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GME - Game Stop Corp


cmattporter

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  • 9 months later...
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I don't, but the provided analysis tells me what I need to know:

 

The proof is in the margins, as the used business accounts for only a quarter of GameStop's total sales, but almost half of its profits!

 

Digital game delivery will be the new standard going forward.  Next gen consoles, such as the new Xbox, will primarily deliver games based on this model.  This means that the market for used games is going to zero.  Even with physical media today, many games are crippled without the use of one-time activation codes that can't be resold.

 

So if it's a good buy at half the profits, then it's a good buy.  Without the used game tie-in, the model is much closer to a Radio Shack or a Best Buy.

 

I like the used device model.  I think it has merit and should be pretty profitable.  But I also think that if it's successful, BBY and/or RSH will copy the model and eat into their profits (as BBY did with used games).

 

 

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  • 3 years later...

I couldn't find a GME thread, so apologies if one exists already. I just got notice of GME outbidding Hot Topic for the GKNT acquisition. Has anyone been looking at GKNT? I'm trying to figure what GME's angle is here. It looks like they're overpaying for a company which brings in no income and I'm a bit irritated as a GME shareholder.

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Yes I've followed GKNT pretty closely.

 

The key with Geeknet is their Geeklabs products.  They create proprietary toys, gadgets and apparel that cater to the same crowd GME caters to.  It has a 35% gross margin, versus their website products which are close to 12%.  I think that's the secret piece to it.

 

On the profitability side, Geeknet could be profitable.  Unfortunately, they're subscale.  Ideally, they'll be able to leverage GME's distribution facilities and logistics to sell Thinkgeek.com products.  They had huge issues in the second half of '14 with order fulfilment and website traffic.  The website crashed on Cyber Monday, to give you just one example.

 

My high level analysis:

$20 price = $95M enterprise value for GKNT.

2014 Gross Profit (certainly a trough number) = $24M

Price Paid: 4x Gross Profit

 

2014 EBIT: -$8.3M

 

What adjustments can we make to the combined GME/GKNT?

 

For one, no more G&A.  So back that out.  That's $8.3M

And technology related expenses are certainly redundant as well.  That's $8.6M

And the sales and marketing...assume there are some synergies, so lets back out just 25%.  That's $15.7M x 25%, or $3.9M

 

That's an adjusted EBIT of $12.5M, or EV/EBIT of 7.6x

 

So not a terribly aggressive paid.  And 2014 was certainly a trough year.

 

Another hidden asset, maybe, is the Geeknet Twitter and Facebook page.  They have like 100,000 followers and fans.  That's worth something.

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That was a very impressive analysis, besides, the company's capital allocation over the last few years has not been tragic, quite the opposite. I may be biased, as I love how they are always disproving the naysayers. 

 

 

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For one, no more G&A.  So back that out.  That's $8.3M

And technology related expenses are certainly redundant as well.  That's $8.6M

And the sales and marketing...assume there are some synergies, so lets back out just 25%.  That's $15.7M x 25%, or $3.9M

 

Thanks for the analysis. I suspect the reality may be less rosy than this due at least to some upfront costs needed to restructure. I do appreciate the angle that you've given. Costs can indeed be reduced if GKNT has a problem with distribution and can utilize GME's distribution. I guess I'm just used to Apple's way, which is strategic partnerships with suppliers so that AAPL doesn't have to share in mishaps of overpromises and underestimated costs. I would have been happier if GME went that way, but I guess in the grand scheme, GKNT is only a fraction of GME.

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  • 2 years later...

Was wondering if anyone was looking at Gamestop

6x earnings

.88x b/v  1.30 industry average

5x FCF  9.92 industry average

.23 P/S  .59 industry average

ROE and Net Margins in line with the industry average at 15% and 3%

Debt to Equity stands at .35

 

Has a 7% dividend thats covered 2x by free cash flow.

 

Anything I'm missing here.

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My big worry would be that most games are going to eventually only be downloads and will thus have no physical media.  This is going to put a pretty big dent in GME's business.

 

Of course, they might migrate to selling consoles (new & used), controllers, do hickey's, LCD screen repair and so on....but I think it would be a MUCH smaller business than what it is now.

 

Question is what does their business look like in 4-5 years?

 

Probably needs a HUGE discount to make it worth while.

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My big worry would be that most games are going to eventually only be downloads and will thus have no physical media.  This is going to put a pretty big dent in GME's business.

 

Of course, they might migrate to selling consoles (new & used), controllers, do hickey's, LCD screen repair and so on....but I think it would be a MUCH smaller business than what it is now.

 

Question is what does their business look like in 4-5 years?

 

Probably needs a HUGE discount to make it worth while.

 

That's the biggest question does half industry average as well as half their 5 year average free cash flow and a 7% dividend provide enough value for the risk of what the business could be. Cash flow would have to be cut in half for the dividend to not be covered, but then we've seen download only games for a while.

 

Still researching but it piqued my interest when it came up on a screen.

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Just wanted to throw this out there its trading at the same valuation that it did at the deepest of the Financial Crisis when it had 38% more shares outstanding and B/V has doubled. Free Cash Flow has been fluctuating slightly but otherwise has been flat for 10 years. And it didn't have a dividend during 2008.

 

If the only risk  that the market thinks is that this business model will be wiped out in 3-5 years it might be worth a position given that business hasn't really deteriorated in such a fashion that would give me alarm. Unless they are overextended with stores and employees. 

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FWIW I think book value is a useless metric here. There's 2.2b in intangibles, tangible book is close to zero, NCAV is negative and they have ~900m in debt and long term liabilities. If their business deteriorates there is no safety in the balance sheet.

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Value trap if you ask me.

 

Very high level view I think it's important to know what margins would do if revenues from physical games sold took a further dive. Selling consoles and doing some repairs likely isn't going to be enough to carry operating costs that you can't easily dial back.

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"Dealer Agreements" are valued at 400m which comes from a deal they did with Cricket and Spring and the Goodwill comes from "technology brands" not to sure where they get these numbers from.

 

They took a 600m goodwill charge in 2012.

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Value trap if you ask me.

 

Very high level view I think it's important to know what margins would do if revenues from physical games sold took a further dive. Selling consoles and doing some repairs likely isn't going to be enough to carry operating costs that you can't easily dial back.

 

Just figured I'd ask what you mean by a value trap? usually when I think of a value trap its a company who has traded at depressed prices for a long period of time. GME has traded sideways for a year and a half and was as much as $45 about 2 years ago.

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Just from a quick calculation if net margins were cut in half FCF would look like

 

2016: 218.5M vs 353M

2015: 282M vs 402M

2014: 124.5M vs 393M

 

Dividend is covered in 2016, 2015 slightly and not in 2014. Its a cash flow story and I like assets when I invest I'm leaning towards moving on.

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Value trap if you ask me.

 

Very high level view I think it's important to know what margins would do if revenues from physical games sold took a further dive. Selling consoles and doing some repairs likely isn't going to be enough to carry operating costs that you can't easily dial back.

 

Just figured I'd ask what you mean by a value trap? usually when I think of a value trap its a company who has traded at depressed prices for a long period of time. GME has traded sideways for a year and a half and was as much as $45 about 2 years ago.

 

I mean that valuation will likely remain cheap but that as fundamentals detoriate, so will stock price. As an investor, you'll get the feeling of being "trapped" as at any point in time the stock will still look attractive because stock price will have followed fundamentals down.

 

The fact that it was at $40 two years ago doesn't indicate it can be a value trap from this point forward. I just believe it's likely to be a value trap from here on out. Valuation by the market seems to indicate that too. But I could be entirely wrong and this thing could double as the business proves its more robust than I think.

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This reminds me of Outerwall, but here you have a lot more leverage due to a large retail footprint/leases and with Outerwall you had Coinstar as downside protection. I think it's a worse case, and a lot of people lost money on Outerwall. Ask yourself if you'd honestly consider GME if it wasn't for the divy. I don't think many would, but it's useless if things deteriorate and you end up owning an over-leveraged retailer with declining earnings (I think they're in a tough spot but not sure. Just don't see any downside protection, and what's the upside?).

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This reminds me of Outerwall, but here you have a lot more leverage due to a large retail footprint/leases and with Outerwall you had Coinstar as downside protection. I think it's a worse case, and a lot of people lost money on Outerwall. As yourself if you'd honestly consider GME if it wasn't for the divy. I don't think many would, but it's useless if things detoriate and you end up owning an overleveraged retailed with declining earnings (I think they're in a tough spot but not sure. Just don't see any downside protection, and what's the upside?).

 

 

The only thing I can think of that would make the case as to why this wouldn't fall apart is because Microsoft has a new console coming out and the business is cyclical towards new console releases.   

 

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  • 3 months later...

Hey all:

 

Anybody still following this?

 

The CEO is stepping down for legitimate health reasons this AM and the stock hit a 10% yield briefly. 

 

At $16/share, it is at multi-year lows.

 

Clearly the business is challenged...but they have branched out a bit...

 

I'm also seeing a local retailer selling digital download codes.  I get TONS of these things as promotional give aways when I buy certain processor types and graphics cards.  I never even considered that they can be resold OR that there would be a demand for them.  Perhaps GME could also sell these?  Heck, I'd be willing to sell mine for a few bucks each...GME sells them for $10 or $15, everybody is happy!

 

GME has some debt, but it looks like it is well covered by the cash on hand, and cash flows.

 

Of course, they've also got leases...but I wonder if they've signed mainly shorter term leases and can let stores go empty as the leases expire?

 

Any thoughts?

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Took a look this past week.  Two key issues bugging me:

 

1. Digital share of console game purchases is about 30%.  Why can't it get to around 75% like PCs?  This would hit the largest parts of their business.

 

2. Technology brands seems like a crappy business that got worse when AT&T bought DirecTV.  I'm not sure the diversification strategy is a good one.

 

Just bad business trends, so no reason to think earnings will go any higher, and easy to see how they go lower.  On the plus side, any strength in the console/gaming cycle will boost earnings, and the dividend seems well covered for now.  Stock could double and the yield would still be high.

 

I'm still watching and thinking about it.

 

 

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Of course, they've also got leases...but I wonder if they've signed mainly shorter term leases and can let stores go empty as the leases expire?

 

They've said their average remaining lease term is <2.5 years, so yeah they can manage store count with runoffs and/or renegotiate rent.

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I think a basket type approach towards beaten down retailers might work, but trying to pick individual names in such a fast moving space is a too hard for me.

 

So many moving pieces here.....

 

New CEO with no capital allocation record to evaluate

 

Lots of enclosed mall-based stores that are exposed to mall traffic trends

 

The whole digital vs. physical games issue that GME bulls and bears have been arguing about for years. I don't think anyone really knows how quickly physical console games will decline in favor of digital distribution. For year's GME's cash machine has been buying used console games low and selling them high. By all accounts this is a business in secular decline, it's a question of forecasting how the rate of decline, and how well GME will manage the downtrend.

 

GME is moving more towards collectibles, something I can confirm from a couple recent mall visits. Obviously there's competition in this space from Spencer's and Hot Topic. Also, see the mall traffic issue.

 

Lots of operating leverage

 

 

 

 

 

 

 

 

 

 

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