Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

GameStop Is A Compelling Short

|About: GameStop Corp. (GME)

Summary

GameStop has all the makings of a BlockBuster and is going extinct to technologically superior competitors.

Management likely will not be able to sustain its current dividends and cash burn.

The company has pivoted to a business model in which it does not have experience.

GameStop (GME) is a specialty electronics retailer and cellular services retailer. The first word that comes to mind when I think about GameStop: BlockBuster. It’s a household name that at one point dominated its brick and mortar technology retail sector but now is quickly approaching its fate to more technologically advanced competitors and consumer buying patterns; GameStop is sure to face a similar end as the once great movie rental company.

            There are several reasons to short this company. The first and foremost is that consumers simply do not have a need for it anymore as technology has adapted to help facilitate the video game retail sector. In estimating sales for the next 3 years, revenue was broken down into 8 major categories and individually forecasted. From these projections (exhibit 1 and 2), sales are expected to decrease several percent in the next several years, primarily attributed to the trend in online purchases and software downloads.

            The main area of sales growth for GameStop comes from its technology brand expansion, which is essentially a thousand AT&T stores throughout the country. While this may seem promising to some who are hopeful that GameStop is diversifying away a portion of its video game risk, it is important to note that same store sales have declined and that almost all of the sales growth is inorganic. They funded this expansion via mass amounts of debt, and tripled their leverage ratios in the last year alone. The management team has generally avoided addressing this, but did comment that they have significant risk if AT&T adjusts its current relationship with GameStop.

            Over the last several years, the market has been taking notice of GameStop’s decline. In 2013 it hit a peak price of $56.53 a share and now currently sits at $18.17, but I believe it will continue to fall. Investors likely have been rewarding GME for its shift to a high margin business but do not seem to take into account that the new business is shrinking as well. Their growth is unsustainable as it has been funded primarily by debt, and there will come a time shortly where they are not able to generate sufficient cash flow to maintain both their high dividend yield (over 8%) as well as their collapsing business lines.

            In the end, GameStop has all the makings of a BlockBuster, which likely points to either a bankruptcy or a pivot to an entirely different business model that has nothing to do with its core competencies. Regardless, the numbers and intuition indicate that the stock price will continue to drop and that an investor should short the stock as quickly as possible to capitalize on that decline. Though nothing is certain, I’m particularly confident that GameStop will not be able to sustain its current share price for very long and drastic liquidation measures may be imminent.

Exhibit 1

Projected Income Statement

2016

2017

2018

2019

Statement of Operations Data:

($ in millions)

Net Sales

8,607.9

8,460.3

8,284.1

8,291.8

Cost of Sales

5598.6

5527.8

5384.7

5389.7

Gross Profit

3009.3

2932.6

2899.4

2902.1

SGA

2252.6

2324.7

2390.1

2511.9

Depreciation and Amortization

165.2

165.2

165.2

165.2

Goodwill Impairments

0

0

0

0

Asset Impairments

33.8

33.8

33.8

33.8

Operating Earnings (loss)

557.7

408.9

310.4

191.2

Interest Expense, net

53.0

61.0

70.2

80.8

Earnings (loss) before income tax expense

504.7

347.9

240.2

110.4

Income tax expense

151.5

104.4

72.1

33.1

Net income (loss)

353.2

243.5

168.1

77.3

Per Share Data:

Earnings (loss) per share — Basic

3.42

2.42

1.73

0.82

Earnings (loss) per share — Diluted

3.4

2.42

1.72

0.82

Dividends per common share

1.48

1.52

1.56

1.60

Weighted-average common shares outstanding:

Basic

103.4

100.4

97.4

94.4

Diluted

103.8

100.8

97.8

94.8



Exhibit 2

Revenue and Gross Profit Calculation by Category

Revenue

($ in millions)

2015

2016

2017

2018

2019

New video game hardware

1,944.7

1,396.7

1,424.63

1,282.17

1,153.95

New video game software

2,905.1

2,493.4

2,140.04

1,836.77

1,576.47

Pre-owned and value video game products

2,374.7

2,254.1

2,139.62

2,030.96

1,927.82

Video game accessories

703.0

676.7

676.70

676.70

676.70

Digital

188.3

181.0

200.00

220.99

244.19

Technology Brands

534.0

814.0

1,017.50

1,271.88

1,589.84

Collectibles

309.7

494.1

642.33

802.91

1,003.64

Other

404.3

297.9

219.50

161.74

119.17

Total

9,363.8

8,607.9

8,460.3

8,284.1

8,291.8

Gross Profit

2015

2016

2017

2018

2019

New video game hardware

175.5

154.2

113.97

102.57

92.32

New video game software

689.3

600.4

515.31

442.29

379.61

Pre-owned and value video game products

1,114.50

1,044.10

991.90

609.29

578.35

Video game accessories

255.5

235.2

235.20

235.20

235.20

Digital

149.6

155.5

171.82

189.86

209.79

Technology Brands

306.6

554.6

610.50

890.31

953.91

Collectibles

116.6

171.6

224.82

321.17

351.27

Other

110.7

93.7

69.04

50.87

37.48

Total

2918.3

3009.3

2932.6

2841.6

2837.9

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.