GameStop has experienced an eventful past year, with changes accelerating over the past six months. The company has seen its sales decrease, with executives and directors leaving after granting themselves millions of shares of GameStop stock as compensation. GameStop booked nothing but net losses since 2018, and the company’s share price has done nothing but soar upwards. So what is the financial performance underlying the “meme stock” headlines? The picture is a little bleak, but perhaps some light is starting to peek through. Although management has rewarded themselves for this marginally improved performance as if they’ve grown the company to the size of a direct Amazon competitor.
GameStop’s Recent Financial Performance
First, let’s explore the performance of GameStop’s operations in the fiscal year 2020. Sales at the company fell in the fiscal year 2020 by 21.3% compared to 2019 and a whopping 38.6% from 2018. While falling sales are bad enough, a double whammy comes when operating costs do not fall at a similar rate. At GameStop, these costs have only reduced at a rate of 17.5% compared to 2019, and 33% from 2018. Sales falling faster than costs is a recipe for ever increasing net losses. However, GameStop has seen its net losses get smaller ever since 2018, where the loss record was $673 million, compared to 2020 when the net loss was $215 million. So how did losses shrink while sales fell faster than costs? What gives?
Asset Impairments
GameStop recorded a particular type of expense in both 2018 and 2019 known as “goodwill and asset impairments” expense. This expense recognizes a permanent reduction in the value of a company’s assets. In GameStop’s case, this charge was for the asset ‘goodwill’, which is an asset used to recognize the overpayment of prior acquisitions. In this case, ‘overpayment’ is used to mean the amount paid over the acquired company’s assets, and not that the acquirer “paid too much” for the acquisition. The use of goodwill to record acquisitions is very common.
The uncommon thing is the need to record an impairment of this asset. When this happens, the company’s management is saying they do not believe they will be able to produce enough income from their acquired assets to cover their cost of investment. GameStop recorded $364 million and $971 million in “goodwill and asset impairments” expenses for 2019 and 2018, respectively. Now, since this money was paid to the previous owners of GameStop’s acquisitions, the expense doesn’t reduce the amount of cash available to the company in the year it is recognized.
This means, if we ignore this impairment from GameStop’s results, the company would have recorded an approximate net income of $343 million in 2018. With 2020’s net loss of approximately $200 million (with a $15 million impairment ignored), that means the company is operationally in a much worse position at the end of 2020 than it was in 2018. This is despite the headline news that losses are narrowing in recent years.
Executive Management Changes
So what did the company’s management think about these results? It will soon be hard to ask them, as every one of the five named executives at GameStop has either already quit or has given notice of their intention to quit, since 2020. However, they haven’t stepped down before paying themselves cash compensation north of ten million dollars from 2019 to 2020.
From GameStop’s most recent Proxy Statement filing.
Management also generously awarded themselves stock grants worth a little over $278,000,000. (Estimated when the stock price was at $156.44 per share. As of June 15th’s market close, each share cost $222.50). All of which resulted in the CEO earning 650 times more than the median employee he paid. (Median is a statistical metric that marks the middle of a data set. Half the values in the data set are above the median and half are below. For GameStop, management paid HALF of their employees less than $11,033 in 2020. Cool.)
From GameStop’s most recent Proxy Statement filing.
New Shareholders
All of this was backdropped by GameStop issuing 3.5 million new shares to the general public in a follow-on offering. (i.e. GameStop asked you to invest new money into the company, even as its performance deteriorated). These newly issued shares netted the company $551 million dollars in cash. This allowed GameStop to pay off all of its long-term debt, and as a pat on the back, management handed themselves equity worth 50% of the capital they asked new investors to put into the company. To produce a net loss of $215 million or, put another way, a loss of $589,000 every single day in the fiscal year 2020.
Not too bad for a company that has continued to see sales fall and operating costs reduced at a slower rate. And GameStop has already disclosed its intent to issue up to 5,000,000 additional new shares, further reducing the value of each currently outstanding share. Shareholders have already seen their proportional ownership per share reduced by 10% since March 20th, 2020. If the next five million shares are issued, the proportional ownership will have fallen by 16%. But what about that small ray of sunshine mentioned at the top of this article?
New Management
Well, on June 9th, 2021, the company filed financial results of its first fiscal quarter in 2021 with the Securities and Exchange Commission. For the first 3 months of GameStop’s fiscal year, sales rose 25% compared to last year. The net loss also shrank from $166 million last year to “just” a loss of $67 million. These narrowing losses are coupled with two new executives who join the company from Amazon in the Chief Executive Officer and Chief Financial Officer roles.
GameStop recently announced Matthew Furlong as the company’s new CEO. Before working at GameStop, Mr. Furlong served as the Australian “Country Leader” for Amazon ever since September 2019 and held various other roles at Amazon since October 2012.
GameStop will also appoint Mike Recupero as CFO on July 12, 2021. Most recently, Mr. Recupero served as CFO of the North American Consumer business of Amazon since January 2021. Prior to this role, Mr. Recupero served as CFO for various Amazon business lines since 2016 and served in various other finance roles at Amazon since joining the company in April 2004.
Bang for Your Buck?
Altogether, GameStop has asked new investors to finance poor results all the while the 2020 executive team paid themselves lavishly. Then quitting after producing increasingly worse operating results over the last three years. New management is taking over the operations of the company, with some very solid resumes, and results are already trending upward (partially under old management). But is any of this supportive of the company being valued at $16.5 billion?
The last time the company booked a profit for a full year was in 2017 when it made $35 million. At that rate, it would take 471 years to make your investment back (on a non-discounted basis). That’s longer than the USA has been a country, by a mile. But usually companies trade on expected future earnings, which are assumed will grow. The question then becomes; do you believe GameStop’s business model of selling physical games will grow significantly in the future? And if you do, are you really willing to wait 471 years to find out?
*Disclaimer: The author does not own any stock in GameStop. Opinions expressed are the view of the author alone. This article is not solicitation, investment advice, nor legal advice, it is intended for entertainment purposes only.
