GameStop Corp. — Q2 FY2010 Form 10-Q
Reporting period: 13 weeks and 26 weeks ended July 31, 2010; comparisons are with the corresponding periods ended August 1, 2009. Financial amounts below are in U.S. dollars, rounded to millions unless stated otherwise.
Business context and reporting period
GameStop was a video game and PC entertainment retailer operating 6,549 stores across the United States, Canada, Australia and Europe, alongside e-commerce sites and Game Informer magazine. Results are seasonal, with a major portion of sales and operating profit typically generated in the holiday quarter; management cautioned that first-half results do not indicate full-year results.
Financial performance and liquidity
| Metric | Q2 FY2010 | Q2 FY2009 | First half FY2010 | First half FY2009 |
|---|---|---|---|---|
| Sales | $1,799.1 | $1,738.5 | $3,881.8 | $3,719.3 |
| Gross profit / margin | $516.8 / 28.7% | $495.4 / 28.5% | $1,087.6 / 28.0% | $1,037.5 / 27.9% |
| Operating earnings / margin | $69.6 / 3.9% | $71.0 / 4.1% | $194.1 / 5.0% | $199.4 / 5.4% |
| Net income attributable to GameStop | $40.3 | $38.7 | $115.5 | $109.1 |
| Diluted earnings per share | $0.26 | $0.23 | $0.74 | $0.65 |
- Q2 sales rose 3.5%, while operating earnings fell 2.0% and GameStop-attributable net income increased 2.8%. First-half sales grew 4.4%, operating earnings declined 2.7%, and consolidated net income rose 5.1%.
- Q2 comparable-store sales increased 0.9%; first-half comparable-store sales declined 0.4%. New software sales were a key growth driver. In the first half, new hardware sales fell 5.0%, while new software sales increased 9.7%.
- SG&A increased 5.2% in Q2 and 6.3% in the first half, outpacing sales growth. Management cited store expansion and spending on digital and customer-loyalty initiatives. Q2 SG&A was 22.5% of sales versus 22.1%; first-half SG&A was 20.8% versus 20.4%.
- For the 26 weeks, operating cash flow was negative $291.2, versus negative $260.8 a year earlier; investing cash flow was negative $89.5, versus negative $91.9. Financing cash flow was negative $243.1, primarily reflecting $241.6 of treasury-share purchases.
- Cash and cash equivalents were $289.3 at July 31, down from $905.4 at January 30, 2010 and up from $197.9 a year earlier. Inventory was $1,129.5; current assets were $1,585.8 and current liabilities $1,154.4.
- Long-term senior notes had a $447.8 carrying value, representing approximately $450 of principal, and bore interest at 8.0%; the notes mature October 1, 2012. No revolver borrowings were outstanding; $8.4 of letters of credit were outstanding under the $400 revolver. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Growth in stores and new releases supported revenue, but comparable-store trends varied by region. Europe reported an operating loss of $7.6 for the first half, compared with $0.5 of operating income a year earlier; management cited weak traffic, macroeconomic pressure and lower hardware price points. Australia also reported lower operating earnings. U.S. segment operating earnings increased.
- Management expected to open approximately 400 stores in FY2010; 160 had opened in the first half. FY2010 capital expenditures were projected at approximately $200, primarily for stores, distribution and information systems. Approximately $100 was allocated for acquisitions supporting e-commerce and digital initiatives.
- Management believed cash, operating cash generation and revolver availability would fund operations, debt payments and planned investment for at least 12 months. This outlook is subject to seasonal cash needs and the risk factors identified in the filing.
- Digital delivery and alternative software distribution, supplier availability and release schedules, competition, economic conditions, international operations, and execution of store openings and acquisitions were identified as risks. Management noted ongoing investment in e-commerce, digital distribution and loyalty initiatives.
- After quarter-end, GameStop acquired online social-gaming company Kongregate; management expected the transaction to be immaterial to consolidated financial statements.
- A wrongful-death lawsuit was on appeal before the Alabama Supreme Court after summary judgment for defendants. The company said a possible loss, if the appeal succeeds, could not be estimated. Management did not expect other ordinary-course legal matters to have a material adverse effect. Uncertain tax positions could change, but the company could not estimate the possible range.
- Foreign-currency contracts were not designated as hedges. The company reported a $11.2 net fair-value asset and a hypothetical 10% currency-rate move would change contract value by approximately $26.0 in either direction. The contracts produced a Q2 loss of $7.8 and a first-half gain of $4.1.
Most important facts for investors to verify
- Whether improving quarterly comparable-store sales and software demand continued, particularly given the first-half decline and weakness outside the U.S.
- Whether SG&A growth, store openings and digital investments translate into operating-earnings improvement and returns on capital.
- Seasonal working-capital requirements, operating cash flow and cash levels after substantial first-half share repurchases.
- Senior-note repayment and refinancing plans ahead of the October 2012 maturity, along with revolver availability and covenant constraints.
- Updates on the Alabama appeal, uncertain tax positions, currency exposures and the integration or performance of Kongregate.