Don’t Bet That GameStop Can Compete With Amazon
Without execution, strategy is just words.
That’s why you should not buy GameStop GME shares after they jumped 28% on a report that an investor who bought 10% of the stock is talking with the company’s management about a plan for it to compete with Amazon.
Here are three more specific aspects of strategy and execution where GameStop — a whopping 259% of whose float is sold short, according to Morningstar — is likely to miss the mark:
- Its recent earnings report was a disappointment
- Its current CEO articulates a strategy that sounds much like the new investor’s proposal
- It lacks the scale and execution excellence needed to match or surpass Amazon
Before getting into those problems, let’s look at GameStop’s new investor and what is known about his proposal.
Ryan Cohen — who founded pet supply retailer Chewy.com and sold it for over $3 billion — bought 10% of GameStop and is talking to its board about turning the company into a “true competitor to Amazon,” according to Bloomberg News.
The details of Cohen’s proposed strategy have been leaked through anonymous sources. In essence Cohen’s plan is to widen the range of merchandise beyond video games and some toys that GameStop sells and ship it more quickly to consumers. His proposal would keep open the retailer’s profitable stores and close the rest, noted Bloomberg.
GameStop’s Disappointing Results
GameStop’s sales are plunging and that trend is expected to continue for the rest of 2020. As the company told investors on September 10, its total sales declined 26.7% during its most recent quarter — which ended August 1 — to $942 million while the company lost $111 million.
To its credit, GameStop generated cash in the latest quarter — $175 million worth (compared to burning through $119 million last year) — leaving the company with $735 million in cash as of August 1.
Sadly an immediate turnaround is not imminent. “The company is expected to post its third straight net loss this fiscal year and — even with a holiday bump from video-game consoles — overall revenue is predicted to be down 14%. Covid-19 has taken a toll on its physical stores, many of which closed temporarily during lockdowns,” noted Bloomberg.
Is Cohen’s Proposal That Different From GameStop’s Current Strategy
Cohen’s proposed strategy — while vague — does not sound radically different from what GameStop’s recently appointed CEO George Sherman is doing.
Sherman is “a retail veteran who was named CEO last year after attempts to sell the company failed” according to Bloomberg. He told investors on the conference call that he has been cutting costs — with plans to close 400 to 450 stores this fiscal year. Sherman is also excited about growth through mobile commerce — which GameStop expects will drive e-commerce sales above $1 billion in 2020. “We see this as critical to our future,” he said.
Sherman is also pushing the company to implement a so-called omni-channel model. That means customers can purchase and take delivery of products in many ways including “curbside delivery or Delivery@Doors, buy online pickup in-store and enhanced ship in-store and web in-store capabilities,” he told investors.
GameStop is also adding same-day delivery and a significant expansion of its “consumer payment options, including expanded focus on our private label credit card, several buy now pay later options and also leasing options for high value items.”
Admittedly it takes time to turn around a company that appears to be heading the way of the dodo. I think investors would tolerate losses were GameStop able to grow its top line. However, it remains unclear whether Sherman’s strategy will yield growth — or whether Cohen’s ideas are significantly better and can be implemented by GameStop.
Will Cohen’s Proposal Really Push GameStop Ahead of Amazon?
To pull ahead of Amazon, GameStop would need to offer consumers a better selection of products, at a lower price, with faster and more reliable delivery.
Amazon is much larger than GameStop — with a market capitalization of nearly $1.5 trillion about 2,631 times more than GameStop’s $570 million. That superior scale means that Amazon can get more substantial volume discounts from suppliers, build huge warehouses and tentacle-like transportation networks to get products to the customer quickly, and offer relatively good customer service.
Is there anything GameStop can do to come close to matching Amazon on selection, price, service delivery and quality? Anthony Chukumba, an analyst at Loop Capital, told Bloomberg, “I have a hard time foreseeing how GameStop can morph into a credible competitor to Amazon. There are a lot of companies with much deeper pockets than GameStop that have had a very difficult time competing against Amazon, and some are barely competing with Amazon — Walmart WMT , for example.”
An analyst at a hedge fund who covers the gaming sector told me September 23, “[GameStop competing with Amazon] seems like a long shot. I’m not sure how they could compete that is differentiated from others. The only angle I see is that they could use their stores as fulfillment centers, but most of their stores are in malls and are pretty small footprints, so doesn’t seem like a great asset. [The recent run-up in its stock price] seems like a short squeeze and a desperate attempt to save the company.”