I have not looked at GameStop (GME) in quite a while, but it recently crossed my radar as I was researching potential buyout targets trading at low levels of net current asset value. GME, which seems to be almost universally hated, is trading at a 14 year low, and at 2.2x net current asset value. I did not include it in Tuesday's piece on potential acquisition targets, however was prompted to dig into the story based on some of the numbers I saw.
Retail is a rough business these days, let alone brick and mortar gaming retail with more than 5800 locations. Recent guidance offered by management had several firms issuing warnings on the name, and slashing price targets. You could just call this an ugly business, one in clear decline, and move on, but for me it's not quite that simple.
While GME's market cap is over $900 million, and it had $820 million in debt at year end, the company's enterprise value (market cap - cash + debt) is just $111 million. The recent sale of the company's Spring Mobile business for $700 million has filled the company's cash coffers, which stood at $1.624 billion or $15.91 per share at year-end (2/2/19).
GME was clear that it would use part of that cash to pay down debt, and announced that it would retire $350 million in unsecured senior notes by April 4th of this year. Interestingly, that move would have no effect on the enterprise value, with the reduction in debt offsetting the reduction in cash.
Complicating matters (if that is the right word) is the company's current 38 cent quarterly dividend, which equates to a 15% yield, which clearly the markets believe is not sustainable. Yet, that dividend consumes about $155 million annually in cash, about 12% of the cash on the books after factoring in the debt retirement.
Part of GME's plan was also to buy back shares, with the board authorizing a $300 million buyback. While buybacks are not new to GME - the company reduced shares outstanding by 20% between 2013 and 2018 - this is an example where repurchasing shares did not work out, as the company paid much higher prices for those shares. I like the buyback here though; if the company follows through, it may indicate that management believes there is some life left. However, I would be in favor of cutting or eliminating the dividend, and potentially using that capital to buy back more shares, at least until (or if at all) the company can prove that it can survive and be profitable.
There's no doubt that this is an ugly situation, a potential value trap, the ultimate dumpster dive, or whatever euphemism you'd use to describe a company that has seen better days. The real question is whether what's left of GME is worth more than its current $9 share price, and whether markets have overly punished the name.
Adding some intrigue, GME does have a great deal of short interest, with 41.268 million shares, or 41.38% of the company's float currently short. In addition, it trades at about 6x next year's consensus estimates, but not surprisingly, the spread between the high and low estimates of the seven analysts weighing in is quite wide, with a low of 40 cents, and high of $2.05.
Whether or not GME is the proverbial "fifty-cent dollar" remains unclear, at least to me, but it is back on my radar.