November 15, 2019 Long Equity - $5.94 Theodore Rose, Sachin Jain, Ish Singham, Ivan Wang, Raahish Kalaria Alternative Investment Fund deep value Timeline of Share Price Progression Hired Perella Weinberg to Explore sale w/ Apollo and Sycamore as two main suitors. Talks fell through as one “couldn’t raise financing”. Dividend Cancelled , prompting mass exodus from dividend funds / ETFs reaching for the > 20% dividend yield Tender Offer takes 12% of shares outstanding, large proration factor & smallest interval prompts selling. Michael Burry Pushes for Repurchases, Insider Buying , More SG&A Cuts, and high guidance from earnings call. Sale of Spring Mobile for 700m for >7x EBITDA to Prime Communications provides 350 m of cash & 350 m debt paydown. Alternative Investment Fund Forced Selling From Dividend Funds Alternative Investment Fund WisdomTree Trust - WisdomTree U.S. SmallCap Dividend Fund (ARCA:DES) (1,689,954) First Trust Exchange-Traded Fund II - First Trust Dow Jones Global Select Dividend Index Fund (ARCA:FGD) (904,177) Global X Funds - Global X SuperDividend ETF (ARCA:SDIV) (866,423) Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF (ARCA:VYM) (331,172) FundVantage Trust - Skybridge Dividend Value Fund (312,780) 4.1 M shares were forced to sell the next trading day after the dividend was cancelled - dividend funds / ETFs chasing after yield pressed the share price down below fair value Note: this only includes funds with “dividend” in their name! This is after taking a tumble from ~$47 in late 2015 Our analysis shows an expected valuation $10 - $20 Price Drop-Off Submerged Equity under Fair Value Alternative Investment Fund "The streaming narrative dovetailing with the cycle is creating a perfect storm where things look terrible” -Michael Burry (The Big Short / Housing Bubble) Flaws in Market Perception + Core Valuation Arguments Short Squeeze/Buyback 1. Short Interest - Record highs in short interest / cost to borrow are driving probability of a short squeeze. 2. Buyback Plan - Aggressive share buyback plan / cash surplus share provides opportunity for EPS growth Aspects of Secular Decline 1. Amazon’s Devour - Poses threat due to advantages in scale, shipping capabilities, and price competition 2. Downloads/Streaming - Provide a new vector for video game delivery to end consumer 3. PC Games, DLC Content, One Time Use Codes GameStop has a sales problem - who even shops there anymore? Declining Same Store Sales (SSS) and Pre-Owned sales will compress margins rapidly GameStop is the next Blockbuster/RadioShack - the terminal value is zero Xbox Live, Playstation Store present streaming & download risk Video Game / Console Sales are a pure commodity industry - price competition coming Investment Overview 4 5 3 2 1 Gamestop’s SG&A has been allowed to saturate above gross profit levels consistently for a full 7 year console cycle steadily causing operating profit compression GameStop said to be exiting Nordic region (300 stores) - Nov 1 Gamestop Lays off 14% of Corporate Office (120 people) - Aug 22 Gamestop Fires District/ Regional Managers (>50 people) - Aug 1 Misperception: GameStop has a Sales Problem Alternative Investment Fund Gamestop’s New Management & Partially Refreshed Board are aggressively cutting SG&A Notes from Q3 Conference Call - SG&A expenses declined by $19.2 million or 4.3% , reflecting just the beginning of the impact of our organizational changes as we implemented them late in or subsequent in the quarter. We are on track to close between 180 and 200 underperforming stores this year ... 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. We believe these operating profit improvement initiatives will substantially exceed the previous management team's initial $100 million target ... we believe the total annualized run rate of our profit improvement initiatives will be in excess of $200 million for 2020. So it's all very new, but it is now in effect, we think of that call it $100 million of cost reduction opportunity has been roughly 40% complete now. And that's a combination of structural changes that we made as well as some indirect procurement initiatives that have taken hold. So, that gives us a level of confidence again to commit to a $200 million number because we made very, very good progress on -- to get there. Alternative Investment Fund >200 m SG&A Incremental Earnings Alternative Investment Fund Opportunity To Drop Stores In Oversaturated Markets Bowling Green, Kentucky Nashville, Tennessee Gamestop’s New Management has a massive opportunity to close stores and preserve sales due to evident cannibalization New York, New York Nashville, Tennessee Houston, Texas Birmingham, Alabama Alternative Investment Fund Alternative Investment Fund 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 Heatmap for Potential 10% Closest-Location Store Cut Alternative Investment Fund 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.) 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. 1. Gamestop’s New Management is aggressively cutting unprofitable (~5-10%) stores, and taking advantage of the short term operating lease profile. 1. SG&A & Operational Efficiencies of 200m by the end of 2020 exploited 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. Misperception: SSS/Preowned Declines will Flip Margins Alternative Investment Fund Gross Profit 2177M OPEX 1982M 195M EBT Net Income Walk (LTM 2019 in Millions) Alternative Investment Fund Gross Profit SG&A Depreciation/Capex Interest Run-Rate Adjusted Earnings 27.8% 38 23.6% 2177 1849 94 196 Adjusted Earnings Highlight a 21% IRR In our Bear Case, and a 42% IRR in our Bull Case Net Income Walk (2020/2021 Millions) Alternative Investment Fund Gross Profit SG&A Depreciation/Capex Interest Run-Rate Adjusted Earnings 38 2277 1649 94 496 “Our success can be measured by our 88% growth in hardware 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 +100 -200 153% INCREASE Former BlockBuster CEO: With $350 million in debt that was due in the first quarter of 2009. It was something Keyes wasn’t worried about because he was planning to refinance the debt at a later date. But now, with banks unwilling to lend, and nervous movie studios changing their credit terms from 90 days to cash, Blockbuster had only one option. 1. BlockBuster was saddled with high interest debt, maturing in 2009/2010 (900m), and were unable to refinance during the financial crisis. 1. BlockBuster had razor thin margins and high interest payments well before their bankruptcy in 2010. 1. Despite aggressively cutting SG&A, store count only fell from ~9000 to ~6500, suggesting that long operating lease durations prevented a scale-down. Misperception: GameStop is the next BlockBuster Alternative Investment Fund 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 Misperception: GameStop is the next RadioShack Alternative Investment Fund Downloads are already a well-baked in trend, but there are structural discounts to buying physical -> resale value / unique offerings $59.99 on Playstation Store / Xbox Live / Gamestop $8.80 Gamestop Store Value / ~$12 Net of Shipping on eBay 15%-20% Off Alternative Investment Fund Misperception: Xbox / Playstation Download Risk 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 i n 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 Slow/Frustrating Downloads & File Size / Cost Issues Alternative Investment Fund Exclusive Items Can’t Be Replicated By Other Retailers 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 Market Share Provides Opportunity in Cyclical Bounce