GameStop is Failing; Here’s Why.

I decided to write about GameStop (Herein referred to as GME for it’s ticker), and many outlets are reporting it is going under because of the shift into the the online gaming space, which GameStop is reporting as well. This is a prime example where you simply cannot trust news outlets because they simply do not know what they are writing about and it’s combined with poor research. GME is failing, but it is not due to online gaming.

Online gaming is still in it’s infancy because many video game addicts will not adopt online game play. Take the Nintendo Switch for example; it does not come with any internal storage and so it has a price point of $300. If it came out of the box with internal storage with any meaningful capacity to support downloadable games; the price point of the Switch would most likely be closer to $450, which Nintendo knows the market will not support. So, in this space, many users adamantly buy physical games.

GME’s own audited financial statements report that new video game sales are increasing quarter over quarter. So new video game sales are increasing; then why is GME failing? The answer lies in the fact that new video game sales, which are video games still wrapped in cellophane, is not their source of the profit; albeit a strong source of revenue. GME Chief Financial Officer Robert Loyd stated,

We continued to see declines in pre-owned software, [because] of fewer title launches and a decline in physical software sales earlier in 2018 which affect[ed] inventory levels, [as well as] weakening demand … [due to greater] digital access to older titles and fewer promotions offered to our customers in the quarter.

Digital access here is a scapegoat. The issue that GME is facing and they refuse to accept is that it is not worth it to the end customer to sell them a game; and it not worth it to an end customer to buy a used game. If you were to buy Red Dead Redemption 2 for $60 with the cellophane still on; play it for one day and sell it back to GME; they would most likely sell it back to you for $15 and then resell it as a used title for $58. Consumers are smart; this practice is easy to pick up on and manipulate. Why sell your game to GME for $15 when you can resell on Facebook Marketplace or eBay for $40 or $50. As a buyer; why would you buy a used game for $2 (3%) off the new price. This hardly seems like a good deal for the buyer or seller, but seems like it was a great deal for the middleman, GME.

My dad bought my son a Gift Card to GameStop and my son really wanted Splatoon 2. The gift card was for $50 and the game sold for new with cellophane for $60 or used for $58. My wife who is not a video game player or financial aficionado looked the sales person in the eye and asked, “What difference does it make? I’ll just take the new.” When non financial experts and non gamers can come to the same consensus as financial experts and video game addicts that Video game retailer is a bad deal; then it is probably a bad deal.

Since GME is showing strong new sales growth, but weakening used sales growth; the issue is not digital access; it is that their business and pricing model is extremely flawed and customers have caught on to the flaw. Do I think GME is a buy at the rock bottom prices? I would consider purchasing GME if the entire upper management and board of directors were relieved and replaced with meaningful and experienced directors and executives. GME unsuccessfully found a buyer for the company that they were scouting for; which means the executives are not looking to turn the company around; they are looking for a golden parachute they can use to escape. Shares in GME started moving upwards when they announced they were courting potential buyers. Once they announced they failed to secure a buyer; the shares plummeted back to where I would expect the stock price to be.

Since a total management changeover is unlikely to happen; I am going shy away from GME. I may change my mind if existing management wises up and starts to scale down their stores. If they are failing to get customers to sell them their used titles; then there is no reason GME requires so much real estate. If management were smart enough to enact this; I may may take a second look about adding them to my portfolio.

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