Wednesday, November 16, 2011

Dairy: GMG

Ah yes, GMG (Game Group) - and US equivalent GME (Gamestop) - a company doing the rounds amongst value investors so much lately that everyone's dizzy. Wait, I'm sure there must be better wordplay in it than that. Game over for Game Group? ... now that's just hackneyed. At the Value Investors Conference, legendary investor Joel Greenblatt has been touting it as a good and cheap company with a lot of negative sentiment, whilst at the same conference, Jim Chanos has been touting it as a value trap that will look cheap all the way down. Anyone who's been following HMV will know how that one works. In light of today's news, it's looking like Chanos 1, Greenblatt 0.

I had GMG lined up to talk about some time in the future, but in light of the fact that it's down 37% (was at nearly 41% at one point), I thought now is the time to talk about it. Clearly, when a share bombs 37% in a day, there's something wrong. It doesn't take long to find out why. They issued an IMS today. Some snipppets: lfl sales down 8.6% across all categories, including pre-owned [emphasis mine - and is it really too much for management to say "second-hand"?]. customer footfall down, and internet sales flat. online margin has doubled since launch of a new web platform, and online share has remained at 19%. group digital sales have grown over 40% YTD. pre-owned is 28% of total sales at 40% margin. GAMEwallet, a new way for customers to find and pay for digital games, launched in October.

Clearly, the market is focussing on the bad stuff, and dismissing the good stuff.

I've said it before, and I'll say it again: being a second-hand trader seems like a bit of a daft way to go for a major retailer. A "mom and pop" business can maybe get away with it, but major retailer, no. I continue to see Steam as a serious threat. I'm not a games player, but I get trial offers when I'm playing my Deus Ex Human Revolutions (great game, I love it. I'm replaying it actually). Steam will be able to lock down games tighter than a camel's arse in a sandstorm - so you can forget about second-hand games being a long-term business model - "Doctrine of First Sale" be damned!

The Motley Fool reported on 27-Sep-2011 that managers pledged to buy shares in GMG every month in lieu of 20% of their salaries. Perhaps the most insightful and convincing comment ever about GMG which clearly articulates why it's a sell is from "Stevokkenevo":
I would count myself as an enthusiast video gamer and have worked at Game in the past and I really can't see the company existing in 10 years time. The audience they target is non-enthusiast gamers and mums and dads. If this market grows out of playing video games they will have very few people to sell products to. Nearly everyone I know that plays games on a regular basis refuses to shop at Game because their customer service is disheartening and awkward.

If games go fully digital in the next 10 years with the increase in internet connectivity and speed, Game is dead in my opinion. Sounds to me more like the directors are just trying to convince people their business is sound.
On the same artcile, F958B (a poster I highly respect) offered the advice:
Investors are not required to have a buy/hold/sell opinion for every share in the market. If in doubt - leave it alone: take no action: do not short it: do not buy it. It can't go wrong then. Nowadays, we see periodic opportunities to invest in good businesses at sensible prices. There is no need to get involved with falling knives.

He continues:
My comment was also to remind investors that "falling knives" and "value that's too good to be true" is dangerous and more likely to end in losses than profits.

On 16-Aug-2011, James Emerson wrote a piece on Seeking Alpha, calling it a value trap:
fundamental changes in the industry have rendered the business model obsolete ... Consumers will download software directly to their gaming device and will play on websites like Zynga and Flonga bypassing GameStop completely and eliminating the market for new games.
There has, of course, been counter-opinions to his article. 

The ever-intelligent valuestockinquisition wrote an article about UK retailers on 18-Aug-2011. GMG was one of the companies he wrote about. He offer some additional insights:
On the surface many UK non food retailers trade with net cash on the balance sheets, but these do not reflect the reality of off balance sheet committments in the form of lease agreements. ... the fixed charge cover on the last balance sheet date is 1.6. By my reckoning a 4% fall in sales cet par would leave fixed charge cover below 1. ... So for the moment, despite valuation seeming to be attractive, I am not prepared to part with hard cash to buy any UK retailer.
An interesting comment by a poster on a BBS:
Game are their own worst enemy, they have pretty much given up with sensible retailing. And are now just after marketshare, check their trade-in deals page for a complete joke, Games that are for sale at Tesco for £25/£30 GAME are offering £35 trade in on them against a new release title. Funniest one was RAGE, Gamestation (part of game) were selling for £24.99 and GAME were offering £35 trade for it when people were trading towards Gears of War. Anyone can sell £10 notes for £5... GAME seem being undercutting and selling them for £4.95

The Motley Fool pulished an article about GMG today, in which the author expresses relief at not having pulled the trigger earlier on buying in. He called it a "Death or glory" punt. The article doesn't contain any new insights.

Having all said that @MrContrarian over at Twitter rates it a buy: "Game Group (£GMG):another warning. FY LFL down 7% at best, margin -150BP. At 11.75p PSR 0.02, EV/sales 0.06. Priced to go bust. Bt small pos" He has more investing acumen in his little finger than I have throughout my entire body, so you're likely to be better off listening to him than me. I asked him to explain his position, and he responded: "GMG will continue to shrink but if it survives to the next console cycle the PSR should revert somewhat. High risk high reward." A real cigar butt, then.

I leave you with this wit from a twit @GSElevator:
I'm not afraid of anybody, except maybe black guys who have scars... You know they didn't get them from falling off a bicycle.


Richard Beddard said...

It's doing the right thing though, closing stores, embracing digital, management buying shares sends out the right signal.

I look at it every year and come to the same conclusion (avoid), but never say never :-)

UK Value Investor said...

I'd say it's a speculative bet and nothing more than that. It may rebound dramatically in a year or more if it can last. On these super-low 'valuations' anything can happen. But as a business I cannot see how it will survive without a complete transformation away from selling games since they WILL all be downloaded very shortly, which of course involves pure speculation about how it will all turn out.

Not one for me.

Lewis said...

Milk-related typo in the title, Mark!

Just writing a short bit on you for Friday reading and thought I'd give you a heads up.