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Former Chewy CEO seeks to make GameStop the amazon of the online game business

Game Stop Store in New York City.

Michael Brochstein | LightRocket | Getty Images

The move away from brick-and-mortar retailers in favor of online shopping has hurt GameStop over the past decade, dragging the company's stocks down nearly 40% over that period.

However, Ryan Cohen, former Chewy CEO, believes the vicious video fame retailer can turn around by shifting its focus away from physical stores to build a robust e-commerce platform. Cohen believes GameStop can leverage its brand and large customer base to help make this transition. He got heavily involved in the company to steer it in that direction.

Company: GameStop Corp (GME)

Companies: GameStop is a retailer that primarily sells video game hardware, physical and digital video game software, video game accessories, and mobile and consumer electronics products and other merchandise through retail outlets. All stores sell new and pre-made products, their own video game systems, software and accessories.

Market value: $ 828 million ($ 12.71 per share)

Activist: Ryan Cohen

Percentage ownership: 9.98%

Average cost: $ 5.98

Activist Comment: Cohen is not an activist but an extremely successful entrepreneur. Cohen is the co-founder and former CEO of the e-commerce company Chewy, which he built for $ 3.35 billion in 2017 and sold to PetSmart. Cohen remained CEO until March 2018 after the acquisition, and in June 2019 Chewy went public with a value of $ 8.7 billion. This is Cohen's first 13D filing, but what he lacks in activist experience it makes up for in strategic and operational skills in building and running a business in the digital age, which gives him a lot of credibility here, even more so than the average activist in relation to certain areas.

What's happening:

On November 16, 2020, Cohen sent a letter to the company's board of directors urging them to immediately conduct a strategic review and provide shareholders with a credible and publicly available roadmap to cut costs, prioritize profitable retail locations and geographic markets and Build the e-commerce ecosystem.

Behind the scenes:

Cohen resorted to this public letter because his private attempts were not productive. GameStop sells video games and consoles and has been bearishly compared to Blockbuster. Cohen doesn't make that direct analogy, but he certainly paints the picture of a company that is on the same path if it doesn't change.

Revenue declined from $ 9.5 billion in fiscal 2011 (before the last console cycle) to $ 6.4 billion in fiscal 2019. EBITDA fell from $ 839 million in 2011 to just $ 111 million in 2019. Net income decreased from $ 339 million in 2011 to a loss of $ 470 million in 2019. In the last two quarters alone, the company lost another $ 277 million. All of this happened while the size of the global gaming market has grown more than 2.5 times since the last console cycle. Cohen sees a company stuck in a real mentality and unwilling to embrace the digital mindset necessary to grow with the players.

However, Cohen also sees a company with valuable assets, including a strong brand and customer base, and a path to success and shareholder value. He believes the company can be the ultimate goal for gamers, but that goal has to start with a strong e-commerce platform that offers competitive prices, a wide selection of games, fast shipping and a really high-touch experience, the customer, including content and content, inspires and inspires community. It needs to become the amazon of gaming, with the added expertise and specialized customer service as the main differentiator.

To that end, Cohen urges the company to cut excessive property costs, streamline or sell non-core activities in Europe and Australia, and recruit the right talent. While Cohen is not specifically targeting CEO George Sherman, he notes that Sherman has extensive experience working for large brick and mortar retailers such as Advance Auto Parts, Best Buy, and Target, and is committed to the 20th century focus on physical stores and stores has -in sales despite the transition to an ever-active digital world.

The company is at a tipping point to make this change. Cohen notes that the company will be able to temporarily disguise some of its issues with the new console cycle, which appears to confirm adherence to an outdated business model that relies too heavily on brick and mortar sales. However, it is also this new console cycle and additional sales that may provide the cash flow to fund this strategy change in the future, as the global gaming market is projected to hit $ 174.9 billion this year and $ 217.9 billion by 2023.

Cohen is alluding to the fact that a seat on the board would not be acceptable to him as he would like the company to actually focus on a changed mindset. This would require at least two – and likely three or more – new directors on the ten-member board, depending on who is being replaced. While it looks like Cohen has an ally on the board of directors in James Symancyk, the CEO of PetSmart while Cohen ran Chewy, Symancyk also has a stationary background and may not see him the same way as Cohen.

If this leads to a proxy battle, it seems Cohen is the type of shareholder who steps back when needed. In this case he would have two possible headwinds. First, the company recently added four new directors through shareholder settlements and nominations. This could be enough to reassure certain institutional shareholders and the ISS if they don't see a situation as bad as Cohen is in this ultrafast industry. Second, a large portion of the shareholder base is made up of index funds like BlackRock (12.12%), Vanguard (8.12%), and State Street (4.0%), who refuse to support an activist without the backing of an ISS or Glass Lewis recommendation. What is interesting here, however, is that there is an unusually high short interest with around 90% of the shares in loan programs. Hence, we don't know exactly who loaned their shares, who can vote them, and who can call them back before the meeting.

It will be interesting to see if the board can take the changes necessary to propel GameStop into the 21st century. In the words of former US Army General Eric Shinseki, "If you don't like change, you will like irrelevance even less."

Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets

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