GameStop (GME) – Get GameStop Corporation report has been under the leadership of CEO Matt Furlong and Chairman Ryan Cohen for just over a year. With these two at the helm, the company adopted a bold turnaround plan. Company management aims to elevate and modernize GameStop’s business beyond brick-and-mortar stores.
However, short-term pain is often necessary to make lasting, bold changes. Here’s a closer look at GameStop’s turnaround plan.
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GameStop’s aggressive turnaround plan
One of the reasons GameStop has become a strong short-selling target is its declining brick-and-mortar business model. For years, the company’s growth prospects were bleak.
However, Ryan Cohen—the founder and former CEO of Chewy and now GameStop’s largest investor and chairman—is trying to change the game with his strong e-commerce and retail experience. He arrived at GameStop with a plan to bring about a profound transformation. Cohen sees GameStop’s success as dependent on its ability to become a thriving e-commerce business.
Cohen’s turnaround plan has so far been executed without much clarity being offered to investors. What is clear, however, is that GameStop management is shifting its focus and investing heavily in technology, inventory and supply chain infrastructure. They also grew the company’s e-commerce business while launching new digital products through GameStop’s new blockchain division.
But also key to Cohen’s plan is eliminating the company’s excessive operating costs. Today, GameStop has a robust free cash flow (FCF) of more than $1 billion — derived in part from the company issuing a whopping $1.67 billion in equity last year.
But cash raised through a stock issue is quite different from cash produced by operations. Data as of the end of April 2022 shows that FCF per share was negative $10.47 – the lowest since 2010.
GameStop burns through about $300 million in cash each quarter to support its operations. Maintaining this current pace of spending is unsustainable.
Several more consecutive quarters of cash burn would erode the company’s healthy balance sheet. GME could find itself in a situation where it needs to issue even more equity capital to finance its bold transformation plans.
And while GameStop is working to trim the fat in some locations, it’s still funneling a lot of cash into new businesses.
For example, the company recently announced the “GameStop Wallet,” a place where users can securely store, send, and use Ethereum, NFT, and ERC20 tokens. GameStop’s NFT Marketplace, slated to launch in July, promises to be the company’s most robust brick-and-mortar initiative to date.
The big unknown here is the exact cost that GameStop’s investment in its blockchain group will bear. We expect these new projects to have a significant impact on the company’s operating costs, at least at first glance.
“Intense owner mentality”
To eliminate cost overruns while other future-oriented projects are being developed, GameStop is making significant headcount cuts. The company will be laying off staff, including CFO Mike Recuper, who has been in the role since last June.
With fewer employees, the company will have to operate more than ever with an “intense owner mentality” – a model introduced by Ryan Cohen.
The company’s board of directors should serve as a model case. That’s because, as recently approved at GME’s annual general meeting of shareholders, the company’s CEO compensation for 2021 will come purely in the form of share prices.
Under this new structure, it will no financial compensation payable to the non-employee directors, except for directors Alan Attal and Jim Grube, who received a pro rata portion of GameStop’s 2020 standard non-employee director compensation.
Board Chairman Ryan Cohen declined to receive any compensation. Additionally, GameStop CEO Matt Furlong was hired under Cohen’s influence and shares his ownership mentality. He has made it clear that he will fulfill his role without taking on the usual frills of a CEO. Additionally, the vast majority of his compensation will take the form of stock awards.
Because of this model of ownership mentality, GameStop insiders are highly motivated to remain committed to the company’s success and create shareholder value.
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