The video game retailer is embarking on a $300 million share repurchase plan, promising to buy its stock at a time when everyone else seems bent on washing their hands clean of it.
Normally that would be a commendable strategy. GameStop is a cash-rich company, and in the next fiscal year it expects to generate twice as much cash from operations as it plans to spend on the buyback. The master spending plan is $300 million for repurchases, $200 million for opening 400 new stores and other capital expenses, and $100 million in reserve for potential acquisitions.
GameStop could theoretically do all this and still close out the year with roughly the same $700 million that it will start the fiscal year with.
It's a good plan, but only on paper.
Time for the rubdown
The rub, of course, is that GameStop may not be the same company it was a year ago. If folks aren't buying new or used games and consoles -- at least not from GameStop -- the entire plan craters.
Reading through the company's press release detailing its capital allocation strategy is a real treat if you enjoy arrogance and misplaced bravado.
- "GameStop, one of the world's fastest growing retailers with a unique business model," begins one paragraph.
- "The company intends to continue its aggressive roll-out strategy of opening new stores worldwide," begins another.
- "The company believes its cash flow will remain at or above existing levels for the year ahead and believes the video game industry and GameStop will continue to grow in the years to come," reads yet another chunk of the release.
GameStop does such a good job of selling itself, you have to wonder how it has one of the few consumer-facing stocks trading lower today than when the general market bottomed out in March.
Behind the self-penned accolades
Unwarranted confidence is a scary thing.
Is GameStop really one of the world's fastest-growing retailers? Not anymore. Same-store sales during the holidays fell a staggering 8.6%, and that "aggressive" expansion was only good enough to generate flat total sales during the two-month holiday period. I wouldn't dare call myself "one of the world's fastest" anything in a pocket of stagnancy, especially when several fast-growing retailers -- rue21
Opening new stores while comps are tanking is also just plain stupid. It's a trap that snagged Gap
GameStop doesn't get it. Maybe management thinks that the sales hit was temporary. Maybe it doesn't fully grasp the gravity of the situation. It can no longer get away with selling new games at retail prices when Wal-Mart Stores
This segment used to be GameStop's "unique business model," with gamers trading in tired titles and consoles for store credit, which GameStop would then mark up significantly for resale. Its well-oiled chain comes undone when sales slow. It also doesn't help that several offline and online retailing heavies began nibbling at GameStop's resale model last year.
I won't even get into the trends of digital distribution, social gaming, and App Stores that will challenge GameStop's relevance in the future. This is not a company that should be working off of last year's results for cash flow projections or have faith in "growth over the years to come."
If it really wants to spend $600 million in a capital allocation strategy -- even if it ultimately eats well into its cash balance -- it needs to forget the buyback and the expansion. Throw it all into the acquisition pool and diversify -- instead of going old school the way it did with last year's $700 million purchase of French retailer Micromania.
Buy into social gaming companies, in-game advertisers, and gamer sites. Spend money in areas that will still be relevant, long after we've moved on from consuming games in shrink-wrapped form.
The ultimate trap
You know what's nuts? I bet that thousands of investors will buy into GameStop this week, assuming that the retailer's board wouldn't spend $300 million of shareholder money if this wasn't the bottom. Surely no one knows the company better than its own leaders. If they're drawing the line in the sand, it just has to be safe.
Unfortunately, this is also the same group that called bottom in May, August, and November -- only to be humbled a few months later. If it can't get a good read on the following quarter, how could anyone take its promise for "growth in the years to come" seriously?
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Longtime Fool contributor Rick Munarriz will admit to still playing video games, though finding time is the rub. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.