Clash of The Opposites

When I was pregnant with my daughter Bb, I could not get enough of watermelon and feta cheese. I ate them together. Every. Single. Day. The dry, salty feta mingled with the juicy, sweet watermelon was absolute divinity, even though most (ok, all) of my coworkers were grossed out. But let’s face it; extremely disparate ingredients often complement each other in surprising ways, as a clash of opposites serves to satisfy two cravings at once. Bacon and ice cream. Pizza with pineapple. Michael Jackson and Eddie Van Halen. You can’t ‘Beat It’!

One of our holdings lies in the epicenter of a unique American extreme; the meltdown of the American shopping mall due to spiraling commercial real estate values married together with the dizzying rise of virtual reality and gaming.

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The American shopping mall is experiencing an apocalyptic collapse of value and influence. In the mid-1990s, the number of American malls peaked at around 1,500, while today there are only about 1,000 left. The fall of anchor stores like Sears (SHLDQ OTC; $0.30) and JC Penny (JCP NYSE; $1.31) and the rise of internet shopping (the monster being AMZN NASDQ; $1,649.00) have led to constant mall bankruptcies and closings all over the country. There’s even a show on YouTube called Dead Mall Series, check it out: (https://www.youtube.com/playlist?list=PLNz4Un92pGNxQ9vNgmnCx7dwchPJGJ3IQ). ‘Dead Mall’s’ spot-on satire is hilarious and depressing at the same time. Retailers that aligned themselves with brick-and-mortar malls are in mid-pivot (or mid-collapse) and recasting their business models toward virtual or experiential shopping.

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The antithesis of mall culture is our nascent gaming culture. Thanks to platforms like Playstation, Xbox and Wii and mobile streaming, video game spending in the US increased 40% in the first half of 2018 to $19.5 billion, with mobile games experiencing the most impressive growth. Gaming has become a true meta-cultural phenomenon; globally, the gaming industry is expected to reach $171.96 billion by 2025 (according to a report by Grand View Research).

Our holding that expands this clash to a higher high concurrent with a lower low is GameStop (GME, NYSE $13.88). GME is a multichannel video game retailer with a footprint largely in the malls of America, selling consoles, new and used games, accessories like headsets and controllers, and collectibles. The company owns 3,802 video game stores in the U.S. and 1,951 internationally, and they are presently in the throes of its most important quarter of the year otherwise known as “theSpend-i-days”(when we try not to spend too much on our children and epically fail). GameStop’s revenues are $9.07 billion (on a trailing twelve-month basis) and somewhat surprisingly, given the volatility in the industry and the market, it has held on to that top line number for years (from 2013-2018, highest revenue was $9.36B in 2016 and lowest $8.6B in 2017).

GameStop’s stock was crushed in late 2015 as the aforementioned Dying Mall trend gained momentum. Notoriously, the company was tabbed as ‘the new Blockbuster’, as investors saw the business model as a similar dying brand. However, the company continued to kick out good free cash flows to support their hefty 10.95% dividend. As well, they reported that they are exploring a sale, most likely to another public company or private equity firm. Here’s our brief analysis of the Salty and the Sweet of this opportunity:

Salty:

  • Brick-and-mortar mall model is obsolete

  • The stores themselves are sloppy and customer service is nonexistent

  • Console makers and publishers are moving to streaming content and direct-to-consumer models rather than boxed CDs

  • Management cannot get out of its own way to take advantage of virtual trends and truly cut costs related to brick-and-mortar businesses

Sweet:

  • Low stock price price/earnings multiple

  • Excellent free cash flow (to support dividend)

  • Collectibles and accessories businesses have experienced excellent growth

  • Recent appointment of a board member who has successfully assisted with other brand buyouts (PetSmart, Timberland)

  • Financially sound company

The rise of Virtual Reality will eventually finish off the slow meltdown of the mall; in the meantime, we believe GameStop has an opportunity to realize value for shareholders, and for that we are willing to (get paid to) wait.

Have a beautiful Thanksgiving!

Love,

Dani

All quotes as of the close 11.12.18

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