GameStop Corp. — Form 10-Q Summary
Period: Fiscal first quarter, 13 weeks ended May 2, 2015; comparisons are with the 13 weeks ended May 3, 2014. The request metadata says 2014 Q1, but the filing itself covers 2015 Q1. Unaudited results.
Business context
GameStop operated 6,715 stores across its video-game and Technology Brands businesses, including Spring Mobile, Cricket Wireless and Simply Mac, alongside e-commerce and digital operations.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $2,060.6 million | $1,996.3 million | +3.2% |
| Gross profit / margin | $639.0 million / 31.0% | $626.4 million / 31.4% | Profit +2.0%; margin down 0.4 points |
| Operating earnings / margin | $123.9 million / 6.0% | $105.9 million / 5.3% | +17.0% |
| Net income | $73.8 million | $68.0 million | +8.5% |
| Diluted EPS | $0.68 | $0.59 | Up $0.09 |
Net sales rose despite a $97.6 million adverse foreign-exchange impact. Comparable store sales increased 8.6%. New video game software sales grew 9.6% and mobile/consumer electronics sales grew 33.9%; digital sales declined 18.0%. Technology Brands sales increased $42.0 million year over year, while that segment’s operating earnings declined $2.9 million to $3.1 million.
Gross margin pressure reflected lower margins on next-generation hardware and lower warranty sales. The overall gross margin declined even as higher-margin Technology Brands, digital content and other product categories supported gross profit dollars. Interest expense rose to $5.6 million from $0.8 million, primarily due to the $350 million 5.50% senior notes issued in 2014.
Cash flow, liquidity and debt
- Operating cash flow was negative $128.6 million, versus negative $277.2 million a year earlier; the filing attributes the improvement mainly to lower working-capital cash use, including inventory and taxes.
- Investing cash flow was negative $38.2 million, including $27.8 million in property and equipment purchases and $10.9 million for acquisitions.
- Financing cash flow was negative $80.1 million, including $42.9 million of share repurchases and $38.8 million of dividends paid.
- Cash and equivalents were $369.8 million at May 2, 2015, down from $610.1 million at January 31, 2015.
- Debt included $350.0 million of long-term senior notes and $2.1 million current debt. The $400 million asset-based revolver had no borrowings and $391.7 million available; $8.3 million of standby letters of credit were outstanding. The company reported compliance with debt covenants.
- Management said cash, operating cash generation and revolver availability were expected to fund operations and planned investments and capital returns for at least the next 12 months.
Changes, outlook and notable items
- U.S. comparable sales rose 9.1%; Canada 12.4%; Australia 11.7%; Europe 3.4%. Foreign exchange significantly reduced reported international sales. Europe reported an operating loss of $5.1 million, improved from a $10.8 million loss.
- Management projected fiscal 2015 capital expenditures of approximately $150–170 million and planned to open or acquire approximately 450–550 Technology Brands stores. It expected Technology Brands expansion costs to continue weighing on second-quarter operating earnings. The filing gives no full-year revenue or earnings guidance.
- On June 2, 2015, after quarter-end, GameStop announced a proposed cash acquisition of Geeknet for approximately $140 million, subject to customary conditions and expected to close in fiscal Q2.
- The annual dividend was increased 9% to $1.44 per share; the board approved a $0.36 quarterly dividend payable in June, subject to the stated terms. The company repurchased 1.2 million shares during the quarter and 0.5 million more through June 2.
- Retail results are seasonal, with the largest portion of sales and operating profit generally occurring in the holiday quarter. Legal proceedings include ordinary-course wage-and-hour and consumer class actions; management did not expect them to have a material effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is for fiscal Q1 2015, not 2014.
- Track whether comparable-sales growth and software demand persist, and how hardware mix affects gross margins.
- Assess foreign-exchange effects and the continuing decline in digital sales.
- Monitor Technology Brands store growth, its profitability and the expected second-quarter expense impact.
- Review cash conversion and seasonal working-capital needs alongside capital spending, dividends, buybacks and the proposed Geeknet purchase.
- Check the final terms and completion of the Geeknet transaction, and any subsequent changes to liquidity or debt.