I'm short this stock. GME has massive infrastructure and fixed costs associated with current model - physical store footprint and operating its own distribution network. My question to longs is how do you expect GME to completely shift from brick and mortar to digital model without massive margin compression and share holder value destruction. Let's think about it:
Vast majority of GME revenue is derived from physical hardware and software sales in the store. Slight deceleration in hardware/software sales will have a dramatic negative impact on profits given the mix. Software sales are decelerating at an exponential rate moving forward - GME has basically admitted this with its most recent acquisitions.
GME has high fixed cost network. 6,000 plus retail locations plus the company owns/leases and operates its physical distribution network. Each digital sale hurts profit margins incrementally.
A larger percetange of sales are deteriorating at an accelerating rate with an unchanged fixed costs network.
Digital sales are such a small % of total that even if GME grows this category at a high end rate it will not offset the continous margin compression resulting from software sales declines on top of an unchanged fixed cost footprint.
GME needs to shrink its stores and distribution model rapidly to offset this trend. Has management acknowledged this?
It's likely the inability to transition fast enough to a digital download model with a matching lower fixed cost model (ie close some stores and shrink distribution network) that will drive the stock down. There is a better potential that the company is unable to do this in time.
Right now GME is on borrowed time. They are just maintaining shareholder value by repurchasing shares and now they are burning cash making acquistions to transition to a model they may not be able to execute in a timely fashion.
The fixed cost model, secular sales trend shift working against GME, and risk that the digital download model will not work for GME, far outway the return on this stock despite the valuation. Given this thought process why would anyone want long exposure. Too much risk. If you want to play a digital video gaming download strategy I'd be long a company that already has the model in place - ie already has digital download model fully built out and no physical stores.
You might want to look at the last earnings report below again. There are plenty of companies out there that are not making money and I would recommend you short them. Also, Gamestop has approximately 700 MILLION in cash as of Jan. 29, 2011.
Gamestop has posted earnings for the fiscal year, and they’ve broken the company’s previous records. Sales are at an all-time high of $9.47 billion, and net profit set a record at $408 million. Over the same year, there was a 61 percent increase in “digital console and PC offerings” which took in $290M.
For the quarter ended Jan. 29, net income attributable to the company was $237.8 million, or $1.56 per share, up from $215.9 million, or $1.29 per share, a year earlier.
Revenue rose to $3.69 billion from $3.52 billion a year ago. In addition to new developments in e-commerce and digital offerings, GameStop said revenue was driven by growth in its PowerUp Rewards loyalty program.
For all of 2010, the Grapevine, Texas company reported net income of $408 million, or $2.65 per share, compared with $377.3 million, or $2.25 per share, in fiscal 2009. Revenue increased to $9.47 billion from $9.08 billion in 2009.
Just for the sake of accuracy, Rob Lloyd stated in the Investor Day call that GME had $430 million in cash on hand, and another $380 left allocated for buybacks. Not sure how that's accounted, the $380 million must be future cash generation and they have $430 million now.
Gamestop will be torn asunder by accelerated super splash devastation denial in software sales. There is no hope for gamestop, "power up rewards" to keep a customer base much less grow one, "1.9 million Facebook friends and growing."
It will be very soon that bricks and motor stores will be locked out of the consumer market as digital takes over, "Nintendo 3DS offers legend of Zelda ocarina of time 3D in physical copy."
So with the customers fleeing Gamestop, "12 million powerup rewards members expected by year end" and profit margins shrinking, "used games and digital social gaming shop on Facebook improve margins" there is no hope.
Can anyone even say Gamestop has any growth at all anymore, "game informer subscriber numbers at record high last year."?
No creativity from Gamestop and cash burn spells, "spawn labs plus impulse plus powerup rewards means anyone anywhere can try video game demos before ordering them and order them phys or digital." doom!
"12 million powerup rewards members expected by year end"... "game informer subscriber numbers at record high last year."?"
These two are related, so it's double counting in a way. I'm a member just because I want the Game Informer mag for $15. I couldn't care less about the other benefits. GI is the only thing I buy from GameStop (Amazon is always much cheaper). However I, and possibly millions of others, are thrown in with this stat about Rewards to make it look like we're participating in something we're not.
Let me reiterate again. The physical model buy\sell\trade is funding GME's future. They have a foot in both worlds right now, weight transfer to take place gradually as the market shifts. This is business 101, its called milking a cash cow. Anyone strictly in digital at this point in time is funding through debt, as digital is not quite self-sustaining on a large scale. GME will be debt-free. Please bring your "A" game next time shortie.