GME Pitch.pptx (3).pdf -

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Albuquerque, New Mexico Seattle, Washington We are applying a more definitive analytic approach, including profit levels and sales transferability that we expect will yield a much larger tranche of closures over the coming 12 months to 24 months. We believe these actions will significantly add to our profit improvement run rate with little to no cash expense as our average lease life is approximately two years. -Jim Bell, CFO Q2 (Latest) Earnings Call Alternative Investment Fund Heatmap for Potential 10% Closest-Location Store Cut Before After Heat Map distribution is very similar, suggesting that store overlap provides an opportunity to cut 10% of stores (~335 locations) and still retain presence in multiple markets. This suggests reduction in COGS / SG&A while retaining a large portion of sales in these over-crowded locations (Nashville, Bowling Green KY, etc.) Alternative Investment Fund Misperception: SSS/Preowned Declines will Flip Margins High SSS Declines & high-margin preowned sales declines prompt bears to cite a potential margin flip, but we think this is misguided due to a multitude of incoming margin-improvement factors. Gross Profit 2177M 1. Gamestop’s New Management is aggressively cutting unprofitable (~5-10%) stores, and taking advantage of the short term operating OPEX 1982M lease profile. EBT 1. SG&A & Operational Efficiencies of 200m by the end of 2020 exploited 195M widen this gap to 24.3%. 1. Late Stage in 10 year console cycle & confirmation of disk drive in both big console releases next year will stave off gross profit declines. Streaming / Download still in early stages w/ many issues. Alternative Investment Fund Net Income Walk (LTM 2019 in Millions) 2177 1849 Adjusted Earnings Highlight a 21% IRR In our Bear Case, and a 42% IRR in our Bull Case 23.6% 27.8% 94 38 196 Gross Profit SG&A Depreciation/Capex Interest Run-Rate Adjusted Earnings Alternative Investment Fund Net Income Walk (2020/2021 Millions) 2277 “Our success can be measured by our 88% growth in hardware 1649 +100 sales for the fourth quarter compared to the U.S. hardware market growth of 39% as measured by NPD.” - Management on PS4/Xbox One Holiday Release 94 38 496 -200 153% INCREASE Gross Profit SG&A Depreciation/Capex Interest Run-Rate Adjusted Earnings Alternative Investment Fund Misperception: GameStop is the next BlockBuster 1. BlockBuster was saddled with high Former BlockBuster CEO: interest debt, maturing in 2009/2010 (900m), and were unable to refinance during the financial crisis. With $350 million in debt that was due in the first quarter of 2009. It was something Keyes 1. BlockBuster had razor thin margins and wasn’t worried about because he was high interest payments well before their planning to refinance the debt at a later bankruptcy in 2010. date. But now, with banks unwilling to lend, and nervous movie studios changing their 1. Despite aggressively cutting SG&A, store credit terms from 90 days to cash, count only fell from ~9000 to ~6500, Blockbuster had only one option. suggesting that long operating lease durations prevented a scale-down. Alternative Investment Fund Misperception: GameStop is the next RadioShack 1. Radioshack did not close stores with ~4300 stores in the U.S. in 2015 and in some instances 25 in a 25 mile radius (Sacramento, CA) 1. Extreme management issues, considering 7 CEO changes from 2005-2014 with aggressive marketing & reinventing spend for each new charlatan. 6.8 m in executive comp in 2009. 1. SG&A stayed flat to up despite rapidly declining gross profit, no cyclical aspect of their business decline (like the console cycle with Gamestop). 1. Indemnification Contracts removed accountability to shareholders by not holding directors and management teams at RadioShack accountable. ~3B in aggressive buybacks far too early destroyed their balance sheet Alternative Investment Fund Misperception: Xbox / Playstation Download Risk Downloads are already a well-baked in trend, but there are structural discounts to buying physical -> resale value / unique offerings 15%-20% Off $8.80 Gamestop Store Value / ~$12 Net of $59.99 on Playstation Store / Xbox Live / Shipping on eBay Gamestop Alternative Investment Fund Slow/Frustrating Downloads & File Size / Cost Issues Since the Xbox One and PS4 come with 1TB default HDD, This equates to enough storage for only an astonishing 10 copies of Read Dead Redemption 10 stored via download. Xbox Scarlett and the PS5 are confirmed to have SSDs versus HDDs, but this comes at decreased storage size for more efficiency at the same cost basis. A 2TB SSD is currently around the $200 mark on its own, whereas a 1 TB HDD is ~$50 with 2 TB ~$90. Not to mention, a game download with lower than average download speeds could result in a 5-12 hour wait time, and any loss of connection could potentially reset that. Overstated Streaming Threat Streaming games with high quality is likely to present latency, bandwidth, and throttling issues. Additionally, PS Now and Xbox Game Pass don’t have the top titles due to licensing / publisher cost barriers, and almost never have premier releases. Stadia requires a strong, stable internet connection to work properly, the $10 subscription only provides one free game a month, and is not a rental / subscription service (customers still must buy each and every game) ` Alternative Investment Fund Exclusive Items Can’t Be Replicated By Other Retailers Alternative Investment Fund Market Share Provides Opportunity in Cyclical Bounce Gamestop’s reputation, unique offerings, and lagging / content consumers support online console sales despite no clear-cut moat. Hardware Sales in full year 2018 in the U.S. = 7.5 B 2.725 B / 7.5 B = 36.3% market share! 41% Q2 YoY Decline in Hardware Sales consistent with industry console cycle 36.3% market share + cyclical rebound = obvious exposure to console cycle Alternative Investment Fund Severe Freeze-up in PS4 Sales Dec 2018 - Holiday 2020 Alternative Investment Fund Consistent Freeze-up in Xbox One Sales Until 2020 Alternative Investment Fund GME Rides With the Cyclical Console Life Cycle New console releases fuel hardware sales and foot traffic (thus propagating to sales in the segments in the rest of their mix). With both Sony and Microsoft’s new generation of game consoles on the horizon (Nov 2020) confirmed to have disc drives and SSDs, Gamestop can stonewall their decline. November 22nd, 2005: Release November 11th, 2006: Release November 15th, 2013: Release November 22nd, 2013: Release of Xbox 360 PlayStation 3 PlayStation 4 of Xbox One Alternative Investment Fund Bear Case Valuation “We expect our adjusted free cash flow for fiscal 2019 to be in the $225 million to $250 Note: We use a very million range.” - CFO on Q3 Conference Call conservative analysis here - assuming no Year 2019 2020 2021 2022 2023 2024 benefits from SG&A cuts or implications from the current FCF 225 m 275 m 200 m 100 m 50 m Div. Recap positive book (liquidation) value. (console releases in 2020 should boost fcf) DCF of cash flows above w/ 10% discount rate - 681 m Market Cap - 548 m Expected Share Price - $7.6 24% undervalued in very conservative base case - no bloated SG&A cuts, gross profit declines at maximum analyst estimated rate. No buyers in 2024, return of capital (tax-advantaged) or special dividend as a last-resort. Alternative Investment Fund Bull Case Valuation “We expect our adjusted free cash flow for fiscal 2019 to be in the $225 million to $250 Note: we assume the million range.” - CFO on Q3 Conference Call terminal net income is ~50m with a large scale Year 2019 2020 2021 2022 2023 Then on down in stores from ~5800 to ~1000. 15% discount rate (more FCF 250 m 350 m 325 m 200 m 150 m 50m realistic is a sale of the company). (console releases in 2020 should boost fcf | 200m of SG&A cuts by 2021) DCF of cash flows above w/ 10% discount rate - 1.3 B Expected Shares Outstanding - 72 m (90m * .8) Expected Share Price - $18 3x return in very moderate/achievable bull case - guided SG&A cuts (already 20% done Q3) , gross profit declines at upper quartile analyst estimated rate. Alternative Investment Fund Sale of Distribution Facilities Produces $30m of Cash With around 1.128 m square feet in distribution facilities, ~$97.8 per square foot for warehouse space equates to $110 m Closure of Milan Almost all (except for smaller Grapevine location) are Facility could provide distribution (warehouse) facilities. A burgeoning sector which is $12m, understated by the home value index above. Eagle Farm another $18m Alternative Investment Fund Promising New Management Team George Sherman, Chief Executive Officer James Bell, Executive Vice President and Raul J Fernandez, Director- appointed Liz Dunn, Director - appointed and Director- appointed April 2019 Chief Financial Officer - appointed June June 2019 June 2019 2019 ● Served as CEO of Victra, largest ● CEO and founder of Pro4ma Inc. - ● Vice chairman and owner of ● CEO of Wok Holdings Inc. Monumental sports and authorized retailer of Verizon in ● Led scale of P.F. Changs, Pei Wei cloud-based data forecasting for the U.S. retailers entertainment. and True Food Restaurants ● Co-Owns Washington Wizards, ● Led Auto Advance Parts (NYSE: ● Led Dutch Auction Tender Offer ● CEO and founder of Talmage AAP) from 2013-2016, 2x. - Cut Advisers - Consulting firm for Washington Capitals and Team SG&A retailers (pricing + Strategy) Liquid eSports. ● Served in senior leadership ● Appointed by Activists ● Director at Kate Spade & Co. roles at Best Buy and Home ● Appointed by Activists Depot. Alternative Investment Fund George Sherman’s Credibility on Cost Rationalization We’ve made some improvements and you're right we're going to take a big chunk out of our cost structure. And we're going to continue to look for ways in and begin to find more and more of it. So we’re not stopping at 100 basis points or stopping at any one fixed number we keep looking to fund more and more cost to take to streamline. We expect to take further actions to address underperforming assets and unnecessary costs. We have more work to do, little bit more wood to chop on it... meaning it is taking aggressive cost out in the right places, accelerating our comp sales and expanding our margins. CEO George Sherman has vested interest in Gamestop’s success with experience in deep retail cost structure changes and a hands-on “sense of urgency” to cut at Gamestop Alternative Investment Fund Future minimum annual rentals as of 2/2/2019 Misperception: Gamestop’s Enterprise Value now includes debt from operating lease expenses, although these come with NO marginal interest expense, and have a fairly short term profile Note: Leases Thereafter are likely weighted to select highly-profitable locations. From VIC, Seeking Alpha “Sorry to be snarky on a bad day for me. This thing does not basically trade at zero EV. Market cap is $860m, debt was as $821m as of Feb 19, cash was $1,624m, so superficially looks like EV is only about $55m.” Average Expected Lease Duration ~ 2 years “Where do you see cash and debt each around approx 500m? Yahoo finance is telling me it has net debt of Large Amount of Expected Closures 700m and therefore EV of 1 billion.” Alternative Investment Fund Tremendous Buyback Opportunity At Hand Market-breaking Ability to Employ 238m authorization into Repurchases ● Repurchases could press the short interest Repurchases have massive impacts on a per share basis, significantly, and induce a “public buyout” as highlighted by the dividend example below - ● The existing repurchase authorization has been hinted at by management, and will likely be Hypothetical Scenario of a buyback, *assuming no market employed by the new CEO after the recent tender influence (share price constant) offer (may be taking place as of now). changes in out. shares = $237.6M/$6.09 =39M *Current Shares Outstanding: ~90.5m “We remain committed to returning excess capital to out. shares remaining = 90.5M - 39M = 51.5M shareholders when appropriate and have 150M for dividend / 51.5 M out. shares = $2.91/share approximately $237 million remaining under the existing share repurchase authorization.” 48% potential dividend yield Alternative Investment Fund Sky High Short Interest With Pending Buy Orders Alternative Investment Fund High Rates Provide Bond-Parity & Potential Squeeze Alternative Investment Fund Recent Distressed Retail Offers Suggest Hidden Value Sycamore Partners -> offers $3 per share (declined) Liberty Tax -> offers $6.50 per share (40% premium) ~1460 total stores 23k cash flow per store ~782 total stores 29k cash flow per store 350m all cash offer -> 240k per store (~10% FCF yield) 208 m -> 266k per store (~11% FCF yield) Note: comparables also have similar ~4% slim margin profiles & small debt load Alternative Investment Fund Gamestop Comparable Valuation At $20 per share potential acquisition ~344k per store ( 11% FCF yield) Market valuation w/ operation improvements from new, focused management team ~103k per store (38% FCF yield) ~5830 stores ~39k cash flow per store Why are firms offering so much: cheap debt & PE firms starved for yield, opportunities to slow / stop earnings declines with operational improvements, & LBO opportunity w/ low long-term debt levels Alternative Investment Fund Why did Apollo/Sycamore Pass? GME’s Debt on an LBO event would be really hard to raise - given Gamestop’s BB- Credit Rating (Lower than the B- rating of Shutterfly that Apollo is already struggling with). GME seems like it could not get capitalized on a traditional syndicated deal. Apollo would have to rely on private debt funds / revolvers which could make financing a little troublesome - coinciding with the failure to get reasonable financing from major banks (Gamestop’s name is almost cursed, as if it were a zombie radioshack). Alternative Investment Fund Q&A