GameStop Stock: Here’s what you need to know about GME’s bold turnaround plan

GameStop (EMG) – Get the GameStop Corporation report has been under the leadership of CEO Matt Furlong and Chairman of the Board Ryan Cohen for just over a year now. With these two at the helm, the company adopted a bold turnaround plan. The company’s direction aims to elevate and modernize GameStop’s business beyond physical stores.

However, to make lasting and bold changes, some short-term pain is often necessary. Here, we’ll take a closer look at GameStop’s turnaround plan.

Figure 1: GameStop Stock: Here’s what you need to know about GME’s bold turnaround plan

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GameStop’s aggressive turnaround plan

One of the reasons GameStop has become a strong short-selling target is because of its declining brick-and-mortar business model. For years, the company’s growth prospects were bleak.

But with his strong background in e-commerce and retail, Ryan Cohen – founder and former CEO of Chewy, and now GameStop’s biggest investor and chairman – aims to change that. He came to GameStop with a plan to push a deep transformation. Cohen sees GameStop’s success hinged on its ability to become a thriving e-commerce business.

Cohen’s turnaround plan has so far been carried out without much clarity offered to investors. What is clear, however, is that GameStop management has changed direction and invested heavily in technology, inventory, and supply chain infrastructure. They also scaled the company’s e-commerce business while launching new digital products through GameStop’s new blockchain division.

Eliminating excessive business operating costs is also key to Cohen’s plan. Today, GameStop has a robust free cash flow (FCF) of over $1 billion, partly derived from the company issuing a whopping $1.67 billion in capital. last year.

But the cash generated by issuing shares is very different from the cash generated by trading. End of April 2022 data shows FCF per share was negative $10.47 – the lowest since 2010.

GameStop spends around $300 million in cash to support its operations each quarter. Maintaining this current rate of spending is unsustainable.

Several more consecutive quarters of cash burn would hurt the company’s healthy balance sheet. GME could put itself in a position where it would need to issue even more equity to fund its bold transformation plans.

And while GameStop strives to cut the grease in some places, it’s still making big money in new ventures.

The company, for example, recently announced “GameStop Wallet,” a place where users can securely store, send, and redeem Ethereum, NFT, and ERC20 tokens. GameStop’s NFT Marketplace, slated to launch in July, promises to be the company’s most robust brick-and-mortar initiative to date.

The big unknown here is the exact cost that GameStop’s investment in its blockchain group will incur. We expect these new projects to have a significant impact on the company’s operating costs, at least at first glance.

The “intense owner mentality”

To eliminate cost overruns while more forward-looking projects are being developed, GameStop is significantly reducing its workforce. The company will lay off employees, including chief financial officer Mike Recupero, who has been on the job since June last year.

With fewer employees at its disposal, the company will, more than ever, have to operate with an “intense owner mentality” – a model pioneered by Ryan Cohen.

The company’s board of directors should serve as a model case. Indeed, as recently approved at GME’s annual shareholders’ meeting, compensation for the company’s directors for 2021 will be in the form of equity awards only.

Under this new structure, there will be no cash compensation payable to non-employee directors, with the exception of directors Alan Attal and Jim Grube, who received a prorated share of GameStop’s standard non-employee director compensation in 2020.

Board Chairman Ryan Cohen declined to receive any compensation. Additionally, GameStop CEO Matt Furlong was hired under Cohen’s influence and shares his owner mentality. He made it clear that he would fulfill his role without taking on the usual CEO frills. In addition, the vast majority of his compensation will take the form of stock awards.

With this ownership mindset model established, GameStop insiders have tremendous incentive to stay committed to the success of the company and drive shareholder value.

(Disclaimer: This is not investment advice. The author may own one or more stocks mentioned in this report. Additionally, the article may contain affiliate links These partnerships do not influence editorial content. Thank you for supporting Wall Street Memes)

About Myra R.

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