GameStop Corp. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 weeks ended May 2, 2020 (fiscal 2020 first quarter), not 2019 Q1 as stated in the request metadata. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
GameStop operated more than 5,300 stores across 14 countries, alongside e-commerce and Game Informer. Its four geographic segments were the United States, Canada, Australia and Europe. The quarter was heavily affected by COVID-19: stores in the U.S., Canada, Europe and New Zealand were temporarily closed to customer access, while many locations continued curbside pickup, ship-from-store or e-commerce service. Australian stores remained open. The company also cited the approaching end of the PlayStation 4/Xbox One console cycle; next-generation consoles were expected to launch in holiday 2020.
Financial performance
| Metric | 13 weeks ended May 2, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $1,021.0 | $1,547.7 |
| Gross profit / margin | $282.4 / 27.7% | $471.2 / 30.4% |
| Operating earnings (loss) | $(108.0) | $17.5 |
| Net income (loss) | $(165.7) | $6.8 |
| Diluted earnings (loss) per share | $(2.57) | $0.07 |
| Cash used in operating activities | $49.3 | $665.0 |
Sales fell 34.0%. Comparable sales declined 17.2% excluding stores closed for at least 14 days without curbside service; including the impact of those closures, comparable sales declined 30.4%. Hardware and accessories sales were $513.1 million, software $417.0 million and collectibles $90.9 million. Gross margin fell 2.7 percentage points, primarily because of a greater mix of lower-margin new hardware. SG&A declined 14.8% to $386.5 million, reflecting GameStop Reboot cost savings and lower payroll and variable costs during closures. The quarter included $3.9 million in asset impairments and a $53.0 million valuation allowance on U.S. and state deferred tax assets; income tax expense was $50.4 million despite the pretax loss.
Operating cash use improved by $615.7 million year over year, primarily due to inventory and accounts-payable management. Investing cash use was $6.1 million, while financing provided $131.9 million, principally from a net $135.0 million revolver draw. Cash and cash equivalents were $570.3 million at quarter-end; cash, cash equivalents and restricted cash totaled $583.9 million. Capital spending was $6.6 million.
Balance sheet, debt and liquidity
At May 2, 2020, total assets were $2,469.0 million and stockholders’ equity was $435.0 million. Inventory was $654.7 million, down from $1,149.1 million a year earlier. The $418.4 million principal amount of 6.75% senior notes due March 2021 was classified as current debt, with a net carrying value of $417.2 million. Revolver borrowings were $135.0 million; after outstanding letters of credit, disclosed availability after the facility’s availability reduction was only $4.8 million. The company said it was compliant with the revolver’s financial requirements and reported an additional $35.0 million revolver repayment after quarter-end, leaving $100.0 million outstanding as of June 3. Operating lease liabilities totaled $743.3 million on a present-value basis.
Management stated that cash, operating cash flows and revolver funds were expected to provide adequate liquidity for the next 12 months and foreseeable future. This assessment should be considered alongside the limited reported revolver availability and the upcoming 2021 note maturity. The company also said it had no material off-balance-sheet arrangements.
Material changes, outlook and risks
- COVID-19 closures and reduced customer traffic drove substantial sales declines in the U.S., Canada and Europe. Segment sales changed by -33.5%, -45.3% and -53.5%, respectively; Australia sales increased 11.9% in U.S. dollars, while foreign exchange reduced Australian sales by $14.6 million.
- Management expected COVID-19 effects to continue through the majority of the second fiscal quarter and anticipated material impacts to operations and results for the foreseeable future. It cited risks from prolonged closures, weaker discretionary spending, supply-chain disruption and uncertain economic conditions. No numerical earnings or sales guidance was provided.
- Cost and cash measures included executive salary reductions of 30%–50%, a 50% temporary reduction in director cash compensation, pay reductions of 10%–30% for certain employees, reduced inventory receipts and lower capital spending. Rent concessions received during the quarter were immaterial; negotiations with landlords were ongoing.
- On June 5, 2020, after quarter-end, GameStop launched an offer to exchange up to $414.6 million of 2021 notes for 10.0% senior secured notes due 2023. The offer was subject to conditions and would add secured debt at a higher interest rate; completion was not assured in the filing.
- The corporate aircraft was classified as held for sale at an estimated $9.1 million fair value, less selling costs, and was sold June 5 for $8.6 million net of costs. Store-level impairments were $1.2 million. The company was evaluating possible dispositions or wind-downs of certain unprofitable international operations, with potential charges then expected to be immaterial.
- The company reported that existing legal proceedings were not expected to have a material effect. It identified significant risks including COVID-19, industry cyclicality, digital substitution, console-cycle timing, supplier and lease conditions, and consumer spending. Disclosure controls were assessed as effective as of May 2, 2020.
Important facts for investors to verify
- Confirm the correct reporting period: the filing covers fiscal 2020 Q1, ended May 2, 2020.
- Track store reopening, customer traffic, comparable sales and the duration of COVID-19 impacts, including the distinction between the two comparable-sales measures.
- Monitor cash burn, working-capital changes and actual revolver availability; the filing reported just $4.8 million of availability after the stated reduction at quarter-end.
- Verify the outcome and terms of the 2021 note exchange offer, remaining debt maturities, and any subsequent borrowing or repayment activity.
- Assess whether margins and sales recover as new consoles launch, and whether the company can sustain cost reductions without impairing operations.
- Review the realizability of deferred tax assets and the potential financial effects of store closures, lease concessions or international restructuring.