There’s a good chance that GameStop is, or once were a big part of your life, and they’re not doing well. To me, their current situation isn’t as bad as some people are making it out to be. I think GameStop is one of those places that everyone likes to make fun of. You love to hate them or maybe you just straight-up hate them. So perhaps when they fall on tough times like this, people like to exaggerate the issue. Perhaps it’s because this is a decline, it that’s easy to understand.
Many people are buying games digitally, and that’s not good for a store that relies on the sale of physical copies. But when we look at their sales over the last ten years, they haven’t gone down in the way that we might expect. Some of the most significant evidence of their decline is a 673 million dollar loss in 2018. This loss was the result of a near billion-dollar goodwill impairment charge that they had to bear as a result of a sustained decline in their market capitalization and lower forecasted cash flows.
So that brings us to their stock price, which is horrible. What can I say about it $40 range in 2015, to single digits in 2019? And it’s not that they’re doing terribly at the moment, it’s more than the market has no confidence in the future of the company. It feels like they’ve been diagnosed with a life-threatening disease. The symptoms are starting to show now, but if untreated this thing can go bad fast. There’s no comfortable treatment, they’ve been going through CEOs like crazy, and none of them have put together a clear plan.
Let me go back to the beginning, James McCurry and Gary Cousin were two friends attending Harvard Business School with aspirations of starting a business together. A few years after graduation, they came up with an idea for a potential new company that would specialize in selling computer software and video games. Here’s why they thought that would be a good idea – For one, home computers were becoming popular. The manufacturers had price wars going on, they were becoming cheaper and better, and everyone was buying them. The other reason was the popularity of home video game consoles. The video game market was going crazy in the early 80s. You had the Atari 2600 of course, selling 30 million units. But then you also had Intellivision and ColecoVision, pushing their way into the market along with countless others.
But do you know about the great video game crash of 1983? In that year, the entire North American video game market came crashing down. One big reason behind it was over-saturation. Just imagine that so many companies saw such great potential in the market. We’re talking about dozens of them – all coming out with their consoles with games to go with them, along with third parties producing their games to for these consoles. It was all too much; there was no uniformity. They were all being rushed out.
In many cases, the quality became questionable, which steered people away. Finally, with the rising popularity of home computers on which you could play video games, that meant that these consoles were struggling. I only mentioned the crash because it helps express how booming the market was just before it.
It took James and Gary a little time to get the funding for their store. It ultimately came about a year later by Ross Perot. Perot eventually bought in and received 1/3 ownership in late 1983. They opened their first store in Dallas and called it Babbage’s. He did open their first store right in the middle of the big video game crash, so that wasn’t good. They posted some pretty significant losses in the first few years, but they made it through it.
They were sure to sell mostly games from the most popular consoles like the Atari 2600. Computer software too was a big part of their business. But because they opened the store in the middle of the crash and not before it, so I theorize that motivated them to put a more significant emphasis on the home computer side of things. In 1985, Nintendo Entertainment System was released in North America. It’s generally credited with saving the industry, 60 million units were sold, which was good news for a store that sold video games for it.
These games became an ever-increasing portion of their business, and in the following years, Babbage’s finally started turning profits. In 1988 they became a public company, when they sold 30% of it for twenty million dollars and that twenty million was put right back into the store and used to open new locations. New systems kept coming out, video games continued growing in popularity, and it was all suitable for Babbage’s.
Things get a little messy from here, and it’s easy to get lost in the details. Let me go over some of the highlights in 1994; they doubled in size when they merged with another similar software store called Software, etc. It was a 380 store chain combining with a 335 store chain. By 1996 there were all these new systems on the market. It motivated Toys R Us and Best Buy and everyone else to get involved. All the new competition caused sales to drop and brought them into bankruptcy.
The next month it was bought by Leonard Riggio, who was the founder and primary owner of Barnes and Noble. Andy was already involved in this business too since he helped start Software etc. From there he closed a couple of hundred stores, restructured a few things, and in 1999 it began opening stores under the name GameStop. They would focus more on available video games. A few months later, the entire company was sold again, this time to Barnes & Noble.
Barnes & Noble saw this as an excellent opportunity to enter the video game market and thought that the 215 million dollars they paid for it were a good deal. It included 495 stores, only 20 of which were branded as GameStop. The rest were either Babbage’s or Software etc. About a year later, Barnes & Noble made another deal when they bought 400 FuncoLand stores for 162 million dollars. Soon after Funko’s name was changed to GameStop. In 2002, Barnes & Noble decided to make GameStop a public company but still maintain majority ownership. Two years later, through a combination of a 100 million dollar stock repurchase and additional dividend distribution, Barnes & Noble ended their involvement in GameStop. GameStop was now on their own.
But by 2004, GameStop was incredibly successful. They proudly called themselves America’s largest video game retailer, and it was hard for anyone to dispute that. They were adding hundreds of new locations every year while rebranding those other stores as GameStop’s revenues were increasing. Accordingly, mostly due to the release and growing popularity of the PS2, Xbox, GameCube, and handheld systems.
Over this time, they published Game Informer, which at that time was the most significant growing magazine in the country with over two million paid subscribers. They had an online presence with gamestop.com and an arrangement with Amazon that made GameStop the exclusive specialty video game retailer listed on their site. However you want to define success, I think they were meeting the criteria, and it just gets better from there. The next year, they took out almost 1 billion dollars in debt to buy what many would consider their biggest competitor, Electronics Boutique, who you may know better as EB Games. That was quite a year, their store count doubled in the United States, and they added hundreds of new locations throughout Canada, Australia, and Europe. They had a slight falling comparable-store sales that year, but as you can see – it just took off in the years following.
Alright, that’s how they got so big. So let’s extend everything to today. By most critical measures, including revenue, you can call 2010-2011 their best years. But as I said, they haven’t fallen too much from there. Here’s a breakdown of all their revenue sources, going back to their public offering in 2002. The blue line is game systems, and they’re not too crucial for GameStop. The orange line is the new games that they’re selling, and it’s been on a steady decline for years. Keep in mind, this graph shows their percentage of revenue, but obviously, their total income is going down. It’s because they’re getting hit from all angles.
The shift toward digital downloads, I would say is most responsible behind — buying games straight from your Playstation or whatever system, plenty of advantages to it. I’m sure I don’t have to tell you about and add to that game streaming from multiple platforms. You can also see how that would be negative for GameStop. Then even when someone is looking for that physical copy, it’s a competitive market. Amazon and Best Buy had their gamers Club. It’s no surprise that this orange line has been going down. I think most of us would predict that decline to continue.
Their most significant issue is the gray line, used game sales – because it’s been dropping even faster over the past three years and you can tell that’s tied to their decline in new game sales. The fewer new game sold means fewer used games out there, which is terrible — their most significant profit margin. Primarily the most money they’re making from any sale comes from used games. I’m sure you’ve experienced it. You go to trade in your copy of NBA 2K18, and they give you less than a dollar for it, then they take it and sell it to someone else for $6.99 that’s a pretty good profit margin. So they want that to be their primary source of revenue, but as you can see, it’s quickly becoming their smallest source.
The yellow line, which represents everything else, has been rising. This segment mainly consists of video game accessories and collectibles. But the margins aren’t quite as high, and the sustainability of those numbers has come into question. A good part of it is from those Funko pop figures, which many labeled as a fad. Plus those sales don’t create loyal customers in the same way that video games do. The bottom line is, overall, their profit margins have been sinking for the past three years because they’re having trouble selling the stuff that makes them money.
The core of their business is becoming outdated, and everyone knows it. So the idea is GameStop needs to make some changes. They can hang on to this current model for a little longer. But we all see where it’s headed, and many would argue they’ve already hung on for far too long. For a public company, it’s hard to make those changes you have millions of shareholders expecting quick results; most of them aren’t willing to stick around through.
A few bad years as they figure it out, it’s like they need to call a timeout, get a little rest, huddle together, drop a few good plays and get back in the game, sort of what they were trying to do at the beginning of 2019 when they were looking for a buyer. That way, they can be taken off the market and given a chance to try out some of these changes. Well, that never happened.
They gave up on their search for a buyer, and they remain on their own. GameStop’s stock price hit a considerable drop when they announced that and continued dropping. Ever since investors have no confidence in GameStop’s business model, and they’ve yet to outline something better. Let me know in the comments what should they do? They need to give customers a reason to go there, as opposed to downloading their games at home or stopping at Best Buy.
I think I’ve got it; maybe they should start pushing the rewards program onto the customers. It sure sounds like they need to transition into something else. There’s been talk about them getting involved in eSports, but no clear plan in place. They’ve tried other seemingly random things too. They had a mobile business that they recently sold. They also started Thinkgeek, Simply Mac and they’re all over the place. But it just all feels like side efforts, rather than something that can save them. Of course, I could also write about some more specific issues with employees and customer experience, but again I don’t know how significant that is. There’s a bigger issue here, plus I’ll leave that to you to discuss in the comments.