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Video game retailer GameStop reported mixed third quarter earnings after the close Tuesday  $GME stock has been a hot stock in 2020 with investors like Scion's Michael Burry and Chewy's Ryan Cohen and is one of the most heavily shorted stocks on the market with approximately 90% of the shares in lending programs. $GME fell 20% on the report.

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 GameStop has one of the largest short positions out there with punters comparing it to Blockbuster.

GameStop Corp. NYSE: GME

Reported Earnings After Close Tuesday

($0.29) Beat ($0.85) EPS BUT $1 Billion Missed $1.09 Billion forecast in Revenue

Earnings

GameStop Corp. reported third quarter earnings after the market close on Tuesday. The videogame retailer reported a net loss of $18.8 million, or 29 cents a share beating consensus estimates for a loss of 85 cents a share, according to FactSet. However sales of $1 billion missed forecasts of $1.09 billion. Comparable sales fell 24.6% year over year larger than estimates for sales to fall 20.5%. These declines were largely expected as the quarter ended in October, a month before Sony (SNE) and Microsoft (MSFT) launched their new gaming consoles.

GME also said it is planning a shelf registration and prospectus supplement with the Securities and Exchange Commission that would allow it to sell stock through at-the-market offerings. The yearly range of GME shares is $2.57  to $19.42.

Ahead of earnings sales have declined from $9.5 billion in fiscal year 2011 (before the last console cycle) to $6.4 billion in fiscal year 2019; EBITDA has dropped from $839 million in 2011 to only $111 million in 2019; net income has fallen from $339 million in 2011 to a loss of $470 million in 2019; and in the two most recent quarters alone, the company lost another $277 million.

All of this happened while the size of the global gaming market has grown by more than 2.5x since the last console cycle. Cohen sees a company that is stuck in a brick-and-mortar mentality and is unwilling to embrace the digital mindset necessary to grow with gamers.

Gaming continues to flourish, both the method of gaming has changed with online and the explosion of Forthite. Gamestop has recovered somewhat after it had been hit on multiple fronts, the collapse of brick and mortar stores and the success of fortnite has eliminated alternative game sales whilst at the same time franchise titles are being played more online through the publishers like Take Two. Console upgrades will help pick up sales.

 

GameStop Corp. NYSE: GME

Market Reaction > After hours $13.69 ▼ 3.25 (-19.19%)

“We believe the shelf registration and associated at-the-market program, if we chose to use it, provide us further options to enhance our liquidity alternatives to support an efficient and successful execution of our transformational strategies,” Chief Financial Officer Jim Bell said in the earnings release.

Highlights

As of Oct. 31, the company had $602.6 million in cash and restricted cash, nearly double what it had a year ago. It had $269.5 million of short-term debt and $216 million of long-term debt on its balance sheet. On Dec. 11, the company plans a voluntary early redemption of $125 million in principal amount of its 6.75% senior notes due in 2021.

November same-store sales were up 16.5% year over year, presumably November’s totals included sales from the new PlayStation 5 Digital Edition and Xbox Series S. Those consoles don’t have disc drives, which would effectively cut out GameStop’s business of buying and selling used games.

GME Earnings Q3 20

Outlook

CEO George Sherman said in the earnings release that the company expects year-over-year sales growth and profitability during the fiscal fourth quarter.

“Given the strength of our e-commerce sales and omnichannel capabilities, which I’ll comment on momentarily, we now see the opportunity to close additional stores going forward in 2021 and 2022 as we optimize the profitability of an omnichannel architecture.

Overall, our goal is to serve our customers wherever, whenever and however they choose to shop. We continue to improve our balance sheet. We again improved working capital management with a 33% reduction in inventory and a 38% decline in accounts payable ending the period with $603 million of cash and restricted cash, about $300 million more than the prior-year third quarter.

Finally, as a result of the continued strength of our balance sheet, we further enhanced our capital structure with the announcement of the voluntary early reduction — redemption of $125 million or approximately 63% of our outstanding notes due in 2021.” Sherman said.

 

Chewy Founder Ryan Cohen's Big Bet on Gamestock

Ryan Cohen, the former CEO of Chewy beieves Ganestop can turn itself around by shifting its focus away from physical stores in favor of a building robust e-commerce platform. Cohen thinks GameStop can use its brand and large customer base to make that transition. He has taken a large stake in the company to try and push it in that direction.

  • Investor: Ryan Cohen
  • Percentage Ownership: 9.98%
  • Average Cost: $5.98

 

Who is Ryan Cohen?

Cohen is the co-founder and former CEO of e-commerce company Chewy, which he built up and sold to PetSmart in 2017 for $3.35 billion. Cohen remained CEO following the acquisition until March 2018, and in June 2019, Chewy went public at a valuation of $8.7 billion. GME is Cohen’s first 13D filing.

Cohen brings the strategic and operational qualifications needed building and running a company in the digital era.

On Nov. 16, 2020, Cohen sent a letter to the company’s board, urging them to immediately conduct a strategic review and to provide stockholders with a credible and publicly available roadmap for cost containment, prioritizing profitable retail locations and geographic markets and building the e-commerce ecosystem. Cohen resorted to this public letter because his private attempts were not productive. Cohen sees a strong brand and large customer base and a path to success and shareholder value.

He believes the company can be the ultimate destination for gamers, but that destination must start with a strong e-commerce platform that provides competitive pricing, broad gaming selection, fast shipping and a truly high touch experience that excites and delights customers, including content and community. It needs to become the Amazon of gaming, with the added expertise and specialized customer service as a key differentiator.

Cohen urges the company to cut excessive real estate costs, streamline or sell non-core operations in Europe and Australia and hire the right talent. While Cohen does not specifically target CEO George Sherman, he does note that Sherman has substantial experience working for large brick-and-mortar retailers such as Advance Auto Parts, Best Buy and Target and is committed to a twentieth century focus on physical stores and walk-in sales despite the transition to an always-on digital world. - CNBC

Cohen notes that the company will be able to temporarily mask some of its issues with the new console cycle that will appear to validate its adherence to an outdated business model that is overdependent on brick-and-mortar sales. However, it is also this new console cycle and additional sales that can provide the cash flow to finance this strategy change into the future as the global gaming market is expected to reach $174.9 billion this year and $217.9 billion by 2023.

Cohen might have an ally on the board in James Symancyk, the CEO of PetSmart while Cohen was running Chewy, Symancyk also has a brick-and-mortar background and might not see it the same way Cohen does.

About GameStop Corp (GME)

GameStop is a retailer that sells video game hardware, physical and digital video game software, video game accessories, as well as mobile and consumer electronics products and other merchandise primarily through retail operations, with all stores engaged in the sale of new and pre-owned video game systems, software and accessories. Gamestock recently added four new directors through settlements and nominations by shareholders. A large part of the shareholder base is comprised of index funds such as BlackRock (12.12%), Vanguard (8.12%) and State Street (4.0%), who are reluctant to back an activist without the cover of an ISS or Glass Lewis recommendation. However, what is interesting here is there is an unusually high short interest,

Play on....

From The TradersCommodity Research Desk

 

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