GameStop Corp. — Form 10-K Summary
Period: Fiscal year ended January 30, 2016 (52 weeks), filed March 28, 2016. This is an annual report, not a filing for fiscal 2014 Q4; the filing also provides unaudited fourth-quarter figures. GameStop operated 7,117 stores across its video-game, wireless, Apple-reseller and collectibles businesses.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $9,363.8 million | $9,296.0 million |
| Gross profit / margin | $2,918.3 million / 31.2% | $2,775.9 million / 29.9% |
| Operating earnings / margin | $648.2 million / 6.9% | $618.3 million / 6.6% |
| Net income | $402.8 million | $393.1 million |
| Diluted earnings per share | $3.78 | $3.47 |
| Cash from operations | $656.8 million | $480.5 million |
| Cash and cash equivalents at year-end | $450.4 million | $610.1 million |
| Total debt at year-end | $350.4 million | $355.7 million |
| Working capital | $144.4 million | $422.8 million |
Operating cash flow improved mainly because of working-capital timing, particularly income taxes, accounts payable and accrued liabilities. Investing cash outflow was $444.6 million, including $267.5 million for acquisitions and $173.2 million in capital expenditures. Financing cash outflow was $346.2 million, principally share repurchases and dividends. Cash declined by $159.7 million during the year.
Fourth-quarter sales were $3,525.0 million versus $3,476.1 million a year earlier; operating earnings were $381.9 million versus $385.9 million, and net income was $247.8 million versus $244.1 million. The fourth quarter generated approximately 38% of FY2015 sales.
Material changes versus FY2014
- Sales increased 0.7%, while comparable sales rose 4.3%; foreign-exchange movements reduced sales by $430.2 million.
- Gross margin expanded 1.3 percentage points. Technology Brands and collectibles supported gross-profit growth; higher SG&A, including Technology Brands growth and ThinkGeek-related costs, partly offset it.
- Sales mix shifted: mobile and consumer electronics rose 25.8% and other products rose 48.7%, while new software fell 6.0%, digital fell 12.9%, and hardware fell 4.1%.
- Technology Brands sales rose 62.5% to $534.0 million, but segment operating earnings declined 17.9% to $27.0 million, reflecting store-opening delays and expansion costs.
- GameStop acquired ThinkGeek for $126.0 million net of acquired cash and acquired additional wireless and Apple resellers. It opened or acquired 568 Technology Brands stores during the year.
Liquidity, debt and capital allocation
At year-end, GameStop had $450.4 million in cash and $391.6 million of available borrowing capacity under its $400 million asset-based revolver, with no revolver borrowings outstanding. Management said these resources and expected operating cash flow were sufficient for at least the next 12 months. The company had $350.0 million of 5.50% senior notes due 2019; the remaining $0.4 million of reported total debt was current notes payable.
In March 2016, after year-end, the company issued $475.0 million of 6.75% senior notes due 2021. Proceeds were intended for general corporate purposes, potentially including acquisitions, dividends and share repurchases. FY2015 dividends totaled $154.1 million ($1.44 per share); the board later authorized an annual rate of $1.48. The company repurchased 5.2 million shares for $202.0 million and had $245.3 million remaining under its authorization.
Outlook, risks and unusual items
- Management targeted at least 50% of operating earnings from sources other than physical gaming by fiscal 2019, and planned approximately 140 store openings and 200 Video Game Brands store closures in fiscal 2016. Projected FY2016 capital expenditures were $160–170 million; these are plans, not earnings guidance.
- Key business risks include digital game distribution and changing consumer preferences, the cyclical console market, dependence on major suppliers, and reliance on AT&T for Technology Brands growth. Holiday seasonality is significant.
- Technology Brands expansion diversifies revenue but carries higher operating costs; the segment’s earnings fell despite sales growth. GameStop also faces foreign-exchange exposure and substantial operating-lease commitments.
- French tax authorities asserted a potential additional tax charge of approximately €23.0 million for certain deductions. GameStop is contesting the reassessment, has not recorded a reserve, and warns additional assessments may follow; an adverse outcome could materially affect tax expense.
- FY2015 included $4.6 million of asset impairment charges and $5.2 million of derivative fair-value losses, partly offset by remeasurement gains. No goodwill impairment was recorded; annual testing found reporting-unit fair values at least 50% above carrying values.
Important facts for investors to verify
- Whether higher comparable sales and gross margins can continue as software and digital sales decline and the console cycle matures.
- Whether Technology Brands acquisitions and store expansion translate into improved operating earnings and returns on invested capital.
- The outcome and potential exposure from the French tax reassessment and related audits.
- The use of proceeds from the $475 million 2021 notes, resulting interest burden, and effects on leverage, dividends and repurchases.
- Liquidity after seasonal working-capital movements, foreign-held cash, acquisitions, lease obligations and shareholder returns.