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GameStop Needs to Step Up Its Game

Chris Hill, The Motley Fool

In this episode of MarketFoolery, host Chris Hill and analyst Emily Flippen analyze today's market winners and losers. GameStop (NYSE: GME), down 5% on earnings, has blown through some four CEOs in the last year, and that's not even touching its (complete lack of a) business model. On the other hand, Dave & Buster's Entertainment (NASDAQ: PLAY) seems to have figured out how to turn a profit from video games, and recent changes are paying off big. The Food and Drug Administration plans to weigh in on cannabidiol (CBD) edibles this May, and the changes could be huge for CBD producers at every point on the sketchiness spectrum. Tune in to find out more.

A full transcript follows the video.

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This video was recorded on April 3, 2019.

Chris Hill: It's Wednesday, April 3rd. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, it's Emily Flippen. Thanks for being here!

Emily Flippen: Thanks for having me again, Chris!

Hill: We've got some earnings we're going to get to. We're going to dip into the Fool mailbag. We're going to get to one of your areas of expertise. I know you have many areas of expertise, but we're going to get to one with the growing trend of cannabis legalization. We'll get to all of that. 

Unfortunately, we're going to start with GameStop. It was a rough fourth quarter for GameStop. Even worse, the video game retailer warned that there's probably going to be a loss in the first quarter, the current quarter that we're in right now. Shares down 5%. I'm looking for a silver lining with GameStop, and I can't find one.

Flippen: I should have told you this before I came on, Chris, but you could not have picked a worst analyst to come on give commentary about GameStop. I've had a long and complicated relationship with GameStop.

Hill: Do tell!

Flippen: Well, GameStop has been a terrible investment! But in my opinion, it's a terrible investment because management has always made terrible decisions. For a while, I was a big believer -- and in a sense, still am -- in GameStop's ability to change its business model for the better; to make it something that exists in five or 10 years. That hedged on, GameStop has this amazing refurbishment facility out in Texas. They're the only people really capable of buying, refurbishing, selling games. And they've never really tried to do anything with it. It was always this back-of-their-mind business model. 

So, for me, it's a frustrating stock to look at. At this point, there's really no saving GameStop. It's definitely down and out at this point. I'm not sure if there's a silver lining purely because management -- by the way, they're getting a new CEO in April, but the CEOs turned over a ton. They just have no vision. They're just sitting there, getting the dividend, wringing out the company for what it's worth then moving on.

Hill: We've talked on this show before about executive turnover at Tesla. Executive meaning the executive suite. In some ways, that pales in comparison to GameStop. This is going to be their fifth CEO in just over a year. That's going to be so depressing for so many people who work at that company!

Flippen: It's clear that the company has no vision. I joked talking about GameStop earlier today with Aaron Bush. I made the joke that at least with Sears, Eddie Lampert had a plan.

Hill: [laughs] It was not a great plan!

Flippen: Not a plan to return value to shareholders. But man, did he have a plan to return value to himself, and he did it! And at least there was an underlying goal with that company. With GameStop, it's clear, they're just flailing, and they've been flailing for a long time.

Hill: We'll keep an eye on it, but we're going to move on.

On the flip side, Dave & Buster's had a pretty solid fourth quarter. Same-store sales came in higher than expected. Shares of Dave & Buster's up about 4% or 5% this morning. They look like they are doing a very good job of not only just operating well quarter after quarter, but also not really sitting on their hands. 

Flippen: Yeah, definitely. They've been expanding aggressively. They've done a great job marketing this reformed Dave & Buster's, where it's a trendy, fun spot for adults to hang out after work or on the weekends. Been running a ton of promotions, including happy hours and food specials. Trimming down the business model to make it look sleeker and more exciting. Changing up the amusements to be more modern and high-tech. They're actually doing an impressive job. 

I will say that the company, while it beat on this quarter, they still expect same-store sales to be flat to the range of 0% to 1.5% over the next fiscal 2019. That to me is a little bit concerning, especially because you see this pop today, but ultimately, net income, while it beat expectations, it's still down 17% year over year. It's not like this is a really high-growth business. But they're definitely taking steps to change the brand and change the awareness of the company. 

Hill: Yeah. Some would, in the years past, derisively refer to this as Chuck E. Cheese for adults. To your point, they're doing a good job of refreshing the games that they have. They're also doing a good job of slimming down their menu and just saying, "We just need to have enough food and make it be good enough." They're doing a good job with the menu. The food menu is being slimmed down. They're doing a good job with their drink promotions. Think what you want about that, but that's a profit part of the business for them. So it seems like they're doing well on the operating level. 

Did you get a sense of any plans they have for expansion? I forget the company we were talking about, some retailer, last week. Maybe it was Five Below. I was really surprised by how many new locations Five Below is planning in this calendar year. Do you have a sense of what Dave & Buster's [is planning]? Among other things, management at Dave & Buster's has struck me as being pretty smart about not being overly aggressive in opening new locations. 

Flippen: Yeah, they're definitely not being as aggressive as someone like Five Below is. But, that's largely because Dave & Buster's already has a huge footprint. They are still expanding, though. They're net expanding. You mentioned the food. I know we're going to touch on this a little bit later, but they're doing a good job of staying trendy with their menu. One of the foods that they're bringing on is actually the Impossible Burger, a meat alternative burger. They're now offering that at their locations, as part of that slimmed-down menu. It's going to be a fun company to watch. I'm not really sold at this point, though. 

Hill: The Food and Drug Administration announced its first public hearing on legalizing CBD in food and drinks. Speaking of food and beverages. That's going to be on May 31st. We had talked last week about CVS and then Walgreens starting to sell CBD lotions, topical cannabis products, in their stores. This will certainly be an interesting hearing to watch unfold. When you look at this in your role, not just as an analyst but as co-advisor of one of our marijuana investing services, who stands to benefit from this? 

Flippen: There's a lot of companies that both stand to benefit and lose from the potential outcomes of this hearing. To be clear, a lot of people who are interested in this space don't necessarily spend all their day researching the industry like the analysts here do.

Hill: Right. The listeners have jobs.

Flippen: [laughs] Exactly!

Hill: They're going to school, they have jobs. They're like, "No, that's why I listen to you people."

Flippen: So, to clarify the difference between cannabis and CBD and THC. CBD is derived from the hemp part of cannabis, which was legalized in December. However, you'll see CVS, Walgreens, they're selling CBD products, but they're topical products. They don't have to go through the FDA to get approval. Anything that involves CBD that's being sold as a dietary supplement, that's what's affected by this upcoming hearing. Right now, virtually every company that's selling CBD is violating FDA orders by selling it as a dietary supplement. They haven't been very proactive in going after these companies unless they've been the companies that are making extremely egregious claims -- like that CBD will cure cancer or Alzheimer's. Those are the companies they're going after. But for basic companies that are just selling CBD oil and saying, "It's a dietary supplement, order online!" the FDA is acknowledging, "Hey, you're outside the bounds. We're not going to go up against you, but we are going to put a hearing on and determine whether or not CBD, A. should be sold as a dietary supplement; and B. should be sold in food and drinks." At the moment, you can't put CBD in any sort of edible or drinkable product. It's interesting, CBD is acting in this space where it's both a drug, because there is a CBD-based drug that has been FDA approved for epilepsy, and also acting as a dietary supplement. Those two things are naturally against each other. You're not going to be able to go and buy a controlled substances off the shelves of your local grocery store. The FDA has a big job ahead of them, determining how they're going to handle CBD if it's both a drug, but also being used as a dietary supplement.

Hill: Depending on the outcome of this hearing, do you expect to see another wave of investment, in the same way that last year we saw large companies, whether it was Altria, Coca-Cola, Pepsi, either making direct investments, or at least reportedly looking into investments? Should we expect some other wave coming depending on the outcome of this? 

Flippen: Yes, for sure. I'm a big fan of making unsubstantiated claims. [laughs] I really do believe that the FDA is going to give approval for CBD to be used once it's proven safe and effective in things like food and drinks. I fully expect, once the FDA has given that final stamp of approval, we're going to see a huge wave of investment into CBD, which is why I said I think companies stand to both benefit from it and lose from it. If you're one of the companies that's making these egregious claims, yeah, they're going to crack down on you. But if you're one of the companies that's selling your products maybe a little bit under the table, admittedly, at this time, once you get that approval, it opens up so many doors. 

Hill: E-mail from Steve Jenkins, who writes, "I'm using my Grammarly Premium subscription to write this impactful email to tell you how much I enjoyed the April Fool's MarketFoolery podcast. The unbelievable podcast was made that much more believable by Taylor Muckerman's constant approving and reinforcing "hmmms" throughout the back-and-forth with Jason Moser. Standardized street signs with advertising. Really? April Fool on, guys."

Thank you for that, Steve! Thank you to everyone who's written in or tweeted at us about the joke! I was telling someone on Monday about what we did on the episode. He said, "Do you think anyone's going to be fooled?" And I said, "Here's the thing. When people listen to podcasts, a lot of people are multitasking. They're driving, they're doing stuff around the house. If part of your brain is on something else, then yeah, you might get sucked in." And, in fact, that happened to me. Monday night, I was at home, listening to Pardon the Interruption, the PTI podcast. I was doing some dinner prep. Their lead story was about Zion Williamson, the star basketball player for Duke. They were talking about, "Hey, Zion Williamson, reports are, he's not going to go pro. He's not going to the NBA. He's going back to Duke because he doesn't like the prospects of the team he's going to be going to." And I was sitting there, chopping some vegetables, thinking, "Boy, that's a little surprising, but it's not that surprising." They totally got me!

Flippen: You fell for it!

Hill: Totally fell for it! You mentioned the Impossible Burgers, which leads me to Burger King. I'm sure someone has written about this, and I just haven't found it yet. On April 1st, Burger King announced it is testing a new burger called the Impossible Whopper. And people thought it was a joke because it was April 1st. No, this is not a joke. These are veggie burgers made by a company called Impossible Foods. Burger King is testing it at around 60 locations in the St. Louis area. For any of the dozens of listeners who are in the St. Louis area who want to test that out for us, do a little boots-on-the-ground research, we'd appreciate it. You can email us, marketfoolery@foo.com.

You said you've tried these before. Not the Whoppers because you haven't been to St. Louis lately, but you've tried these. 

Flippen: I have. I've tried the Beyond Meat burger. That's a company that makes a competing burger. It's coming up for an IPO this year. I'm actually trying the Impossible Burger with a friend on Friday. Very, very few times have I been upset that The Motley Fool is based out of Alexandria, Virginia, but today is one of those days because, man, I wish I was in St. Louis! I want to try this Impossible Whopper. Unfortunately, I'm limited to the restaurants around this area that sell it, which of course is going to lead to me paying $15 for a meatless burger just to give it a try. 

Hill: So, again, if someone could do a little research for us, let us know, in part because now we know it's going to really bum Emily out that you got to try it and she didn't. 

Beyond Meat's going public later this year. Do we have timing on that IPO? Is that in the first half of this year, as a lot of other companies seem to be moving up there IPOs? Or have they not put a date on it?

Flippen: To the best of my knowledge, there's not a date on it. They've had the prospectus out since November. It's been on the table for a while now. I think they' actually might be going through some legal issues, which has pushed that back a bit. 

It's definitely going to be an exciting one to watch. Not only is it a new product. Impossible Burger is a competitor to them. They do similar things with different methodologies. Nobody knows how large the industry could be for meatless burgers. If they're able to produce ground meat that tastes like ground meat, is at the same price point as ground meat, nobody knows how many people are going to start switching over to this meatless alternative. I know personally I would. But it's TBD whether or not that ends up being a quick fad or a long-term trend. 

Hill: I have to believe that, even though it's not Beyond Meat who has this arrangement with Burger King, at least some of the people in the executive offices at Beyond Meat have to be happy that this is happening. It raises the profile for this type of industry to make it even more viable. 

Flippen: Exactly. Actually, Beyond Meat and Impossible Foods have gone in two different directions. While both are selling to stores, Impossible Burger has spent a lot more time getting stores to start selling their burger where you go out to eat -- restaurants, retail locations. Beyond Meat is much more focused on grocery stores. They want the local consumer to go out and buy a meatless sausage, buy a meatless patty, and cook it themselves. That's not to say that they don't have operations with food chains. They do. But the focus of the two companies has been somewhat different. So, I agree. I think that this is just going to push toward a long-term trend of accepting meatless alternatives. 

Hill: Emily Flippen, always good talking to you! Thanks for being here!

Flippen: Thanks for having me!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd! Our man behind the glass is back behind the glass! Thank you, Chicago, for returning him safely to us! I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

Chris Hill has no position in any of the stocks mentioned. Emily Flippen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TSLA. The Motley Fool owns shares of GameStop and PEP and has the following options: short April 2019 $13 calls on GameStop. The Motley Fool recommends CVS, Dave & Buster's Entertainment, and FIVE. The Motley Fool has a disclosure policy.