According to GameStop’s co-founder, the company now led by Ryan Cohen needs to reduce its stores footprint in order to succeed in the long term.
- Co-founder Gary Kusin advises GameStop to streamline operations by reducing its store footprint through layout optimization and increased online sales.
- Despite challenges, GameStop reported its first annual profit in 2023 since 2018, attributed to substantial expense reduction while maintaining $1.19 billion in cash and investments.
- GameStop’s future may rely on CEO Ryan Cohen’s strategy shift towards becoming a diversified holding company, potentially leveraging assets for sustained profitability under his leadership.
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GameStop Co-founder’s Advice for Ryan Cohen
In a recent interview, Gary Kusin, the co-founder of Babbage’s in the 1980s, which now operates as GameStop (GME), stated that the company needs to reduce its footprint if the video game retailer wants to stay alive.
According to Kusin, “nothing works in a 10,000-store footprint, unless it’s a historically enormous sector.” This footprint reduction refers to minimizing the physical space or environmental impact of retail stores.
Some strategies for footprint reduction consist of optimizing store layouts to make more efficient use of space, implementing sustainable practices to reduce energy consumption and waste, or shifting towards online sales to decrease the need for physical store locations.
Kusin suggests that with a reduced footprint, GameStop would have a smaller staff requirement. He proposes implementing this strategy across all store locations until it is resolved which categories bring in revenue and can cover the “overhead, the rent, the people to be there, and generate a return on investment”.
Furthermore, Kusin recommends that GameStop should close 90% of its stores that will need to have their leases renewed.
It’s worth noting that around 40% of GameStop’s operating leases are set to expire in fiscal 2023, with only 16% expiring in 2027 or beyond.
What Does the Future Hold for GameStop?
According to the company’s corporate filings, GameStop aims to achieve profitability in its operations to sustain itself in the long term, especially as sales have been gradually declining over the last five years. The company has faced challenges such as declining physical game sales, competition from online retailers, and shifts in consumer preferences.
To address these challenges, GameStop has focused on reducing expenses and operating in “extreme frugality” mode, which has proven successful. In 2023, GameStop reported its first annual profit since 2018, amounting to $6.7 million, a significant achievement given the current headwinds.
This turnaround comes after reporting losses of $313 million in 2022. The profitability was largely attributed to a 24% reduction in selling, general, and administrative (SG&A) expenses over the past year, despite a year-on-year sales drop of 11% to $5.27 billion.
Despite the decline in sales, GameStop has a major positive factor in its balance sheet. The company holds $1.19 billion in total cash and short-term investments with virtually no debt, ensuring ample liquidity for the present.
While liquidity is not currently a problem, the challenge lies in sustaining profitability amid ongoing sales declines. Simply cutting costs may not be a sustainable long-term strategy for the company.
The most likely path for GameStop to address this situation revolves around its CEO and largest shareholder, Ryan Cohen. In October of last year, the company changed its investment policy, shifting from investing cash in fixed income to investing in other equities under the guidance of Cohen and two other members of the board.
Some market participants interpreted this move as a lack of confidence in the company itself. However, I view this initiative as a strategic move that could potentially transform GameStop from a declining brick-and-mortar video game retailer into a diversified holding company. This shift could enable GameStop to leverage its investments for capital gains, particularly by selling stakes in companies that appreciate in value.
Of course, this transformation would require strong management from Ryan Cohen and his team to ensure successful investments.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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