GAMESTOP CORP. (GME)
ANALYSIS & EVALUATION
Jonathan Jaeger
August 15, 2013
UW-Milwaukee
BUS ADM 600
Data & Factual Information Collection
GameStop (GME) Corporation falls into the investment sector called consumer
discretionary, more specifically specialty retail and consumer electronics. According to
NPD Group, Inc., a market research firm, the electronic game industry was
approximately a $13 billion market in the United States in 2012. (GME 10-K, 2013)
Other firms that fall into this category and/or are close competitors include; Best Buy
(BBY), H.H. Gregg (HGG), and RadioShack (RSH). In this analysis I will be using
GME as the focal firm and the other three firms to draw comparisons within the
industry.
Overall GME is a very well-run firm with solid senior leadership which has a grasp on
changing global segments and upcoming concerns. The last 52-week stock prices are
indicative of the firms current market position, GME has had an outstanding run,
starting at $15.75 and increasing to nearly $50, an impressive gain by any standard.
This gain has come before the lagging release of two new video gaming platforms, the
new XBOX ONE and PlayStation 4. You many ask why this is such an impressive feat?
The answer lies in the chart below, which displays the cyclical track history of GME
stock price compared to new platform release. The release of new platforms and
product lines has historically spurred on additional sales; in fact GME has already
collected revenue in the form of pre order sales for these new systems and related
products.
Realizing this trend, it is possible that intelligent investors are getting ahead of the
anticipated increased leap in stock price. Alternatively, if the sales are less than
expected than GME could be in for a drastic decrease in stock price. This brings up the
high short interest that the company also has, nearly 31% as of July 12, 2013. This
short interest represents a large amount of people whom believe that GME stock is
overvalued right now and is going to decline in the near future.
Prior to July the industry was on edge waiting to hear from both Sony and Microsoft if
their new platforms would offer replay of older games. If the new platforms wouldn’t
have the capability to play old games, the company’s bottom line would be drastically
reduced and would cripple stores. GME and other second tier retailers were elated
with to hear that both platforms will offer replay of older games on their systems.
(Zimmerman, 2013) The announcement spurred a 7.8% stock surge and meant that
GME could continue operations as normal and shift focus back to other company
planning.
In light of the delayed platform releases and potential console changes, GME became
aware of their potential to fail in the market if they didn’t revise their business model.
The relationship between GameStop and console developers is good, however, in the
business world companies are always trying to cut costs and increase revenues. A
cyclical industry that relies so heavily on new consoles leaves a concern for future
returns and sustainability. To overcome this problem GME has dug deep into their
pockets and rapidly engaged in market acquisitions worldwide. They have
implemented systems and started to offer additional products, including the resale and
repair of smartphones and tablets. The revenue that GME recognized from related
sales and repairs in FY 12’ was $1.5 billion. This number is inflated due to reporting of
the “other” segment which includes PC entertainment and other software, digital
products and currency, mobile products, including tablets and refurbished mobile
devices, accessories and revenues associated with Game Informer magazine and the
Company’s PowerUp Rewards program.
Like many other companies including Best Buy (BBY), GME started a paid loyalty
program in 2010, which allows its customers to apply credit to their account based on
past purchases. The PowerUp Rewards program has 22.3 million members, 7.9 million
of which are paid members. These paid members received a monthly issue of Game
Informer, GME’s own magazine, which recognizes additional advertising revenue and
free promotion for their company.
The decision to expand business into the tablet and smartphone segment can be derived
from a report by the Entertainment Software Association (ESA), which estimates that
the average U.S. household owns at least one game console, PC or smartphone. This
information provided an avenue for diversification and additional revenues.
Additionally, 49% of U.S. households own on average two game consoles. These
aforementioned trends are expected to continue and should play directly into
GameStop’s business model.
Industry Competition
One of GME’s rival companies, RadioShack is currently engulfed in a downward spiral
and looking for any way to recover from poor planning, failed ventures, and an identity
crisis. This makes it clear that not all companies are created equally and set for
boundless success; even companies like RadioShack which have experienced years of
triumph are susceptible to economic downturns and poor planning. According to Wall
Street Journal writer, Drew Fitzgerald, the RadioShack CFO has stepped down and his
company has continued to liquidate assets in an attempt to pay off long term debt that
will come due near the end of 2013. This is one sure sign that a company is in financial
trouble, another is when a company suspends long running dividends and aren’t
expanding into new financial ventures. In comparison, GME introduced quarterly
dividends and has acquired multiple new business ventures. The first time quarterly
dividends started in FY 12’ and totaled $1.10 per share annually.
Other problems that RadioShack faces are low inventory turnover, excessive product
markdowns, and poor cash flows. Poor cash flows comprise a company’s ability to
invest in new products and opportunities, shift their focus, and to pay short term debt.
RSH can say they want to carry fewer products but in reality, they probably cannot
afford to purchase or hold these products either. RadioShack’s last ditch effort to save
their entrenched company involves marketing their highest gross profiting products
and eliminating lowest grossing products in their stores.
The chart below depicts the steep decline in consumer discretionary stock prices and
specifically specialty retail stock prices. While the entire sector is attempting to
revamp their business model, some companies have been more successful than others.
RSH was and is very poorly positioned, BBY was in a tough position last year, and
GME and HH Gregg are best positioned at this time. While Best Buy isn’t in as bad of
a position as RSH and has seen a 128% gain YTD in 2013, it was facing an identity
crisis and struggling to escape the “showrooming” effect, where customers come to play
and touch products before seeking alternative places to purchase. In an attempt to
survive, BBY struck contracts with Microsoft and Samsung, which carve out unique
kiosk areas within existing Best Buy stores. The inventive strategy by Best Buy will
generate sq. ft. leasing revenue but may not be enough to keep them above water and
looking at a situation similar to RadioShack in the future.
BBY took additional actions which included selling 50% stake in its European
businesses, closing unsuccessful stores nationwide and focusing on smaller stores,
shifting to online retail, and hiring/training better sales staff (Jakab, 2013). While
competitors downsized their companies, GME conversely has shifted its business to
include more sectors, including pre-owned games, cell phone resale and repair, tablet
resale/repair, media player resale and digital content. In 2012, this new segment
offered 27.4% or 2.4 B to GameStop’s revenue. This section of revenue also has the
highest gross profit margin at 48.1%, significantly higher than total gross profit of
29.8%. GME’s international segments include 6,602 Company-operated stores in the
United States, Australia, Canada and Europe and have continued to produce positive
revenue for the firm. These international extensions have done so well, GME plans to
expand their global footprint.
GME isn’t totally invulnerable to poor decision making, in 2012 it did record a goodwill
impairment loss of $627 million, leaving GME with 1.4 billion in goodwill. $467 million
of the impairment loss was attributed to the acquisition of MicroMania, a French based
video game retailer. MicroMania’s trade name was impaired due to revenue forecasts
that had declined since the initial valuation (Pg. 42, GME 10-K).
Firm Performance Comparison
Below is the 5-yr stock price history for RadioShack, and GameStop (RSH; & GME).
After that there is a comparison of all four firms stock prices on one graph, comparing
them latterally and longitutnally.
5-Yr Stock Price History- Radio Shack, Corp (RSH)
5-Yr Stock Price History- GameStop, inc (GME)
5-Yr Four Company History (BBY; HGG; RSH; & GME)
.
VRINE & SWOT Analysis
The VRINE model is used to determine if your company or product can sustain a
competitive advantage in an industry. It is comprised of valuable, rare, inimitable/nonsubstitutable, and exploitable. In an industry like consumer discretionary which relies
so heavily on a strong economic standing and loyal customer base, having a valuable
resource or capability is a must. GME does have a valuable and distinguishable brand
name and convenient locations. It competes in a small niche market and relies heavily
on customers for supplies and 3rd party companies for the product base.
GameStop (GME)
Distribution Network
Valuable
Brand Recognition
Early Arriver Advantage
Rare
Product-NO
Service- YES
Product-Absolutely
Inimitable
Service- Attainable, but
difficult
Non-substitutable
Few
Exploitable
Absolutely
GME has many business strategies in place and already working hard for them,
including; being the industry leader position, existing contracts, great standing with
other gaming industry leaders, which leads to bargaining power and leverage, and
finally their outstanding brand recognition worldwide. Not everything about GameStop
is good however, the chart above makes it quite obvious that this business model if not
free from competition. The business is easy to start up and the products they sell are
available and not rare. Having said that, the barrier to entry within this market are
quite steep due to companies like Wal-Mart and Target whom also offer video games,
PC games and software, and accessories. These companies have such small margins
and order in bulk, which blocks out much of the competition. Luckily for GME, they
established themselves early enough in the market and built a competitive advantage
by establishing and exploiting their supply channels.
GME drove a stake in between itself and megastores (Wal-Mart) by choosing to cater to
niche clientele who appreciate a knowledgeable staff which possess a noticeable
appreciation for gaming. This strategy was a cornerstone decision which helped
successfully establishing GME and energizes customers to return. GME has become
even better at exploiting their resources and capabilities, introducing an online
interface which allows customers to trade or exchange games for cash, other games, or
in store credit. Their new online store front is well organized and enhanced for
customer interaction. This exploitation of resources and capabilities contributes to
maintaining their sustainable competitive in an aggressive and changing specialty
retail market.
Strengths
Loyalty Program- Magazine
Subscription add-on
Inventory Management System
Recent Acquisitions
Two Large Distribution Centers
with Strategic locations
Debt Free- Last 2 yrs.
Opportunities
Mobile/Casual/Browsing/Social
Gaming
3rd Party Products
Online Game Trading Interface
Expand Mobile Business
Further investment in Inventory
Management System
Weaknesses
Heavily rely on Asian
distributors
Overpayment of MicroMania
Short Interest in Stock
Mobile/Casual/Browsing/Social
Gaming
Dense US Revenue
Concentration
Internal
Threats
Delayed Release of Gaming
Platforms
Economic Outlook directly
correlates to consumer
discretionary spending
Mobile/Casual/Browsing/Social
Gaming Piracy
IT Security- Data Breaches
Online Game Content
External
Five Forces Analysis
The five forces framework was designed as an industry analysis tool and strategic
development which will evaluate if a company is attractive in a given market. It is
similar to SWOT analysis but conveniently consists of five factors which help make
businesses more profitable and aware of industry changes. The five forces include:
threat of new entrants to the market, threat of substitute products/services, bargaining
power of customer, bargaining power of suppliers, and intensity of competition within
an industry.
For the specialty retail industry, GME is currently well positioned in a dangerous
niche, however, this could quickly deteriorate if the economy crashes again or the new
gaming systems are a failure. The threat of new entrants is quite limited, given the
fierce competition that it would face. There are many small startup gadget repair
operations that are stated every day, with limited overhead and similar technical skills.
The trust and brand recognition that GameStop commands in the market is a valuable
asset. The name alone conveys what the company does for a business and the large
chain that spans the US and international markets are invaluable. Customers love it
when they can travel across the country and the same business is there and will honor
loyalty programs, returns, exchanges, and familiar service and products. Additionally,
this industry isn’t a highly profitable business in and of itself; therefor it isn’t attractive
to new incumbents.
The threat of substitute products or service within this market is a problem; the
products that GME offer are exactly the same as that which is offered at rock bottom
prices at Wal-Mart, online, and hundreds of other stores worldwide. Where GME
differs is the reselling, refurbishing, and exchange of older console games. More than
anything, loyal customers look forward to interacting with other loyal gamers and a
knowledgeable staff that is often equally into gaming.
Bargaining power in the specialty retail industry is skewered in GME’s favor. GME
offers to buy old games from customers at low prices and resells them with a markup.
There are limited other stores that offer any better prices or a better selection to
exchange from. To further handcuff customers, the loyalty program was implemented
and keeps customers coming back to use saved points from previous transactions.
The suppliers in this industry are interestingly enough the consumers themselves,
known as a consumer supply chain. (Chasan, 2013) GME provides the storefront and
money up front for the exchange, but customers provide a portion of the merchandise.
Saying this, the customer lacks the right to haggle for prices, but can elect to privately
sell their game on an online media terminal. GME purchased Buy MyTronics in March
of 2012, which filled their void in online retailing of mobile devices and tablets. Their
acquisition of Kongregate, in August of 2010 eliminated their weaknesses in
mobile/casual/browser/social gaming. By purchasing Kongregate GME has an online
and mobile gaming site that hosts 74,199 games and generates 15 million unique
visitors per month. The success of this site is generated from selling advertising space
and virtual currency to advance in free gameplay. Determining which game will
striking it rich in the world of mobile gaming is quite hard to pin point, however, this is
a good start for GME. The latest addition is Spawn Labs; a game streaming service,
which could become a large revenue source for GME if it proves itself not only reliable
but also has a user friendly interface.
The market is quite intense and there is limited room for price fixing and customers are
price elastic. Right now all companies are looking for any way to save money and
customers aren’t any different. Most consumers enjoy the convenience of online
transactions and quickly evaluating the best valued product. GME’s closest direct
competitors include; Best Buy, Wal-Mart, and Amazon. In comparison to Best Buy,
GME is positioned well in a more specific and niche market, limiting their overhead
and product variety.
Final Recommendations
Based on the SWOT analysis and analytical analysis of GME, I believe that the
company is destined for an upside of an additional $10-15 stock jump following the
initial introduction of the new consoles. Six to twelve months later the stock will
deprecate down and settle around $40-47. The next quarter will have a huge bearing on
the next year and most likely longer, until the next platform release.
There are a few avenues that GameStop senior managers could consider in order to
maintain their competitive advantage within the intensely competitive industry. As
explained earlier, the majority of threats and concerns have already been addressed by
GameStop; they have attempted to eliminate their weaknesses by diversifying, through
acquisitions and expanding their markets and product lines and eliminating under
producing stores globally.
The constant threat of information technology security has been mitigated with the use
of secure technology and the GameStop brand is a good platform to build customer trust
upon. The online gaming content and internet sales are substantially upgraded from
years past and continue to provide customers the convenience and competitive pricing
they desire.
The final recommendation that I can provide for GameStop’s top managers is to
continue to stay vigilant and adapt to the every changing consumer market and
evolving technology.
Data Analysis Sources
This research report is a combination of data research, graphical analysis, logical
considerations, and my personal forward looking opinions. The below listed websites,
SEC Financial Reports, and Analyst Reports were the sources in which helped derive
the information within this report.
Articles
1.
Fitzgerald, D., & Zimmerman, A. (2013, April 23). Latest loss raises
hurdles for radioshack. Wall Street Journal. Retrieved from
http://online.wsj.com/article/SB10001424127887324874204578440363579
665432.html?KEYWORDS=radioshack
2.
Jakab, S. (2013, May 20). Best buy’s comeback story worth a read. Wall
Street Journal. Retrieved from
http://online.wsj.com/article/SB10001424127887323463704578495353955
994718.html?KEYWORDS=best buy
3.
Chasan, E. (2013, May 22). Gamestop CFO: Bartering helps fill the gap
between new consoles. CFO Report-Wall Street Journal. Retrieved from
http://blogs.wsj.com/cfo/2013/05/22/gamestop-cfo-bartering-helps-fill-thegap-between-new-consoles/?KEYWORDS=GameStop
4.
Zimmerman, A. (2013, June 11). Gamestop investors cheer sony’s embrace
of used games. Wall Street Journal. Retrieved from
http://online.wsj.com/article/SB10001424127887323495604578539613330
793012.html?KEYWORDS=GME
5.
Fitzgerald, D. (2013, July 23). Radioshack pushes to clear inventory. Wall
Street Journal. Retrieved from
http://online.wsj.com/article/SB10001424127887324783204578623472213
498886.html?cb=logged0.28164506307803094
6.
Fitzgerald, D., & Jones, K. (2013, August 1). Junk-rated debt is lowered
another notch, boosting pressure on retailer. . Retrieved from
http://online.wsj.com/article/SB10001424127887324635904578642552575
601708.html?KEYWORDS=radioshack
Graphs
RadioShack
http://finance.yahoo.com/charts?s=RSH#symbol=rsh;range=5y;compare=;indicator=volu
me;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
GameStop
http://finance.yahoo.com/charts?s=GME#symbol=gme;range=5y;compare=;indicator=vol
ume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
-RSH; GME; BBY; & HGG 5yr compared stock price history
http://finance.yahoo.com/charts?s=HGG#symbol=hgg;range=5y;compare=bby+gme+rsh;
indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefi
ned;
10-K Filings and Financial Reports
GameStop
https://research.ameritrade.com/wwws/stocks/secfilings/filing.asp?data=B64ENCeyJEb
2N1bWVudEtleSI6IjEzNi0wMDAxMTkzMTI1MTMxNDA0NDMtN0RCSFFSQkg0MlR
UUjlGMzVQS0hOOVYxSE8iLCJGT1JNQVQiOiJIVE0iLCJGT1JNX1RZUEUiOiIxMC1
LIiwiQ0FURUdPUlkiOiJBbm51YWwgRmluYW5jaWFscyIsIkRvY3VtZW50RGF0ZSI6Ij
IwMTMtMDQtMDMgMjA6MzA6MTEiLCJEb2N1bWVudERhdGVfZiI6IjA0LzAzLzIwM
TMiLCJBTUVOREVEIjpmYWxzZSwiQU1FTkRFRF9mIjoiIn0=
https://www.google.com/finance?q=GME&ei=UP_eUeiSJseBrAGQ0gE
https://wwws.ameritrade.com/
RadioShack
https://www.google.com/finance?q=NYSE%3ARSH&fstype=ii&ei=dhHfUajOJ4KGrgHQ
xQE
https://research.ameritrade.com/wwws/stocks/secfilings/filing.asp?data=B64ENCeyJEb
2N1bWVudEtleSI6IjEzNi0wMDAwMDk2Mjg5MTMwMDAwMTAtMVRNVTczNDU0T
UkzNUNKVFFIRUNWTTRQTksiLCJGT1JNQVQiOiJIVE0iLCJGT1JNX1RZUEUiOiIx
MC1LIiwiQ0FURUdPUlkiOiJBbm51YWwgRmluYW5jaWFscyIsIkRvY3VtZW50RGF0Z
SI6IjIwMTMtMDItMjYgMTI6MDk6MDciLCJEb2N1bWVudERhdGVfZiI6IjAyLzI2LzI
wMTMiLCJBTUVOREVEIjpmYWxzZSwiQU1FTkRFRF9mIjoiIn0=
https://www.google.com/finance?q=NYSE%3ARSH&fstype=ii&ei=dhHfUajOJ4KGrgHQ
xQE
Best Buy 10-K reports
http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=irol-reportsannual
HH Gregg 10-K reports
http://www.sec.gov/Archives/edgar/data/1396279/000119312512244215/d340850d10k.ht