Description

The last write-up of Gamestop was in May 2019 as a long cigar butt thesis. In fact, almost all write-ups, including this one and prior long/short arguments in 2011-2014 were similar. As such, this write-up will be brief. Gamestop is your conventional cigar butt / melting ice cube. The key question is the temperature of the room.

A recent activist campaign has seen a change at the board level with the addition of activist representatives. Hestia, Scion, and Permit Capital hold 8.8mm shares or 14% of the shares outstanding. Recently, the Company, on the encouragement of the activists announced an exchange offer and consent solicitation, for the $414MM 6.75% due 2021. They offered to exchange the notes for 10% Sr. Secured Notes due 2023. The final tender results saw $216.4MM of the notes tendered. While the Subordinated notes moved down in the capital structure, the increased tenor should ensure that the Company is well prepared to meet the funding needs on maturity.

Funding situation and considerations

As of June 30th, Gamestop had $570MM of cash on hand and has forecast a similar balance at the end of Q2.We expect that the business should have multiple levers to manage working capital as the current video game cycle ends and the launch of a new cycle begins this holiday season. Gamestop has an existing ABL that it uses to fund the inventory and we expect between that and general payables it should see limited cash burn in the holiday quarter. While there is no full guidance on the year the company believes that it will be EBITDA positive for the year. In the interim the company has done a good job working down its inventory managing SG&A and store base.

For the thesis to play out we do not believe that one needs much of a variant perception - only that the ice cube won't melt before Mid-March maturities in 2021. We do not believe that the activist shareholders would put the enterprise at risk by aggressively returning capital prior to the bond maturity, and that enough parties have a vested interest in the new console cycle to move equipment at economic terms with Gamestop. For reference as of YE 2020 (Feb) Gamestop had  60MM members in their loyalty program, with 15MM being active in the U.S. last year. They saw new membership grow since COVID. On the Q1 call management guided to a flat cash balance at the end of Q2, in addition they are in the process of monetizing some of their Real Estate assets (3 Office & Distributions centers in North America with ~820,000 sq.ft.)

At the current market price of 91% of par, the Gamestop 6.75% bond are a decent risk/reward offering a ~14% return with limited duration, and we believe limited downside.

Scenario 1: They Make it to the March 2021

Given the current cash balance, working capital, potential RE monetization and console cycle we believe that post the recent exchange offer they will be able to repay the ~$200MM of Notes remaining outstanding with a portion of their ~$570MM cash balance.

Scenario 2: They Don't Make it to March 2021

There is still a lot of uncertainty between today and March 2021. Stores could close, liabilities balloon, suppliers disregard them as an attractive channel, etc. We do not see any of these as highly likely or be able to impair the enterprise and cash balance before the maturity, but if they do we believe that given the cash and assets on the balance sheet recovery on the Senior 2021's should be ~70-80 cents.  

Catalyst

Maturity