GameStop Corp. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended November 3, 2018, and was filed December 11, 2018. The request metadata says “2017 Q3,” but the filing itself is for fiscal 2018 Q3; the figures below follow the filing.
Business context and reporting period
GameStop operated 7,173 stores across four geographic Video Game Brands segments and Technology Brands, which included Spring Mobile and Simply Mac. The company described its business as seasonal, with the largest share of annual sales typically in the holiday quarter. The statements are unaudited.
Financial performance and liquidity
| Metric | 13 weeks ended Nov. 3, 2018 | Comparable 2017 period | 39 weeks ended Nov. 3, 2018 | Comparable 2017 period |
|---|---|---|---|---|
| Net sales | $2,084.4 million | $1,988.6 million | $5,665.1 million | $5,722.1 million |
| Gross profit | $690.8 million | $689.4 million | $1,944.2 million | $2,015.6 million |
| Gross margin | 33.1% | 34.7% | 34.3% | 35.2% |
| Operating earnings (loss) | $(493.5) million | $87.6 million | $(414.8) million | $232.3 million |
| Net income (loss) | $(488.6) million | $59.4 million | $(485.3) million | $140.6 million |
| Diluted earnings (loss) per share | $(4.78) | $0.59 | $(4.76) | $1.39 |
- Cash flow: For the 39-week period, operating activities used $179.2 million, investing activities used $66.2 million, and financing activities used $136.0 million. Cash and restricted cash declined $409.8 million to $469.5 million; balance-sheet cash and equivalents were $454.5 million.
- Balance sheet and liquidity: Total assets were $4,656.7 million and stockholders’ equity was $1,565.1 million. Merchandise inventory was $2,027.4 million. Management reported $412.8 million of available capacity under the $420 million asset-based revolver, with no revolver borrowings and $7.2 million of letters of credit outstanding. Management said available cash, operating cash flows, and revolver capacity were expected to meet needs for at least 12 months.
- Debt: Senior notes had $825 million aggregate principal outstanding: $350 million of 5.50% notes due October 2019 and $475 million of 6.75% notes due March 2021. Their combined net carrying value was $820.0 million, of which $348.8 million was classified current. The filing also reports $3.8 million in Luxembourg line-of-credit cash overdrafts.
- Dividends and investment: The company declared quarterly dividends of $0.38 per share, including a December 2018 payment. Fiscal 2018 capital expenditures were projected at $100–110 million, primarily for store remodels and distribution and information systems.
Material changes versus the prior comparable periods
- Quarterly sales rose 4.8%, while year-to-date sales fell 1.0%. Comparable store sales were up 2.1% in the quarter but down 1.3% for the 39 weeks.
- Quarterly sales gains came mainly from new software (+10.9%), accessories (+32.6%), hardware (+12.8%), and collectibles (+11.7%). Pre-owned and value product sales fell 13.4%. For the 39 weeks, pre-owned and value sales fell 9.5%, Technology Brands sales fell 12.8%, and accessories and collectibles rose 24.2% and 16.9%, respectively.
- Gross margin declined in both comparisons, primarily because of product mix; quarterly new software margin also fell. SG&A was essentially flat year over year in both periods.
- Net results were sharply lower, primarily because the quarter included $557.3 million of goodwill impairment charges and $30.2 million of intangible-asset impairment charges. Excluding those impairments, the filing reports lower operating earnings in several Video Game Brands segments year to date, reflecting weaker gross profit and mix.
- Year-to-date operating cash use increased from $17.1 million to $179.2 million, primarily due to inventory growth and the timing of vendor payments. Inventory was $2,027.4 million at quarter-end, versus $1,822.5 million a year earlier.
Outlook, management commentary, risks, and unusual items
- The goodwill and intangible impairments followed a sustained decline in market capitalization and revised valuation assumptions, including higher discount rates and lower terminal values. Management cautioned that changes in operating results, assumptions, or share price could trigger additional material impairments.
- On November 21, 2018, after quarter-end, GameStop agreed to sell Spring Mobile for $700 million in cash, subject to customary adjustments and closing conditions. The transaction was expected to close in fiscal Q4 2018; as of November 3, the sale was not considered probable and the business remained classified as held for use. There was no assurance the sale would close as agreed.
- The board’s comprehensive review of strategic and financial alternatives, including a possible sale of the company, was ongoing. Management noted that no specific outcome was assured and that the review could disrupt operations or affect employee retention.
- The French tax dispute was settled during the quarter. A $29.6 million tax charge had been recorded in the prior quarter; the final settlement covering fiscal years 2008–2018 required no additional charge.
- Management cited growing digital adoption as a headwind to pre-owned sales and said results are seasonal and depend partly on new product releases. No specific revenue or earnings guidance for the next quarter or full year is provided in the supplied filing text.
- The company adopted the new revenue standard in fiscal 2018; reported year-to-date net sales were $17.9 million higher than under the prior standard. The filing also said adoption of the new lease standard was expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the request says 2017 Q3, while the filing covers the quarter ended November 3, 2018.
- Track completion, final proceeds, and use of proceeds from the proposed $700 million Spring Mobile sale, along with any further outcome of the board’s strategic review.
- Assess underlying operating trends separately from the impairment charges, especially gross-margin pressure, pre-owned sales declines, and year-to-date comparable-store sales.
- Monitor holiday-quarter sales and cash generation, inventory levels, revolver availability, and the company’s ability to address the $350 million notes due in October 2019.
- Review assumptions supporting goodwill valuations and the possibility of further impairment, as well as dividend capacity under debt agreements.