GameStop Corp. Form 10-Q Summary
Period: The filing covers the 13 weeks ended April 30, 2016 (first quarter of fiscal 2016), compared with the 13 weeks ended May 2, 2015. This differs from the request metadata’s “2015 Q1.” The quarter is unaudited. GameStop operated 7,074 stores across its video game and Technology Brands businesses.
Financial results
| Metric | Quarter ended Apr. 30, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,971.5 million | $2,060.6 million | Down 4.3% |
| Gross profit / margin | $675.5 million / 34.3% | $639.0 million / 31.0% | Profit up 5.7%; margin up 3.3 percentage points |
| Operating earnings | $114.0 million | $123.9 million | Down 8.0% |
| Net income | $65.8 million | $73.8 million | Down 10.8% |
| Diluted EPS | $0.63 | $0.68 | Down $0.05 |
| Operating cash flow | $(376.1) million | $(128.6) million | Greater cash use |
| Capital expenditures | $29.4 million | $27.8 million | — |
Cash and equivalents were $473.6 million at April 30, 2016, versus $369.8 million a year earlier and $450.4 million at January 30, 2016. Current assets were $2,037.1 million and current liabilities were $1,366.0 million. Total debt, net of financing costs, was $812.6 million: $812.4 million long-term and $0.2 million current, compared with $346.5 million a year earlier. Stockholders’ equity was $2,156.1 million.
Performance drivers and changes
- Comparable store sales declined 6.2%. Management attributed the sales decline to prior-year strength from the Nintendo 3DS XL launch and stronger game releases, along with lower next-generation hardware unit sales and prices as the console cycle matured.
- New hardware sales fell 28.8%; new software sales fell 7.6%; pre-owned and value products fell 3.7%.
- Collectibles sales rose 261.0% to $82.3 million, reflecting ThinkGeek, acquired in July 2015, and growth in collectibles at video game stores. Mobile and consumer electronics sales rose 40.8% to $192.6 million, driven mainly by Technology Brands growth.
- Gross margin improved chiefly because of a higher contribution from Technology Brands and collectibles. SG&A rose 8.7% to $520.8 million, reflecting Technology Brands expansion; depreciation and amortization increased 13.7%. Net interest expense rose to $10.8 million from $5.4 million, primarily due to new notes.
- Technology Brands revenue increased 62.2% to $165.8 million, and segment operating earnings increased to $18.8 million from $3.1 million. United States segment operating earnings declined to $94.4 million from $120.5 million.
Cash, debt, outlook, and risks
- Operating cash use increased mainly from working capital, especially inventory purchases and higher collectibles inventory, and cash paid for accounts payable, accrued liabilities, and taxes. Financing provided $408.2 million, principally reflecting the March 2016 notes issuance; cash increased $23.2 million during the quarter.
- In March 2016, GameStop issued $475 million of unsecured 6.75% senior notes due 2021. It also has $350 million of 5.50% senior notes due 2019. The company reported no revolver borrowings at quarter-end, $391.6 million of availability, and $8.4 million of standby letters of credit. It said it was in compliance with debt covenants.
- Management believed cash, operating cash generation, and revolver availability would fund operations and planned investment and capital returns for at least 12 months. Fiscal 2016 capital expenditures were projected at approximately $160–$170 million; management expected to open or acquire approximately 450–500 Technology Brands stores, with no assurance the target would be achieved.
- The annual dividend was increased to $1.48 per share, or $0.37 quarterly. A $0.37 dividend payable June 21, 2016 was approved after quarter-end; future dividends remain subject to board approval.
- Management cautioned that the business is seasonal, with most sales and operating profit in the fourth quarter, and that first-quarter results are not indicative of the full fiscal year. It described continued investment in Technology Brands, digital initiatives, and collectibles, and said it regularly evaluates acquisitions.
- A French tax reassessment asserted approximately €85.5 million of potential additional tax for 2008–2012, with possible further material assessments for later years. GameStop is contesting the matter, recorded no reserve, and said an adverse outcome could materially affect income tax expense. Other ordinary-course legal proceedings were not expected by management to materially affect financial condition, results, or liquidity.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for Q1 fiscal 2016, not 2015.
- Track comparable sales, console hardware demand, game release comparisons, and gross-margin trends in core video game categories.
- Assess whether Technology Brands and collectibles growth can continue to offset weakness in video game sales, including the profitability and funding needs of store expansion.
- Monitor inventory and working-capital movements, seasonal cash needs, and the effect of the increased debt and 6.75% coupon on earnings and liquidity.
- Follow developments in the French tax dispute and assess the potential exposure, which was unreserved at the filing date.