GameStop Corp. — Form 10-Q Summary
Business context and reporting period
GameStop is a multichannel video game retailer operating 6,606 stores across the United States, Canada, Australia and Europe, alongside e-commerce, Game Informer and digital gaming businesses. This unaudited filing covers the 13 weeks ended October 30, 2010 (fiscal Q3) and the 39 weeks ended that date; comparisons are with the periods ended October 31, 2009. The company notes that interim results are seasonal and not indicative of the full fiscal year.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement figures are in millions except per-share data.
| Metric | Q3 2010 | Q3 2009 | 39 weeks 2010 | 39 weeks 2009 |
|---|---|---|---|---|
| Sales | $1,899.2 | $1,834.7 | $5,780.9 | $5,554.0 |
| Gross profit / margin | $546.3 / 28.8% | $523.1 / 28.5% | $1,633.9 / 28.3% | $1,560.6 / 28.1% |
| Operating earnings | $92.8 | $90.3 | $286.9 | $289.7 |
| Net income attributable to GameStop | $54.7 | $52.2 | $170.2 | $161.3 |
| Diluted earnings per share | $0.36 | $0.31 | $1.10 | $0.96 |
- Q3 sales rose 3.5%; comparable-store sales increased 1.1%. Year-to-date sales rose 4.1%, while comparable-store sales were flat.
- For the 39 weeks, operating cash flow was negative $84.3 million (versus negative $74.4 million); investing cash flow was negative $183.5 million, including $141.5 million of property and equipment purchases and $38.1 million for Kongregate. Financing cash flow was negative $458.3 million.
- Cash fell to $181.1 million from $905.4 million at fiscal year-end, primarily reflecting share repurchases, $200 million of note repurchases, investment spending and seasonal inventory build. Inventory was $1,942.4 million, versus $1,734.0 million a year earlier.
- At October 30, current assets were $2,300.0 million and current liabilities $2,078.9 million (working capital approximately $221.1 million; current ratio approximately 1.11). The $400 million revolving facility had no borrowings outstanding; letters of credit were $8.0 million.
- Senior notes outstanding were $250 million principal ($248.9 million carrying value), down from $450 million a year earlier; the notes bear 8% interest and mature October 2012. The company repurchased $200 million principal during the period and recorded $6.0 million of debt-extinguishment expense.
Material changes and management commentary
- Growth was driven by new-store openings and stronger new software sales, partly offset by weaker hardware sell-through. New software sales increased 9.1% in Q3 and 9.5% year to date; hardware sales fell 14.1% and 7.9%, respectively.
- Higher-margin used products and other products supported consolidated gross-margin improvement. Q3 used-product margin was 47.4%; new software margin declined to 21.7%, partly due to lower vendor allowances net of advertising and loyalty-program costs.
- SG&A rose 4.5% in Q3 and 5.7% year to date; as a share of sales it increased to 21.5% and 21.1%, respectively, reflecting store growth and spending on digital and loyalty initiatives. Year-to-date operating earnings declined 1.0%, while net income attributable to GameStop increased 5.5%.
- Performance varied by region: year-to-date U.S. sales and operating earnings increased, while Australia and Europe operating earnings declined. Foreign exchange movements materially affected international sales comparisons.
Outlook, risks and unusual items
- Management expected to open approximately 400 stores in fiscal 2010; 238 had opened during the first 39 weeks. Fiscal 2010 capital expenditures were projected at approximately $200 million, with approximately $100 million allocated for acquisitions supporting e-commerce and digital initiatives.
- Management stated that cash, operating cash generation and revolver availability should fund operations, debt payments, expansion and capital programs for at least the next 12 months. No specific earnings or revenue guidance was provided in the supplied filing text.
- The company acquired online gaming company Kongregate on August 1, 2010 for $38.1 million net of cash acquired and described continued investment in digital distribution, e-commerce and customer loyalty.
- Foreign-currency contracts were not designated as hedges; Q3 and year-to-date derivative-related losses recorded in SG&A were $11.0 million and $6.9 million. A hypothetical 10% currency move was estimated to change contract value by approximately $22 million in either direction. Management said it did not use derivatives for speculation.
- Key disclosed risks include weak consumer traffic and hardware demand, competition and alternative digital distribution, dependence on suppliers and successful game releases, international and currency exposure, store-opening execution, and litigation or regulatory costs. The Alabama wrongful-death case was affirmed in GameStop’s favor and resolved with no liability; management said other proceedings were not expected to have a material adverse effect.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether software-led growth and flat year-to-date comparable-store sales persist, particularly as hardware sell-through remains weak.
- Whether the substantial seasonal inventory build converts to holiday-quarter sales and cash generation without margin pressure.
- How international currency effects and the disclosed derivative exposure affect reported results and cash needs.
- Whether planned store openings, capital expenditures and digital investments deliver returns while the company maintains liquidity after debt and share repurchases.
- The terms and remaining capacity of the share-repurchase authorization, covenant headroom, and cash requirements for the 2012 notes maturity.