GameStop fires CEO, retailer 'doomed', says analyst

GamesStop shares plummeted by more than 15% on Thursday after the retailer fired its CEO and named Ryan Cohen executive chairman of its board. In a note to investors, Wedbush Securities Media and Gaming Analyst Nick McKay wrote that the retailer is "doomed" and on a "long and winding road to termination." In an interview with Yahoo Finance Live, McKay says "there are things happening at the industry level which are going to be difficult if not impossible (for GameStop) to overcome," such as issues in the hardware and collectibles space. He also points out that neither the company nor Ryan Cohen has detailed "a fully fleshed out turnaround program."

Video transcript

- All right, let's talk about a big mover today, and that is GameStop. Its shares are taking a toll after the company shakes up its C-suite. The video game retailer fired its CEO and named board chairman Ryan Cohen as executive chairman.

However, while Cohen is known for his king status in the meme stock community, the news of his new role at GameStop is raising some eyebrows. One social media user saying, quote, oh, RC is the CEO now? That same guy who rigged all those BBBY shareholders? Great. Followed by another user criticizing Cohen, who's a founder of Chewy, on his time with the pet retailer, saying, quote, the same guy that could never make Chewy profitable.

Well, GameStop's CEO switch also coming shortly before the company reported another lackluster quarter. And according to our next guest, this is part of the, quote, the long and winding road to termination for GameStop.

Joining us now, we want to bring in Nick McKay, vice president of equity research at Wedbush Securities. Nick, it's good to see you here. So it doesn't seem like from your note that you think Cohen is going to right the ship at GameStop. So what's ahead here for the company?

NICK MCKAY: Thanks for having me. Yeah, there are things happening at the industry level which are just going to be difficult, if not impossible, to overcome. So if you think about GameStop at a high level, it's hardware, software, and collectibles.

And on the software side, you saw the number underperform in the first quarter there are dollars increasingly shifting over to digital spending, mobile spending, subscription spending. All three of those things aren't really in a big way at GameStop.

On the hardware side, eventually you're going to have this current generation slow down. And we don't have a date yet or even a name for a successor for the Switch from Nintendo. And then finally on the collectible side, Q1 underperformed. Didn't really get a reason for that.

But generally, there are things going on at industry level that I think Ryan Cohen's going to struggle to overcome.

- Yeah, and Nick, all those concerns have been raised before. But I'm curious about the stock move that we've seen since yesterday, the announcement that we got. I mean, is this about Ryan Cohen? Is that why we're seeing so much pressure? Is this actually trading on fundamentals a stock that doesn't normally do that?

Yeah Yeah. I mean, what happened yesterday between the shakeup at the top and the financial results of the company just highlighted to us instability. So you have, I think for the first time, at least that I've been at Wedbush Securities, you have a general manager calling the shots at GameStop, as long as those don't go against what Ryan Cohen wants.

You have a Q1 where sales missed by $100 million roughly, where EPS missed the Street's expectations by a few pennies, where you also saw a over $400 million swing in free cash flow to a burn of over $100 million.

And we still-- against that backdrop, we still don't really have a fully fleshed out turnaround program from Ryan Cohen or from the company in general. You know, this time last year, it was going to be a push towards e-commerce. That didn't really work out. So reportedly, Mr. Cohen pivoted back towards in-store dynamics, and that hasn't helped.

I think what you saw in the reaction today was coming out of Q4, the shares were up a lot on a big free cash flow number on results that largely meshed with what the industry had suggested in terms of its own performance. You flip that to Q1, you've got a big reversion to negative free cash flow, and you also have GameStop sales down 10% on the broader markets down about 1%.

- Nick, to that point there, just in terms of the position that GameStop is in and the difficult path forward for them, what about just attracting top talent, bringing in great names that would potentially be able to help out GameStop in the future?

When you have someone that's very divisive like Ryan Cohen, who people have very strong opinions about, how does that complicate that path forward?

- I think even if you brought in big names, you still would have the issue on the software side where dollars are going towards digital, mobile, and subscription, where eventually they'll go towards streaming as well. So I don't think a big name can solve that.

And then on the hardware side, the numbers coming from Sony have been positive for the PlayStation. Microsoft had a rough quarter. Its hardware revenue is down roughly 30%. And Nintendo's been talking about softening Switch demand at retail for a couple of quarters now, so I'm not really sure what big names, what they could really do to turn things around.

And on top of that, you've got the CEO gone after about two years. You had the CFO leave after about a year one year ago. I'm not sure big names necessarily would feel like they'd have an extended run at GameStop, given what's been going on at the executive level over the past two or three years.

- So Nick, you pretty much bottom line it in your note. You say you're convinced that GameStop is doomed. What does that mean? Where does the company go? Is it a target for acquisition? Is it headed towards potential-- I mean, what are we talking about when you say it's doomed?

- Well, they've got about $1.3 billion in net cash. This quarter, again, a free cash flow burner of just over $100 million. So I mean, they should be in a position where they can last for several more years. But long term, in our opinion, it's not a story that can be turned around to the joy of the GameStop fanboys.

Over time, the software piece is going to be challenged. The hardware piece is eventually going to be challenged by slowing current gen sales and by, potentially, Microsoft and others pushing gaming away from consoles and towards streaming solutions. And the collectibles side, as I mentioned, just wasn't there in the first quarter.

So they can hang on for several quarters, if not several years. But I just-- especially with the NFT marketplace not working out the way they'd hoped, I'm not sure what the solution is for these guys.

- And Nick, it feels like you're kind of tiptoeing around it. But you're talking about closure, right? I mean, bankruptcy? I mean, what is the end game?

- Yeah. I just don't see why GameStop would be relevant within its core video game market several years from now. I'm sure there are some assets they can sell, but I think over time, they're going to find themselves headed towards bankruptcy.

- All right. So GameStop shares off just about 17% in the final hour of trading. Nick McKay of Wedbush Securities, thanks.