GameStop (NYSE:GME) announced at the end of July that it will rebrand all of its Canadian stores from EB Games to GameStop to align itself with its U.S. operations. The change, which is expected to happen by the end of 2021, gives owners of GME stock a little insight into the specialty retailer’s future direction.
Is this piece of news good or bad for the future direction of GameStop’s share price? Let’s consider both sides of the argument.
GME Stock Will Head Lower
One undeniable conclusion you can make from GameStop rebranding all of its Canadian stores to the GameStop name: The company intends to move forward with an omnichannel business model. It wouldn’t spend money on this much new signage if it were planning to divest its brick-and-mortar locations and go fully digital.
If that is the case, I’m not sure what Ryan Cohen and his group of former Chewy (NYSE:CHWY) insiders bring to the table. Last time I checked, Cohen’s been lauded as some digital savior of the company, yet he’s spending money on brick-and-mortar signage.
Not only do all of these stores require signage, but they also require long-term leases. Cohen’s said very little about its future business model other than wanting to increase its digital sales. That’s why it hired Matthew Furlong as its new CEO in June. Furlong was the Country Leader for Amazon’s (NASDAQ:AMZN) Australian operations since 2019.
As a hire, I understand bringing in Amazon alumni. If anybody understands e-commerce, it’s an Amazon executive. They live digital sales. However, as far as I know, Furlong’s resume has no retail operations background. They’ve just said they’re going to spend a few million on Canadian signage.
How is he going to get the brick-and-mortar stores to pay their way? I suppose he could turn them into last-mile fulfillment centers.
But, consider this. GameStop’s operating lease liabilities as of May 1, 2021, were $664 million — a current portion of $219.4 million and $445.0 million long-term — these will always be a part of its cost structure as long as it remains in the brick-and-mortar game.
In the first quarter of 2021, GameStop lost $40.8 million from its operations, and while it was a much lower loss than a year earlier, it was still a big loss from nearly $1.3 billion in quarterly sales.
GameStop’s gross margins were 25.9% during the quarter, 180 basis points less than a year earlier. By comparison, Williams-Sonoma (NYSE:WSM), who I believe is one of the best omnichannel retailers in the country, had a gross margin of 43.0% in its latest quarter, 850 basis points higher than a year earlier.
If GameStop’s going to win, it had better follow Williams-Sonoma’s game plan rather than Chewy’s to get back to profitability.
GameStop Stores Serve a Purpose
By committing to its Canadian stores, Ryan Cohen says that he believes omnichannel can work in the gaming realm. I believe it can too. While lots of stuff is going digital, I don’t think the excitement of checking out new video games with other people around — much like the movie theater environment — will ever disappear.
And I’m sorry, but real video gamers aren’t going to be caught dead checking out new games in a Walmart (NYSE:WMT) or Target (NYSE:TGT). GameStop remains the best retail option for checking out the latest and greatest. Sure, you’ve got Five Below (NASDAQ:FIVE) opening Localhost esports venues in some of its locations across the country in partnership with Nerd Street Gamers. Still, those are more about the competition and less about product marketing.
The average Five Below Localhost venue is 3,000 square feet. The average size of a GameStop store is about half that. GameStop may reposition its store network in the future to accommodate larger stores but fewer than the 4,000 or so worldwide that it currently operates.
A classic example of how omnichannel can work well is Ulta Beauty (NASDAQ:ULTA). It has close to 32 million Ultamate Rewards members. Those members account for 95% of its sales. The top spenders — those spending between $500 and $1,200, or more, account for 43% of its overall sales. It has found that its members that buy online and in-store spend three times as much as those who only shop in-store.
It’s possible that Cohen’s positioning of the 15.2 million PowerUp Rewards members who purchased something in 2020 — 4.4 million are actual paying members — to spend more in much the same way Ulta’s most engaged customers do.
One can hope.
The Bottom Line on GME Stock
There is no question in my mind that the rational investor should choose WSM over GME every day of the week.
That said, if you can afford to blow your entire bet, the fact that it’s committed to an omnichannel future, I do think a speculative buy of around $150 for GME stock could deliver big rewards.
I wouldn’t buy GME, but that doesn’t mean you shouldn’t.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.