GameStop Corp. — Form 10-Q Summary
Business context and reporting period
GameStop is a multichannel video game retailer operating 6,614 stores, alongside e-commerce, digital gaming and related businesses. The filing covers the 13 weeks ended April 28, 2012 (first quarter of fiscal 2012), compared with the 13 weeks ended April 30, 2011. This differs from the request metadata identifying 2011 Q1.
Financial results and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Sales | $2,002.2 million | $2,281.4 million | Down 12.2% |
| Gross profit / margin | $599.9 million / 30.0% | $620.2 million / 27.2% | Profit down 3.3%; margin up 2.8 points |
| Operating earnings / margin | $115.0 million / 5.7% | $131.1 million / 5.8% | Down 12.3% |
| Net income attributable to GameStop | $72.5 million | $80.4 million | Down 9.8% |
| Diluted earnings per share | $0.54 | $0.56 | Down $0.02 |
| Cash used in operating activities | $162.2 million | $132.5 million | Use increased $29.7 million |
Cash and cash equivalents were $329.1 million at April 28, 2012, down from $655.0 million at January 28, 2012. Current assets were $1,635.6 million and current liabilities $1,319.0 million. The company reported no borrowings on its $400 million asset-based revolver; $8.8 million of letters of credit were outstanding. Senior notes had been fully redeemed by January 2012. A foreign subsidiary had $1.8 million in overdrafts under a discretionary line of credit.
Investing activities used $22.1 million, including $22.3 million of property and equipment purchases. Financing activities used $140.9 million, principally $121.6 million for share repurchases and $20.5 million for dividends. Cash declined by $325.9 million during the quarter.
Material changes versus prior period
- Comparable store sales fell 12.5%. Management attributed the decline mainly to lower new hardware and software sales as the current console generation aged and to fewer new software releases. Foreign exchange reduced reported sales by $19.6 million.
- New hardware sales fell 19.4% and new software sales fell 20.1%; used-product sales declined 1.0%. Used and other products gained mix share, supporting the increase in overall gross margin.
- SG&A declined slightly in dollars to $440.4 million, but rose to 22.0% of sales from 19.4%, reflecting fixed-cost deleverage. Interest expense fell to $0.6 million from $6.3 million, primarily after retirement of senior notes.
- Cash used in operations increased, mainly due to lower earnings adjusted for noncash items and changes in long-term liabilities and working capital. Quarterly cash use also reflects seasonal payment of year-end payables.
- U.S. sales were down 14.2%; Canada down 9.7%; Australia down 10.4%; and Europe down 4.2% as reported, though European sales rose 1.6% excluding foreign exchange. Australia moved to a $1.5 million operating loss; Europe’s operating loss narrowed to $1.2 million.
Outlook, commentary, risks and unusual items
- Management expected declines in hardware and software sales during fiscal 2012 because of the mature console cycle, while anticipating growth in digital products. It noted new consoles or current-console price cuts could partly offset declines.
- Fiscal 2012 is a 53-week year ending February 2, 2013. Management cautioned that the first-quarter results are not indicative of full-year performance because of seasonality; the fourth quarter typically generates the largest share of sales and operating profit.
- Company plans included approximately 150 store openings for fiscal 2012, with 42 opened in the quarter, and projected capital expenditures of approximately $140 million. Management believed cash, operating cash generation and revolver availability would fund plans and operations for at least 12 months.
- The board approved a $0.15-per-share quarterly dividend; future dividends remain subject to board approval. The company repurchased 5.4 million shares during the quarter for $121.6 million and reported $454.8 million remaining under its then-current authorization. It purchased an additional 1.7 million shares through May 29, 2012.
- Key risks include the aging console cycle, digital and alternative content distribution, mobile/social gaming competition, supplier and release dependence, international operations, foreign exchange, and litigation. Management said ordinary-course legal matters, including wage-and-hour and consumer class actions, were not expected to materially affect financial condition, results or liquidity.
- Foreign-currency contracts had a net fair-value asset of $12.6 million; a hypothetical 10% currency move would change their value by approximately $19.2 million in either direction. IRS examinations were ongoing; management did not expect material audit adjustments, but could not estimate the possible range of changes in certain unrecognized tax benefits.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material quarterly change in internal control over financial reporting. No significant asset impairment charges were recorded in either comparative quarter.
Important facts for investors to verify
- Confirm that the intended filing is the quarter ended April 28, 2012, not 2011 Q1.
- Track comparable-store sales, hardware/software demand and whether digital and used-product growth can offset weakness in new releases.
- Assess cash generation and seasonal working-capital needs alongside the substantial buybacks, dividends and projected capital spending.
- Review the effect of foreign exchange and operating performance in Australia and Europe, as well as revolver availability and covenant restrictions.
- Check subsequent results against management’s fiscal 2012 store-opening, capital-expenditure and outlook statements; the filing provides no specific full-year earnings or revenue guidance.