GameStop Corp. (GME, Financial) continues to pound out cash, its gross margins have increased 670 basis points since 2011 and capital spending is still far less than net income. The company has taken on more debt, but in a very manageable way, while it figures out the next pivot.
Virtual reality will be a big deal for the company in the future and it does not appear the rise of smartphone apps has stopped people from playing video games on consoles. Personally, I am really excited about Nintendo Switch and the new Mario and Zelda games, which I think will be a big winner not only for Nintendo (TSE:7974, Financial), but for stores like GameStop as well. GameStop has already reported a big uptick in preorders of the gaming system.
Current quarter
GameStop had a pretty disappointing holiday season, with sales declining 16.4% year over year. This was on the back of decreased same-store sales of 18.7% in the last quarter, impacted by weak "Call of Duty" and "Titanfall" sales.
The real problem is that retail is changing quickly. As evidence of this, GameStop suffered from reduced in-store traffic, which lead to the declines. Yet, the company generated more than $2.5 billion in the quarter at a profit and is still paying out a 37-cent quarterly dividend (6% yield), which will only increase due to continued share buybacks. With the stock currently priced at just six times earnings - dare I say it is a buy.
On the bright side, comps for the Tech Brands division, which was launched in 2013 when it acquired Simply Mac, and Spring Mobile, the fastest growing AT&T authorized retailer of wireless services, surged 44% to $192 million due to store expansion and strong iPhone sales.
GameStop is a resilient company. It was founded in 1984 by former Harvard Business School classmates James McCurry and Gary M. Kusin as Babbage, named after the British mathematician credited with inventing the first mechanical computer. Billionaire Ross Perot was one of the first investors. The company started with Atari as its main product, which is now irrelevant, but what matters is that over time, the company has pivoted and game prices have risen. If the trend continues, GameStop's sales will follow along just by keeping its doors open. That is important.
I am not a big fan of retail because most retailers are doing a lousy job of tying the online and brick-and-mortar experience together to serve customers better. GameStop is no different. Despite this, games are still a popular item. With over 7,600 stores, there is a GameStop in most neighborhoods across the U.S. In addition, the company’s other brands along with a network of 48 million rewards members indicates the death of this retailer is a long way off.
Looking forward
Guidance for the year is just shy of $4 per share. Management has plans to reduce selling, general and administrative expenses by $100 million by 2019, which could easily add up to another dollar per share on the EPS number. All in all, by 2020, GameStop could be doing $10 billion in sales with EPS in the $5 range.
Jim Simons' (Trades, Portfolio) Renaissance Technologies has accumulated just shy of 1% of GameStop stock, 877,802 shares, at a price closer to $30 per share.
I realize the company does not have a moat around it for long-term durability, but that does not mean the stock price will not double in the next three to five years, which is what I am looking for.
Disclosure: I have no positions in GME, but may initiate a long position over the next 72 hours.
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