The video game segment is about to get an entire fresh shot in the arm. While video game publishers have enjoyed a strong 2020 in the stay-at-home economy due to pandemic-induced shutdowns, the larger event coming for the next year is the video game console refresh cycle, as the new Xbox and PlayStation systems are released later in 2020.
One company that needs any bit of good news that it can get is GameStop Corp. (NYSE: GME). This brick-and-mortar video game seller has been in secular decline as more and more games go to download formats directly through gaming systems. That said, GameStop still has millions of customers, and it still generated almost $6.5 billion in revenues in its last fiscal year.
The ailing factors are well known here, and all prior attempts to find a buyer have failed. Bringing activist investors onto its board has not managed to rescue the company yet. GameStop is one of those companies that will have to survive on its own, and it will have to be nimble, as many publishers and consumers now no longer care if there is a retail presence for games.
GameStop is going to have to figure out its trade-in services of used games for new or other used games. The company has a massive inventory of these used games, and it needs to get these cleared ahead of the new Xbox and PlayStation console launches for the coming holiday season, which is so critical on a seasonal sales cycle for video game sales.
GameStop has sent out special ads for years now, but one that illustrates just how much inventory it has is a “Buy 3 and get 2 free” promotion for used video games under $19.99. The company also currently is promoting a sale of 40% off any pre-owned game with any new game purchase of $29.99 or more. For its deal of the day, GameStop is offering “6 for $10” on its pre-owned video games that are selling for $4.99 or less.
GameStop has joined other retailers that are now requiring customers to wear masks or face coverings in all U.S. stores. The company also has a “Pick Up at Store” option for video game shoppers to wait for a “Ready for Pick Up” email that allows buyers to select their closest stores and pick up the games up in a contactless manner that has become popular with so many pick-up and delivery options.
As of the end of April, GameStop had $570 million in cash. That was down handily from the over $1 billion more than a year earlier, but that has been known for some time. At the end of the last fiscal year (January 31, 2020), GameStop’s inventory was down to about $850 million, compared with more than $1 billion for each of the three prior years. For even better news, GameStop’s inventory was down to about $655 million as of April 30, 2020.
GameStop’s latest data would point out that its inventory turnover ratio was about 0.98 and its inventory-to-revenue ratio was about 0.74. These numbers, similar to other retailers, can change drastically, based on seasonality and based on economic trends.
The big trick may be that GameStop’s total inventories have to go up for it to win from the coming console releases. Many consumer-gamers will not care about the cheap pre-owned games they could buy for value in the used section once they can get new video game consoles that have not seen a refresh cycle in years. That means that the company will have to blow out even more of its older titles, almost without care of the carrying cost.
One issue that proved to be interesting in recent weeks was that Moody’s actually upgraded GameStop’s credit rating to B3 from Caa1, and it also assigned a better Probability of Default Rating. This was not due to inventory levels but to approximately 52% of its existing senior unsecured noteholders agreeing to exchange their notes for new secured notes due in 2023.
Moody’s further pointed out that GameStop still has weak EBIT/interest coverage of less than one time due to the secular pressures it faces. On top of downloads, streaming and subscription services were listed as concerns, along with GameStop’s vulnerability to product renewal cycles, including new gaming console launches. The credit rating agency also expects lower EBITDA in 2020, despite its material improvement in earnings that is anticipated in the fourth quarter of 2020. GameStop’s credit profile also was said to reflect the disruption caused by the coronavirus, and it expects the second quarter to be its trough for sales declines.
By moving roughly half of its maturity in 2021 out to 2023, GameStop has lowered its cash needs required in 2021 for corporate balance sheet maintenance. The company still likely has more inventory that it needs to blow out ahead of the coming console refreshes, so that it can bring in new inventory that will match the new game consoles for better graphics and more advanced gaming features.
A longstanding thorn in the stock’s side is that short sellers have been betting on the long-term demise of the retailer for years. Its most recent short interest, according to ShortSqueeze.com, was over 54.5 million shares. That would be nearly its entire float.
GameStop shares were up 4% at $4.01 on Tuesday, in a 52-week range of $2.57 to $6.92. Its market cap is now just $261 million.
Whether GameStop’s efforts all pan out ahead of the Xbox and PlayStation refreshes remains to be seen. That said, its stock has been in decline since 2015, when it was still above $40. There will be many years between 2020 and the next video game console refreshes, and GameStop will have to be extra nimble when it comes to managing its inventory levels in the years ahead.