GameStop Corp. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the 13 weeks ended May 1, 2021, compared with the 13 weeks ended May 2, 2020. The request metadata says “2020 Q1,” but the filing covers 2021 Q1.
Business context
GameStop operates specialty retail and e-commerce businesses across the United States, Canada, Australia and Europe. The quarter reflected continued COVID-19 disruption in some locations, alongside demand for newly launched console hardware. Management describes a strategy to optimize the core business and transform GameStop through technology, improved customer experience, expanded product categories and fulfillment improvements.
Financial results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $1,276.8 million | $1,021.0 million |
| Gross profit / margin | $330.1 million / 25.9% | $282.4 million / 27.7% |
| SG&A | $370.3 million | $386.5 million |
| Operating loss | $40.8 million | $108.0 million |
| Net loss | $66.8 million | $165.7 million |
| Net loss per diluted share | $1.01 | $2.57 |
| Cash used in operating activities | $18.8 million | $49.3 million |
Sales rose 25.1%. Hardware and accessories increased to $703.5 million from $513.1 million, collectibles to $175.4 million from $90.9 million, while software declined to $397.9 million from $417.0 million. Management attributed growth mainly to new console launches, continued Nintendo product demand and higher store traffic versus the prior-year period, when pandemic closures began. Gross margin fell 1.8 percentage points, which management attributed primarily to a sales mix shift toward lower-margin new hardware and higher freight and card fees associated with e-commerce.
SG&A declined 4.2%, reflecting lower store payroll and occupancy costs and store closures, partly offset by $13.2 million of higher transformation-related costs. Operating loss improved, but net loss included $17.8 million of make-whole premium expense on early redemption of the 2023 Senior Notes. Income tax expense was $1.3 million versus $50.4 million a year earlier; the company said it did not recognize tax benefits on current-period losses because of valuation allowances.
Cash, debt and liquidity
At May 1, 2021, cash and cash equivalents were $694.7 million, restricted cash was $76.1 million, and total assets were $2,562.7 million. Cash, cash equivalents and restricted cash increased $135.8 million during the quarter. Investing activities used $14.7 million, primarily reflecting capital expenditures.
GameStop raised $551.7 million net by issuing 3.5 million shares through its at-the-market offering. It repaid $73.2 million of 2021 Senior Notes, redeemed the remaining $216.4 million of 2023 Senior Notes, and repaid $25.0 million drawn on its revolving facility. At quarter-end, debt was $48.1 million, consisting of French term loans; there were no revolver borrowings and $99.9 million of revolver availability. Management stated that it expected adequate liquidity for the next 12 months and foreseeable future.
Changes, outlook and risks
- Management reported 118 net store closures during Q1 and 693 during fiscal 2020; it continues to assess options for European operations.
- No numerical revenue or earnings guidance is provided. Management expects to continue transformation-related severance, closure, consulting and other costs, and COVID-related health and safety costs.
- COVID-19 could cause renewed closures, weaker discretionary spending, supply-chain disruption, delayed game releases and asset valuation pressures. Management noted that these uncertainties could materially adversely affect results and cash flows.
- Restricted stock vesting could require substantial tax-withholding cash payments in Q2. At the assumed June 1 share price of $249.02, the filing estimated obligations of at least $74.6 million and potentially up to $157.2 million, depending on share-withholding arrangements; actual amounts could differ.
- The company disclosed an SEC Staff request for documents concerning trading activity in its securities and others. GameStop said it intended to cooperate and did not expect the inquiry to adversely impact it. It also disclosed CEO and CFO appointments effective after the quarter.
- GameStop maintained a full valuation allowance on net deferred tax assets. The filing states existing legal proceedings were not expected to have a material effect on financial condition, results or liquidity.
Important facts for investors to verify
- Whether sales growth and improved operating performance continue after the new-console launch comparison and pandemic-related effects.
- Whether gross margin recovers as product mix, e-commerce costs and freight expenses evolve.
- Cash generation, remaining French loan maturities, revolver availability and the use of ATM offering proceeds.
- Actual cash required for restricted-stock tax withholding and any resulting share dilution or liquidity impact.
- Progress and costs of the transformation, store rationalization and European business review; also the outcome of the SEC inquiry and ongoing COVID-19 impacts.