Former Chewy CEO Ryan Cohen urges GameStop to turn into the Amazon of video video games

The shift away from brick-and-mortar retailers in favor of on-line procuring has damage GameStop over the previous decade, pushing the corporate’s inventory down almost 40% in that point interval.

However Ryan Cohen, the previous CEO of Chewy, thinks the maligned video-fame retailer can flip itself round by shifting its focus away from bodily shops in favor of a constructing sturdy e-commerce platform. Cohen thinks GameStop can use its model and huge buyer base to make that transition. He has taken a big stake within the firm to try to push it in that course.

Enterprise: GameStop is a retailer that sells online game {hardware}, bodily and digital online game software program, online game equipment, in addition to cell and client electronics merchandise and different merchandise primarily by way of retail operations, with all shops engaged within the sale of recent and pre-owned online game programs, software program and equipment.

Inventory Market Worth: $828 million ($12.71 per share)

Share Possession: 9.98%

Common Price: $5.98

Activist Commentary: Cohen is just not an activist however an especially profitable entrepreneur. Cohen is the co-founder and former CEO of e-commerce firm Chewy, which he constructed up and bought to PetSmart in 2017 for $3.35 billion. Cohen remained CEO following the acquisition till March 2018, and in June 2019, Chewy went public at a valuation of $8.7 billion. That is Cohen’s first 13D submitting, however what he lacks in activist expertise he makes up for in strategic and operational {qualifications} in constructing and working an organization within the digital period, giving him a ton of credibility right here, much more so than the typical activist with respect to sure areas.

On Nov. 16, 2020, Cohen despatched a letter to the corporate’s board, urging them to instantly conduct a strategic overview and to offer stockholders with a reputable and publicly out there roadmap for value containment, prioritizing worthwhile retail areas and geographic markets and constructing the e-commerce ecosystem.

Cohen resorted to this public letter as a result of his personal makes an attempt weren’t productive. GameStop sells video video games and consoles and has been bearishly in comparison with Blockbuster. Cohen doesn’t make that direct analogy, however he actually paints the image of an organization that’s on that very same path if it doesn’t change.

Gross sales have declined from $9.5 billion in fiscal yr 2011 (earlier than the final console cycle) to $6.Four billion in fiscal yr 2019; EBITDA has dropped from $839 million in 2011 to solely $111 million in 2019; web revenue has fallen from $339 million in 2011 to a lack of $470 million in 2019; and within the two most up-to-date quarters alone, the corporate misplaced one other $277 million. All of this occurred whereas the dimensions of the worldwide gaming market has grown by greater than 2.5x for the reason that final console cycle. Cohen sees an organization that’s caught in a brick-and-mortar mentality and is unwilling to embrace the digital mindset essential to develop with players.

Nonetheless, Cohen additionally sees an organization with helpful property, together with a powerful model and huge buyer base and a path to achievement and shareholder worth. He believes the corporate may be the final word vacation spot for players, however that vacation spot should begin with a powerful e-commerce platform that gives aggressive pricing, broad gaming choice, quick transport and a very excessive contact expertise that excites and delights clients, together with content material and group. It must turn into the Amazon of gaming, with the added experience and specialised customer support as a key differentiator.

To do that, Cohen urges the corporate to chop extreme actual property prices, streamline or promote non-core operations in Europe and Australia and rent the fitting expertise. Whereas Cohen doesn’t particularly goal CEO George Sherman, he does word that Sherman has substantial expertise working for giant brick-and-mortar retailers similar to Advance Auto Components, Greatest Purchase and Goal and is dedicated to a twentieth century give attention to bodily shops and walk-in gross sales regardless of the transition to an always-on digital world.

The corporate is at an inflection level to make this variation. Cohen notes that the corporate will be capable of briefly masks a few of its points with the brand new console cycle that may seem to validate its adherence to an outdated enterprise mannequin that’s overdependent on brick-and-mortar gross sales. Nonetheless, it is usually this new console cycle and extra gross sales that may present the money move to finance this technique turn into the long run as the worldwide gaming market is predicted to succeed in $174.9 billion this yr and $217.9 billion by 2023. 

Cohen alludes to the truth that one board seat wouldn’t be acceptable to him as he needs the corporate to really give attention to a shift in mindset. This is able to require no less than two — and possibly three or extra — new administrators to the ten-person board, relying on who’s changed. Whereas it seems to be like Cohen might need an ally on the board in James Symancyk, the CEO of PetSmart whereas Cohen was working Chewy, Symancyk additionally has a brick-and-mortar background and may not see it the identical method Cohen does.

If this does find yourself going to a proxy struggle, Cohen looks like the kind of shareholder who will take it the space if vital. In that case, he would have two potential headwinds. First, the corporate just lately added 4 new administrators by way of settlements and nominations by shareholders. That may very well be sufficient to placate sure institutional shareholders and ISS if they don’t see as dire of a state of affairs as Cohen does on this ultra-fast-moving business. Second, a big a part of the shareholder base is comprised of index funds similar to BlackRock (12.12%), Vanguard (8.12%) and State Avenue (4.0%), who’re reluctant to again an activist with out the quilt of an ISS or Glass Lewis suggestion.  Nonetheless, what’s attention-grabbing right here is there’s an unusually excessive quick curiosity, with roughly 90% of the shares in lending applications, so we do not actually know who has loaned their shares, who can vote them and who can recall them earlier than the assembly.

It will likely be attention-grabbing to see if the board will be capable of abdomen the change essential to propel GameStop into the 21st century. Within the phrases of former U.S. Military Normal Eric Shinseki: “When you do not like change, you are going to like irrelevance even much less.”

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments