GameStop Corp. — FY2012 Form 10-K
Period note: The request identifies “2011 Q4,” but the supplied filing is GameStop’s Form 10-K for the 53 weeks ended February 2, 2013 (fiscal 2012). Comparisons below are principally to the 52 weeks ended January 28, 2012 (fiscal 2011), so period length differs.
Business context
GameStop operated 6,602 stores across the United States, Canada, Australia and Europe, alongside e-commerce, digital gaming, mobile-device resale and Game Informer. Its core business sells new and pre-owned video game hardware, software and accessories; pre-owned products generally earn substantially higher margins than new hardware and software.
Financial and operating metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $8,886.7 million | $9,550.5 million |
| Gross profit / gross margin | $2,651.5 million / 29.8% | $2,679.5 million / 28.1% |
| Operating earnings (loss) | $(41.6) million | $569.9 million |
| Net income (loss) attributable to GameStop | $(269.7) million | $339.9 million |
| Diluted earnings (loss) per share | $(2.13) | $2.41 |
| Comparable-store sales | (8.0)% | (2.1)% |
| Cash from operating activities | $632.4 million | $624.7 million |
- FY2012 included $680.7 million in impairment charges: $627.0 million goodwill, $44.9 million Micromania trade name and $8.8 million property and other assets. Excluding these charges, management reported operating earnings of $639.1 million and net income of $403.0 million.
- SG&A was $1,835.9 million, or 20.7% of sales, versus $1,842.1 million, or 19.3%, in FY2011. Higher SG&A as a share of sales reflected lower comparable sales and fixed-cost deleveraging.
- Sales mix shifted: new hardware sales fell 17.3%, new software fell 11.5% and pre-owned sales fell 7.2%; “other” sales rose 21.2%, mainly from PC software and mobile products. Digital product receipts increased 39% to approximately $630 million.
- At year-end, cash and cash equivalents were $635.8 million; working capital was $295.6 million. Total debt was reported as zero. The $400 million asset-based revolver had no borrowings and $388.7 million availability, with $9.0 million of letters of credit outstanding.
- Investing cash outflow was $152.7 million, including $139.6 million of capital expenditures. Financing cash outflow was $498.5 million, including $409.4 million of share repurchases and $102.0 million of dividends paid.
Material changes versus prior year
- Sales declined 7.0% despite the extra fiscal week; sales from that week were $112.2 million. Comparable sales decreased 8.0%, reflecting the aging console cycle and fewer new game releases. Foreign exchange reduced reported sales by $90.7 million.
- Gross margin improved 1.7 percentage points, chiefly from a higher contribution by other products and improved margins in hardware, software and pre-owned products. Gross profit dollars nevertheless decreased $28.0 million.
- Reported operating and net results swung to losses, principally because of the impairment charges. International segments recorded the significant goodwill impairments; the U.S. segment reported $501.9 million operating earnings, while Canada, Australia and Europe reported operating losses.
- Cash from operations increased modestly. Cash declined by $19.2 million during the year, ending at $635.8 million.
- The company began quarterly dividends in 2012 and paid $0.80 per share for the year. It repurchased 19.9 million shares at an average $20.60 per share.
Outlook, commentary and risks
- Management expected digital sales to increase in fiscal 2013. It planned approximately 65 store openings and 250 closures, and projected capital expenditures of about $135 million, primarily for digital initiatives, stores, remodels and systems.
- Management stated that cash, operating cash flow and revolver availability should fund operations and planned investments, including declared dividends, for at least the next 12 months. A quarterly dividend of $0.275 per share was declared after year-end.
- Management expected current-generation hardware demand to keep declining ahead of next-generation launches. It anticipated that the planned PlayStation launch could pressure gross margin in its launch quarter and subsequent years.
- Key risks include continued consumer shift to digital, mobile and social gaming; console-launch timing and success; dependence on a small number of suppliers; discretionary-spending and European economic weakness; foreign-exchange exposure; and the company’s ability to sustain trade-in supply and execute store closures and digital initiatives.
- Goodwill impairment testing depends on forecasts and discount-rate assumptions; further impairments are possible. The company reported $28.7 million of unrecognized tax benefits, plus accrued interest and penalties, and said the timing of settlement was uncertain. Management did not expect existing litigation to materially adversely affect financial condition, results or liquidity.
- The auditor gave an unqualified opinion on the financial statements and internal controls. Management concluded disclosure controls and internal control over financial reporting were effective at the reasonable-assurance level.
Important facts for investors to verify
- Confirm the intended period: the supplied filing covers FY2012 ended February 2, 2013, not 2011 Q4.
- Assess the impairment-adjusted earnings figures alongside the reported losses, and review assumptions underlying international goodwill and Micromania valuations.
- Track comparable sales, store traffic, hardware/software trends and whether digital and mobile growth can offset declines in the core categories.
- Review liquidity and capital returns against lease commitments of $1,028.4 million and purchase obligations of $769.1 million; confirm revolver availability and dividend restrictions.
- Monitor foreign-exchange derivative exposure: contracts had a net liability of $5.3 million at year-end; a hypothetical 10% currency move was estimated to change their value by approximately $11.6 million.