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The recent announcement that GameStop will be closing 180-200 stores’ nationwide on the surface seems like a bad indicator of times ahead for the floundering brand. The second quarter earnings call this last week reported shrinkage in sales that where greater than the company had forecasted in the end 2018 for the fiscal year 2019. Executive Leadership at GameStop was anticipating a drop by 5%- 10% in comp and they have now adjusted this to the mid-teens for the balance of the year. When you dig further into the earnings call the picture that begins to form is of a company that knows they are in rough water and is far ahead of the storm.
While the slowing sales in the physical console market seems to be a poor indicator to Wall street, GameStop and Gamers both know that this is just a cycle of the market in anticipation of the new consoles releasing. 2020 will be a much better year for sales at GameStop and the executive team is positioning themselves to fully capitalize on it. Game stops leadership knows they have to cut fat and increase the bottom line margins. There was langue in the 2nd quarter earnings call that gave me a moment to pause.
“ The company is implementing a $200 million profit improvement plan, consisting of cost cuts and gross margin initiatives like inventory management improvements and pricing changes. This should lead to margin gains even before any potential sales recovery.”
I know this is corporate speak for cut labor, cut inventory, increase retail price. After this they head further down the path that leads me to be concerned at first with the plan that they will preemptively close profitable stores in order to gain some of those sales at nearby stores that are even more profitable. This allows them to retain the sales while drastically cutting the cast of the sale in any given market. The issue with plan is it is high risk. People that continue to purchase things in person at GameStop do so for several reasons. One of those reasons is convenience.
If the store closet to my home was closed because GameStop thought they would be able to capture more or the same amount of my business at another store that may be farther away, purchasing through Amazon may be looking better and better. This is in by no means a plug for amazon, but let’s be reasonable. Amazon is already a big part of my consumer decisions. Something that is as easy to ship in a very short time frame such as a video game is that much easier to buy from Amazon, when the convenience GameStop provides diminishes.
Farther into the earnings call some small amount of information gave me rise to believe that the long term health of the company is more secure in the hand s of the current leadership then people in the market may think. GameStop has closed the gap on their debt burden. Meaning GameStop now brings in more cash than they have debt obligations. It has been some time since GameStop has been cash flow positive. This information alone is enough to assure most reasonable gamers and investors that the company is viable for some years to come and should be able to maintain some sort of profitability for some time.
If GameStop where to continue to pay down its debt obligations and make itself even more competitive they could actually began to grow sales in the long term. As odd as this sounds if GameStop continues the trend of dropping there debt burden which in the start of 2018 was at 816 million, and which as of the end of the 2nd quarter this year they had dropped by 400 million. GameStop could cut their prices in the coming years, and began to push others out of the market, simply because they carry a lower debt to income ratio and do not spend as much money financing the debt load that they carry. Being competitive comes in many forms, and the long-term health of a company is something that so often is overlooked. As more and more electronic retailers try to trim costs and conserve as much of their brick and mortar operations as possible; GameStop is trying to find the smartest place to position themselves in each individual market. As always I would love to know your thoughts. Thanks for stopping by,
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Sincerely, Total Mage.