GameStop Corp. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended August 4, 2018 (fiscal 2018 Q2 and first half), compared with periods ended July 29, 2017. This differs from the request metadata, which says 2017 Q2. Financial figures are in millions of dollars unless stated otherwise.
Business context
GameStop operated 7,192 stores across the United States, Canada, Australia and Europe, with video game retail and Technology Brands businesses. The company noted that sales are seasonal, with the largest portion typically occurring in the fourth fiscal quarter.
Financial performance and liquidity
- Q2 revenue and margins: Net sales were $1,646.7, down 2.4% year over year. Gross profit was $596.1; gross margin declined to 36.2% from 37.0%. Operating earnings were $21.6, or 1.3% of sales, versus $43.6, or 2.6%.
- Q2 earnings: Pre-tax earnings were $7.7 and net loss was $24.9, compared with prior-year net income of $22.2. The current quarter included a $29.6 tax charge related to a French tax dispute.
- First-half results: Sales were $3,580.7, down 4.1%; gross profit was $1,253.4 and gross margin was 35.0%, versus 35.5%. Operating earnings fell 45.6% to $78.7. Net income was $3.3, down from $81.2.
- Cash flow: Operating cash outflow was $429.9 for the first half, versus $311.7 outflow a year earlier. Capital expenditures were $40.1. Cash and cash equivalents were $279.6 at August 4, down from $864.4 at fiscal year-end; cash, cash equivalents and restricted cash totaled $293.7.
- Debt and liquidity: Long-term debt, net, was $819.2, comprising $350.0 principal of 5.50% notes due 2019 and $475.0 principal of 6.75% notes due 2021. The $420.0 asset-based revolver had no borrowings and $407.7 available capacity. Management said available cash, operating cash generation and revolver capacity were expected to fund operations and planned uses for at least 12 months. The company reported compliance with debt-facility requirements.
- Dividends: Dividends were $0.38 per share quarterly, or $0.76 per share for the first half. The board approved another $0.38 quarterly dividend, payable October 2, 2018.
Material changes versus prior comparable periods
- Q2 comparable sales in Video Game Brands declined 0.5%; first-half comparable sales declined 3.2%. First-half declines were broad outside the United States, with comparable sales down 5.3% in Canada, 10.2% in Australia and 9.8% in Europe.
- Weakness in new software and pre-owned/value products weighed on sales. First-half sales fell 13.7% in new software and 7.8% in pre-owned/value products. Hardware, accessories and collectibles grew 3.0%, 20.7% and 19.9%, respectively.
- Technology Brands first-half sales declined 13.3%, partly reflecting fewer stores and changes to dealer compensation. Its store count fell to 1,336 from 1,509 a year earlier; management attributed improved segment operating earnings in part to closing lower-performing stores.
- First-half operating cash use increased, primarily due to lower net income and timing of vendor payments. Prior-year investing cash flows included proceeds from the Kongregate divestiture.
- Adoption of the new revenue recognition standard increased first-half reported net sales by $11.9 and net income by $1.4 versus the prior standard; the filing also recorded an $11.5 after-tax cumulative adjustment to opening retained earnings.
Outlook, commentary and risks
- Management projected fiscal 2018 capital expenditures of approximately $110–$120, mainly for store remodels, distribution and information systems. The filing provides no earnings or revenue guidance.
- On September 6, 2018, the board announced a comprehensive review of strategic and financial alternatives, including a potential sale. No transaction was assured; the filing warned the process could distract management, affect personnel retention and disrupt business.
- French tax authorities issued a collection notice of approximately €80.0 for disputed deductions covering certain years from 2008 to 2013. GameStop recorded a $29.6 tax charge, intends to contest or settle the matter, and warned that an adverse outcome could materially affect its tax provision. Additional reassessments could follow.
- Management reported no indicators of material goodwill or intangible-asset impairment at August 4, but stated that deteriorating assumptions or sustained share-price declines could lead to impairment. The company expected adoption of the new lease standard to materially increase reported assets and liabilities.
- Other ordinary-course legal proceedings were not expected by management to materially affect financial condition, results or liquidity.
Investor verification checklist
- Confirm the period: this is fiscal 2018 Q2, not 2017 Q2.
- Track comparable sales, segment operating results and product mix, particularly weakness in software, pre-owned products and international markets.
- Assess cash burn, seasonal working-capital needs, revolver availability and the approaching 2019 senior-note maturity.
- Monitor developments in the French tax dispute, including any settlement, further assessments or litigation outcome.
- Verify progress and implications of the strategic-alternatives review, including whether it results in a transaction and any effect on operations or the dividend.