Turnaround Letter Buy-rated GameStop (GME) reported a 27.5% decline in 2019 holiday period (Nov-Dec) sales compared to a year ago. While huge and worse than consensus estimates, it was not entirely unexpected as the company reported on December 10th that its 3Q revenues fell 25.7% and offered guidance for similarly weak 4Q revenues. GME shares have declined 15% in the past two days on the news. However, the shares remain about at the midpoint between their August 2019 lows and their December 2019 minor rebound high.
GameStop continues to feel the effects of the secular headwinds facing retail in general, the transition of game purchases to digital downloads and to desktop/portable devices that allow consumers to bypass GameStop, and the lull period as gamers put off purchases while they wait for the new Sony Playstation and Microsoft Xbox consoles coming in late 2020.
The company’s turnaround has two primary drivers. First, under new CEO George Sherman, GameStop is improving how it runs its operations (including closing low-value stores, releasing excess cash tied up in working capital, increasing efficiencies) and transitioning to new services to capture more of the rapidly growing revenues of the gaming industry. The effects of these improvements should be seen over the next 3-12 months.
The second driver is the upcoming new console cycle. The releases could spawn a new console cycle which should provide a huge tailwind to GameStop’s revenues and profits. The cycle will likely not drive the stock until later in the year.
For most of 2020, GameStop shares will likely be volatile. We encourage investors to take starter positions now, and add on weakness during the year. At the current price, we estimate GameStop is trading at less than 2x depressed 2020 EV/EBITDA, with a net-cash position on the balance sheet by the end of fiscal 4Q.
We retain our Buy rating and our $16 price target.
Disclosure Note: One or more employees of the Publisher own GME shares.