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Subject: Gamestop Page 1 Date: 2/24/2010 10:37 PM
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I received an email wanting an update on GME on this board, so I am posting my thoughts about them here.

Gamestop (GME)
Price: $18.12

Today the price is $18.12 and the PE ratio is 7.71.

March 21, 2006 4Q:2005 highlights:
** Net income $85 million for 4Q:2005 or $0.55 per share
** Net income for fiscal 2005 was $.81 per diluted share
** Revenues increased 135.2% to $1,666.9 million in the fourth quarter, in comparison to $708.7 million
** Revenues were $3,091.8 million for fiscal 2005, an increase of 67.8% over fiscal 2004 sales of $1,842.8 million. On a comparable store basis, sales decreased 1.4% during fiscal 2005.
** Cash flow $180,722,000
** Debt $975,990,000
** Cash $401,593,000
** Revenues per share were $23.74 per share
** Diluted shares 124,972,000
** Store count 4490 under the Gamestop or EB brand
** Trading range between March 21, 2006 and May 18, 2006 was $20.96 to $24.84: PE Range was 26.03 to 30.86: PS range .88 to 1.05

May 18, 2006 1Q:2006 highlights:
** Net earnings $11.7 million (including merger-related expenses of $1.3 million ($0.8 million, net of tax benefit and stock compensation of $5.2 million or $3.3 million net of tax benefits).
** Diluted earnings per share were $0.075 (including merger-related expenses of $0.005 and stock compensation of $0.02 per diluted share
** Revenues were $1,040.027 million up from $474.727 million
** TTM revenues 3,657.1 million or $23.30 per share
** TTM earnings $0.785
** Diluted share count 156,194,000
** Trading range between May 18, 2006 and August 17, 2006 was $17.94 to $23.65: PE range 22.84 and 30.13: PS ratio was .77 to 1.02

August 17, 2006 2Q:2006 highlights:
** Revenues increased 132% to $963.3 million from $415.9 million
** Same store sales increased 3.9%
** TTM revenues $4,204.5 or $26.67
** Net income $3.2 million including merger-related expenses of $2.6 million or $1.6 million net of tax benefit.
** Diluted earnings per share $0.02, including merger related expenses of $0.01.
** TTM Earnings $0.735
** Diluted shares 157,658,000
** Trading range between August 17, 2006 and November 21, 2006 was $20.64 and $28.09: PE range was 28.08 and 38.21: PS ratio range .77 to 1.05.


November 21, 2006 Fiscal 3Q:2006 Highlights:
** Sales were up 89% to $1,011.6 million up from $534.2 million
** TTM revenues were 4,681.9 or $29.52 per share
** Same store sales increased 8.8%
** New video software increased 14% with Madden NFL 2007 and Saints Row leading the bestseller list.
** Net income was $13.6 million compared to a loss for last year. Fiscal 2005 was affected by merger expenses.
** Net income per share for the quarter was $0.085 ($0.025 mostly debt retirement costs) compared to a loss of –($0.02) last year.
** Diluted shares 158,582,000
** Basic shares 150,786,000
** Cash $180,948,000
** Debt $889,994,000 – An important note here is that the fourth quarter is their best cash flow producing quarter by far. It will allow them to repay good part of their debt.
** Inventory is eating up cash flow in the quarter, but its part of the holiday buildup and that a necessary expense.
** Hardware sales grew 69% led by Nintendo DS Lite, Xbox 360, and the 6 year old Playstation 2. The latter is important as it means that the industry is enjoying a growing base of budget-oriented gamers that will drive the sales of both new and used PS2 sales.
** Their used game business grew 10%.
** Playstation 3 and Nintendo Wii were sell outs. They have been resupplied and they expect to receive more on a weekly basis.
** Tie ratios for Nintendo Wii as 3 which was a pleasant surprise. PS3 tie ratio is much lower at 1.5, but they feel that will improve as more gamers get the system. The tie ratio is the number of games sold per system.
** Major distribution center in Louisville, KY. Note mostly for me.
** GameStop owns about 25% of the US game market.
** Trading range between November 21, 2006 and March 27, 2007 was $25.57 to $31.16

3Q:notes
February 9, 2007, the Company announced a 2 for 1 split.


March 27, 2007 4Q:2006 highlights:
**Cash $652,403,000 up from $401,593,000
** Debt $855,899,000
** 4Q:2006 earnings per share was $0.81 (including $0.01) for debt retirement, compared to $0.55 per diluted share last year.
** 4Q: revenues were $2.304 billion up from $1.6669 billion last year
** Same store sales for the quarter was 26.5%
** Fiscal 2006 earnings were $158.3 million (53 week fiscal year), including merger-related expenses of $6.8 million ($4.3 net of tax benefits) up from $100.8 million in fiscal 2005 up 57%.
** Store count 4,911
** 271 new stores were opened in the U.S bringing the total to 3,895
** Fiscal 2006 diluted earnings per share was $1.00, including merger related expenses and debt retirement costs of $0.05 per diluted share up from $0.81 last year.
** Fiscal 2006 revenues were $5.3189 billion up 72% from $3.0918 billion last year
** TTM revenues were $5.3189 billion or $33.28 per share
** TTM earnings $1.00
**Cash flow for fiscal 2006 $289.574 million
** Diluted share count 159,832,000
**Fiscal 2006 same stores sales were up 11.9%
** Trading range between March 27, 2007 and May 23, 2007 was $30.93 to $37.87: PE ratio range was $30.93 to $37.87: PS Ratio range .93 to 1.14

May 23, 2007 1Q:2007 earnings’ highlights:
** Revenues were $1.278,983 bilion up from $1.040027 billion
** TTM revenues $5.56 billion or $34.46
** Earnings were $0.15 up from $0.07 1Q:2007 included $0.03 for early debt retirement.
** TTM earnings $1.08
** Diluted share count 161.256 million
** Cash $307.328 million
** Debt $749.547 million
** 4,816 global stores
** Trading range between May 23, 2007 and August 23, 2007 was $34.79 to $48.86: PE range was 32.21 to 45.24: PS ratio range was .94 to 1.42

August 23, 2007 2Q:2007 earnings’ highlights:
** Revenues were $1.338 billion up from $963.347 million
** TTM revenues were $5.935 billion or $36.02
** Diluted share count 164.769 million
** Earnings per share was $0.13 up from $0.02 (earnings this quarter included $0.01 loss from early debt retirement.)
** Stores 4,954 in 16 countries
** TTM earnings are $1.19
** Cash $349.277 million
** Debt $706.166 million
** Trading range between August 23, 2007 and November 20, 2007 was $46.42 to $60.80: PE ratio range was 39 to 51.09: PS Ratio range was 1.29 to 1.69

November 20, 2007 3Q:2007 earnings’ highlights:
** Revenues were $1.611 up from $1.012
** TTM revenues were $6.534 billion or 39.28 per share
** Diluted share count 166.357 million
** Earnings $0.31 up from $0.09 3q:07 included early debt retirement costs of $0.02 per share
** Same stores sales were up 46.3%
** comparable stores sales were 46.3%
** TTM earnings are $1.41
** Cash $277.808 million
** Debt $574.229 million
** Cash flow (negative $256.004 million)
** Trading range between November 20, 2007 and February 2, 2008 was $47.46 to $63.77: PE ratio range was 33.66 to 45.23: PS ratio range 1.21 to 1.62

February 2, 2008 4Q:2007 earnings’ highlights:
** Revenues increased 24% to $2.866 billion up from $2.304 billion
** Comparable stores sales increased 17.4%
** New video game software sales grew 38.4%
** Net income was $189.8 million (13 weeks) up from $129.8 million (14 weeks)
** Earnings per share was $1.14 up from $0.81 last year.
** Sales for fiscal 2007 $7.094 billion up 33.4% from $5.318 billion
** TTM sales were $7.094 billion or $42.48 per share
** Diluted share count was 166.992 million
** Earnings per share of $1.75 up from $1.00
** Cash $857.414 million
** Debt $574.473 million
** Cash flow for the year $502.725 million
** Cash flow for the quarter $758.7 million
** Trading range between February 2, 2008 and the present May 22, 2008 was $41.91 to $59.13: PE ratio range 23.95 to 33.79. PS ratio range was .99 to 1.39.

May 22, 2008 1Q:2008 1Q:2008 earnings’ highlights:
** Revenues were $1.814 billion up 41.8% from $1.289 billion
** TTM revenues were $7.619 billion or $45.52
** Diluted share count 167.377 million
** Earnings per share was $0.37 up from $0.15
** TTM earnings $1.97
** Cash $625.096 million
** Debt $544.992 million
** Comparable store sales up 27.1%
** Cash flow for the quarter negative ($237.112 million)
** New video software games grew 72%
** Opened a record 210 stores (86 in the U.S and 87 in Europe, 25 in Canada and 12 in Australia) This is the first time store opening in Europe exceeded those opened in the U.S)
** Trading range between May 22, 2008 and August 21, 2008 was $38.82 to $50.67: PE ratio range was 19.71 to 25.72: PS ratio range was .85 to 1.11

August 21, 2008 2Q:2008 earnings’ highlights:
** Revenues were $1.804 billion up 35% from $1.338 billion
** TTM revenues were $8.085 billion or $48.125 per share
** Diluted share count 168.067 million
** Earnings per share $0.34 up from $0.13
** TTM earnings are $2.18
** Cash $539.898 million
** Debt $545.220
** Total stores 5557
**Gross margins 26.83% down from 27%
** Operating margins 5.6% up from 3.8%
** Stock based compensation was $8.3 million (a bit on the highside)
** New hardware sales grew 29%
** New software sales grew 43%
** Used software sales grew 32% (much higher profit margins for the used games)
** Cash flow for the quarter negative ($54.627 million)
** Cash flow for six months negative ($291.739)
** Comparable stores sales up 20%
** Trading range between August 21, 2008 and November 20, 2008 was $16.91 to $44.75: PE range was 7.76 to 20.53: PS ratio range of .35 to .93
** Special note: Price was down $3.00 based on this report


3Q:2008 November 20, 2008 earnings’ highlights:
** Revenues $1.696 billion up 5.2% from $1.611 billion
** TTM revenues were $8.17 billion or $48.63
** Diluted share count 167.995 million
** Earnings per share $0.28 down from $0.31
** TTM earnings were $2.15 per share
** Comparable store sales declined by 1.8%
** Cash $478.056 million
** Debt $545.462 million
** Gross margins 27.92%
** Operating margins 5.03%
** Stores 6,207 with 4,331 in the U.S
** Cash flow for nine months Negative ($332.524)
** Used game sales were up 19%, and trades set a company record in the third quarter.
** Trading range between November 20, 2008 and March 26, 2009 was $16.91 to $29.08 was 7.87 to 13.53. PS ratio range was .35 to .6

March 26, 2009 4q:2008 earnings highlights:
** 4Q revenues were $3.492 billion up 22% from $2.866 billion
** 4Q earnings $1.39 up from $1.14
** Fiscal 2008 revenues were $8.806 billion up from $7.094 billion
** TTM revenues were $8.806 or $52.52 per share
** Same store sales grew 9.6% for the quarter
** Fiscal 2008 earnings per share was $2.38 up from $1.75
** Diluted share count 167.671 million
** Cash $578.141 million
** Debt $545.7 million
** Cash flow for 2008 $366.043 million or $2.18 per share
** Cash flow for the quarter $698.567 million
** Trading range between March 26, 2009 and May 21, 2009 was $25.10 to $32.82: PE ratio range was 10.55 to 13.79: PS ratio range was .48 to .63


May 21, 2009 8:30 AM 1Q:2009 Notes:
** Revenues were $1.981 billion up 9% from $1.814 billion
** TTM revenues were $8.98 billion or $53.46
** Earnings were $0.42 up from $0.37
** TTM earnings were $2.43
** Cash $230.255 million
** Debt $495.571 million
** Cash flow negative ($305.385 million) down from negative ($237.112 million)
** TTM cash flow $297.77 million or $1.77
** Diluted share count 167.972 million
** Same stores sales were down 1.5%
** Trading range between May 21, 2009 and the present July 24, 2009 was $20.02 to $26.50: PE ratio range was 8.24 to 10.91: PS ratio range was .38 to .5
** Special note: Stock fell $4.00 based on this report


August 20, 2009 2Q:2009 earnings’ highlights:
** 2Q:2009 revenues were $1.74 billion down 4% from $1.804 billion
** TTM revenues were $8.92 billion or $53.12
** Diluted share count 167.857 million
** Earnings per share $0.23 down from $0.34
** TTM earnings were $2.32
** Cash flow for the six months negative ($337.7 million) down from negative ($291.7 million)
** Cash flow for the quarter was negative ($32.298 million)
** TTM cash flow was $320.043 million or $1.91 per share
** Cash $197.86 million: Debt $495.8 million
** Same store sales were down 14.1%
** Stores 6,333
** Trading range between August 20, 2009 and the present October 31, 2009 was $22.06 and $27.78: PE ratio range was 9.51 to 11.97: PS ratio range was .42 to .52: Cash flow yield 6.9% to 8.7%

October 31, 2009 3Q:2009 earnings’ highlights:
** Revenues were $1.84 billion up 8.2% from $1.696 billion
** TTM revenues were $8.34 billion or $49.63 per share
** Earnings per share $0.31 up from $0.28
** TTM earnings $2.35
** Diluted share count 168.113 million
** Cash $292.027 million; Debt $447.121 million
** Cash flow negative ($195.971 million) nine months up from negative ($336 million)
** TTM Cash flow $506 million or $3.01 per share
** Trading range between October 31, 2009 and the present January 25, 2010 was $19.42 to $26.05: PE ratio range was 8.26 to 11.09: PS ratio range was .39 to .52: Cash flow yield range was 11.6% to 15.5%

ThompsonFn estimates: January 25, 2010
4Q:2009 $1.30
Fiscal 2009 $2.29
1Q:2010 $0.49
Fiscal 2010 $2.63

Old Guidance:
GameStop expects diluted earnings of $1.47 to $1.65 for the fiscal fourth quarter. They expect same stores sales to range from 7% to -1%. They expect full year earnings to range from $2.45 to $2.63. They expect same store sale to range between -7% to -4% for the year. Guidance doesn’t include debt retirement costs or merger related expenses.

New guidance: Based on holiday sales, Gamestop has lowered fourth quarter 2009 guidance. They now believe fourth quarter earnings per shares will range from $1.25 to $1.29. Same store sales will range between negative -8.5% to -9.5%.

For the full year, they expect earnings to be $2.23 to $2.27. They expect same store sales to be negative for the year ranging from -8.0% to -9.0%. Total sales are expected to grow between 2% and 3%. Again guidance doesn’t include debt retirement costs or merger related expenses. This still represents growth of 25% from 2007 numbers, but down from their record breaking 2008 diluted earnings of $2.38.



3Q:2009 Notes:

New game software was up 9.4% which increased their market share by 150 basis points over last year. Used game sales increased 19.4%. Same store sales fell 7.8% due to declines in hardware sales. It is important to note that margins are much lower on hardware sales than either new software or old software sales. It is also important to note that Best Buy software sales were down 10.9% in the third quarter. During the same period MPD reported that software sales were down 12% for the industry.

Net earnings were $52.2 million including $2.5 million in debt retirement costs ($1.6 million net of tax benefits). Diluted earnings per share were $0.31 which included $0.01 of debt retirement up from $0.28 which included merger-related costs of $0.06.

The holiday season is off to a strong start. Gamestop sold 2.5 million copies of Call of Duty: Modern Warfare 2 in the first 72 hours after its release.

Gamestop opened 86 new stores (48 in the U.S. and 38 internationally)in the quarter. They also opened their e-commerce sites in Australia, Italy, and a bilingual site in Canada. They also acquired a majority interest in Jolt Games – a developer browser games based in Ireland.

Used game margins improved 1.5% sequentially to 47.3%, but declined .9% from last year. Part of the decline was due to the contribution from their European used game sales. It affected margins in this segment by 1%. They believe it is dues to the immaturity of the European market and that the impact is a temporary one.

They expect to generate $400 to $425 million in cash flow for the full year, after having invested $175 million in capital expenditures. This would mean about a $600 million fourth quarter cash flow which would boost cash totals far above debt totals. The balance sheet will continue to improve.


Important events:

January 7, 2010 – Gamestop announced their sales for the 9 week holiday period ending January 2, 2010. Total sales were $2.86 billion flat as compared to last year. Same store sales fell 8.6% while new stores performed well. New video game software increased 4%. The top five video games were Call of Duty: Modern Warefare 2 from Activision, Ubisoft’s – Assassin’s Creed II, Nintendo’s New Super Mario Brothers, Wii Left 4 Dead 2 and Dragon Age: Origins from Electronic Arts.

Hardware sales declined 8%. This should not have been unexpected. Their used video game product sales were up 10%. Weather conditions, storms at peak holiday sales seasons may have attributed to lower sales. But who knows. Based on their own analysis, they saw no impact from other entrants into the used game category. I haven’t seen any news on this front either.

January 11, 2010 – The Company announced that they have plans to buy back $300 million in company stock. They should produce about $600 million in cash flow for the fourth quarter, combined with their $292 million in cash, they would have about $892 million to buy back $300 million of stock and then $592 million to cover the $447 million in present debt. They were cash flow negative by about $196 million for the first nine months. They expect to be able to make about the same amount of cash flow in 2010 or about $450 million. Next year, they should be able to buy back $300 million in shares and have enough cash to more than pay off debt if they choose to do so. This would also allow them to spend about $175 million in capital expenditures. If they buy back the shares at today’s prices it would be accretive to earnings by about $0.23 per share.

The Company believes, they will have about $700 million in cash at the end of 2010. They plan on $200 million in capital expenditures, $100 million reserve for acquisitions (they may not acquire any company so the money could be used to pay down debt) and buying back $300 million in stock. So even after these planned outflows of cash, they believe they will have about $700 million in cash by the end of 2010.

Risk factors: I would like to cite a risk factor which I am sure I discussed before, but wanted to repeat it. Their used game market is very important to Gamestop. It is still a growing part of their business and its most profitable business. However, there are risks to that business. Some may immediately say new entrants. But that is the least of my worries. I don’t think the others, like Best Buy or Amazon will be able to beat them here. However, there is another threat. New games are great and game manufacturers are extending the life of those games by introducing new features which can be downloaded straight from the Internet. By extending the life of the new games, there will be fewer trade-ins to fuel their used game business. It is a risk factor, but the outcome is hardly decided at the present. Gamestop’s used game business is still growing strong.





Conclusion:

I think they are very cheap. I bought the stock recently and I will also be glad to buy again if the price goes down significantly from today’s prices. I don’t think there is a chance of getting it much cheaper. Why? I don’t think it will go down much more because the PE is about 8.5. Assuming earnings go down next year to $2.00 which is much lower than Gamestop’s guidance of $2.23 on the low end, the PE becomes about 10, still very cheap. Lower earnings are reflected in the stock price in my opinion.

They should make about the same amount of cash flow in 2010 as they have in 2009. If so they could easily pay a 15% dividend. The stock is cheap. And investors are selling it as if the company was doomed. And their used game business doomed, even though, it has grown so well that the is forcing others to enter the market, or be left sorely behind.

Best Buys video game business was down 10.9% in the third quarter, the same quarter that GameStop announce video game sales were up 4% for new games and 19% for used games. They are still taking market share from the industry. Yet they are being traded as if they made buggy whips. I am a value investor when I am not a growth investor and I like both, but one has to know what drives value and what drives growth and to value each properly.

Value investments seldom look like growth companies when they are cheap, they will have problems. It is part of why they are selling for PE under 10 instead of PE over 30.

There are risks concerning all business investments. But where is the short-term downside for Gamestop? The PE is 8.50. They will produce a large amount of fourth quarter cash flow, and likely to do the very same amount next year. At the height of fear, the price of the stock only went down to $16.91 which represented a PE ratio of about 7.76. For the price to hit that PE ratio, it would have to fall to 18.24. Today its $19.98. You are getting it nearly at recession low values. Cash flow is much higher, so I am not even going there.

Being a value investor has been in vogue since 2000, and getting much more attention since the recession. But being a value investor rarely means buying a company growing at 20% for 10 times earnings. That is a rare event. If you didn't load up on such companies at the trough of the recession you will be waiting a very long time to find such bargains. Most of the time it means buying present cash flow cheap and GameStop is giving investors over a 50% discount to the value of their present cash flow.

When Benjamin Graham was buying companies under asset value, do you think he was thinking, I am buying a growth company, or just buying under asset value? I am fairly certain, his purchases were mostly looking pretty stinky, and growth wasn't really entering into the picture. They were simply selling under asset value, or perhaps he bought cash flow on the cheap. We have a chance to buy Gamestop cash flow cheap. If one believes the business is going away in a few years, then surely no price is worth the risk, but it isn't going anywhere. And next year should be just as good as this year. So the chances of seeing the price again over $30 is high in my opinion.

And once again, we are in a super secular bear market. The economy is still a mixed bag of yucky stuff with some improving stuff mixed in, but still pretty yucky. What is likely to happen to Gamestop if the economy does improve - and goes back to 2006?

Call me crazy, but I like buying companies that people believe are doomed particularly when they are producing $500 million in cash flow. I don't see an immediate threat. We regularly hear analysts and investors talking about the threat to Gamestop. New entrants to their used game business, manufacturer downloads, and of course the dreaded console upgrade cycle. But these threats may never materialize. The latter is a sure thing. At some point there will be a Playstation 4. Maybe in 2011 or 2014, no one seems to know and other hardware makers will also offer a new generation of platforms, but this has always been part of their natural business cycle. And the threat has always been of a temporary nature. The rest of the threats may not materialize and remain only speculation. Gamestop may find ways to resume growth, or the improvement in the economy itself may be enough to once again send them soaring.

Presently, I am happy buying Cash flow at what I believe is a very conservative 50% discount to its real value. If they maintain, cash flow at present levels, the stock should be selling over $30 even if earnings never grow again. I expect that cash flow will fall some, but I don't see it falling much, and the margin of safety in my opinion is deep.

If Playstation 4 does materialize: What will that do for hardware sales, new software sales - and the used game business? Unknown and today not very relevant. I can't wait to see how the trading ranges work out between now and next year. If the stock price does rise to $30 in the next 52 weeks, I believe then many so called value investors will jump all over the stock but the true value investors will have already bought them and will be thinking about lightening positions. I can't tell anyone what they should do, I can only say what I am doing. I bought them recently and I would love to get another chunk around $16.91 the recession lows, but I think that $16.91 is a dream only scenario.

I am here to answer questions about Gamestop. If you have any questions please ask.


tom e

thomas engle
tmf Coverage Fool
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