Lost in the conversation: How viable is GameStop’s business?

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Updated on Sep 26, 2024

Reading time 3 minutes

GameStop has seen its annual revenue consistently fall over the years.
The company faces large competitive pressures but was dealt a lifeline from consoles including physical discs.
The company's viability in the near-term should not be up for debate.

The epic short-covering fiasco playing out in GameStop Corp. (NYSE: GME) has overlooked one key part of the conversation: how viable is the businesses?

GameStop: Competitive pressure mounts

The case against GameStop’s stock is mostly based on the fact that it is a specialty retailer with a strong mall presence in an industry that faces an uncertain future. The company was spared a fatal blow when the newest generation of video game consoles included a physical disc drive so consumers still have a reason to visit a GameStop store.

But the fact that consumers can shop at a physical GameStop store doesn’t mean they are. In a digital reality where two-day (or less) delivery is the norm, gamers have chosen to buy physical discs on Amazon.com Inc. (NASDAQ: AMZN).

While gamers can download a game directly to their console’s hard drive, GameStop positioned itself to remain relevant by selling collectibles and exclusive merchandise at heavy margins. Also, GameStop’s trade-in program lets gamers exchange their used games for store credit and also awards the company with hefty margins.

Making the right changes

GameStop deserves credit for accelerating its online business. During the recent holiday season, online sales were up by more than 300% compared to the prior year. The company also reinforced its commitment to bolster its online channel through the addition of Chewy Inc. (NYSE: CHWY) founder Ryan Cohen to its board.

Cohen executed a vision of selling pet food and related animal products online so his expertise in winning in a category not typically associated with online sales should come in handy.

Cohen’s vision for GameStop’s future consists of fewer stores in the U.S. and closing nonessential operations in Europe and Australia.

GameStop is scheduled to report fiscal fourth quarter and full-year 2020 results in early April. According to The Wall Street Journal, the company is expected to report its fourth straight year of revenue declines.

Q3 results shows it isn’t going away

GameStop reported third quarter results in early December 2020. The report offers investors the most recent glimpse into the company’s positioning.

As expected, revenue was severely impacted by the COVID-19 pandemic but other factors impacted results. For example, an unplanned shift in games out of the third quarter impacted sales.

But the company ended the quarter with a strong balance sheet backed by $602.6 million in cash and restricted cash. This compares favorably to $304.4 million in the same quarter last year.

Short-term debt at the end of the quarter was $269.5 million and $216 worth of long-term debt. During the quarter GameStop took advantage of its cash and closed out $125 million in principal of its 6.75% senior notes due 2021.

Bottom line, GameStop’s business outlook for the near-term remains challenged amid intense competition. But the company’s strong balance sheet position and a motivated management team make it clear expectations for the company to declare bankruptcy in the coming years are unfound.