Game Stop store in New York.
Michael Brochstein | LightRocket | Getty Images
The shift from physical retailers to online shopping has hurt GameStop over the past decade, pushing the company’s stock to nearly 40% during that time.
But Ryan Cohen, the former CEO of Chewy, believes the maligned video acclaim retailer may backfire by shifting its focus away from physical stores in favor of a robust e-commerce platform. Cohen believes GameStop can use its brand and large customer base to make this transition. He took an important part in the company to try to push it in this direction.
Company: GameStop Corp (GME)
Business: GameStop is a retailer that sells video game hardware, physical and digital video game software, video game accessories, as well as mobile and consumer electronics and other merchandise primarily through trading operations. retail, with all stores engaged in the sale of owned video game systems, software and accessories.
Market value: $ 828 million ($ 12.71 per share)
Activist: Ryan Cohen
Percentage ownership: 9.98%
Average cost: $ 5.98
Comment from the activist: Cohen is not an activist but an extremely successful entrepreneur. Cohen is the co-founder and former CEO of e-commerce company Chewy, which he founded and sold to PetSmart in 2017 for $ 3.35 billion. Cohen remained CEO after the acquisition until March 2018, and in June 2019, Chewy went public at a value of $ 8.7 billion. This is Cohen’s first 13D dossier, but what he lacks in activist experience he makes up for with strategic and operational skills in building and running a business in the digital age, giving him a ton of credibility here, even more than the average activist with in some areas.
What is happening:
On November 16, 2020, Cohen sent a letter to the company’s board of directors, urging them to immediately conduct a strategic review and provide shareholders with a credible and publicly available roadmap for cost containment, prioritizing profitable retail locations and geographic markets and building-commerce ecosystem.
In the wings:
Cohen resorted to this public letter because his private attempts were not productive. GameStop sells video games and consoles and has been likened to the downside to Blockbuster. Cohen doesn’t make this direct analogy, but he certainly paints a picture of a company that is on the same path if it doesn’t change.
Sales grew from $ 9.5 billion in fiscal 2011 (before the last console cycle) to $ 6.4 billion in fiscal 2019; EBITDA fell from $ 839 million in 2011 to just $ 111 million in 2019; net income fell from $ 339 million in 2011 to a loss of $ 470 million in 2019; and in the past two quarters alone, the company has lost an additional $ 277 million. All of this has happened as the size of the global gaming market has grown more than 2.5 times since the last console cycle. Cohen sees a company that is stuck in a brick and mortar mindset and unwilling to embrace the digital mindset needed to grow with gamers.
However, Cohen also sees a company with valuable assets, including a strong brand and a large customer base and a path to success and shareholder value. He believes the company may be the ultimate destination for gamers, but that destination must start with a solid ecommerce platform that offers competitive pricing, a wide selection of games, fast delivery, and a truly tactile experience that excites and excites. delights customers, including content and community. It must become the Amazon of gaming, with the additional expertise and specialized customer service as a key differentiator.
To do this, Cohen urges the company to cut excessive real estate costs, streamline or sell non-core operations in Europe and Australia, and hire the right talent. While Cohen does not specifically target CEO George Sherman, he does note that Sherman has substantial experience working for large physical retailers such as Advance Auto Parts, Best Buy, and Target and is committed to focusing on physical stores and walk in the twentieth century. -in sales despite the transition to an ever-active digital world.
The company is at an inflection point to make this change. Cohen notes that the company will be able to temporarily hide some of its issues with the new console cycle that will appear to validate its adherence to an outdated business model that’s too reliant on brick-and-mortar sales. However, it is also this new console cycle and the additional sales that can provide the cash flow needed to fund this change in strategy going forward, with the global gaming market expected to hit $ 174.9 billion this year and $ 217.9 billion by 2023.
Cohen hints that a board seat would not be acceptable to him because he wants the company to really focus on a change in mindset. That would require at least two – and possibly three or more – new directors to the ten-person board, depending on who is being replaced. While it appears Cohen may have an ally on the board of directors of James Symancyk, the CEO of PetSmart while Cohen was running Chewy, Symancyk also has a brick and mortar background and might not see it the same way. than Cohen.
If it ends up going to a proxy fight, Cohen seems like the type of shareholder who will take the distance if necessary. In this case, it would have two potential headwinds. First, the company recently added four new directors through bylaws and shareholder appointments. That might be enough to appease some institutional shareholders and ISSs if they don’t see such a dire situation as Cohen does in this super-fast industry. Second, a large portion of the shareholding is made up of index funds such as BlackRock (12.12%), Vanguard (8.12%) and State Street (4.0%), which are reluctant to support an activist without the hedge. Lewis ISS or Glass Recommendation. However, what is interesting here is that there is an unusually high short interest, with around 90% of the shares in the lending programs, so we don’t really know who loaned their shares, who can vote. and who can call them back before the meeting.
It will be interesting to see if the board is able to withstand the change needed to propel GameStop into the 21st century. In the words of former US Army General Eric Shinseki: “If you don’t like change, you will like insignificance even less.”
Ken Squire is the founder and chairman of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments