How to Stop a Failing Business

The crash of Gamestop: from gaming giant to speculator's pawn

Although the share is currently rallying: Gamestop - the largest video game retailer in the world - has been on a steady downward trend for years.

The price bottomed out last year when share prices fell below $ 3 in parts.

In addition to the corona pandemic, the reasons for the high losses are also an outdated business model and poor acquisitions. A review.

The largest video game retailer in the world, Gamestop, is currently keeping the US stock markets in suspense. Investors had agreed on the Internet forum Reddit and bought en masse shares of the actually badly ailing group - with celebrity advocates such as Elon Musk and billion-dollar investor Chamath Palihapitiya. The price soared, hedge funds lost billions. In the meantime, even US politics has intervened.

A look back at the balance sheets of recent years shows that share and company values ​​diverge widely. Because actually Gamestop is in serious trouble: In the 2019 fiscal year, the company's share value fell by two thirds - from around US $ 15 in January 2019 to below US $ 5 in January 2020. The company exchanged management, but also because of it the situation did not improve after the corona pandemic. For the crisis year, losses of around 680 million US dollars are expected. The price was sometimes under 3 US dollars and only recovered a little from last August, with speculation about the entry of the entrepreneur Ryan Cohen.

As in many areas, the corona crisis has above all exacerbated existing tendencies. Like Blockbuster Video before it - a former franchise chain for the rental and sale of DVDs and Blu-Rays that filed for bankruptcy in 2010 - Gamestop faced the major challenges the internet posed for its business model even before the pandemic. Because the dealer relied primarily on the purchase and sale of video games as physical data carriers. The trend towards digital downloads has been hurting Gamestop's business model for several years.

But that's by no means the company's only problem. The dealer, founded in 1984 by two Harvard Business School graduates, put obstacles in his own way through poor acquisitions, half-hearted initiatives and an inability - or unwillingness - to develop further.

Gamestop's problems started in 2013

In 2013, a new generation of consoles came onto the market with the Xbox One and Playstation 4. This was accompanied by a major change in the industry: every game was now also available for download from the online shops operated by Sony and Microsoft.

With the digitization of console games, the company faced an existential threat, similar to the impact iTunes had on record and CD stores. "Downloads became popular and Gamestop's business went down," Wedbush analyst Michael Pachter said in a 2019 interview with Business Insider. "They just kind of didn't notice." And so, Gamestop's problems with inactivity began.

Bad acquisitions, high debt

In 2013, Gamestop launched a new initiative: smartphone stores. "They just bought other chains and paid a lot of money," said Pachter. “And then these companies' earnings went down right after the acquisition.” First, they acquired Spring Mobile, followed by the purchase of hundreds of stores from US telephone and Internet service provider AT&T. In 2016, Gamestop owned and operated nearly 1,500 wireless stores under the Spring Mobile name.

These deals were expected to fetch about a million dollars each. And when those expectations were not met, they quickly became an expensive burden. "The purchases turned into a complete disaster," said Pachter. “These stores should bring in a million a piece. With 1,500 stores, you need $ 1.5 billion in sales and double-digit margins. So $ 150 million or $ 200 million in profit - and I think it came to $ 80 million. They weren't even close. "

Before the acquisitions, Gamestop had no debt. When they sold Spring Mobile for $ 700 million, the company was literally swimming in it. “I estimate they spent about $ 1.5 billion to buy all of these stores - $ 700 million in cash and $ 800 million in debt. And they ultimately sold for $ 700 million, ”said Pachter. The company "went from debt-free and $ 400 million in sales to $ 800 million in debt and just $ 300 million in sales," he said.

The attempt to sell fails due to the banks' lack of trust

At around $ 16 per share at the end of 2018, there was apparently a lot of interest from private equity groups in buying the ailing retailer - but these interested parties were unable to get the banks to fund the purchase.

There are undoubtedly several reasons for this. Wedbush analyst Michael Pachter speculated in an interview that the failure of the sale said a lot about the uncertainty surrounding the future generation of game consoles. At the end of 2018, it was not clear whether the next Playstation and Xbox consoles would even work with physical media. And if they didn't have optical drives, there wouldn't be any physical disks for sale - which are still Gamestop's core business. We now know that the Playstation 5 and Xbox Series X still have optical drives, but that has only been certain for a good year.

Free fall in the share price and significant losses in the corona pandemic

Due to the failure of the sales negotiations at the end of 2018, the share was already in free fall before the corona pandemic. From January 28 to January 29, 2019 alone, it fell from about $ 15 to about $ 10. There was a similar low in June 2019. For the entire fiscal year, the group drove a loss of around 471 million US dollars, in 2018 it had even lost 673 million US dollars. Branches were closed and at the same time the company's management was heavily restructured. The current CEO, George Sherman, took over the company in May 2019. Before him, Mike Mauler had only been in office for three months.

The corona pandemic continued to affect the company. The in-house online shop was unable to compensate for the store closures and although the video game industry as a whole benefited greatly from the lockdown, Gamestop suffered further losses. For example, the share value fell below US $ 3 in some cases and, according to reports by the "Handelsblatt", analysts expect a loss of US $ 680 million for the fiscal year that is now ending.

Speculation after the entry of Chewy founder Ryan Cohen

At the end of August, however, the share price of the ailing retail chain began to rise steadily when RC Ventures, the company of entrepreneur Ryan Cohen, announced that it had acquired 10 percent of Gamestop shares. In December, the successful co-founder of the animal feed online shop Chewy acquired a further 2.9 percent. Therefore, before the rocket spike in January, the stock closed December 2020 at around $ 18. As Gamestop announced in a press release on January 11, 2021, Cohen will join the company's board of directors with former Chewy managers Alan Attal and Jim Grube. According to reports in the “Handelsblatt”, investors are now hoping that the trio could turn Gamestop's business model upside down after they made Chewy an important player in the US market.

Such a company update is urgently needed, as the ongoing losses impressively show. Analyst Michael Pachter predicted in an interview with Insider in 2019 that Gamestop's business model was not sustainable. "I definitely think it's a melting ice cube," said Pachter. “It will definitely go away at some point. And their future will certainly be cut off and eliminated on the day that discs are no longer manufactured. ”With the new generation of consoles,“ they have just received a seven-year grace period from 2020, ”Pachter added in 2019. "Gamestop still has about 10 years before this ice cube is completely melted."

This article was translated from English and supplemented by Steffen Bosse. You can find the originalhere.