GameStop Corp. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended November 1, 2014, comparing with periods ended November 2, 2013. Although the request metadata says “2013 Q3,” the filing is for fiscal 2014 third quarter. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
GameStop operated 6,664 stores across its Video Game Brands and Technology Brands businesses. Technology Brands includes Simply Mac, Spring Mobile and Cricket Wireless. Results are seasonal, with the largest portion of sales and operating profit typically occurring in the fourth quarter. Management cautions that interim results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | 13 weeks ended Nov. 1, 2014 | 13 weeks ended Nov. 2, 2013 | 39 weeks ended Nov. 1, 2014 | 39 weeks ended Nov. 2, 2013 |
|---|---|---|---|---|
| Net sales | $2,092.2 million | $2,106.7 million | $5,819.9 million | $5,355.7 million |
| Gross profit / margin | $622.2 million / 29.7% | $598.4 million / 28.4% | $1,799.5 million / 30.9% | $1,658.1 million / 31.0% |
| Operating earnings | $89.8 million | $109.1 million | $232.4 million | $215.1 million |
| Net income | $56.4 million | $68.6 million | $149.0 million | $133.7 million |
| Diluted EPS | $0.50 | $0.58 | $1.30 | $1.12 |
| Operating cash flow | Not separately provided for the quarter | $36.6 million | $490.2 million |
For the 13-week period, sales fell 0.7% and net income fell 17.8% year over year. For the 39-week period, sales increased 8.7% and net income increased 11.4%. SG&A rose to $494.3 million in the quarter and $1,450.7 million year to date; SG&A was 23.6% and 24.9% of sales, respectively.
At November 1, 2014, cash and cash equivalents were $374.0 million, inventory was $1,714.4 million, total assets were $4,641.6 million and stockholders’ equity was $2,008.6 million. Total debt was $354.0 million, consisting primarily of $350.0 million in senior notes and $3.8 million current debt. The $400 million asset-based revolver had no borrowings outstanding and $391.6 million of availability; the company reported compliance with its requirements. Cash was $471.9 million a year earlier.
Year-to-date investing cash outflow was $175.7 million, including $106.5 million of capital expenditures and $70.4 million for acquisitions. Financing cash outflow was $22.7 million, including $257.9 million of share repurchases and $112.9 million of dividends, offset in part by the $350.0 million senior-note issuance.
Material changes versus the prior comparable period
- New console hardware sales increased 147.4% in the quarter and 113.5% year to date, reflecting PlayStation 4 and Xbox One launches. New software sales declined 34.4% in the quarter and 20.5% year to date, reflecting fewer major releases than in the prior year.
- Technology Brands contributed $85.3 million of quarterly sales and $9.9 million of operating earnings; year-to-date contributions were $215.5 million and $23.0 million. Acquisitions contributed to the growth in mobile and consumer electronics sales.
- Quarterly gross margin improved, supported by Technology Brands and higher pre-owned and value-product margins. Year-to-date gross margin slipped 0.1 percentage point as lower-margin new hardware represented a larger share of sales.
- Year-to-date operating cash flow decreased by $453.6 million. Management attributed the decline principally to working-capital movements, including timing differences in accounts payable and accrued liabilities associated with the prior-year console launch.
- Europe reported operating losses of $4.7 million for the quarter and $27.5 million year to date. GameStop exited Spain and recorded a $13.9 million pre-tax charge.
Outlook, commentary, risks and unusual items
- Management expects cash, operating cash generation, the senior-note proceeds and revolver availability to fund operations and planned capital allocation for at least the next 12 months. Fiscal 2014 capital expenditures were projected at approximately $150–$160 million, and the company expected to open or acquire approximately 300–350 stores in total during the year.
- On September 24, 2014, GameStop issued $350 million of unsecured 5.50% senior notes due October 1, 2019. Proceeds were used to repay the revolver and may support general corporate purposes, including acquisitions, dividends and repurchases.
- The board increased the annual dividend to $1.32 per share. It also authorized a new $500 million share-repurchase program on November 11, 2014, replacing the prior authorization. Through December 3, the company had repurchased 0.8 million additional shares at an average $41.15 per share.
- The Spain exit charge included inventory write-downs, severance and lease obligations; management said further shutdown charges might occur. The filing also reports ordinary-course wage-and-hour and consumer class-action matters, which management did not believe would materially affect financial condition, results or liquidity.
- Key risks include console and game-release demand, digital distribution and other changing consumer preferences, competition, reliance on suppliers and AT&T, integration and performance of acquisitions, foreign exchange and economic conditions, seasonality, cybersecurity, and restrictions under debt agreements. Management stated that the risk factors had not materially changed from its latest annual report.
- The company revised the timing for recognizing outstanding checks in prior-period presentations. The revision reduced reported November 2013 cash and current liabilities by $177.2 million and increased reported prior-year operating cash flow by $84.2 million; it did not change net income.
Important facts for investors to verify
- Confirm the reporting-period label: this is the quarter ended November 1, 2014, not 2013 Q3.
- Assess whether console-related hardware growth can be sustained and whether software, pre-owned and digital sales can offset weaker release cycles and digital-channel competition.
- Monitor Technology Brands’ acquired-store growth, margins, integration and dependence on AT&T, alongside continuing losses and exit costs in Europe.
- Review the causes and seasonality of the sharp year-to-date operating cash-flow decline, including inventory investment and payment timing.
- Track debt costs, revolver availability and covenants, as well as the cash requirements of dividends, acquisitions and the new repurchase authorization.