GameStop Corp. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 39 weeks ended October 29, 2011, not 2010 Q3 as indicated in the request metadata. The interim financial statements are unaudited. Amounts are in millions of dollars except per-share data.
Business context and reporting period
GameStop operated 6,627 stores across the United States, Canada, Australia and Europe, alongside e-commerce, digital gaming and related businesses. The company sells new and used video game hardware and software, digital products, accessories and other merchandise. Results are seasonal, with the largest portion of sales and operating profit typically in the fourth quarter.
Financial performance and liquidity
| Metric | 13 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 29, 2011 | Prior comparable period |
|---|---|---|---|
| Sales | $1,946.8 | $5,971.9 | $1,899.2 / $5,780.9 |
| Gross profit; gross margin | $572.9; 29.4% | $1,736.3; 29.1% | $546.3; 28.8% / $1,633.9; 28.3% |
| Operating earnings | $82.6 | $267.4 | $92.8 / $286.9 |
| Net income attributable to GameStop | $53.9 | $165.2 | $54.7 / $170.2 |
| Diluted EPS | $0.39 | $1.16 | $0.36 / $1.10 |
- For the 39-week period, operating cash flow was $211.0, versus cash used of $84.3 a year earlier. Investing activities used $162.8 and financing activities used $327.6. Cash declined by $268.2 to $442.6.
- At October 29, cash was $442.6, current assets $2,436.1 and current liabilities $2,298.8. Merchandise inventory was $1,778.3.
- Debt included $124.7 net current senior notes payable, with no long-term debt and no revolver borrowings. A $400 million asset-based revolver remained available subject to borrowing-base and covenant conditions; $8.8 of letters of credit was outstanding. The company reported covenant compliance.
- The company repurchased $194.9 of stock and retired $125.0 principal of senior notes during the 39 weeks. The filing reports $180.1 remaining under the February authorization at period-end.
Material changes versus prior comparable periods
- Third-quarter sales rose 2.5%, but comparable-store sales declined 0.6%; management attributed reported growth partly to foreign exchange and additional stores. Third-quarter operating earnings fell 11.0% and net income fell 1.1%.
- Year-to-date sales rose 3.3%, while comparable-store sales declined 1.2%. Operating earnings decreased 6.8% and net income decreased 2.8%.
- Gross margin improved year over year in both periods, aided by used products and higher-margin digital and other products. Used-product gross margin declined modestly amid trade-credit promotions.
- SG&A grew faster than sales, increasing to 22.8% of sales in Q3 from 21.5%, and to 22.2% year to date from 21.1%. Management cited digital and loyalty investment, foreign exchange and fixed-cost deleveraging.
- Operating cash flow improved mainly because working-capital cash use was lower, including lower inventory purchases and related payable effects; cash flow remains sensitive to seasonal inventory and working-capital movements.
Outlook, commentary, risks and unusual items
- Management projected approximately 280 store openings in fiscal 2011; 197 had opened in the first 39 weeks. Fiscal 2011 capital expenditures were projected at approximately $170 million, mainly for stores, remodels, digital and loyalty initiatives, distribution and information systems.
- Management believed cash, operating cash generation and revolver availability would fund operations and planned investments for at least the next 12 months. It cautioned that year-to-date results are not indicative of full-year results because of seasonality.
- On November 15, 2011, the board approved a new $500 million authorization for share repurchases and/or debt retirement, replacing the prior authorization. The company also gave notice it would redeem the remaining $125 million of senior notes on December 16, 2011 at par plus accrued interest. By November 23, it had purchased an additional 2.0 million shares at an average $22.38.
- Key risks identified include competition from digital distribution and alternate gaming formats, mobile/social/browser gaming, economic and retail conditions, supplier and product-release dependence, international operations, execution of store expansion and digital initiatives, acquisitions, litigation and regulatory compliance.
- Foreign-exchange contracts were not designated as hedges. Management disclosed that a hypothetical 10% move in underlying exchange rates would change their value by approximately $22.4 million in either direction. Derivative and related currency remeasurement effects largely offset in the reported periods.
- Ordinary-course litigation includes wage-and-hour class actions; management did not expect existing matters, individually or collectively, to materially adversely affect financial condition, results or liquidity. The filing reports no material developments in previously reported cases during the quarter.
Most important facts for investors to verify
- Confirm the reporting-period mismatch: this filing covers the quarter ended October 29, 2011, rather than 2010 Q3.
- Track comparable-store sales and operating performance separately from growth attributable to currency movements and store openings.
- Assess whether digital and loyalty investments can generate returns sufficient to offset higher SG&A and continued margin pressure in used products.
- Verify completion and funding of the announced December 2011 senior-note redemption and subsequent share repurchases.
- Review holiday-season inventory, working-capital needs, revolver availability and the impact of the company’s seasonal sales concentration.
- Consider the cited competitive, foreign-exchange, litigation and execution risks, and consult the full Form 10-K risk factors referenced in the filing.