeeze, which may just not have been that epic.

 

Yeah, his history with GME definitely isn't buy-and-hold, particularity recently. There have been two mini short squeezes since September or October of last year, with both being jump started by Burry's quasi-activist open letters to the board.

[Foreign Tuffett]

Q1 results out. No surprise that they are bad given the COVID situation

 

Check out the deterioration of shareholders' equity over TTM. Even setting aside goodwill writedowns, it has been brutal. I think they are letting inventory run off ahead of additional store closings. Cash balance is higher and inventory # is lower than I expected.

 

At some point in the relatively near future per store inventory is going to have to rise to support holiday shopping season and launch of new consoles. I expect more stores to close in coming months as management attempts to generate cash and shrink the biz down to a more sustainable size.

 

Speaking of stores closing, someone put this site together to track them. Gone but not forgotten!

 

http://gsclosing.blogspot.com/

 

35 locations suffered "extensive physical damage" in the recent American unrest. I am honestly a little shocked by how large that # is

 

Attempting to do an exchange offer for the senior notes

 

 

[johnny]

I am honestly a little shocked by how large that # is

 

unfathomable, considering how largely peaceful the protests have been, the tv tells me every day

[5xEBITDA]

Attempting to do an exchange offer for the senior notes

 

I'm thinking that the exchange offer is going to fail. For a current bondholder, what do you gain and in exchange for what? You get a new senior secured piece of paper at 10% with a 2023 maturity (+2 years). At a current price somewhere between 75 - 80 cents (this thing never trades, hard to tell what a real bid is) you are creating the exchanged piece of paper at a ~20% yield as compensation. You get a first lien collateral package including IP/trademarks and any properties (so distribution centers) and a second lien collateral package on A/R, inventory, etc. behind the ABL facility. Probably the more significant benefit is that the new bonds become structurally senior to operating leases which are currently pari with existing bonds. It sounds like quite a lot of security and a pretty good deal...but then ask, where will this Company be in two years and what will my exit be? To consent to the exchange is essentially a bet that the upcoming console cycle will turn the Company around and everything will be fine after that. Sounds like a lot of uncertainty. Bondholders hate uncertainty. I think bondholders actually have a better shot at preserving value by having this Company file bankruptcy sooner rather than later...the rest of this year is going to be especially brutal for them.

 

If I were a large bondholder (which I'm not) and I thought the console cycle turn will yield massive upside for the Company, I'd be more inclined to counter the Company's exchange offer with a debt for equity swap and ride the upside at a cheaper multiple that way. Unfortunately not going to happen this way.

 

I think that the exchange offer failing (or having very low participation) when they announce initial results on June 17th (correct date?) will result in the stock starting to price in real bankruptcy risk.

 

Edit: I live in NYC and can confirm the GameStop close to my place got busted up last week.

[Foreign Tuffett]

Yeah, if was a bondholder I would want bankruptcy ASAP. This is a company that badly needs to be slimmed down and restructured, and it will probably be easier to do that in bankruptcy. This is a company that has been several years behind on everything, mostly due to having no permanent management team in place for an extended period of time. At some point it is going to have to make drastic changes very quickly in order to catch up to a video games industry that is rapidly changing.

 

Also, the company is attempting to do a sale-leaseback of its HQ and associated warehouse(s)

 

https://my.hfflp.com/GetDocument?DT=DealDocument&ID=227459

 

[Foreign Tuffett]

GME up over 5% at market open is lunacy given that Sony announced after hours yesterday that PS5 would be launching with an all-digital (no disc drive) edition option. Cuts GME out of the loop completely!

[Jurgis]

GME up over 5% at market open is lunacy given that Sony announced after hours yesterday that PS5 would be launching with an all-digital (no disc drive) edition option. Cuts GME out of the loop completely!

 

Wait until it goes BK and then it goes up 300%.

[Foreign Tuffett]

Just to add some color:

 

"At PS5’s launch, we will offer two options: a PlayStation®5 console with an Ultra HD Blu-ray disc drive and a PlayStation®5 Digital Edition without a disc drive. The PS5 gameplay experience will be the same, so the choice is all yours."

 

https://blog.playstation.com/2020/06/11/ps5-showcase-recap-everything-you-need-to-know/

 

 

"Many of our consumers are purchasing solely digitally these days. We thought that we would do what we typically try and do, and just offer choice."

 

https://www.gamesindustry.biz/articles/2020-06-12-jim-ryan-ps5-digital-edition-exists-because-many-consumers-purchase-solely-digitally

[Guest roark33]

Isn't this just like the last Xbox though that had two version, one without the disc drive and the other with it?  Disclosure: I have never played a video game in my life.