BREAKING NEWS: GME’s Business Strategy and Priorities Revealed – Analyst Weighs In
As the market continues to fluctuate, GameStop (GME) has been at the center of attention. In this article, we’ll dive into the company’s business strategy and priorities, as revealed through their 10-K filings from FY 2019 to FY 2023. Our analyst will provide insights and speculate on the implications of these findings.
Business Strategy:
GME’s business strategy is centered around creating a "unique and engaging" retail experience, leveraging their brick-and-mortar stores to drive sales and customer loyalty. The company has focused on:
- Omnichannel retailing: Integrating online and offline channels to provide a seamless customer experience.
- Gaming and e-commerce growth: Expanding their product offerings and services to cater to the growing demand for gaming and e-commerce.
- Cost reduction and efficiency initiatives: Implementing cost-saving measures to improve profitability.
Business Priorities:
GME’s business priorities are:
- Gaming and e-commerce growth: Driving sales and revenue growth through gaming and e-commerce initiatives.
- Store remodels and renovations: Upgrading and modernizing their physical stores to enhance the customer experience.
- Digital transformation: Investing in digital technologies to improve operational efficiency and customer engagement.
Analysis and Speculation:
Based on the 10-K filings, our analyst believes that GME’s business strategy and priorities will have a significant impact on the company’s future performance. Here are some key takeaways:
- Gaming and e-commerce growth: GME’s focus on gaming and e-commerce will likely drive revenue growth, as these segments continue to experience high demand.
- Store remodels and renovations: The investment in store remodels and renovations will enhance the customer experience, potentially increasing foot traffic and sales.
- Digital transformation: GME’s digital transformation efforts will improve operational efficiency, reducing costs and enhancing customer engagement.
However, our analyst also notes some potential challenges:
- Competition: GME faces intense competition from online retailers, such as Amazon, and traditional retailers, such as Best Buy.
- Market fluctuations: The gaming and e-commerce markets are subject to market fluctuations, which could impact GME’s sales and revenue.
Conclusion:
GME’s business strategy and priorities reveal a company focused on creating a unique retail experience, driving growth through gaming and e-commerce, and improving operational efficiency. While there are potential challenges, our analyst believes that GME has a solid foundation for future growth.
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My previous post was pure Due Diligence and I purposely avoided any speculations.
You should have a look if not done yet, here is the link: Review and compilation of the Business Strategy and Business Priorities information provided officially by the company in all the 10-Ks from FY 2019 until FY 2023. Additional info on Debt evolution, Shares Repurchases, Dividends, Liquidity and Management Changes is also provided.
In this post I perform my analysis over the previous post and provide some speculation, all done on top of some additional info I provide in this post.
My Analysis
In FY 2019, the pre-Ryan Cohen era, the company had a very conservative and innocuous Strategy, mainly focusing on optimizing the core business.
To the company's credit, they launched a share repurchase program with up to $300 million budget an bought back 38.1 million shares, totaling $198.7 million, for an average price of $5.19 per share. As of February 1, 2020 (and as of now), there still was/is $101.3 million remaining under the repurchase authorization.
In FY 2019 the company paid cash dividends of $40.5 million and on June 3, 2019, the Board of Directors elected to eliminate the Company’s quarterly dividend immediately.
The old Credit Agreement was in place, with a borrowing base capacity of $420 million and a maturity date of November 2022. As of February 1, 2020, total availability under the Revolver was $270.3 million, with no outstanding borrowings and outstanding standby letters of credit of $7.3 million. During the first quarter of fiscal 2020, the company borrowed $150 million on the Revolver.
All the above done by the previous Management team, pre-RC era.
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In the 10-K for FY 2020 we start to see RC's moves and him gaining increased influence.
The Business Strategy mentions that besides the stabilization and optimization of the core business, they would be in parallel "… pursuing strategic initiatives to transform GameStop for the future by expanding our addressable market and product offerings to drive growth in the gaming and entertainment industries."
That was the first time "growth" was mentioned.
RC's handwriting is clear in this passage: "Transform GameStop into a customer-obsessed technology company to delight gamers."
They immediately mention some steps they would be taking in FY 2021, among them
"Investing in technology capabilities, including by in-sourcing talent and revamping systems, and evaluating next-generation assets.;"
There isn't yet any concrete references to what technologies at this point in time.
In FY 2020 they started paying up and exchanging their bonds.
The old Credit Agreement was still in place but their availability to borrow from it was decreased to only $ 88.4 million, so it became much tighter.
In FY 2020 (December 20 2020) the company launched an ATM program and later stated they were considering expanding it further in 2021 "primarily to fund the acceleration of our future transformation initiatives." "Net proceeds from sales of our shares of Class A Common Stock under the ATM Program are expected to be used for working capital and general corporate purposes, which may include funding our ongoing digital-first growth strategy and product category expansion efforts"
In my opinion the company was visionary at this point, they saw the squeeze and the social media interest and positioned themselves properly to raise capital.
By March 23 2021, the time of the issuance of the FY 2020's 10-K the Management Team had already changed considerable, with RC and Alan Attal already on board, but the Board was still a mix of old and new members and still quite big.
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Then we enter FY 2021.
Matt Furlong and Mike Recupero join in June from Amazon as CEO and CFO, respectively.
In the Business Strategy part of the FY 2021's 10-K we find again the same sentence as in FX 2020's: "pursuing strategic initiatives to transform GameStop for the future by expanding our addressable market and product offerings to drive growth in the gaming and entertainment industries"
and again
"GameStop is focused on transforming into a customer-obsessed technology company to delight gamers".
But there is more.
"Establish ecommerce excellence" is mentioned for the first time. Larry Cheng's handwriting on that one, as he had also joined by this time.
"We aim to be the leading destination for games and entertainment across all channels and will scale up our ecommerce operations to make the most convenient solution for our 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."
"Invest in new growth opportunities. As we scale and expand our core offerings we will simultaneously invest in additional growth, including blockchain, digital assets (including non-fungible tokens ("NFTs")), Web 3.0 technology, and new destination formats for our stores. In January 2022, we entered into partnerships with Immutable X Pty Limited (“IMX”) and Digital Worlds NFTs Ltd. ("Digital Worlds") 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. In addition, Digital Worlds agreed to provide up to approximately $150 million in IMX tokens to GameStop upon the achievement of certain milestones."
Aha, the above is the company stating they would invest in new growth opportunities, not only in their core offerings but also in new areas like blockchain, digital assets including NFTs, Web 3.0, etc.
The FY 2021's 10-K was issued on March 17 2022. so now we know for sure they were already working on those topics by that time.
The Business Priorities section of the FY 2021's 10-K is so important that I will copy it here in full:
They also eliminated debt and raised $ 1.67 billion from ATM Offerings.
What a thrive it should have been to be working there at that time!
Really a bright future appeared to be ahead!
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Now we can go to FY 2022.
Please have a look at the excitement that can also be seen at the letter from CEO Matt Furlong to the Shareholders for the 2022's Annual Meeting from April 21 2022:
Now, their Business Strategy section of the FY 2022's 10-K still stakes that they are still in parallel "… pursuing strategic initiatives to generate long-term sustainable growth in the gaming and entertainment industries."
So far so good.
They slightly rephrased the "ecommerce excellence" part but the content is almost the same:
*"*Establish Omnichannel Retail Excellence. We aim to be the leading destination for games and entertainment products through our stores and ecommerce platforms. To accomplish this, we are taking steps to ensure we are a fast and convenient solution for our customers. This includes app & site redesigns, better product availability across all channels, improved fulfillment speed, partnerships and store concepts to attract new customers, and a further improved customer service experience."
Growth was still mentioned explicitly:
"Leverage Brand Equity to Support Growth. GameStop has many strengths and assets, including strong houshold brand recognition and a significant store network. We intend to use these assets to attract new partnership arrangements, expand product offerings and acquire new customers. We will simultaneously explore and pragmatically invest in strategic initiatives to support our growth."
However, there is a new point that appears in their Strategy for the first time:
*"*Achieve Profitability. During fiscal 2022, we optimized our corporate cost structure to align with our current and anticipated future needs following the completion of a majority of the necessary upgrades to our systems, fulfillment capabilities and overall foundation. We will continue to focus on cost containment as we streamline parts of the organization where we can operate with increased efficiency."
Profitability. Cost Structure. We will come back to this in a minute.
First let's have a look at the section Business Priorities for FY 2022.
All we saw before until now (except Profitability) is related to that initial first pahse, up to middle of 2022.
Gamestop was then entering a new phase of its transformation from July 2022 onwards, and it is in this phase that the "Achieve Profitability" target belongs to.
They go on: "We are taking the following steps, with a significant emphasis on cost containment:"
Significant emphasis.
What more significant as emphasis than all the layoffs from second half of 2022 that even slashed the Blockchain positions?
https://blockworks.co/news/gamestop-layoffs-crypto-staff-axed
Some steps to achieve the 2nd phase of the transformation are mentioned, among them:
" Prudently increasing the size of our addressable market by growing our product catalog across PC gaming, collectibles, consumer electronics, toys, augmented reality, virtual reality and other categories that represent natural extensions of our business; "
They mention as achievements: "In May 2022, we announced the launch of our non-custodial digital asset wallet to allow gamers and others to store, send, receive, and use cryptocurrencies and NFTs across decentralized apps. In July 2022, we launched our NFT marketplace to allow gamers, creators, collectors and others to buy, sell and trade NFTs. Our NFT marketplace enables parties to own their digital assets, which are represented and secured on the blockchain, and allows parties to connect to their own digital asset wallets to enable transactions. In November 2022, we launched the integration of the Immutable X blockchain protocol, which provides access to various Web 3.0 products and NFT gaming assets to our customers."
However, in FY 2022, which ended January 28 2023, also saw the start of the dismantlement of all the achievements above:
"In an update posted on its GameStop NFT website, the company said it has decided to wind down its NFT marketplace “due to the continuing regulatory uncertainty of the crypto space.”
“Effective as of February 2, 2024, customers will no longer be able to buy, sell or create NFTs,” GameStop said in the update. “Your NFTs are on the blockchain and will remain accessible and saleable through other platforms.”
So, clearly things were not so bright anymore by End of FY 2022.
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We enter now FY 2023.
One good point to start is to look at the letters to the Shareholders contained in the 2023 Proxy Statement, from the still CEO Matt Furlong (but not for long):
I find this a beautifully written Letter. It provides a review of the situation and progress since 2021 and projects what should happen in 2023.
I emphasise this part, talking about what happened in the past. in 2022:
"In fiscal 2022, GameStop’s operating environment dramatically changed due to the onset of inflation, rising interest rates and macro headwinds. Rather than stand still, we pivoted to cutting costs*, optimizing inventory and enhancing the customer experience. We also found efficient ways to improve shipping times, integrate online and in-store shopping experiences, and establish a culture of increased incentivization among store leaders and tenured associates****"***
So the company's strategy had to change due to Inflation, rising interest rates and macro headwinds.
And also this part giving the outline of the future:
"Looking ahead, GameStop is aggressively focused on achieving profitability while still pursuing pragmatic long-term growth."
They emphasise again the need to achieve profitability, aggressively. Long-term growth would still be persued, but only pragmatically.
So let's have a look of what the 10-K for FY 2023, issued on February 3rd 2024 contains.
2023: "Leverage Brand Equity to Support Growth. GameStop has many strengths and assets, including strong household brand recognition and a significant store network."
However, there is a major difference, please compare the above with the 2022's section:
2022: "Leverage Brand Equity to Support Growth. GameStop has many strengths and assets, including strong houshold brand recognition and a significant store network. We intend to use these assets to attract new partnership arrangements, expand product offerings and acquire new customers. We will simultaneously explore and pragmatically invest in strategic initiatives to support our growth."
They removed the part "while pursuing strategic initiatives to generate long-term sustainable growth in the gaming and entertainment industries."
And then we find the same 3 items as in 2022's Business Priority section, Establish Omnichannel Retail Excellence, Achieve Profitability and Leverage Brand Equity to Support Growth.
However, there is again a major difference:
2023: *"*Leverage Brand Equity to Support Growth. GameStop has many strengths and assets, including strong household brand recognition and a significant store network."
2022: "Leverage Brand Equity to Support Growth. GameStop has many strengths and assets, including strong houshold brand recognition and a significant store network. We intend to use these assets to attract new partnership arrangements, expand product offerings and acquire new customers. We will simultaneously explore and pragmatically invest in strategic initiatives to support our growth."
Yes, they removed formally the part talking about how they would "simultaneously explore and pragmatically invest in strategic initiatives to support our growth."
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All in all, it is my opinion that at this point Gamestop had gave up growth and is since then strictly persuing profitability.
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Matt Furlong's employment was then terminated by the company and RC took full control:
*"*On June 5, 2023, our Board of Directors terminated Matthew Furlong’s employment with the Company as its President and Chief Executive Officer without Cause (as such term is defined in Mr. Furlong’s letter of employment dated June 9, 2021), effective immediately. On June 7, 2023, in connection with Mr. Furlong’s termination, our Board of Directors appointed Ryan Cohen as Executive Chairman of the Company and Mark Robinson as the new principal executive officer of the Company with the title of General Manager. On September 27, 2023, the Board of Directors, with Mr. Cohen abstaining, unanimously appointed Mr. Cohen, as the President, Chief Executive Officer and Chairman of the Company. In connection with this appointment, Mr. Cohen relinquished his Executive Chairman title and assumed the role of principal executive officer of the Company from Mr. Robinson. Mr. Robinson remained the Company’s General Counsel and Secretary.
On July 21, 2023, Diana Saadeh-Jajeh resigned from her position as the Company's Chief Financial Officer, effective August 11, 2023. On July 27, 2023, in connection with Ms. Saadeh-Jajeh’s resignation, the Board of Directors appointed Daniel Moore as the Company’s Principal Accounting Officer and interim Principal Financial Officer, effective August 11, 2023."
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*"*On December 5, 2023, the Board of Directors approved a new investment policy (the “Investment Policy”). Subsequently, on March 21, 2024, the Board of Directors unanimously authorized revisions to the Investment Policy to codify the role of certain members of the Board of Directors in overseeing the Company’s investments. In accordance with the revised Investment Policy, the Board of Directors has delegated authority to manage the Company’s portfolio of securities investments to an Investment Committee consisting of Mr. Cohen and two independent members of the Board of Directors, together with such personnel and advisors as the Investment Committee may choose."
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"At-The-Market Equity Offering Program
On May 17, 2024, we entered into an Open Market Sale AgreementSM (the “Sales Agreement”) with Jefferies LLC (the “Sales Agent”) providing for the sale by the Company of shares of our Class A common stock, par value $0.001 per share (“Common Shares”), from time to time through the Sales Agent in connection with an "at-the-market" equity offering program ("ATM Offering"). Pursuant to the prospectus supplement relating to the ATM Offering filed with the SEC on May 17, 2024 (the "May Prospectus Supplement"), we sold an aggregate of 45.0 million Common Shares for aggregate gross proceeds before commissions and offering expenses of approximately $933.4 million*.*
Pursuant to the prospectus supplement relating to the ATM Offering filed with the SEC on June 7, 2024*, (the “June Prospectus Supplement”)* We sold an aggregate of 75.0 million additional Common Shares for aggregate gross proceeds before commissions and offering expenses of approximately $2.137 billion*.*
We intend to use the net proceeds from the ATM Offering for general corporate purposes, which may include acquisitions and investments in a manner consistent with our investment policy."
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Now the newest information from them all:
With respect to retail operations RC clearly states that focus is on cost reduction and profitability. He will not chase revenue for revenue, they have to bring profit and prospects of future cashflows to be of value to shareholders.
Then RC talks about how having a strong balance sheet, specially in uncertain economic times, is a strategic advantage. In other words, to wild investments, no acquisitions in these uncertain times.
It is worth noting that this statement from RC is form June 17 2024, after the company had already received the proceeds from the sales of 120 million shares.
My Speculations
Based on all the above, I can now provide my speculations:
- I believe the company will probably keep the proceeds from the ATMs invested according to the new Investment Policy, in marketable securities. I don't believe that the company would perform any Acquisition or Merger during these times of economic uncertainty.
- They may start to invest part of the proceeds in equity securities, thus expanding their definition of marketable securities, but the major part I believe they will continue to invest in the debt securities as done until now, with a short maturity date.
- So, in the next 10-Q I expect to see exactly what I describe in the 2 points above.
- I expect store closures to continue, as RC wants to have a smaller but profitable company. I also expect cost cutting measures to continue and revenue declines for the next quarters (MSM will be all over it)
- I expect that the interest rates from the investments will help the company to become and remain profitable until point in time when the operational efficiencies will be so high that the small company remaining will be profitable on its own, and only then I speculate that the company would use their cash to pursue other types of investments and even acquisitions.
- I also speculate that the share price will slowly cool down, in the absence of any new hype caused by RK or any other big news.
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