Gamestop – Revenge of the Shareholders

So, I haven’t mentioned much about corporations and stocks lately because I haven’t seen anything interesting flag up. This pattern was broken Thursday when I got a notification that Gamestop’s stock had dropped several percent, something that doesn’t typically happen for no reason. I wasn’t overly surprised by what I found when I looked though.

“While the outcome of the process was unfortunate, we believe that the Board has a tremendous opportunity to create value for its shareholders by returning significant capital to equity holders, and by hiring a CEO who is properly incentivized to focus on leveraging the Company’s competitive advantages and on improving operational efficiency.” – HCM Letter – Feb 12, 2019

One of their shareholders, Hestia Capital Management, sent them a letter suggesting that they do several things to at least correct their share price, which they believe is significantly undervalued, as well as raising it long term. The whole thing is about four pages, and I don’t intend to go over it point by point.

“However, the Board’s lack of a meaningful response following Hestia’s February 12, 2019 open letter to the Board (the “February 12 Letter”), (…) and Hestia’s considerable efforts to engage with the Board, have driven us to group together and speak publicly now.”

The recent drop occurred because not only did they not get the results they wanted, but now another shareholder has joined them in penning a second letter, Permit Capital Enterprise Fund. The irony is that both letters insist that the companies current value, roughly $11, is significantly less than what it should be based on the numbers, $19. This doesn’t seem to be inspiring investor confidence though, and they’ve expressed the opinion that if they don’t get the results they seek, they will work to replace the board.

“However, if this letter fails to elicit an acceptable response, we are prepared to take our proposals directly to stockholders and nominate directors for election at the Company’s 2019 annual meeting.”

One of the first charts in the new letter is a comparison of Total Shareholder Return between Gamestop, it’s “peers”, the S&P 500, and the Russel 2000. I personally am unsure that the companies listed as peers are a great comparison. It’s mostly specialty retailers, but I’m not super familiar with those industries, really, and feel like Gamestop may be facing a larger challenge overall than they are.

“Peer group used by GameStop’s Board in most recent proxy; group includes: Advance Auto Parts, Dick’s Sporting Goods, Abercrombie & Fitch, AutoZone, Barnes & Noble, Tiffany & Co, Foot Locker, The Gap, Bed Bath & Beyond, Williams-Sonoma, L Brands, Nordstrom, Kohl’s, Office Depot, Ross Stores and O’Reilly Automotive.”

Among that list, I only see one business that I think faces similar challenges to Gamestop, and that’s Barnes and Noble. Both companies are operating in an industry that is moving from physical goods to digital goods. The rest of these businesses deal in physical objects, as we have yet to invent non-physical shirts and transmissions. Of course, I may be overlooking details too, I’m way in over my head on this one.

See, I figured if the “average” Total Shareholder Return is 119.14 to Gamestops 42.49, then I should be able to calculate B&N by itself to see if it reflects the average or is an outlier more in line with Gamestop. This was somewhat more difficult than I had anticipated. First, this number is calculated with a known, assumed, or hypothetical investment amount over a specific period of time. It was fortunately provided in the source document “Value of $100 Invested on 2/11/14 as of 2/11/19.”

The value itself, unless I am mistaken, appears to be (Starting Share Value – Final Share Value + Dividends Paid) That’s a rough estimate I think, anyway. In this case it’s 100-57.4591+41.36, or -$1.18. I’m, uh, still not sure that’s correct. It took a good hour to figure out how to calculate it and locate all the requisite numbers.

This would appear to confirm my suspicion, though, that the companies listed are not a good measuring stick for the realities of Gamestop’s situation. I’m uncertain if the changes they want to make will ultimately have the impact they would like. It’s obvious that something needs to change, and maybe it’s the board members, maybe it’s just not a large enough market now to sustain a chain this size anymore. I… don’t shop there anymore. They have very little of interest or value to me personally. There was a time I could spend hours browsing here, but those days have obviously passed.

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