Chewy Founder May Drive GameStop Turnaround

game stop business development
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Ryan Cohen, the entrepreneur that co-founded e-commerce pet supplier Chewy.com and eventually sold it to PetSmart Inc., first accumulated a 9% stake in video game retailer GameStop Corp. (GME) roughly a month ago.

Since the Aug. 28 activist filing, Cohen’s fund, RC Ventures LLC, has increased its stake to 9.98% via two separate public disclosures. Shares, meanwhile, have doubled to about $10.59 apiece since his initial accumulation, jumping with each disclosure in hopes Cohen will engineer a turnaround at the company. 

A day later, on Sept. 22, shares moved higher again after Bloomberg reported Cohen wants to expand GameStop’s online selection to compete with big e-commerce giants, such as Amazon.com Inc. (AMZN).

The report noted that Cohen wants the Grapevine, Texas, retailer to improve its customer service and build the infrastructure needed to offer thousands of items and services, including online services such as trading in video games online.

It remains unclear whether Cohen has allies on GameStop’s board, or if he would launch a hostile insurgency campaign if the company and its board do not acquiesce  to his suggestions.

Cohen clearly has some connections on the video game retailer’s board. GameStop director James Symancyk has been PetSmart’s CEO since 2018 and he is also on Chewy Inc.’s (CHWY) board. (Chewy conducted an IPO in June 2019 but PetSmart is still its majority owner). Cohen sold Chewy in 2017 to PE-backed PetSmart Inc. for $3.4 billion.

In addition, GameStop director Carrie Teffner served as CFO of PetSmart between 2013 and 2015, according to relationship mapping service BoardEx, a sister company of The Deal. It is likely Cohen knows Symancyk, considering their PetSmart and Chewy connections.

Even so, it is possible that Cohen would consider a proxy contest to elect himself to the board of GameStop if the company doesn’t consider his suggestions. Cohen hasn’t launched a director fight in the past, but could do so by nominating directors by a March 14 deadline for a June 2021 annual meeting.

Another question is whether RC Ventures could seek to buy GameStop, considering Cohen’s significant net worth. However, he likely would have remained in the shadows, had he had that interest. 

GameStop in June, settled with two activists in a deal that put one of them, Hestia Capital Partners LP’s Kurtis Wolf, on the board along with another new director. The other activist, Permit Capital Enterprise Fund LP, reported Sept. 8 that it cut its stake to 4.8% from 5.8%, likely taking profits in response to the Cohen-driven share rise. The other, Hestia, continues to own about 2.1%.

Michael Pachter, analyst at Wedbush Securities Inc., notes that Cohen clearly has shown serious skill in taking a commodity business – pet supply — people think is old and pre-internet and transforming it into something successful with e-commerce giant Chewy.

“I’m sure he has plans to make major changes to GameStop,” Pachter said.

Cohen appears to be seeking to significantly expand GameStop’s online presence, following his success with Chewy’s varied online offerings. Pachter noted that GameStop has a large used video game trade in business, a lot of which could be converted to online transactions.

“Technically they do have online used game trade in business, but it could be expanded. With Covid-19, we’re learning how to do things differently than before,” Pachter said. “GameStop could do online trade-ins and thrive at it. GameStop has a reputation of making a market in games and people do value that.”

Pachter noted that both Sony Corp. (SNE) Play Station and Microsoft Corp. (MSFT) Xbox are set to release their next-generation new consoles in early November, moves that likely will help GameStop by generating a flurry of trading and selling of older consoles and used video games.

Cohen also appears to want GameStop to improve its customer service and build the infrastructure needed to offer thousands of items and services.

Pachter added that there are a wide variety of other products GameStop could sell online to complement video game sales. “They could sell Doritos and weed, if legal in a particular states,” Pachter said. “There is definitely something they could sell online beyond traditional video games and consoles.”

GameStop’s stock price jump likely caused trouble for GameStop’s large number of short-seller investors — Roughly 136.6% of its float is short, according to FactSet.

“The short sellers see that Sony and Microsoft are offering cheaper consoles that don’t have disk drives and they believe those will replace the consoles with drives, putting GameStop out of business,” Pachter said.  “But they are wrong. People will buy the ones with the disc service because they can later sell used games.”

Christopher Davis, partner at Kleinberg, Kaplan, Wolff & Cohen, P.C. in New York, is providing advice to RC Ventures and Cohen.

GameStop and Cohen did not return requests for comment.

Follow Ronald Orol on Twitter and LinkedIn.

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