Key Ratios of GameStop’s Q4 balance sheets - Looking at the inventory management we see large improvements from Q3.

(Source: https://investor.gamestop.com/static-files/55a92a3e-144e-4d2b-8ee6-930db9045593)

In this analysis I will be going over the improvements in inventory management in Q4 from Q3. Numbers in cursive are Q3 ratios. Numbers in Bold are Q4 ratios. What I want to show with this kind of analysis is, that stock analysts are looking at the company the wrong way. Not all these ratios are super great, but all of them have improved. GameStop had to start from scratch, with weights tied to it's ankles from all the short-sellers, bad analysts, shitty board of directors, mismanagment and a global pandemic. If we look closely and in terms of changes from previous quarters and fiscal years, we can see a lot is changing within GameStop and we will see more of that going into the future. Without saying more lets have a look at some key metrics for GameStop's inventory management.

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Days Sales Outstanding shows how long it takes for invoices owed to the company to be paid. An increase in the days sales outstanding therefore indicates negligent receivables management. This reduces the operating cash flow, as less money actually flows into the company.

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Days Sales Outstanding Q3: 7.05

Days Sales Outstanding Q4 = Accounts Receivable / Revenue * Days of Period -> 1.29

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This is a decline from Q4 2019 (1.44) which is good, as more money is actually flowing into the company. And a strong decline from our last quarter, which shows much better receivables management.

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Now let’s compare this to the Days Payable. This indicates how long a company needs to settle its own invoices with suppliers. The greater the difference between the two values, the longer the company has external money at its disposal without paying any interest. Accordingly, the need for short-term credit decreases.

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Days Payable Q3: 55.15

Days Payable Q4 = Accounts Payable / Cost of Goods Sold * Days in Period -> 18.64

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GameStop's Days Payable declined from Jan. 2019 (21.76) to Jan. 2020 (18.64). It may suggest that GameStop accelerated paying its suppliers.

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Finally comparing the values show 1.29 < 18.64, which is what we have hoped to achieve. As more operating cash flow is flowing into the company, while GameStop is taking it’s time paying it’s suppliers, fully using the interest free money.

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The next indicator we want to look at is Inventory Turnover. This measures how fast a company sells inventory. A low turnover implies weak sales and possibly excess inventory, also known as overstocking. It may indicate a problem with the goods being offered for sale or be a result of too little marketing.

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Inventory Turnover Q3: 1.09

Inventory Turnover Q4 = COGS / Ø Inventory -> 2.29

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This is a much better number than 1.09 in the previous quarter. It also shows an improving inventory management. I expect this number to go up even further as GameStop transforms itself. For the fiscal year ending in January 2020 the Inventory was 4.32, a much healthier rate. I am expecting the Inventory Turnover to shift back towards this higher number, possibly surpassing it, which would be a great indicator of healthy inventory management.

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From the Inventory Turnover, we can now calculate the amount of days inventory is stocked. This gives a better grasp of the term Inventory Turnover, as this actually gives us the amount of days inventory is stocked for. Likely we would like to see numbers as low as possible, as anything over 180 days is just inventory mismanagement.

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Period in Stock Q3: 330 Days

Period in Stock Q4 = 360 / Inventory Turnover -> 157.21 days

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From Q3 we saw, lots of inventory stocked, low Sales and therefore a long period in stock. This situation has drastically improved cutting the period in stock by roughly 50%. For the Inventory Turnover of 4.32 in the fiscal year 2019 the Period in Stock is 83 days. Which is much more healthy than the 330 days.As expected in my Q3 analysis, this number started dropping by a lot with the large shift to ecommerce, and sales picking up again.

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From these key metrics we can now take a look at the Cash-Conversion-Cycle. This indicates how long capital is actually tied up in inventories and receivables less outstanding invoices.

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Cash-Conversion-Cycle Q3: 281,9 Days

Cash-Conversion-Cycle Q4 = Days Sales Outstanding Period in Stock - Days Payable -> 139,86 Days

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This is a much shorter period for cash to be tied up in inventories and receivables. Again, if we take a look at the 83 day period in stock for 2019, the Cash-Conversion-Cycle (assuming same DSO and DP) would have been around 65,65 Days. The situation is improving quickly. And we can already see Gamestop taking full charge into a better future.

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As you can see, the pandemic has had large effects on GameStop as a brick & mortar business. The company has been overstocked, struggling to make sales, tying up cash for too long, which is bad for our operating cash flow.

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But as we all know, this isn’t a brick & mortar business anymore. In Q4 we saw better Inventory Management, good receivables and payables management, a better Cash Conversion Cycle, but most of all a HUGE shift towards ecommerce. Companies don’t typically slash their Period in Stock and Cash-Conversion-Cycle in half. This shows strong structural changes within GameStop.

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I conclude that we will see the inventory management improving by a lot, having operating cash flow coming in through all kinds of revenue channels. This will not only help in financing debt and making further improvements towards the digital business model, but also create enormous shareholder value. Ecommerce will be the future Cash Cow of GameStop.

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I am as bullish as ever, the company is growing and improving it’s internal management. This will definitely show over time. I will be writing a similar analysis on GameStop's liquidity, to show exactly why the company will not be going bankrupt and how it will be heading for more profitable quarters coming up.

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With that being said, this is by no means financial advice. These ratios can easily be looked up and the information used is publicly available for anyone to do their own research. Also English is not my first language, so excuse and spelling or grammar mistakes. Do your own research and stay informed! Already edited the first few mistakes :)