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GameStop (GME) Stock Crashes 27% on Divestiture Cancellation

Zacks Equity Research

GameStop Corp. GME saw its shares crash a major 27.2% on Jan 29, as management revealed that it is no longer pursuing the company’s divestiture. In the past three months, the company has lost close to 23%, way worse than the industry’s decline of 12.6%.

Well, the company was exploring ways to improve shareholder returns as part of a strategic review that began in June 2018. The review also included GameStop considering plans to sell the business.



However, management stated that it has ceased efforts to undertake a divestiture, owing to scarcity of available funds, which would be required to satisfy any potential acquirer. Clearly, management’s decision to abandon the sale came as a big blow to investors who were recently rejoicing on hearsays of a potential takeover deal.

Incidentally, earlier this month there were rumors that GameStop might announce a deal associated with its own takeover in February. Previously, there were rumors of private equity firms such as Sycamore Partners and Apollo Global Management being interested in the deal. In June 2018, Sycamore Partners emerged as the possible forerunner in this deal, per certain media reports. With so much brewing about GameStop’s possible divestiture, yesterday’s announcement was certainly a letdown for the company’s investors.

This month, GameStop posted soft sales numbers for the holiday season. For the nine-week holiday period (ended Jan 5, 2019), the company generated total global sales of $2.63 billion, down 5% year over year. Nonetheless, comps for the holiday period grew 1.5%, reflecting 3.6% growth in the United States, offset by 3.1% decline internationally.

Apart from this, GameStop offloaded its Spring Mobile business this January for cash proceeds of nearly $735 million. Management is exploring options to efficiently utilize the sale proceeds, which include curtailing the company’s debt load, sponsoring share buybacks or reinvesting in key video game and collectibles categories, among others.

Notably, GameStop’s collectibles sales category has been profitable for the past few quarters. In the fiscal third quarter, sales of collectibles rose 11.7%, following an increase of 15.7% and 24.4% in the second and first quarters of fiscal 2018, respectively. The category was driven by continuous growth in domestic and international collectibles business. The company believes that it has a solid potential for sustained growth in this business. Moreover, GameStop seeks to strengthen this unit by widening its global footprint in video game stores, ThinkGeek and Zing stores along with e-commerce platforms.

We believe that concerted efforts to grow in this category along with GameStop’s other initiatives are likely to aid this Zacks Rank #3 (Hold) stock to revive in the forthcoming periods.

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