Digging into GameStop Corp.’s annual report today, which just came out after yesterday’s market close, a couple numbers really stuck out to me:

  • Sales are down 40% in 2 years
  • Shareholder equity is down 80% in 2 years

And lest we blame COVID for all of this, note that the percentage sales decrease from 2018 to 2019 was slightly larger than that from 2019 to 2020. In all, the business shrunk a bit more than 20% both years.

These losses are taking a serious toll on shareholders’ investment. $2.2 billion in shareholders’ equity in 2018 was reduced to just $400 million by the end of 2020.

GameStop shares have reacted quite negatively to this report, dropping over 30% today so far. Speculation has driven the stock up a great deal this year, but this business is shrinking fast. How much longer can speculation support it? You can’t shrink by 20% a year for very long until your business ceases to exist.

There were a few bright spots in the report. Losses, inventories, and long term debt are all down. Losses have also dropped as a percentage of revenue. And most of the board is expected to resign soon, perhaps giving Chewy founder and board member Ryan Cohen a freer hand to transform the company into an e-commerce business.

But he will face an enormous drag from 5,000 money losing stores, many of which have long term leases that will saddle the company with losses for the forseeable future. His competitors, like Amazon, Microsoft and Sony, don’t face that drag on their performance.

The video game business is increasingly based on downloads. Microsoft and Sony have even released diskless consoles, removing any need or even possibility of buying games for them at GameStop.

There were a few positives in this report, but the overall picture is of a dying business that will be difficult to turn around due to its existing obligations and weak competitive and financial position. I’ll be staying away from this one.

For more on GameStop, check out these posts:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

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