Gamestop Corp. quarterly report, Q2 FY2015

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GameStop Corp. — Form 10-Q Summary

Period clarification: The request identifies 2014 Q2, but this filing reports the 13 weeks ended August 1, 2015, and the 26 weeks ended August 1, 2015. Comparisons are with the corresponding 2014 periods. Amounts are in millions of dollars unless stated otherwise.

Business context and reporting period

GameStop operates video game retail and e-commerce businesses across the U.S., Canada, Australia and Europe, plus Technology Brands businesses including AT&T/Cricket wireless resellers and Simply Mac. At quarter-end it reported 6,133 Video Game Brands stores and 731 Technology Brands stores. The filing notes that results are seasonal, with most sales and operating profit typically generated in the holiday quarter.

Financial performance

  • Second quarter: Revenue was $1,761.9, up 1.8%; gross profit was $580.5, up 5.4%, and gross margin rose to 32.9% from 31.8%. Operating earnings increased 40.9% to $51.7. Net income rose 2.8% to $25.3; diluted EPS was $0.24 versus $0.22.
  • First half: Revenue was $3,822.5, up 2.5%; gross profit increased 3.6% to $1,219.5, with gross margin of 31.9% versus 31.6%. Operating earnings rose 23.1% to $175.6; net income increased 7.0% to $99.1. Diluted EPS was $0.92 versus $0.80.
  • Revenue mix: First-half mobile and consumer electronics sales grew 30.2% to $279.0, and “other” sales grew 16.3% to $191.0. Digital sales fell 19.2% to $87.6; pre-owned and value products declined 1.5% to $1,143.2. Accessory sales grew 9.4% to $276.3.
  • Cash flow: First-half operating cash flow was a use of $23.0, compared with a use of $275.3 a year earlier. Investing cash outflow was $273.5, including acquisitions and $75.8 of property and equipment purchases. Financing cash outflow was $166.1. Cash fell from $610.1 at January 31, 2015, to $136.2 at August 1, 2015.
  • Liquidity and debt: Current assets were $1,501.6 and current liabilities $1,344.5. The company reported $350.0 of 5.50% senior notes due 2019 and $11.0 of revolver borrowings; revolver availability was $328.2. Management said it was in compliance with debt covenants.
  • Capital returns: First-half dividends paid were $77.2 and share repurchases totaled $104.1 in cash. The quarterly dividend was increased to $0.36 per share, or $1.44 annualized, subject to future board approval.

Material changes and management commentary

  • Comparable-store sales increased 8.1% in the quarter and 8.4% in the first half. Reported sales growth was partly offset by foreign-exchange effects, which reduced revenue by $97.3 in the quarter and $194.9 in the first half.
  • GameStop acquired Geeknet on July 17, 2015, for $126.0 net of acquired cash, expanding its collectibles and ThinkGeek business. The filing recorded $5.6 of Geeknet transaction costs in second-quarter SG&A; purchase-price allocations remained preliminary. Technology Brands acquisitions during the first half cost a combined $74.0 net of acquired cash.
  • Technology Brands growth lifted sales but increased operating costs; its operating earnings were $3.6 for the first half, down from $13.1. Europe remained loss-making, with a first-half operating loss of $12.2, although losses narrowed year over year.
  • Interest expense increased following issuance of $350.0 in senior notes in September 2014. The first-half effective tax rate rose to 39.8% from 34.3%, partly due to nondeductible Geeknet acquisition costs and the geographic mix of earnings.

Outlook, risks and contingencies

  • Management expected available cash, operating cash generation and revolver capacity to fund operations, investments, acquisitions, dividends and repurchases for at least 12 months.
  • Fiscal 2015 capital expenditures were projected at approximately $150–$170. GameStop said it was on track to open or acquire approximately 450–550 Technology Brands stores during fiscal 2015; it had opened or acquired a net 247 in the first half.
  • Management cited ongoing investment in Technology Brands, digital initiatives, store openings and remodels. It gave no specific revenue or earnings guidance in the provided filing text.
  • Key disclosed risks include foreign-exchange exposure, seasonal retail performance, changing console and digital gaming markets, acquisition execution and integration, and product-safety, recall or product-liability matters. Ordinary-course legal proceedings were not expected by management to materially affect financial condition, results or liquidity.
  • Foreign currency translation reduced other comprehensive income by $30.0 in the first half. The filing reported no significant asset impairment charges in the first half.

Important facts for investors to verify

  • Confirm the reporting period: this is the 2015 second-quarter filing, not 2014 Q2.
  • Assess whether revenue and earnings growth can continue after adjusting for foreign exchange, acquisitions and the one-time Geeknet costs.
  • Track cash conversion and liquidity: operating cash flow remained negative, while cash declined materially amid acquisitions, capital spending, dividends and repurchases.
  • Evaluate whether Technology Brands expansion can improve profitability and whether Geeknet’s preliminary purchase accounting and integration perform as expected.
  • Monitor digital and pre-owned sales trends, foreign-exchange effects, revolver availability and compliance with capital-allocation restrictions.