Business Context and Reporting Period
Company: GameStop Corp.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 and 39 weeks ended November 1, 2008 (Fiscal 2008)
Business Overview: GameStop is the world's largest retailer of video games and entertainment software, operating 5,734 stores globally as of November 1, 2008. The company sells new and used video game hardware, software, and accessories, as well as PC entertainment software.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Nov 1, 2008 | 39 Weeks Ended Nov 1, 2008 | 39 Weeks Ended Nov 3, 2007 |
|---|---|---|---|
| Sales | $1,695,746 | $5,313,783 | $4,228,377 |
| Gross Profit | $473,429 | $1,430,958 | $1,129,632 |
| Gross Margin % | 27.9% | 26.9% | 26.7% |
| Operating Earnings | $85,335 | $295,307 | $208,270 |
| Net Earnings | $46,669 | $165,957 | $98,490 |
| Diluted EPS | $0.28 | $0.99 | $0.60 |
| Cash and Equivalents (Nov 1, 2008) | $478,056 | ||
| Long-Term Debt (Nov 1, 2008) | $545,462 | ||
| Operating Cash Flow (39 weeks) | $(199,766) used |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 5.2% in the 13-week period and 25.7% in the 39-week period compared to the prior year. The 39-week increase was driven by a 14.1% comparable store sales increase and the addition of 1,112 new stores.
- Profitability: Net earnings increased 68.5% for the 39-week period ($166.0M vs. $98.5M). However, for the 13-week period, net earnings decreased 10.2% ($46.7M vs. $52.0M) due to a difficult comparison with the prior year quarter which included the launch of Halo 3.
- Product Mix: Sales of new video game software and used video game products increased significantly, improving the overall gross margin percentage. Hardware sales as a percentage of total sales declined.
- Expenses: Selling, general, and administrative (SG&A) expenses increased 16.2% in the 13-week period, primarily due to store expansion and foreign currency translation losses. Merger-related expenses of $16.6M were incurred in the current period related to the Micromania acquisition.
- Cash Flow: Operating cash flow was negative ($199.8M used) for the 39-week period, primarily due to a $241.1M increase in merchandise inventories in anticipation of the holiday season and software launches.
Guidance, Outlook, and Risks
- Acquisition Activity: On November 17, 2008, the company completed the acquisition of Micromania (France) for approximately $628.5 million, funded by cash, a $275M draw on its revolver, and new term loans. This significantly expands the company's European presence.
- Capital Expenditures: The company expects to open approximately 600 new stores in fiscal 2008 (excluding Micromania) with projected capital expenditures of $175 million.
- Debt Management: The company repurchased $30 million of Senior Notes during the period. It has authorized an additional $130 million buyback of Senior Notes. A new $150 million term loan facility was secured to support the Micromania acquisition.
- Legal Contingencies: The company is a defendant in a wrongful death lawsuit alleging that violent video games contributed to a murder. The company states it cannot estimate the potential loss, if any.
- Seasonality: Results for the 39-week period are not indicative of full-year results due to the seasonal nature of the business, with the majority of sales and profit realized in the holiday quarter.
Investor Verification Checklist
- Inventory Levels: Verify the $1.42 billion inventory balance against sales velocity to assess potential obsolescence risk, especially given the $241M increase in inventory during the period.
- Debt Covenants: Confirm compliance with the fixed charge coverage ratio covenant (1.5:1.0) triggered by the new term loans and revolver usage.
- Acquisition Integration: Monitor the integration of Micromania and the conversion of Free Record Shop (Norway) stores to assess the return on the $628.5M investment.
- Comparable Store Sales: Track the trend of comparable store sales, which declined 1.8% in the 13-week period, to gauge organic growth health independent of store count expansion.
- Foreign Exchange Impact: Assess the volatility of foreign currency translation, which resulted in a $7.7M loss in the 13-week period and impacted European segment earnings.