GameStop Corp. — Form 10-Q Summary
Period clarification: The request identifies 2017 Q1, but the filing covers the 13 weeks ended May 5, 2018, compared with the 13 weeks ended April 29, 2017. The statements are unaudited. GameStop operated 7,216 stores across its Video Game Brands and Technology Brands businesses.
Financial performance
| Metric | 13 weeks ended May 5, 2018 | Prior-year comparable quarter | Change |
|---|---|---|---|
| Net sales | $1,934.0 million | $2,045.9 million | Down 5.5% |
| Gross profit / margin | $657.3 million / 34.0% | $702.5 million / 34.3% | Down 6.4%; margin down 0.3 percentage points |
| Operating earnings / margin | $57.1 million / 3.0% | $101.1 million / 4.9% | Down 43.5% |
| Net income | $28.2 million | $59.0 million | Down 52.2% |
| Diluted EPS | $0.28 | $0.58 | Down $0.30 |
| Cash used in operating activities | $531.9 million | $256.8 million | Use increased $275.1 million |
Gross margin contracted primarily because of lower margins in pre-owned and value products, reflecting higher promotional activity. SG&A was $566.1 million, broadly flat year over year; excluding foreign-exchange effects, it declined about $10.1 million. The effective tax rate was 35.0%, versus 32.3%.
Cash used in investing activities was $16.4 million, including $17.6 million of property and equipment purchases. Cash used in financing activities was $57.3 million, including $40.9 million of dividends paid and $12.2 million of acquisition-related debt repayment. Cash and cash equivalents were $247.2 million at quarter-end, versus $864.4 million at February 3, 2018; cash and restricted cash totaled $261.5 million for cash-flow reporting.
At May 5, 2018, total assets were $4,308.4 million, current liabilities $1,214.7 million, and stockholders’ equity $2,183.5 million. Long-term debt, net, was $818.6 million, representing $825.0 million principal outstanding on senior notes. The company had no revolver borrowings and reported $407.7 million of availability under its $420 million asset-based facility.
Material changes and operating drivers
- Comparable sales in Video Game Brands declined 5.3% overall: United States down 2.6%, Canada down 13.8%, Australia down 14.9%, and Europe down 9.5%. Technology Brands comparable gross profit declined 7.4%.
- New software sales fell 10.3%, hardware sales 7.9%, and pre-owned/value sales 5.8%. Management attributed weakness mainly to less favorable new-title releases and comparison with the prior-year Nintendo Switch launch.
- Collectibles sales increased 24.4% and accessories increased 13.1%, partly offsetting declines elsewhere. Collectibles growth reflected expanded store space and exclusive products; accessory growth included audio products.
- Technology Brands sales declined 16.1%, reflecting a slower wireless upgrade cycle, lower commissions following dealer compensation changes, and the January 2018 sale of Cricket Wireless stores.
- Operating losses were $7.6 million in Australia and $12.9 million in Europe, compared with operating earnings of $1.8 million and $0.1 million, respectively, in the prior-year quarter. U.S. segment operating earnings included $11.2 million of non-recurring executive-management-related charges.
Outlook, liquidity, and risks
- Management stated that cash, expected operating cash flows, and revolver availability should fund operations, planned investment, capital-allocation programs, and declared dividends for at least the next 12 months. This is a management assessment, not a quantified earnings forecast.
- Fiscal 2018 capital expenditures were projected at approximately $110 million to $120 million, principally for store remodels, distribution, and information systems. No earnings or sales guidance is provided in the supplied filing text.
- The $0.38-per-share quarterly dividend was maintained; future dividends remain subject to board approval. The company noted that its business is seasonal, with the majority of sales generally occurring in the holiday quarter, so Q1 results are not indicative of the full year.
- Operating cash outflow rose mainly because of the timing of vendor payments, including a $678.2 million cash use from accounts payable and accrued liabilities. The filing also cites foreign-exchange exposure and ongoing pressure from digital delivery and changing gaming-product cycles.
- A French tax dispute is a material contingency: authorities issued a collection notice of approximately €80 million over challenged deductions for 2008–2013, and further reassessments may follow. GameStop is contesting the matter, has recorded no reserve, and says an adverse outcome could materially affect income tax expense.
- GameStop adopted the new revenue standard in the quarter. It increased reported net income by $0.4 million versus the prior accounting standard for this quarter; the opening retained-earnings adjustment was $11.5 million net of tax. The company expected lease accounting adoption to materially increase balance-sheet assets and liabilities.
Key investor verification points
- Confirm the period: this is a Q1 2018 filing, despite the request’s 2017 Q1 label.
- Track whether the substantial operating cash outflow reverses as seasonal working-capital movements normalize, and assess the timing of vendor payments.
- Monitor comparable sales, product-category margins, and whether collectibles and accessories growth can offset weakness in core game categories and Technology Brands.
- Review developments in the French tax reassessment, the potential for additional claims, and any change to the company’s no-reserve position.
- Assess the assumptions behind management’s 12-month liquidity statement, planned capital expenditures, debt maturities, and continued dividend payments.