GameStop needs a reboot to ride the gaming boom
GameStop (NYSE: GME) expects to do pretty well now that the game console upgrade cycle has officially started. Although its shares collapsed after the release of its third quarter earnings report, the video game retailer says the rubber is hitting the pavement now.
Now that Microsoft (NASDAQ: MSFT) released their new Xbox series X and Sony (NYSE: SONY) debuted with the new Playstation 5, GameStop anticipates the new consoles “are now entering what we see as a period of sustained growth.” And with an activist investor pushing GameStop to slim down and look into the digital gaming revolution, the point of sale may no longer be on the brink of death, no matter how the market reacts to the earnings news.
Address the elephant in the bedroom
GameStop reported that sales fell 30% year on year to $ 1 billion, which was lower than the $ 1.1 billion Wall Street expected, but the loss of $ 0.29 per share on record was much better than the analyst consensus of $ 0.85 per share.
Comparable store sales fell nearly 25% during the period, worse than the 20% expected, but the retailer said November lineups – reflecting when the games consoles went on sale – surged by 16.5%, marking the first month in nearly two years that GameStop has seen an increase.
CEO George Sherman basically said the quarter was as bad as everyone thought it would be, but now it’s going to get better from here on out. Let’s see if the optimism is justified.
It took a while to get GameStop up to speed, but it sure looks like this old dog is learning new tricks.
The retailer has signed a partnership agreement with Microsoft that not only allows it to use the software giant cloud-based back office business solutions platform, but most importantly also gives GameStop a cut in revenue generated by the Xbox ecosystem on the sales it makes along the line.
How much this is actually worth for GameStop is unknown, but it is a alternative source of income related to the digital age of gaming and says Microsoft at least still sees the retailer as important to the future of video games.
GameStop has also started selling Vizio TVs made for gamers. The new sets are exclusive to the retailer and the Quantum 4K P-Series TV was ranked by industry site IGN as the best 4K gaming TV of 2020. While most people don’t consider GameStop their first stop for a new model of gaming-oriented TV, it does. seems a natural extension of its product offerings.
Like the Microsoft deal, the exclusive partnership with Vizio shows that GameStop has started to think differently about the future. She needs to transform her business, and these small steps are a welcome change.
A whole new mindset is needed
Still, GameStop needs to go much further. Activist investor RC Ventures believes the retailer is not doing enough to change course and more drastic action is needed.
The hedge fund fears that the fleeting success that GameStop enjoys will convince management that it is on the right track and prevent it from implementing strategies that strike at the heart of the old way of doing business. He sent a letter to management denouncing his leadership that has hurt the company, and said the equity gains only masked gaps that still exist.
We did a lot of massive increase in digital sales generated during the pandemic, but it is clear that this is primarily a one-time event. Suddenly faced with few entertainment options when forced to stay home, gamers turned to GameStop’s online store for what they needed, but the rate of growth in those sales is on the rise. drop.
E-commerce sales jumped 519% in the first quarter and rose more than 1,000% in the six-week period that its stores were closed at the start of the pandemic. They then increased 800% in the second quarter, and GameStop just announced that they increased 254% in the third.
While this is encouraging as it suggests gamers still see GameStop as the go-to location for video game hardware and software, it also means that after the pandemic has passed, the digital channel may simply normalize. In addition, there is a lot of competition online, especially from Amazon.com, Apple, and Alphabetfrom Google, which launched new streaming services that don’t require physical consoles.
The hedge fund rightly sees this as a real threat to GameStop stores, which is why it says the retailer needs to focus only on its most profitable locations and get rid of all the rest. GameStop has yet to prove that it can support an omnichannel business model that relies heavily on the e-commerce part.
What happens after
Because the the upgrade cycle will pass soon, GameStop can’t wait. It must take all the profits it generates from the early stages of the sale and invest them in the path it will take to meet the challenges of tomorrow.
I love that the leadership seems to be showing a willingness to think differently, but there must also be signs that bigger changes are coming. For example, GameStop has announced plans to sell $ 100 million of new stock, essentially the opposite of the stock buybacks that investors have urged to make.
Where buybacks increase earnings per share, sales of shares dilute investors’ holdings, although this would give GameStop some financial flexibility to deal with any liquidity concerns.
Even with the sharp drop in its share price following the announcement of the results, the stock is still a long way off in hopes of a change. Investors should probably stay on the sidelines until the video game retailer shows that it is ready to take the next step.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.