GameStop Corp. — Form 10-K Summary
Business context and reporting period
This is an annual report for fiscal 2017, the 53 weeks ended February 3, 2018—not a standalone 2016 fourth-quarter filing. Fiscal 2016 was the 52 weeks ended January 28, 2017. GameStop operated 7,276 stores across its Video Game Brands and Technology Brands businesses. The filing also reports fourth-quarter results separately.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $9,224.6 million | $8,607.9 million |
| Gross profit / margin | $3,040.1 million / 33.0% | $3,009.3 million / 35.0% |
| Operating earnings | $135.6 million | $557.7 million |
| Net income | $34.7 million | $353.2 million |
| Diluted EPS | $0.34 | $3.40 |
| Cash from operations | $434.9 million | $537.1 million |
- Fourth quarter: Sales were $3,502.5 million versus $3,045.4 million; operating loss was $96.7 million versus earnings of $286.6 million; net loss was $105.9 million versus income of $208.7 million. FY2017 fourth-quarter results included $390.8 million of impairment charges.
- Cash and liquidity: Cash and equivalents were $864.4 million at year-end, including $357.1 million held in foreign operations that management said might not be immediately available in the U.S. The company reported $412.6 million of revolver availability and no revolver borrowings outstanding.
- Debt: Net long-term debt was $817.9 million, representing $825 million principal of senior notes: $350 million at 5.50% due October 2019 and $475 million at 6.75% due March 2021.
- Balance sheet: Working capital was $623.1 million; current assets were $2,538.7 million and current liabilities were $1,915.6 million.
- Capital returns: The company paid $155.2 million in dividends in FY2017, or $1.52 per share, and declared a $0.38 quarterly dividend for March 2018. No shares were repurchased during FY2017.
Changes versus the prior comparable period
- Sales rose 7.2%, but the 53rd week contributed approximately $142.6 million and favorable foreign exchange contributed $104.6 million. Comparable sales increased 5.8%, compared with an 11.0% decline in FY2016.
- Growth was led by new hardware (+28.3%), collectibles (+28.8%) and accessories (+15.9%), with the Nintendo Switch launch a key factor. Pre-owned and value product sales declined 4.6%.
- Gross margin fell 2.0 percentage points to 33.0%, reflecting mix shifts and weaker margins in hardware, software, pre-owned products, accessories and collectibles.
- Net income fell 90.2%. Operating results absorbed $390.8 million of goodwill and asset impairment charges, primarily involving Technology Brands dealer agreements and goodwill; operating earnings excluding the impairments are not presented here as a company-reported measure.
- Technology Brands reported a $315.7 million operating loss, versus $44.2 million of operating earnings in FY2016. Its comparable-store gross profit declined 13.1%, amid a slower wireless upgrade cycle and changes in AT&T commissions.
- Operating cash flow decreased $102.2 million, attributed primarily to vendor-payment timing and lower earnings. Investing cash use eased substantially, partly because acquisitions were lower and the company received proceeds from divestitures.
Outlook, commentary, risks and unusual items
- Management expected existing cash, operating cash flow and revolver availability to fund operations and planned capital allocation for at least the next 12 months. FY2018 capital expenditures were projected at approximately $110–$120 million, mainly for store remodels and distribution and information systems. No specific revenue or earnings guidance is provided in the filing.
- The company sold Kongregate in July 2017 for $54.7 million net of transaction costs and recorded a $6.4 million gain; it sold 63 Cricket stores in January 2018 for $3.8 million.
- The French Tax Administration issued a collection notice of approximately €80 million concerning disputed deductions for fiscal years 2008–2013. GameStop is contesting the assessments, recorded no reserve, and warned that an adverse outcome could materially affect income tax expense. Further reassessments may follow.
- The Tax Act produced a provisional $42.0 million net tax expense in FY2017; the company said its analysis was incomplete and the estimate could change.
- Key risks include the shift toward digital game distribution, pressure on physical and pre-owned sales, product-release and console-cycle volatility, intense retail competition, reliance on major vendors and the AT&T relationship, and sensitivity of impairments to future forecasts. The filing also describes a recent CEO transition: Michael Mauler became CEO on February 4, 2018, following an interim CEO appointment and other senior-management departures.
- The board declared the regular $0.38 quarterly dividend, but future dividends remain subject to board approval, financial conditions and debt restrictions. The company reported compliance with its debt covenants at year-end.
Important facts for investors to verify
- Whether the $390.8 million impairment and the Technology Brands outlook indicate further impairment or profitability risk.
- Underlying sales, comparable-store trends and margins after accounting for the extra fiscal week, foreign exchange and Switch-driven demand.
- Progress in stabilizing AT&T-related commissions and Technology Brands comparable-store gross profit.
- The outcome and potential financial effect of the French tax dispute, including any subsequent reassessments.
- Debt maturities, covenant headroom, dividend capacity and the availability of foreign-held cash.
- Final tax effects of the Tax Act and the impact of the new revenue and lease accounting standards.