Business Analysis: GameStop

GameStop sells physical products in physical stores, but those physical products don’t need to be sold in stores. Video games and video game related products (like gaming consoles, controllers, stickers, books, etc.) don’t need to be tried on in a store like a pair of pants. Customers can accomplish the same tasks completely online.

Ignoring the e-commerce competition, GameStop also has physical retailers competing with comparable or sometimes cheaper prices. Stores like Target, Wal-Mart, and Best Buy offer the exact same products and accessories that GameStop offers, and GameStop doesn’t have any well-known social competitive advantage like friendly and inviting environments or incredible customer service. Yet, GameStop is making enough money to be paying out a 9.3 percent dividends. Where is the money coming from? And, more importantly, is GameStop still a viable company or are they another Blockbuster waiting to happen?

I’m going to take you through exactly what I did to find out.

The best thing to do when trying to find quantitative data on a company you’re evaluating is going straight to their financial documents. If it’s a pubic company, the information is public too. Go to sec.gov, click on “company filings” in the top-right corner (underneath the search bar), type in the company’s name or stock ticker symbol, search for “10-k” in the filing type search bar, and then click on the first document (most recent year), and then click on the top document again (the page changed).

It’s easy to do, but I had to go to college to find out this existed.

The next step is to read this long and boring document. For straight financial data you can scroll down to the income statement, balance sheet, and cash flow statement, but I wanted to really dig in to find out what the heck GameStop is doing to make all their money.

An Overview:

GameStop has two main sources of revenue.

1. Video Game Product retail, licensed by a large variety of companies with no contracts
2. Technology Brands: mobile and consumer product resell, licensed by AT&T and Apple with strict contracts

They operate in the United States, Canada, Australia, and Europe, but around 60 percent of their revenue and sales come from the United States. They also get around 38 percent of their total sales in the Holiday season (Christmas), but this isn’t different from other retailers who sell entertainment products.

Okay, now to get into the numbers and… what? Their net income dropped 91 percent from 2016 to 2017! They’ve been closing stores in every country except Australia, and their net income went from 4 percent of Net Sales to 0.4 percent of Net Sales in just one year. These are some concerning numbers that jump out to me, to suggests there is a problem at GameStop and now all I have to do is find where it’s coming from.

To do that I look at their selected financial data (or you can look at the income statement) and discover that Operating Earnings is lower than the previous two years because of a 324 percent increase in Asset Impairments from 2016 to 2017. Basically, GameStop has $358 million of value on their balance sheet less than the market value for those assets. They’ve posted consistent decreases in earnings from the United States (their biggest market) and experienced a $315 million loss from the technology brands segment.

This struck me as interesting because I found the source of the problem, but it wasn’t what I expected it to be. GameStop is losing hundreds of millions of dollars from their contracts with Apple and AT&T and not from selling video games from physical locations. In fact, 100 percent of their asset impairments is from the Technology Brands Segment.

Where is GameStop’s money coming from?

Primarily their physical store locations in the United States, but they have established a presence to retail products online and have strong relationships with manufacturers. Since there is no real difference between GameStop and other physical video game retailers there doesn’t seem to be a reason to doubt their ability to sell their products.

Is GameStop still a viable company?

Yes, but not for long with their current model. The management decisions for company strategy don’t make sense when you look at the data. They recognize that market trends are changing, as more and more consumers are spending money for gaming on computers and mobile devices instead of traditional consoles. Physical video game products and digital video game products total between $33 billion and $44 billion, while the mobile and consumer electronic market exceeds $188 billion.

However, instead of forming relationships with mobile and consumer electronic suppliers to continue selling products on an order by order basis like with their other physical video game products, GameStop decided to lock themselves into long-term and expensive contracts. They’re buying used or low-value products from Apple and AT&T, that quickly lose their value which means GameStop will post heavy losses until the contracts end, if they can’t sell those products for an excessive markup.

They’ve seen a 54 times increase in acquisition related debt, despite a 98 percent drop in acquisition cash expenditures. Their accounts payable is 104 percent of available cash. And, as previously stated, all of their Impaired Assets come from their Technology Brands segment.

Even if GameStop survives these horrific contracts, there’s still nothing to separate them from Wal-Mart or Best Buy. It’s currently a viable business, but I’m not going to invest in it.