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GameStop's Experimental Stores Are Doomed To Failure

May 04, 2020 9:55 AM ETGameStop Corp. (GME)GDIGF121 Comments
Robert Vink profile picture
Robert Vink
1.86K Followers

Summary

  • GameStop is experimenting with different new store concepts to try and become "the social and cultural hub of gaming".
  • At first glance, these concepts seem to have tons of potential.
  • In reality, most of these concepts don't bode well with GameStop's business model.
  • Instead, management should accept the fact that GameStop is a dying business and maximize the puff out of this old cigar butt.
  • GAME Digital tried a similar approach with its stores, but this did not provide the turnaround hoped for.

Management is trying to reimagine GameStop (NYSE:GME) stores with the goal of becoming "the social and cultural hub of gaming". These new store designs look sleek and are filled with potential at first glance. But in reality, these stores concepts are unrealistic and won't do much good to shareholders.

GameStop's reimagined stores

GameStop is experimenting with four different store concepts:

GameStop Social

GameStop Social is a revamped GameStop store that serves to specific audiences, or, as GameStop puts it, "focuses on our core customer". GameStop Social has a video game arena for esports events, mostly used by children, actually. Some of these stores also have a place for tabletop games, catering to a totally different audience unrelated to GameStop. It is clear that GameStop Social wants to become the social hub of gaming.

(Source)

GameStop Retro

GameStop Retro is a transformed GameStop with only retro gaming products for sale. Some of these might also have video game arenas with old consoles.

GameStop 2.0

GameStop 2.0 is a more sophisticated approach of the GameStop Social. GameStop 2.0 includes couches, smaller video game arenas, and in general, more room for socializing. The idea is to redesign a GameStop into a more customer-friendly place.

GameStop Pop!

GameStop has been seeing modest success in selling collectibles over the last few years, which has partially compensated decreasing gaming sales. The idea of a GameStop Pop! store is to create a store that only sells collectibles.

GAME Digital

The UK-based gaming retailer Game, owned by GAME Digital (OTCPK:GDIGF), is a gaming retail chain very similar to GameStop. In the United Kingdom, the transition from physical sales to digital sales has been very similar to that seen in the United States. GAME Digital has been fighting to remain profitable for years and looked at similar store concepts as

This article was written by

Robert Vink profile picture
1.86K Followers
Robert Vink has graduated in Business Analytics at the VU Amsterdam, and is currently pursuing a CFA. In his articles, Robert has mostly covered underfollowed European stocks and technology / e-commerce stocks in general. Feel free to contact me on LinkedIn to further discuss equities.I am open to front office job opportunities in finance like investment analyst, equity research analyst and investment banking analyst.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (121)

bazooooka profile picture
@Robert Vink Do you expect GME sales for March thru May to be better than expected since online has spiked? Also presumably they have lowered compensation and headcount so is it far fetched to think they could even profit 50M for fye 2020? What price do you like this stock for that last "puff"? I'm hearing they are on verge of rolling their debt - that would help too if they can get a fair rate.
bazooooka profile picture
GameStop might flop and the online spike in March/April might dissipate. But even if online sales stay elevated at 2x its old numbers then there might be value here. Michael Burry thinks so.
d
thank God market close on Monday. can't bear further drop.
F
Could drop on Tuesday too you know. Could rise too. Something tells me you’re getting nervous about the direction. Are you short?
d
i think at this moment longs are more nervous than shorts. i am long and i had lost one third of my capital.
F
As long as you’re willing to hold for a year, you’ll be fine
t
The good folks at Hestia and Permit Capital value shares at $19 and perhaps significantly higher than that. So what will it take to get us there? The question all shareholders are asking themselves.
d
when we longs double all our stakes at the same time to force a short squeeze.
d
the talk of short squeeze can be dated back to 2017 and it did not happen, nor did it in 18 and 19. and it seems that it will not happen in 20 too.
F
did the new xbox and playstation come out in 2017 as well? did they in 18 and 19?
d
new console is the last hope but no guarantee.
i
there's always talk of a squeeze when the SI is high. For any stock. What's your point?
F
Everyone needs to take a look at this presentation: www.sec.gov/...
t
The challenge here is clear: can the company make the shift from being a Blockbuster to becoming a Netflix? I hope management has been reading the tea leaves. Online sales are, as many have noted, quite robust. I think the upcoming earnings call will be pivotal as a gauge for the company's future. Any positive developments regarding overall debt will also drive this upward. And with the enormous short position here, any upward movement could become meteoric. Let's make the shorts lose their shorts.
bazooooka profile picture
Not sure if they ever make the swap but I'm pretty happy with my Trade from last Spring.
bazooooka profile picture
GME online sales are up big right now. They should continue their focus there and close all stores that aren't meeting expectations. GameStop becomes RadioShack in the next 5 years if they don't get things turned around. There could be some value left in this brand but will they spend their remaining dry powder on the correct initiatives?
Jocubus profile picture
"GME online sales are up big right now" -- based on what? I haven't seen any press releases with sales data
g
wow this is cool report, thx for sharing
LifeScienceInvesting profile picture
Fundamentally, how is the GME story different from the Block Buster - Net Flix story?
d
the difference is that gme is the new blockbuster, while there is no new netflix.
endrow profile picture
The difference is that 50% of console games are still sold by physical format and we are at an end of a console cycle. Look up how GME-s price and valuation changed with previous real console releases.
Shangrila Value profile picture
50% of console games WERE sold.
d
Eventually, Mr Vink, you are right.
X
Anyone knows the record date for share ownership to vote on June 12?
h
April 20, 2020.
X
@humanbeing Thanks. Looks like there will be low vote count then.
With that many shares sold short and needed to recalled to be able to vote. There should have been a massive squeeze. That did not happen so vote count should be low.
endrow profile picture
Yep, thanks for the GME management... Everybody thought that the april 20th date will be pushed to may so not much people got their shares back from lenders etc.
soostefan profile picture
It seems people do not realize the huge positive impact from Coronavirus Aid, Relief and Economic Security Act (the CARES Act) which was passed on March 27, 2020 by the U.S. Congress and accelerated the companies' ability to claim federal refunds of alternative minimum tax credits.
If we look back just over the last 3 years GME paid $521m in income taxes over the past three years (2019: 123m, 2018: 168m and 2017: 230m)
If we look at the results published for Q1 by few companies we could see how material the impact is.
For example EQT said that free cash flow was positively impacted in Q1 by $95 million of accrued income tax refunds related to CARES Act and the estimated refunds for the full year is $390m.
x
Looking at the 10k.. Not sure they have much to gain.. but something is better than nothing. I'm no accountant but here are the NOL's.. Assuming 30% tax rate on 50Mil NOLs (excluding foreign). They are eligible for about 20m. Not accounting for any losses post 10k.. Seems more of past NOLs are foreign, not sure its applicable to IRS refunds.

As of February 1, 2020, we have approximately $25.8 million of net operating loss ("NOL") carryforwards in various foreign
jurisdictions that expire in years 2019 through 2035 (primarily related to Puerto Rico), as well as $244.5 million of foreign NOL
carryforwards that have no expiration date. In addition, we have approximately $19.5 million of foreign tax credit carryforwards
that expire in years 2024 through 2027. We also have approximately $56.1 million of Federal NOL carryovers acquired through
the ThinkGeek acquisition that will expire in years 2020 through 2035
x
Also to note most of their cash is sitting foreign as well. It may be time to repatriate some of this cash.
soostefan profile picture
In light of the fact that GME is hard to borrow and we can see that it's still in the list for threshold securities after more than 13 days, I think that we have now an explanation for some days with very high after-hours volume.
We know that GME has been on the threshold list for more than 13 days, so whoever has been responsible for delivering shares 13 days earlier (broker/hedge fund/market maker) had to close out the failed to deliver position and this has been done through an after-hours transfer of shares from another market maker/hedge fund/broker in order to reset the count of the thirteen days delivery requirements and avoid a buy-in.
jchang1234 profile picture
GameStop already acknowledges everything you posted and you even quote them when they are saying they aren’t planning on remodeling all their stores to Tulsa experiments. Those stores are just an incubator of ideas. What will happen is they will slowly wind down unprofitable stores downsize the company and maintain a retail model while improving its omni channel. Legacy high margin business will slowly phase out this console cycle while it pays out current shareholders at least their money back. Then they can transition into a dollar store or five below whatever low margin retail it wants to be chasing sales or they can end up being 100-300 social hubs after leases of all their 4000 stores run out. The value is there. New management is playing it safe and won’t do anything crazy with this many eyes on them.
A
Jchang1234, I agree but think the H/P proxy is aimed and trying to ensure the profits gained as the company runs down, go toward the shareholders as opposed to GME management.
E
GME has been on the threshold securities list for 17 trading days straight [as of EOD May 11th] due to persistent illegal naked short selling and large fails to deliver for at least 21 consecutive trading days since to be put on the list, the per day fails to deliver must be above 0.5% (over 320K shares per day) of the total outstanding shares for 5 days. It was on the list in late March as well for 14 straigh days and FTDs were above the 0.5% threshold 46 of the past 53 trading days. As unbelievable as it is, will the SEC finally take action and investigate since the reason for the list is to flag illegal naked short selling? What is the point of these rules if they are blatantly ignored?
www.nyse.com/...
i
The SEC doesn’t care. They are a reactionary force not a proactive one.
A
Surely SEC have to react, otherwise why have a SEC, and why have rules if they simply allow them to be ignored?

Isn’t this like allowing entities to break the law continuously and get away with it?
A
This is an interesting document on the issues with naked shorting and ways market makers can get around them, with lack of stocks available to short and increasing borrowing rates, and FTD metrics recycling shares to the level needed to maintain the level of naked shorts must be getting hard:

smithonstocks.com/...
Diesel profile picture
Even on a solid green day today where 90% of the stocks are green, this stock is barely flat.
x
usually it trends with retail stocks.. and most of those are red.
Diesel profile picture
I checked Best Buy, Target, Walmart, Costco and they are all green.
jchang1234 profile picture
I’m glad you see GME in the same league as multi billion dollar companies. It’s market cap it only 350 million. You comparing the wrong retailers
C
Good luck with these last ditch attacks, shorts.

Love the short-interest %’s here
soostefan profile picture
I'm still waiting bears to provide us a list of 5 stocks with similar valuation/fundamentals...sales of at least $5-6b, market cap below $400, net cash position, p/bv below 0.6 and similar market share.
Red Pill Investing profile picture
That’s why they are called value traps Because it’s to good to be true lol
Little, Einstein profile picture
Bk one year
endrow profile picture
The shorts would still lose 50% of their money, because the interest rates are close to 200% right now.
Shangrila Value profile picture
They have money for this year. BK 2021.
endrow profile picture
@John Beardslee yes, you are right. They will definitely go bankrupt just after the new console cycle starts and after holidays with the new consoles, also with way better consoles than last gen. New consoles (unlike last gen) will be actually on par with (or even better than) very high end PC-s right now. Looking back to previous console cycle starts GME always dropped a lot, even when the consoles specs and price were not good. Oh, wait, it didn't drop, it approached its all-time heights.

But history never repeats itself, right? :)
endrow profile picture
THANK YOU! I need more articles like that, so that I can buy more shares and calls before GameStop goes to 20+$ a share in two years.

I love that bears don't realize that 50% of console games are still sold by physical copies, also there is incredible short float (90%+, the biggest on any NYSE stock) on GameStop and shorts must play 180-200% interest rate right now. They would only get money if GameStop goes bankrupt in half a year, and we all know it wont. Those shorts have to cover sooner or later. Oh, wait,they cant cover later, because the new console cycle is almost there.
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