GameStop Corp. — Form 10-K Summary
Reporting period: The filing covers fiscal 2018, the 52 weeks ended February 2, 2019, and was filed April 2, 2019. Although the request identifies “2017 Q4,” this is an annual report for fiscal 2018, not a quarterly filing. Fiscal 2017 had 53 weeks, versus 52 weeks in fiscal 2018, affecting year-over-year comparisons. Unless noted, results below are continuing operations; Spring Mobile is reported as discontinued operations.
Business context
GameStop operated 5,830 stores across 14 countries, alongside e-commerce, Game Informer, ThinkGeek and Simply Mac. Its principal categories were video game hardware, software, pre-owned products, accessories, digital products and collectibles. On January 16, 2019, it sold Spring Mobile, its AT&T-branded wireless retail business, for net cash proceeds of $727.9 million.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Net sales | $8,285.3 million | $8,547.1 million |
| Gross profit / margin | $2,308.1 million / 27.9% | $2,484.9 million / 29.1% |
| Operating income (loss) | ($702.0) million | $439.2 million |
| Net income (loss) from continuing operations | ($794.8) million | $230.4 million |
| Net income (loss), including discontinued operations | ($673.0) million | $34.7 million |
| Diluted earnings (loss) per share | ($6.59) | $0.34 |
| Cash provided by operating activities | $325.1 million | $434.9 million |
| Capital expenditures | $93.7 million | $113.4 million |
| Cash and cash equivalents at year-end | $1,624.4 million | $854.2 million |
| Total debt, net | $820.8 million | $817.9 million |
| Working capital | $946.6 million | $478.4 million |
- The $970.7 million goodwill impairment and $45.2 million of asset impairments drove the reported operating loss. Goodwill impairments reflected a sustained decline in market capitalization and lower forecast cash flows.
- Sales fell 3.1%; comparable store sales declined 0.3%. The prior year included an extra fiscal week, which contributed approximately $132.7 million of sales.
- Fiscal 2018 discontinued-operations income was $121.8 million, including a $100.8 million Spring Mobile sale gain ($65.4 million after tax). Fiscal 2017 discontinued operations included substantial impairment charges.
- Year-end cash included $288.6 million held in foreign operations that the company said might not be immediately available for U.S. use. The company reported $385.1 million of availability under its $420 million revolving credit facility, with no borrowings outstanding at year-end.
- Debt included $350 million of 5.50% notes due October 2019 and $475 million of 6.75% notes due March 2021. After year-end, GameStop announced redemption of the 2019 notes on April 4, 2019, using cash on hand.
Material changes versus the prior comparable period
- Sales of pre-owned and value products decreased 13.2% to $1,866.3 million; new software sales fell 5.1% to $2,449.7 million. Management attributed weakness to fewer new releases, declining digital demand for pre-owned products and lower promotional activity.
- Accessory sales rose 22.0% to $956.5 million, and collectibles increased 11.2% to $707.5 million, partially offsetting category declines.
- Pre-owned gross margin fell to 43.4% from 45.5%; new software gross margin fell to 21.5% from 22.9%. Overall gross margin contracted 1.2 percentage points.
- Operating cash flow declined $109.8 million, primarily due to lower earnings after noncash adjustments. Investing cash flow was $635.5 million, boosted by Spring Mobile sale proceeds.
- Fiscal 2018 included a $30.3 million income tax expense charge to settle the French tax dispute covering fiscal years 2008–2018.
Outlook, risks and unusual items
- Management gave no quantified sales or earnings guidance in the supplied filing text. It stated that cash, operating cash flows and revolving-credit availability were expected to fund operations, capital expenditures and capital-allocation plans for at least the next 12 months.
- The board ended its review of strategic alternatives, including a potential company sale, in January 2019. In March 2019 it authorized up to $300 million in share repurchases and approved a quarterly dividend of $0.38 per share. Future dividends remain subject to board approval and financing restrictions.
- Management highlighted digital distribution and downloadable content as risks to physical and pre-owned sales, as well as console-cycle uncertainty, competition, weaker game-release schedules, consumer spending, foreign exchange and dependence on vendor support.
- Seasonality is significant: approximately 37% of fiscal 2018 sales occurred in the fourth quarter. Store closures and lease obligations are also relevant; 2,004 store leases were scheduled to expire during fiscal 2019.
- Disclosure controls and internal control over financial reporting were deemed ineffective because of material weaknesses involving end-user and privileged access to certain IT systems supporting financial reporting. The auditor issued an adverse opinion on internal controls, while issuing an unqualified opinion on the financial statements. Management targeted remediation by the end of fiscal 2019; successful remediation was not assured.
- The company adopted the new revenue recognition standard in fiscal 2018. It reported that adoption increased net sales by $44.6 million and continuing-operations income by $3.3 million versus the prior standard for the year.
- Leases were operating leases under the accounting applied in this report. GameStop estimated that adoption of the new lease standard in fiscal 2019 would recognize an initial right-of-use asset and lease liability of approximately $850 million.
Important facts for investors to verify
- Whether sales, comparable-store trends and margins stabilize, particularly in pre-owned products and software, and whether growth in accessories and collectibles can offset declines.
- Whether the company remediated the IT-access control weaknesses on schedule and whether subsequent reports or audits identify further control issues.
- The cash impact of redeeming the 2019 notes, subsequent debt levels, and the company’s capacity to maintain dividends and execute the $300 million repurchase authorization.
- Whether the Spring Mobile sale proceeds and reported liquidity translate into sustainable operating cash flow, given that the sale proceeds are nonrecurring.
- Future impairment exposure: remaining goodwill was $363.9 million, and management noted that a 10% decrease in projected U.S. segment cash flows could produce approximately $50 million of additional impairment.
- Developments in the French tax settlement and other tax uncertainties, as well as lease obligations and store-closure costs.