Investor interest in GameStop Corp. (GME, Financial) perked up last week on the possibility of buyout offers for the company.
Many analysts are putting GameStop in the same category as Circuit City or RadioShack, counting the days until bankruptcy, and rightly so. The company’s long-term debt is over $800 million and its profits are down significantly from the 2014 to 2017 levels, when the company booked $1.5 billion in total net income. Unfortunately, the retained earnings seemed to be used more for survival purposes than figuring out how to pivot and add value in the market.
This hasn’t stopped successful money managers from getting involved, though. Jim Simons (Trades, Portfolio)’ Renaissance Technologies opened a new 1.6 million-share stake in GameStop during the first quarter, joining Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, which owns 3.1 million shares.
GameStop has so much potential. It’s small store size allows it to avoid the problems big retailers have had. Of course, Best Buy (BBY) has rebounded nicely now that its offline competition is gone. GameStop needs to create instead of compete. It needs to turn these retail stores into something different that creates the future of gaming for customers.
Some ideas
To follow are some ideas of routes the company could take to reinvent its business.Ă‚
First, the company could sponsor esports, either in-store or via teams like Nike (NKE, Financial) does with sports teams. Imagine if the next million-dollar esports tournament was through GameStop and streamed on Twitch and YouTube.
Second, GameStop could create a mobile app for in-home competitions or buy a game developer with the $247 million in cash it has instead of buying back shares or paying a dividend.
A third option could be redesigning its cluttered stores to make way for virtual reality gaming. Virtual reality is a long way off from being “in-home” ready, but GameStop could lead that future. Consoles are not dead yet, but streaming is still the future. Once 5G hits cell phones in 2020 and gigabyte speeds are ubiquitous, consoles will have even longer shelf lives.
The company could also sell smartphones already packed with game downloads or given credit for games via iTunes or the Android store with a GameStop membership. Handheld gaming is massive and only getting bigger. If the retailer can stop thinking like an agent for products and maybe even consult with Zappos on customer experience, it has hope.
Another idea is Gamestop could create a Twitch-like service (or buy one) for its 50 million loyalty rewards members. The entire point is to get eyeballs on your brand. Adding value isn’t always providing the lowest price, just ask Amazon (AMZN, Financial).
Finally, if GameStop remains committed to retail, then at a bare minimum it should offer free same-day delivery in local neighborhoods. Task Rabbit or Cavier would love to help.
The bottom line is GameStop needs to act like a startup, not a big retailer. The company needs top-line growth that will eventually translate to the bottom line.
In 2017, U.S. consumers spent more than $36 billion on games, and around the world more than $40 billion is spent annually on mobile games alone. In the last 12 months, GameStop has posted $9.1 billion in sales, a number that has flatlined over the last decade. For the good of the company, GameStop might need to be taken private, regroup and move forward with new strategies. If that’s the only way for it to stop paying a dividend and put the cash to work, then I’m all for it. Otherwise, debt will eventually eat the company like it did with Circuit City and RadioShack. I still think GameStop is in a better position than those companies were, but for how long?
Disclosure: I am not long or short GME.Ă‚
