After reviewing GME’s Q2 results, I exited my position this morning for a 20% gain. On balance I thought the quarter wasn’t that bad, but the likelihood of an aggressive buyback is lower. This was a large part of my prior thesis, so I’m trying to avoid thesis drift and move on with a profit. I’ll continue following this one.
Most notably, the company reduced its FY 2019 SSS guidance from -5-10% to “a decline in the low-teens.” It was already clear that the late-cycle hardware headwinds and tough holiday comps made the prior guidance unrealistic, but management finally addressed it. Beyond 2019, management doubled its operating profit improvement target to $200mm and plans to achieve this by 2021. This is definitely positive, however 50% of this target will come from gross margin improvement (as opposed to SG&A), so it’s harder to give full credit here. Collectibles growth surprisingly accelerated, however hardware and pre-owned products were again challenged.
The company introduced FY 2019 EPS guidance of $1.15-$1.30, so you’re still getting a ~25% earnings yield in a cyclically trough year – this is interesting, but not obviously compelling. In comparison, my prior post laid out how an aggressive tender could uniquely provide a path to create a back-end stub at ~1x FCF – clearly an easier bet. Management logically paid down $50mm of debt during the quarter, however the outstanding buyback authorization was only briefly acknowledged on the call.
Put differently, we have a management team that recently tendered for shares at $5.20, saw their stock fall well below this level, and didn’t even suggest that the buyback could be accelerated in response to further price weakness. My conclusion is that management has re-prioritized to focusing on debt repayment and we’re more likely to see a measured and gradual buyback over time. I can’t blame management for focusing on de-levering, but the reduced probability of an aggressive buyback has certainly changed my original trade.