GameStop Remains a Poor Way to Play Retail Stocks

In the least surprising news of the month, the Securities and Exchange Commission’s (SEC) 44-page report revealed little about the mania that carried GameStop (NYSE:GME) and GME stock to an all-time high of $483 earlier this year. 

Photo of the Gamestop (GME) logo On a Mobile Phone.
Source: Shutterstock / mundissima

“[T]he run-up in GME stock price coincided with buying by those with short positions. However, it also shows that such buying was a small fraction of overall buy volume, and that GME share prices continued to be high after the direct effects of covering short positions would have waned,” stated page 26 of the SEC’s Oct. 14 report. 

“The underlying motivation of such buy volume cannot be determined; perhaps it was motivated by the desire to maintain a short squeeze. Whether driven by a desire to squeeze short sellers and thus to profit from the resultant rise in price, or by belief in the fundamentals of GameStop, it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock.”

As we’ve seen by what’s happening with cryptocurrencies, the regulatory agency has very little interest in rocking the boat. The status quo keeps Wall Street happy. Once Gary Gensler finishes his term as chairman of the SEC, he might want to go back into the private industry despite being 64. 

So, if you were expecting something enlightening from the SEC, you were sorely mistaken. And, if you think GameStop is a retail stock worth owning, you’re barking up the wrong tree. 

Here’s why.

GME Stock and Its Future

If you are one of the Reddit fans hoping GameStop’s savior will deliver for shareholders, I understand why the focus on e-commerce and online gaming is so alluring. 

E-commerce sales continue to grab market share worldwide. In 2022, eMarketer expects U.S. e-commerce sales to go over $1 trillion. By 2025, they’ll have reached $1.65 billion and account for almost 24% of overall retail sales.

We’re not quite at the tipping point, but we’re getting closer. So, I get the appeal. 

However, if you think its 4,800 or so stores will be part of some miraculous omnichannel turnaround by GameStop’s Ryan Cohen, you are wasting your time. 

In my last article about GME in early October, I said the following about chasing the GameStop dream:

I could name 10 retail companies Reddit fans would profit from over the long haul with far less risk. After all, it’s not your total return that matters; it’s your risk-adjusted total return that’s meaningful. It’s easy to see that GME stock is stuck in a rut. Until the savior delivers his plan from high, I don’t see the shares busting out of their $50 range.

Despite nothing new to report, GME stock is up 9% since my article, rallying from its one-month low of around $171. It’s a resilient little bugger. As we move toward the end of the month, it sits less than 10% from $200.

I’ve yet to see anything that would lead me to change my opinion about the specialty retailer. But, unfortunately, it’s a bad retail stock.

A Better Option

If I were a financial advisor, I’d probably recommend Target (NYSE:TGT) Williams-Sonoma (NYSE:WSM) or even Dollar General (NYSE:DG), whose stock’s gone stone cold in 2021. 

But for this, I’m going to go with a retail stock that’s back on solid footing after several years in the retail wilderness. 

I’m speaking about Buckle (NYSE:BKE), the Nebraska fashion retailer. Its stock is up almost 50% year-to-date and 90% over the past year. In July, Buckle traded at its highest point since 2015. 

It’s back, baby. But why?

Well, even though many people used their stimulus money in 2020 to buy GameStop stock, others went shopping at places like Buckle, which sells reasonably priced apparel, footwear, and accessories from 442 stores in 42 states. 

Page 2 of the company’s 2020 annual report shows that it had average sales per square foot of $311, its lowest number over the past decade. At the same time, the average sales per store were $1.6 million, considerably lower than its average of $2.3 million in 2011. 

The previous paragraph doesn’t seem to paint a pretty picture. However, in 2011, it had an operating margin of 22.2%. In 2020, its operating margin was 360 basis points lower at 18.6%. Further down the income statement, that works out to $130.1 million in net income, the highest it’s been since 2015. 

And, as The Motley Fool’s Eric Volkman pointed out recently, it routinely pays a handsome special dividend on top of its regular dividend. For example, in fiscal 2020, it paid $2 per share. Assuming it matches that in 2021, it could pay out as much as $3.32 in dividends (33 cents per quarter plus a December 2021 special dividend of $2). That’s good for a total yield of 7.8% plus 50% in capital appreciation.

It might not be as sexy as Ryan Cohen and GameStop, but it will make you money just the same. 

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 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. 

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