GAMESTOP CORP GME
May 10, 2019 - 10:17am EST by
bdad
2019 2020
Price: 8.49 EPS 1.91 2
Shares Out. (in M): 102 P/E 4.5 4.2
Market Cap (in $M): 869 P/FCF 4 4
Net Debt (in $M): -799 EBIT 0 0
TEV ($): 70 TEV/EBIT 0 0

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  • Terminal Zero
  • 4th grade book report
  • Value trap

Description

 
Company Description:
The Company is a retailer of video games and related consumer products. The Company has 5800 stores in 14 countries (~1/3 of store base is international) under the GameStop, Think Geek and Simply Mac brands (although the former two represent only 41 and 43 doors, respectively). They recently completed the sale of their Spring Mobile retailer to Prime Communications for $728MM which closed in Q119.
 
  
Why this opportunity exits:
Like many physical retailers, GME has suffered from a shift in consumption to online channels which, in GME’s case, was exacerbated by the advent of digitally downloaded games which have taken share from physical discs as well as the extended nature of the current generation of consoles (Xbox and PS4 are ~6 years old and are expected to see next generations introduced within the next 18 months). GME is hardly a growth story and does have structural problems, but it is also a solid cash generator trading at essentially nil value. 
 
Financial Profile:
 
A few things to note about financials:
o Sales of hardware and software have been under pressure as customers shift to other retailers and/or download games. ~45% of console games are currently
downloaded (+5% from ’18) and this figure will continue to rise.
o But the company has been able to offset much of this pressure with increases in accessories, collectibles and high margin digital sales.
o Also the pre-owned and value game segment is an interesting item. The pre-owned ecosystem is one that doesn’t exist with downloaded games so that a $60 copy of a physical game with a $20 residual value has a $40 net cost to the consumer which effectively makes the game 1/3 cheaper than the digital version.
They recently brought in a new CEO
o They look to add e-sports competitions to drive in-store traffic. This is a similar approach to that taken by Game Digital in the UK with decent success (payback
periods of this are ~18 months)
o Plan to cut $100MM in opex this year
Importantly, the Company has a relatively flexible lease schedule with over half their leases up for renewal in the next 18 months so they won’t be unduly burdened by unprofitable stores like other retailers have been.
o ~35% of their leases expire this year, ~17% next year and ~13% in ’21
 
Capital Allocation:
In March they announced a $300MM share repurchase program. They also pay ~$155MM/year in dividends (~17% yield).
They also recently added investors from Hestia and Permit Capital to the Board . These funds had previously advocated for a tender of up to $700MM as well as a cost cutting program.
 
Risks:
Company is structurally challenged and needs to manage a shrink to survive. Management has indicated they don’t plan to return to their unsuccessful efforts at diversifying away from gaming.
 
Catalysts:
Cash continues to be generated and distributed to shareholders. The Company has also been a persistent takeout candidate (a process earlier this year failed to transpire but that was at prices ~2x current levels and before the Spring Mobile sale)
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

·         Cash continues to be generated and distributed to shareholders. The Company has also been a persistent takeout candidate (a process earlier this year failed to transpire but that was at prices ~2x current levels and before the Spring Mobile sale)

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