What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing today we're doing a video about the rise and fall and rise again of gamestop. Of course, we all know gamestop from the epic short squeeze earlier this year and ryan cohen's plan to turn around the company, but gamestop has a long history going back almost 4 decades in this video we'll examine how the company rose to be the leading video game. Retailer in the us, the structural problems that brought them to the brink of bankruptcy and finally, ryan cohen's plan to make a turnaround. This video is about the business history of gamestop, so we'll refrain from talking about the volatility in the share price.

Gamestop can trace its roots all the way back to 1984, when james mccurry and gary custon opened a customer electronics store called babbages. It was named after charles babbage, the mathematician, who invented the concept of digitally programmable computers. At the time, the video game industry was in its infancy and they started selling the hit atari 2600, which played mostly arcade style games like pac-man in the late 80s. They also started retailing, the nintendo entertainment system or nes.

This was a huge success and babbages shifted their focus to selling mostly video games, wanting to expand in 1994 cuisine, merged bandages with computer software, retailer software, etc and all stock merger which created neostar retail group each chain continued to operate independently under the neostar corporate umbrella. With software etc, focusing on pc software and accessories and baggages focusing on video games on the surface, things looked to be going pretty well after the merger, their revenue increased from 480 million dollars to 513 million dollars in 1996., when babbages and software etc combined in 1994. They had a combined store count of 630 by 1996. This had increased 30 to 817 during the same period, revenue only increased seven percent on a per store basis.

Their sales were declining. You might be surprised that the same store sales were declining in the 1990s as the personal computer business was booming. The problem was that everyone wanted to get a piece of the action, and the number of consumer electronics stores was exploding with so much competition. They were forced to cut prices and even still same store.

Sales declined opening, so many new stores increased their cost base, causing them to swing from profitability into losses in the year ended january 28. 1995. They made a four and a half million dollar loss and in the year ended february. Third 1996.

They barely broke even in the calendar year of 1996. Babbages actually did pretty well as sales were boosted by the new sony playstation, however, software etc posted huge losses as their growth in retail capacity in the computer. Software space substantially exceeded growth and demand facing net losses and unable to raise sufficient capital. Neostar retail group filed for chapter 11 bankruptcy in 1996., barnes and noble chairman leonard riggio, took advantage of the distressed situation to buy neostar's assets out of bankruptcy for just 58 and a half million dollars.

This was a steal for a company that operated more than 800 stores. He rebranded the babbage's stores as gamestop and spun it off as its own. Publicly traded company called gamestop corp in 2002, and things got off to a pretty good start. In 2005.

They acquired eb games for 1.4 billion dollars. This was significant as eb had thousands of retail locations across canada, europe and australia. The acquisition allowed gamestop to expand internationally, this more than doubled their store count from less than 2000 in 2005 to almost 4500 in 2006. They continued their rapid expansion, with their number of global stores peaking at almost 7 500 in 2016..

This made them the largest video game retailer in the world. By far, they also acquired smaller electronics, retailers, including apple authorized, resellers, simply mac and at t branded mobile phone stores, but these acquisitions were only a sideshow compared to their core gamestop franchise, which drove the bulk of their company's revenue and profitability growth. Their revenue grew every single year from 2004 through 2012, where it peaked at nine and a half billion dollars impressively they even managed to grow in fiscal 2009 and 2010. During the global financial crisis.

Throughout the 2000s and early 2010s gamestop was highly profitable. Their net income peaked in fiscal 2011 at over 400 million dollars. They were able to grow to be the global leader in video game retailing because of two key competitive advantages. First off was their brand.

They distributed the game informer magazine, which featured articles reviewing new video games and consoles in 2010. It was the fifth largest magazine in the u.s, with 5 million copies sold. These magazines helped generate interest in new games which readers would mostly buy from gamestop. Secondly, and perhaps more importantly, they were the leading buyer and seller of pre-owned games.

You could walk into your local game, stop and sell your old games for a few dollars. They established a 1200 facility in grapevine texas, where all the pre-owned games and consoles were sent. They went through a rigorous cleaning and testing process such that only working games were sent back to the gamestop stores to be resold at the peak they processed close to a million games consoles and cell phones. Every single month the pre-owned games were sold at their retail locations for a significant discount to their new value.

This was a win-win situation for the sellers, buyers and gamestop itself. After a player beats a game, it often becomes pretty much useless to them and will just end up sitting in their drawer forever doing nothing, even if gamestop would only give them five dollars of store credit for it. At least it's something and they can use this towards purchasing new games. In many cases, a buyer can then purchase the game for less than half of the original value and because it's gone through gamestop's cleaning and testing process players can feel confident that the game will work pretty much as good as new.

While there are mom and pop stores which buy and sell pre-owned games, gamestop was the only company that could guarantee the quality and put them in professional looking packaging. This allowed them to dominate the pre-owned games market and it's a highly profitable business. When customers buy new games from gamestop, they may get roughly 20 gross margin when they buy new consoles, they make a roughly 10 gross margin, but when they buy pre-owned games they make a 40 gross margin because they buy them. For such a cheap price, pre-owned games were a major driver of their business and allowed them to make 400 million dollars of net profit at their peak, while the pre-owned game traded model was a win-win for gamestop and the consumer.

This came at the expense of the game developers who generated zero revenue from the used game transactions. As gaming consoles became more powerful and had more memory. Consumers started downloading their games online. This is often much more convenient than buying a physical copy, especially when the game is new and retailers have limited inventory available.

When customers buy physical, copies of games, the retailers and distributors take a significant cut. In many cases, the developer only gets about half of the purchase price when players download games directly from xbox, live or playstation stores. This cuts out the middleman and the developers make a much higher margin. This is good for the developers, but it's a disaster for gamestop.

For two reasons: firstly, it reduces their sales of new physical games, but, more importantly, when customers download games directly, they can't resell them once they're bored. This crush gamestops trade in business. This is clearly visible in their financial results. Between 2012 and 2020, their revenue was cut.

Almost in half from nine and a half billion dollars to five billion dollars, with a decline accelerating in the past three years. Of course the pandemic didn't help in 2020, but it was just accelerating the pre-existing decline. They also posted net losses in each of the past. Three years, much of these losses are the result of goodwill impairments arising from previous acquisitions, but the core business was undoubtedly declining to conserve cash.

They eliminated their quarterly dividend. In 2019., the stock declined 30 on the announcement, as it was a clear message that the business was in real trouble in an effort to stop the bleeding gamestops management decided to aggressively reduce their physical footprint. They sold their non-core, simply mac in a t, branded stores and started closing down hundreds of unprofitable gamestop stores per year between 2016 and 2020. They closed more than 2 700 stores, bringing their global store count down to 4 800..

The trade and model that built gamestop into a behemoth is rapidly declining and will no longer be a viable business going forward. In november of 2020, chewie, co-founder and millionaire investor ryan cohen bought a 10 stake in gamestop. He urged management to ship the company's focus away from brick and mortar stores and pivot to e-commerce. In april of 2021, he was named chairman of the board.

He then replaced the ceo and cfo and brought in senior executives who used to work at chewie. Gamestop still has a valuable brand in the gaming retail space. If anything. The short squeeze frenzy from earlier this year has only increased the brand recognition, but if cohen wants to make a real turnaround, they're going to have to reinvent the business he's investing in upgrading their gamestop.com website and e-commerce fulfillment capabilities, while games can still be downloaded online Gaming, peripherals, such as controllers and keyboards, as well as collectibles, like funko pops, have to be either purchased in store or delivered.

If cohen, can leverage his e-commerce experience from chewie it's possible that he could execute a turnaround and gamestop could live to fight another day. Despite that, it seems unlikely that they'll ever return to their peak here's when they're making close to 10 billion dollars of annual revenue, alright guys that wraps it up for this video. What do you think about gamestop? Do you think ryan cohen's turnaround plan will work? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.