GameStop Corp. Form 10-Q Summary
Period clarification: Although the request metadata says 2015 Q3, the filing is for the 13 and 39 weeks ended October 29, 2016 (fiscal 2016 Q3), compared with periods ended October 31, 2015. The filing was signed December 6, 2016. Unless otherwise noted, amounts are in U.S. dollars.
Business context and reporting period
GameStop operated 7,586 stores across its Video Game Brands and Technology Brands businesses. The company sells video game hardware, software and accessories, digital products, collectibles, wireless products and consumer electronics. Management described diversification into Technology Brands and collectibles as a way to broaden the business beyond the cyclical video game console market. Results are seasonal, with most sales and operating profit typically occurring in the fourth fiscal quarter.
Financial performance and liquidity
| Metric | 13 weeks ended Oct. 29, 2016 | 13 weeks ended Oct. 31, 2015 | 39 weeks ended Oct. 29, 2016 | 39 weeks ended Oct. 31, 2015 |
|---|---|---|---|---|
| Net sales | $1,959.2 million | $2,016.3 million | $5,562.5 million | $5,838.8 million |
| Gross profit / margin | $708.2 million / 36.1% | $655.6 million / 32.5% | $2,001.4 million / 36.0% | $1,875.1 million / 32.1% |
| Operating earnings / margin | $98.8 million / 5.0% | $90.7 million / 4.5% | $271.1 million / 4.9% | $266.3 million / 4.6% |
| Net income / margin | $50.8 million / 2.6% | $55.9 million / 2.8% | $144.5 million / 2.6% | $155.0 million / 2.7% |
| Diluted earnings per share | $0.49 | $0.53 | $1.39 | $1.45 |
For the quarter, comparable store sales fell 6.5%. Higher gross margin reflected a greater contribution from Technology Brands and collectibles, as well as improved Technology Brands margins. The 39-week effective tax rate was 37.7%, unchanged from the comparable period; the quarterly rate rose to 39.5% from 33.6%.
For the 39 weeks, operating cash flow was $131.6 million, down from $188.1 million. Investing activities used $541.5 million, including $441.1 million for acquisitions; financing activities provided $296.8 million. Cash declined $94.3 million from the fiscal-year start to $356.1 million.
At October 29, 2016, current assets were $2,358.8 million and current liabilities were $2,151.1 million (an approximate 1.1 current ratio). Long-term debt, net, was $814.3 million, comprising $350 million of 5.50% notes due 2019 and $475 million of 6.75% notes due 2021, less financing costs. The company had no revolver borrowings and reported $391.5 million of available borrowing capacity. It stated that cash, operating cash flow and available credit should fund operations and planned uses for at least 12 months.
Material changes versus the prior comparable periods
- Quarterly sales declined 2.8%; 39-week sales declined 4.7%. Management attributed the declines mainly to weaker comparable sales and lower video game hardware and software sales as the console cycle matured and prior-year game releases had been stronger.
- Quarterly hardware sales fell 20.6%; 39-week hardware sales fell 27.5%. New software sales fell 8.6% for the quarter and 10.8% year to date.
- Technology Brands sales rose 54.4% for the quarter and 56.7% for the 39 weeks, primarily from acquisitions and store openings. Collectibles sales rose 37.3% and 96.3%, respectively.
- Gross margin expanded to 36.1% for the quarter and 36.0% year to date, from 32.5% and 32.1%. Despite higher gross profit, quarterly net income fell 9.1%; year-to-date net income fell 6.8%, with higher interest expense among the factors.
- Interest expense increased to $14.8 million for the quarter from $6.5 million and to $39.7 million for the 39 weeks from $17.8 million, principally following issuance of the $475 million 2021 notes.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided in the supplied filing text. Management projected fiscal 2016 capital expenditures of approximately $140 million to $150 million, mainly for Technology Brands growth, distribution and information systems, digital initiatives, store openings and remodels.
- Management said it expected liquidity to be sufficient for at least 12 months, while noting that actual results may differ from forward-looking statements and that the business is seasonal. The company continued to pursue acquisitions and other diversification opportunities.
- In 2016, Spring Mobile acquired 71 stores for $47.0 million and acquired 436 stores for $393.2 million in cash, plus estimated contingent consideration of $40 million to $50 million. The latter acquisition generated $66.9 million in quarterly sales; its purchase-price allocation remained preliminary.
- The company is contesting French tax reassessments of approximately €85.5 million relating to deductions for fiscal years 2008–2012. It recorded no reserve, believes its tax positions will be sustained, and warned that an adverse outcome could materially affect income tax expense. It may receive further reassessments.
- Other disclosed exposures include ordinary-course legal proceedings, foreign-currency risk and debt covenants. Management said it was in compliance with debt covenants and did not expect existing legal proceedings to materially affect financial condition, results or liquidity.
- After quarter-end, the board approved a $0.37-per-share dividend, and the company repurchased 0.8 million shares for $17.1 million through November 29, 2016. Future dividends remain subject to board approval.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: this filing covers fiscal 2016 Q3, not 2015 Q3.
- Track comparable sales and hardware/software trends against management’s explanations of console-cycle maturity and release timing.
- Assess whether Technology Brands and collectibles growth can offset declines in core video game sales, including their margins and operating costs.
- Review the acquired-store purchase-price allocation and contingent consideration as valuations and payment obligations are finalized.
- Monitor cash conversion, inventory and tax-payment working-capital needs, debt service, revolver availability and continued dividends or repurchases.
- Follow the French tax dispute and any subsequent reassessments, given the potential €85.5 million exposure and absence of a recorded reserve.