GameStop today announced a new "capital allocation strategy," which includes a $300 million stock buy-back program. GameStop explained: "The plan will provide ample investment capital for continued aggressive new store expansion worldwide and allow GameStop to enhance shareholder value through a $300 million share repurchase program approved by its Board of Directors today. Purchases will be executed according to market conditions. The impact of the entire $300 million buyback at today's share price would result in accretion to EPS of approximately 10%."
The leading video game retailer has opened nearly 2,000 new stores in the last three years, has redeemed $500 million dollars in long-term debt, and completed the acquisition of Micromania for $580 million. The allocation plan should enable GameStop to maintain its existing cash flow; the company expects to finish fiscal '09 with $700 million of cash on hand.
"As GameStop expects to generate significant excess cash over the next several years, we are pleased that the Board has authorized this program as our equity represents a very attractive investment opportunity," commented Daniel DeMatteo, Chief Executive Officer. "This capital allocation plan underscores the financial strength and long-term confidence of our company and returns significant capital to shareholders even as we continue to expand worldwide."
The new stock buy-back plan comes less than a week after GameStop posted disappointing holiday sales (which may have been more attributable to competition from Walmart than GameStop would admit). Analysts, however, seem encouraged by this new plan. "...we believe both the size of GME's stock buy-back program and the speed with which it was announced post GME's disappointing recent pre-announcement will send a message to investors that GME is focused on improving returns for its shareholders following a disappointing holiday season," said Broadpoint AmTech's Ben Schachter. "Although we continue have concerns about what implied market share losses during 2010 signal about GME's fundamentals going forward, we still have a positive view on the stock, which we think remains relatively undervalued, given what we view as solid secular growth in the games industry and GME's strong cash flow generation potential over the next several years."
