GameStop Corp. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 28, 2017, compared with periods ended October 29, 2016. Although the request metadata says 2016 Q3, the filing itself is for fiscal 2017 Q3. All dollar amounts below are USD millions unless stated otherwise.
Business context
GameStop operated 7,462 stores across its video game and Technology Brands businesses. The company reported four geographic Video Game Brands segments and a Technology Brands segment. Its fiscal year ending February 3, 2018 has 53 weeks; management noted that retail sales and operating profit are seasonal, with the largest portion typically in the fourth quarter.
Financial results
| Metric | 13 weeks ended Oct. 28, 2017 | 13 weeks ended Oct. 29, 2016 | 39 weeks ended Oct. 28, 2017 | 39 weeks ended Oct. 29, 2016 |
|---|---|---|---|---|
| Net sales | $1,988.6 | $1,959.2 | $5,722.1 | $5,562.5 |
| Gross profit / margin | $689.4 / 34.7% | $708.2 / 36.1% | $2,015.6 / 35.2% | $2,001.4 / 36.0% |
| Operating earnings | $87.6 | $98.8 | $232.3 | $271.1 |
| Net income | $59.4 | $50.8 | $140.6 | $144.5 |
| Diluted EPS | $0.59 | $0.49 | $1.39 | $1.39 |
- Quarterly sales rose 1.5%; comparable store sales increased 1.9%. The quarter’s sales increase included a $30.2 million favorable foreign-exchange impact.
- Year-to-date sales rose 2.9%, including a $22.9 million favorable foreign-exchange impact; comparable store sales increased 2.1%.
- Quarterly operating earnings fell 11.3%, despite higher sales, as gross profit declined and gross margin contracted 1.4 percentage points. Net income increased 16.9%, helped by lower income tax expense and a lower effective tax rate (19.4% versus 39.5%).
- Year-to-date operating earnings declined 14.3% and net income declined 2.7%. The effective tax rate was 26.0%, compared with 37.7%.
- Quarterly sales growth was led by new software, hardware and collectibles. Collectibles sales increased 26.5%; new hardware sales increased 8.8%. Technology Brands sales fell 10.2%, while pre-owned/value products and accessories also declined.
- For the 39-week period, collectibles sales grew 33.3% and new hardware sales grew 16.5%; pre-owned/value product sales declined 5.5%. Margin pressure reflected mix, lower pre-owned margins and weaker new-software and hardware margins.
Cash flow, debt and liquidity
- Cash from operations was negative $17.1 for the 39 weeks, versus positive $131.6 a year earlier, primarily due to the timing of inventory purchases and vendor payments. Inventory-related cash use was $715.4.
- Investing cash outflow was $40.9, versus $541.5 in the prior-year period, which included substantially greater acquisition spending. The company received $51.2 net cash proceeds from selling Kongregate.
- Financing cash outflow was $163.9; dividends paid were $116.7 and share repurchases were $22.0. Cash fell $214.7 from the fiscal-year opening balance to $454.7.
- At October 28, 2017, current assets were $2,671.0 and current liabilities were $2,217.5. Long-term debt, net, was $817.2, consisting of $350 million of 5.50% notes due 2019 and $475 million of 6.75% notes due 2021.
- The revolver had no borrowings outstanding and $392.4 available, with $7.5 of standby letters of credit. The company said it was in compliance with its debt covenants and expected cash, operating cash flow and available credit to fund operations and planned capital allocation for at least 12 months.
- On November 20, 2017, after quarter-end, GameStop amended its revolver, extending maturity to November 2022, increasing borrowing-base capacity up to $420 million and reducing applicable margin ranges.
Outlook, commentary and material items
- Management projected fiscal 2017 capital expenditures of approximately $110–$120 million, principally for systems and digital initiatives, store openings and remodels, and Technology Brands.
- Management described the Nintendo Switch launch as a driver of hardware and related sales, while noting that older console cycles were maturing. It also cited weaker new-title releases, lower store traffic affecting pre-owned sales, and a slowdown in wireless upgrades and changes in commission income affecting Technology Brands.
- The July 2017 Kongregate sale generated $54.7 million of proceeds net of transaction costs, including $3.5 million held in escrow, and a $7.3 million gain reported in SG&A.
- The board approved a quarterly dividend of $0.38 per share payable December 12, 2017. Future dividends remain subject to board approval.
- GameStop is contesting French tax reassessments of approximately €85.5 million for specified prior tax years. It has not recorded a reserve, believes its tax positions will be sustained, and states that an adverse outcome could materially affect income tax expense. Ordinary-course litigation was not expected by management to have a material effect.
- The company planned to adopt the new revenue standard in fiscal 2018 using the modified retrospective approach. Management did not expect a material financial-statement impact, but identified loyalty rewards and gift-card breakage accounting as affected areas. Lease accounting adoption was expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether gross-margin pressure, particularly in pre-owned products and new software, persists through the holiday quarter.
- Whether reported sales growth and comparable-store trends continue, and how much reflects foreign exchange, Nintendo Switch demand and collectibles expansion.
- Whether Technology Brands’ comparable-store gross-profit decline and wireless-upgrade weakness improve.
- Whether inventory buildup converts to sales and operating cash flow, given the year-to-date cash used in operations.
- The outcome and potential financial exposure of the French tax dispute, and the effect of the revenue and lease accounting standards.
- Whether liquidity, the amended revolver and cash generation support planned capital expenditures, dividends and other capital allocation.