GameStop Corp. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 3, 2013, compared with periods ended July 28, 2012. This differs from the request metadata’s “2012 Q2.” Amounts below are in millions of dollars except per-share data.
Business context and results
GameStop operated 6,505 stores across the United States, Australia, Canada and Europe, alongside e-commerce, digital gaming and other businesses. Management attributed weaker sales mainly to the late stage of the existing console cycle. The fiscal year ends February 1, 2014; results are seasonal, with the largest share of sales and operating profit generally in the holiday quarter.
| Metric | 13 weeks ended Aug. 3, 2013 | 13 weeks ended Jul. 28, 2012 | 26 weeks ended Aug. 3, 2013 | 26 weeks ended Jul. 28, 2012 |
|---|---|---|---|---|
| Net sales | $1,383.7 | $1,550.2 | $3,249.0 | $3,552.4 |
| Gross profit / margin | $481.4 / 34.8% | $519.3 / 33.5% | $1,059.7 / 32.6% | $1,119.2 / 31.5% |
| Operating earnings / margin | $18.8 / 1.4% | $34.5 / 2.3% | $106.0 / 3.3% | $149.5 / 4.2% |
| Net income attributable to GameStop | $10.5 | $21.0 | $65.1 | $93.5 |
| Diluted EPS | $0.09 | $0.16 | $0.55 | $0.71 |
| Operating cash flow | Not separately presented | Not separately presented | $(274.6) | $(173.8) |
Financial position, liquidity and capital allocation
- At August 3, 2013, cash and cash equivalents were $199.5; current assets were $1,464.5 and current liabilities were $1,249.9, representing working capital of $214.6.
- Revolver borrowings were $50.0, with $253.3 of availability and $9.0 of standby letters of credit. GameStop reported compliance with the facility. No other funded long-term debt is listed in the balance sheet.
- Cash used in investing was $45.9 for the first half, mainly capital expenditures of $47.3. Cash used in financing was $88.2, including $114.4 of share repurchases and $66.2 of dividends, partly offset by net revolver borrowing and proceeds from stock-option exercises.
- Cash declined by $436.3 during the first half, to $199.5. Operating cash use reflected working-capital outflows, including accounts payable and accrued liabilities, and tax payments; the filing also notes the seasonal pattern of paying down year-end payables.
- GameStop repurchased 3.4 million shares for an average $33.58 per share during the first half. A further 0.3 million shares were purchased through September 4 at an average $50.27. The board had $296.9 remaining under its authorization as of that date.
Changes versus comparable periods
- Second-quarter sales fell 10.7%, and first-half sales fell 8.5%. Comparable-store sales declined 10.7% in the quarter and 8.4% for the first half.
- Second-quarter net income fell to $10.5 from $21.0; first-half net income fell to $65.1 from $93.4 consolidated net income in the prior-year period. Operating earnings also declined in both comparisons.
- Gross margin improved year over year, reflecting a more favorable mix as hardware sales fell and pre-owned, mobile and digital products contributed more. However, SG&A as a share of sales increased as lower sales reduced fixed-cost leverage.
- Second-quarter product sales declined across hardware, new software, pre-owned products and other categories. First-half new hardware sales fell 26.7%; pre-owned sales fell 6.8%. Mobile and digital growth partly offset weakness in other products.
- Europe reported operating losses of $25.0 for the quarter and $34.6 for the first half, versus losses of $10.2 and $11.4 in the comparable periods. The U.S. was the largest segment and reported quarterly operating earnings of $43.4.
Outlook, commentary and risks
- Management expected PlayStation 4 and Xbox One launches by the 2013 holiday period to support demand, but anticipated that the new-console cycle would reduce overall gross margin percentage in fiscal fourth-quarter 2013. Management also expected digital product sales to increase in the second half.
- Fiscal 2013 capital expenditures were projected at approximately $135, primarily for digital initiatives, store openings and remodels, distribution and information systems. Management expected approximately 115 store openings during the year, including 44 acquired in France during the first quarter.
- Management believed cash, operating cash generation and revolver availability would fund operations, investments and declared dividends for at least the next 12 months. The filing provides no full-year revenue or earnings guidance.
- Key risks include console-launch features that could constrain pre-owned sales or compatibility with prior-generation games; competition from digital distribution and mobile, social and browser gaming; supplier and product-release dependence; international and European weakness; and execution of digital and acquisition strategies.
- Foreign-currency derivatives are not designated as hedges. Second-quarter derivative losses were substantially offset by gains on remeasurement of related balances; the aggregate derivative position was a net liability of $17.9 at August 3. A hypothetical 10% currency-rate move would change contract value by $9.2 in either direction.
- Ordinary-course wage-and-hour and consumer class-action matters were disclosed; management did not expect existing proceedings or settlements to materially affect financial condition, results or liquidity. The IRS was examining fiscal 2008–2011 returns; management did not anticipate a material impact from those audits.
- The filing states that disclosure controls were effective at a reasonable-assurance level and that there was no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the console launches and holiday selling season offset the persistent comparable-store sales declines, and how they affect margins and pre-owned demand.
- Whether digital and mobile growth can continue to offset weakness in physical products, and whether Europe’s operating losses improve.
- Cash conversion and seasonal working-capital needs, including the impact of payable timing, inventory mix, dividends and repurchases on liquidity.
- Revolver borrowing-base availability and covenant headroom as cash balances and seasonal cash needs change.
- Actual fiscal 2013 store openings and capital spending versus management’s projections, and the outcome of tax audits and legal matters.