GameStop (NYSE:GME) - Game Over or Respawn?
GameStop (GME) announced results on Mar. 28. On both top and bottom line, the company beat expectations, though the picture is not all rosy.
Much of the sales beat was attributable to the widely successful launch of the Nintendo Switch console, but Apple iPhone X and AT&T partnership overall countered the upside. In fact, an estimated $340 write-down ($3/share) was required to properly value the segment.
GameStop is one of those classic multi-month and year downward trending companies. A quick glance of the 3-year chart suggests why investors have given up or are ready to capitulate.
Key valuation ratios: Price to book: $.61 Price to earnings: $4.98 Forward PE (consensus): $3.93 Debt to Equity: .37 Price to sales: $.15 Dividend Yield: 11.52% Free Cash Flow: $321m
The company enjoys alarmingly good value investing ratios compared to its stock performance, but is suffering from the symptoms of lack of growth potential and industry destiny. Physical cartridges and discs is becoming more of a thing of the past, similar to how Netflix displaced Blockbuster video tapes. Online gaming popularity continues to explode, but the method of purchasing games bypasses brick-and-mortar locations in favor of digital payment and instant downloads.
Each time I visit a local GameStop store on the weekend, it is uncomfortably packed and I feel like a <insert your favorite sport team> fan in a dive bar during the playoffs. Especially at some of their 'micro' locations, it can get messy, loud and rowdy. The traffic exists, but isn't enjoyed throughout the entire network.
The Turnaround Begins?
Knowing that the financials can not hide what is really going on, leadership is working on the execution of a 5-pronged turnaround strategy.
1. Halting new investment to refocus on existing business
GameStop's new CEO Mike Mauler described the negative effects of its previous expansion efforts in the technology brands space, and the upside of reorganizing its operating structure and closing underperforming stores:
The extremely fast store count growth through close to 40 acquisitions did pressure internal systems, business processes, and the organization's capabilities. All of these steps will allow the team to focus on operational improvements in the retail portfolio that [have] potential for long-term growth.
2. Hardcore gamer expansion: Fanatics = Revenues
GameStop needs to grow sales from its core audience will likely sink effort into refining its membership program and mining value from those who are already members. Mauler addressing this point:
These areas are being addressed, as well as continuing to improve our video game and collectibles categories. In 2017, our pre-owned business was down nearly 5% [compared] to the prior year. This is a business where GameStop has a built-in advantage. Leveraging our loyalty program, trade credit benefits, and the expertise of our sales associates, we can engage our core customer and provide value unlike any other retailer.
GameStop's PowerUp Rewards members account for an estimated 70% of sales in the collectibles segment. Hence, focus on Fanatics, they drive revenue.
3. Expanding with the casual consumer
An estimated 50% of U.S. adults play games, according to a study by Pew Research. CEO on addressing the untapped population of gamers:
We need to expand our customer demographics, and when we develop that strategy, we need to change the shopability of our stores to be a better value proposition to moms and families, for example. We need to expand our range of cool and relevant products and the type of merchandise we sell, so when we bring in these new customers, that once we get them into the GameStop ecosystem, that we can market other products to them.
GME will seek to grow in the apparel market and get casual customers more involved in the trade-in process by increasing promotional outreach.
4. Improving average transaction value
In addition to reaching new customers, the company is also looking at ways to increase the average value of each sale. Here's Mauler on tactic 4 of the company's strategy:
And, finally, a better attach rate -- once we get these new customers into our stores and expand that demographic, making sure that we're increasing the average transaction value through warranties and accessories. So those are just some examples of the areas that we would want to focus on.
Getting Nintendo Switch owners more involved in the trade-in ecosystem and ramping up its promotional campaigns will also likely be important for the company on this front.
5. Cutting operating expense and margin focus
Cost-cutting is key to preserving cash position and maintaining shareholder value. The company's outlook for the technology brands segment in relation to AT&T's compensation packages, store closings, and other expense-reduction initiatives:
We believe that AT&T is a good partner and we are in discussions with them to improve the compensation plans. Both partners want the other to succeed, and I believe we will find improvements that will [be] a win-win for both companies. In the interim, we have taken several steps to improve the profitability of this division, including the sale of our Cricket Wireless stores, the closing of underperforming AT&T locations, and the reorganization of our operating structure.
In 2017, GME shuttered 131 video game stores and downsized its technology-brands by 80 locations. To start 2018, 65 Cricket Wireless locations have been divested. As a counter, the company opened 17 new collectibles stores, bringing the total to 103.
Company Profile
Employees: 1,500+
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