Strong Balance Sheet and Passionate Customers
All about the GameStop transformation process
"It was an important period of foundation building, significant investment, and cultural change at GameStop. While we are still in the early stages of our transformation, we believe the steps taken over the last several months will be key value drivers for quarters and years down the road."
Matt Furlong (CEO),
former Country Leader of Amazon Australia,
2021 Q4 earnings call
From The Ground Up
Over the past year, GameStop has made significant changes, with an eye on transforming itself into a company that can compete and excel in the global environment. Their recent filings tell the story. Below we will cover major transformative measures that are affecting change at GameStop.
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Repayment of Indebtedness
On March 15, 2021, GameStop repaid their outstanding borrowings of $25.0 million under the 2022 Revolver. That same day they also repaid, at maturity, $73.2 million outstanding principal amount of their 6.75% Senior Notes due 2021. A senior note is debt in the form of a bond that are relatively safe in exchange for lower interest rates. 6.75% is the interest rate.
On April 30, 2021, GameStop completed the voluntary early redemption of $216.4 million 10% Senior Notes due 2023. This voluntary early redemption covered the entire amount of their outstanding 2023 Senior Notes, which was their only remaining long-term debt, save for the French Term Loans that operate under GameStop’s Micromania subsidiary (valued at 44.6 million as of January 29th, 2022).
Funding the GameStop Transformation
GameStop generated approx. $1.7 billion in proceeds from the sale of 8.5 million common shares. The proceeds generated from sales under the transactions have been and are expected to be used for working capital and general corporate purposes.
Growth Initiatives and Product Category Expansion Efforts
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Establish ecommerce excellence. GameStop aims to be the leading destination for games and entertainment across all channels and will scale up ecommerce operations to make the most convenient solution for customers. This includes app & site redesigns, improvements in fulfillment and delivery times, better product availability across all channels, and a further improved customer service experience.
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Expand selection to deliver a market-leading offering in gaming & entertainment. Continued investments in expanding product offering to relevant categories for our customers, including becoming a leader in PC gaming, virtual reality, and other gaming products.
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Leverage existing strengths and assets. Grow presence in the gaming community and increase market share through enhancing the value of the loyalty program and Game Informer assets while also expanding the scope of our buy, sell, and trade business to support the expanded offering.
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Invest in new growth opportunities. As GameStop scales and expands their core offerings, they will simultaneously invest in additional growth, including blockchain, digital assets (including non-fungible tokens ("NFTs")), Web 3.0 technology, and new destination formats for stores. In January 2022, GameStop entered into partnerships with ImmutableX (IMX) and Digital Worlds NFTs pursuant to which IMX will become a technology partner and platform for our NFT marketplace, and Digital Worlds will grant up to $100 million in IMX tokens to creators of NFT content and technology. Digital Worlds agreed to provide up to approximately $150 million in IMX tokens to GameStop upon the achievement of certain milestones.
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Competition
How GameStop is Valued Comparatively
Multisector valuation analysis shows how GameStop compares to other companies in the Consumer Cyclical and Technology sectors. Competitive public companies are used to develop average EV/Revenue values. EV/EBITDA, while valuable, is not currently applicable - it is something that we will monitor and update as GameStop’s EBIDTA improves. Through this analysis, we can see that GameStop’s EV/Revenue number is currently 1.91, whereas the market competition prices this level of revenue at 4.23.
This means GameStop is severely undervalued from a revenue standpoint. For a mature business, GameStop’s EV/Revenue appears expensive. However, this analysis takes that into account and assigns a weighting of 70% to mature businesses in the consumer cyclical sector - the other 30% is devoted towards technological growth prospects. If GameStop is to fully realize itself as a technology-dominant company, the weightings could tilt even further, providing even more of a reason for a higher EV/Revenue target.
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New Fulfillment Centers, Call Centers, and Offices
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The company is transitioning in every facet - cutting poor performing stores while investing in and improving leading stores. This is evident in the above table. With GameStop moving their storefront towards internet based consumption, a reduction in PPE (property, plant and equipment) while adding new centralized fulfillment centers and offices shows just how committed they are to the transition.
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GameStop opened new fulfillment centers in York, Pennsylvania and in Reno, Nevada, continuing their expansion of their North American fulfillment network to span both coasts of the continental U.S.. Logistics is of paramount importance for any e-commerce company and all the right moves are being made to ensure that GameStop succeeds on both the personnel and product fronts.
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GameStop has opened two new corporate offices in Seattle and Boston. They’re hiring for all sorts of positions at these locations, focusing on software, merchandising, and e-commerce to support their transition. GameStop also hired 500 employees for a new call center opened in Pembroke Pines, Florida that is planned to be “an integral part of the Company’s U.S.-based customer care operations”.
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Strengthening The Balance Sheet
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After the sale of GameStop common shares in 2021, the balance sheet took a dramatic turn. The revitalization of GameStop’s balance sheet has allowed them to aggressively hire in competitive markets, increase inventories, and pay off unsatisfactory debt obligations. Prior to the board changes, there was a clear Year over Year (YoY) reduction in assets. A 51.87% increase in inventories, a 34% increase in receivables and 150% increase in cash/short term investments (totaling a 67.53% increase in current assets) shows just how liquid GameStop’s assets have become. The fluidity of these assets allow them to capitalize on opportunities and further increase total assets, while maintaining a debt structure that promotes complete company solvency.
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With the dramatic changes in assets and liabilities, it comes as no surprise that shareholder equity has improved. While GameStop managed to erode shareholder equity year after year after year, the new board and management has, once again, turned the tables. A 267% increase in shareholder equity in one year’s time. With increasing revenues ($921 million, 18.1% increase YoY) and the potential for positive net income in the future, the previous trend of decreasing shareholder equity, without anything to show for it, is abated. Considering GameStop’s goal isn’t short-term profits, positive net income may not happen for several quarters.
Taking a company, tearing down the old structure, and building from the ground up takes time. That’s what the new board and management seek to accomplish: a complete revamp of a business of which they see potential. Even as recently as March 2022, company insiders have taken to purchasing shares at market prices as they see value and growth potential in the company. The trust in GameStop’s future can not be understated. Not only has GameStop accumulated an all-star cast of directors and managers; other stakeholders such as customers and investors have trust in the company - something that is eerily absent in a large subset of publicly traded companies.
Where did all this conviction in GameStop suddenly come from? No one believed in this company a few years ago and it was written off as a failing retailer. It all started with one man seeing an opportunity. Find out about Ryan Cohen, the chairman at the helm of the new and improved GameStop.
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