GameStop Corp. — FY2009 Form 10-K Summary
Business context and reporting period. GameStop operates video-game retail stores, e-commerce sites and Game Informer. The 10-K covers the 52 weeks ended January 30, 2010 (fiscal 2009); the filing also reports fourth-quarter results. At year-end, the company operated 6,450 stores across the United States, Canada, Australia and Europe. FY2009 includes a full year of Micromania results, compared with 11 weeks in FY2008.
Financial performance
| Metric | FY2009 | FY2008 |
|---|---|---|
| Sales | $9.078 billion | $8.806 billion |
| Gross profit / margin | $2.435 billion / 26.8% | $2.270 billion / 25.8% |
| Operating earnings / margin | $637.0 million / 7.0% | $675.1 million / 7.7% |
| Net income attributable to GameStop | $377.3 million | $398.3 million |
| Diluted EPS | $2.25 | $2.38 |
| Cash provided by operations | $644.2 million | $549.2 million |
| Cash and cash equivalents at year-end | $905.4 million | $578.1 million |
| Working capital | $471.6 million | $255.3 million |
| Total debt, net | $447.3 million | $545.7 million |
FY2009 fourth-quarter sales were $3.524 billion, gross profit $874.0 million, operating earnings $347.4 million and net earnings $215.9 million. Diluted EPS was $1.29, versus $1.39 in the prior-year quarter. The quarter generated about 39% of FY2009 sales and 55% of operating earnings.
Material changes versus the prior comparable period
- Annual sales rose 3.1%, but comparable-store sales fell 7.9%, reflecting weaker consumer traffic and slower hardware sell-through. New stores and the full-year contribution from Micromania more than offset the comparable-store decline.
- Used-product sales increased 18.1% to $2.394 billion and grew from 23.0% to 26.4% of sales. Higher used-product mix helped lift overall gross margin by 1.0 percentage point; used-product gross margin itself declined from 48.1% to 46.8%, partly because international used-product operations were less mature.
- New hardware sales fell 5.6%; new software sales rose 1.2%. SG&A increased 13.1% and rose to 18.0% of sales from 16.4%, reflecting store growth, Micromania and deleveraging of fixed costs amid lower comparable sales.
- Operating earnings declined 5.6% and net income attributable to GameStop declined 5.7%. Debt fell by about $98.4 million on a carrying-value basis following repurchases of $100 million principal amount of notes.
- By segment, U.S. sales and operating earnings declined; European sales rose substantially with Micromania and store expansion, while existing-store sales weakened. Canada sales declined, although operating earnings improved; Australia sales increased modestly while operating earnings edged down.
Cash, debt and liquidity
Investing activities used $187.2 million, including $163.8 million of property and equipment purchases and $8.4 million for acquisitions. Financing activities used $154.4 million, primarily for debt repurchases and share repurchases. The $400 million revolving credit facility had no borrowings outstanding at year-end, with $8.8 million of letters of credit outstanding; the company had borrowed and repaid $115 million during the year. Outstanding long-term notes carried an 8.0% coupon and mature October 1, 2012. GameStop reported compliance with its debt covenants.
Management said cash balances, operating cash generation and revolver availability should be sufficient for at least the next 12 months. Contractual obligations included $1.266 billion of operating lease payments and $849.5 million of purchase obligations, generally cancelable until shipment. The filing projects approximately $215 million of FY2010 capital expenditures.
Outlook, commentary and risks
- Management planned approximately 400 new stores in FY2010, continued investment in digital distribution, e-commerce, online game development and digital kiosks, and further promotion of used-product trade-ins. No specific sales or earnings guidance is provided.
- Key risks include ongoing comparable-store weakness, retail and industry competition, digital delivery potentially displacing physical sales, reliance on major suppliers and popular game releases, currency exposure, and holiday-season concentration. All stores are leased; rising lease costs or difficulty renewing or securing locations could weigh on growth.
- Major vendors Nintendo, Sony, Microsoft, Electronic Arts and Activision represented 23%, 17%, 12%, 12% and 11% of new-product purchases, respectively.
- A wrongful-death lawsuit had been dismissed with prejudice at trial-court level, but plaintiffs appealed; the company said a potential loss could not be estimated if the appeal succeeded. Management did not expect other ordinary-course proceedings, including wage-and-hour matters, to materially affect financial condition, results or liquidity.
- The company recorded $5.3 million of debt-extinguishment expense. It reported no goodwill impairment. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether comparable-store sales stabilize and whether expansion can offset weak existing-store demand without further SG&A deleverage.
- Whether used-product growth and margins remain durable, especially as international operations mature and digital distribution expands.
- Liquidity and debt repayment capacity ahead of the 2012 notes maturity, alongside lease, purchase and planned capital commitments.
- Execution and returns on the planned 400 store openings and $215 million FY2010 capital expenditure program.
- Developments in the appealed litigation and tax positions: the filing reports $35.2 million of unrecognized tax benefits, with the timing and range of potential settlement outcomes unclear.
- Share-repurchase cash timing: 6.1 million shares were bought during FY2009 at an average $20.12; $64.6 million of purchases remained unsettled at year-end, and additional purchases were made after year-end.