Roaring Kitty’s favourite stock tends its cash hoard as sales dwindle

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Roaring Kitty’s favourite stock tends its cash hoard as sales dwindle

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GameStop’s ecommerce strategy has faltered, its bricks-and-mortar store count is shrinking and its sales are in a multiyear slide. But one measure of the video game retailer is a picture of health: the amount of cash in its accounts.

The company at the centre of the 2021 meme-stock frenzy has once again captivated Wall Street after its shares soared in the past month on little more than the re-emergence of the influential social media fan known as Roaring Kitty. 

Management took advantage of its sudden increase in valuation to sell 45mn shares and raise $933mn. Last Friday GameStop alerted investors to a potential sale of another 75mn shares, which at Monday’s closing price would be worth $1.9bn.

In doing so, the company followed a well-worn meme stock playbook of recent years, using their shortlived popularity to raise cash. The mystery is where it will put all the money, which stands at $2bn. 

GameStop sells video game hardware and collectibles for gamers such as T-shirts and stuffed toys. The rise of games streamed on mobile apps has undercut a business still anchored by thousands of stores. 

GameStop did not respond to requests for comment. A prospectus last week said the company had no current plans to make any acquisitions or investments. 

The stock’s latest leap followed the reappearance of Keith Gill, the Massachusetts trader who in early 2021 helped to rally hordes of retail investors into the stock. Last week he made his return to YouTube under his Roaring Kitty moniker, where, beer in hand, he reiterated his belief in GameStop’s value and chief executive Ryan Cohen’s vision. 

“Now it’s all about the transformation. That cash pile is growing,” Gill said. 

This time his followers seem unconvinced. GameStop shares have been plummeting since Gill’s monologue on Friday and are down by half from their peak last month, closing at $24.83 on Monday.

Activist investor Cohen, GameStop’s largest shareholder, joined its board in early 2021 after lambasting management for being trapped in a “bricks-and-mortar mindset” that prevented progress towards becoming a tech company. His arrival helped set off the first explosive rise in the shares. 

Cohen, the billionaire co-founder of online pet retailer Chewy, became CEO last September. But expectations of GameStop becoming an ecommerce powerhouse have so far failed to materialise.

“Instead of finding ways to increase revenue, he’s finding ways to cut costs,” said Michael Pachter, an analyst at Wedbush Securities.  

GameStop last Friday reported a 29 per cent decline in net sales in the first quarter that ended on May 4, to $882mn, while it held more than $1bn in cash and marketable securities on its books prior to the latest stock sale.

Column chart of By fiscal year ($mn) showing GameStop's operating income or loss

The potential use of GameStop’s cash pile has been subject to speculation since it amended its investment policy in December to allow the purchase of equity securities. Some speculated GameStop could follow the model of Berkshire Hathaway, Warren Buffett’s investment conglomerate with a vast portfolio of stakes in other companies. In 2022, GameStop launched a marketplace for non-fungible tokens, a form of digital asset, that has since been wound down.

The company has shut down two warehouses in Kentucky and Pennsylvania, leaving one in the US at its headquarters in Texas. Its total store count fell to 4,169 stores as of February, down from 4,800 in 2020. A store visited by the Financial Times this week revealed merchandise markdowns advertised on office paper printouts taped to the display racks.

So far GameStop has held fire on major capital outlays or acquisitions, instead hanging on to its cash hoard or purchasing low-risk securities such as short-term government bonds. Most of the $1.7bn in share sales GameStop conducted in 2021 it used to pay down debt, earn interest and stanch operating losses, records show. The company earned nearly $50mn in interest income in its latest fiscal year, more than offsetting its operating losses, while its interest expenses disappeared.

James Angel, a finance professor at Georgetown University who has written about GameStop’s previous stock volatility, said the company’s willingness to raise capital was a sign of prudence. “They are smart enough to say: ‘The capital markets are going to hand us capital today? We’ll take it. Even if we don’t have any use for it, we’ll grab it while we can and then look for a good use for it,’” he said.

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