GameStop Corp. Form 10-K Summary
Reporting period: Fiscal 2010, the 52 weeks ended January 29, 2011. This is an annual report, not a standalone fourth-quarter filing. Dollar amounts are in millions unless noted.
Business context
GameStop operated 6,670 stores across the United States, Canada, Australia and Europe, alongside e-commerce sites, Game Informer and online gaming platform Kongregate. Its business sells new and used video game hardware, software, accessories and digital products. Used products are a key higher-margin offering. Fiscal 2010 included Kongregate from its August 2010 acquisition; Micromania was included for the full year, as in fiscal 2009.
Financial performance and liquidity
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Sales | $9,473.7 | $9,078.0 | +4.4% |
| Gross profit / gross margin | $2,537.6 / 26.8% | $2,434.7 / 26.8% | Profit +4.2% |
| Operating earnings / margin | $662.6 / 7.0% | $637.0 / 7.0% | +4.0% |
| Net income attributable to GameStop | $408.0 | $377.3 | +8.1% |
| Diluted earnings per share | $2.65 | $2.25 | +17.8% |
| Cash from operations | $591.2 | $644.2 | −$53.0 |
| Cash and cash equivalents at year-end | $710.8 | $905.4 | −$194.6 |
| Working capital | $407.0 | $471.6 | −$64.6 |
| Total debt, net | $249.0 | $447.3 | −$198.3 |
Sales growth reflected 1.1% comparable-store growth and sales from stores opened since the prior year. New software sales rose 6.4%, used-product sales rose 3.2%, and other sales rose 9.9%; new hardware sales fell 2.1%. Used products generated a 46.2% gross margin versus 20.7% for new software and 7.3% for new hardware. Selling, general and administrative expenses were $1,700.3 (18.0% of sales), unchanged as a share of sales.
Cash from operations declined principally because inventory used $227.2 of cash, compared with a $29.6 cash source in FY2009. Investing used $240.1, including $197.6 for property and equipment and $38.1 for acquisitions. Financing used $555.6, primarily for $381.2 of share repurchases and $200.0 of note repayments. Current assets were $2,154.8 and current liabilities $1,747.8 at year-end.
Fiscal fourth-quarter sales were $3,692.8 versus $3,524.0; operating earnings were $375.7 versus $347.4; and net income attributable to GameStop was $237.8 versus $215.9. Diluted EPS was $1.56 versus $1.29. The fourth quarter generated about 39% of annual sales and 57% of annual operating earnings, underscoring the holiday-season concentration.
Material changes versus FY2009
- Comparable-store sales returned to growth at 1.1%, from a 7.9% decline in FY2009.
- Gross margin held at 26.8%; improved hardware and other-product margins were offset by lower software and used-product margins.
- Operating earnings and attributable net income increased, while operating cash flow and year-end cash declined.
- Debt fell by $198.3 through note repurchases; the remaining $250.0 principal amount of 8% Senior Notes was due October 2012 (carrying value $249.0).
- The company repurchased 17.1 million shares in FY2010 at an average $19.84 per share. A new $500 million authorization announced February 4, 2011 may fund share repurchases and/or note retirement.
Outlook, risks and contingencies
- Management planned approximately 300 store openings and 200 closures in FY2011, with capital expenditures of about $170 million. It expected depreciation and amortization to rise with continued investment.
- Management stated that cash, operating cash generation and the revolving facility should fund operations and planned investment for at least the next 12 months. The $400 million asset-based revolver matures in January 2016; there were no borrowings outstanding at year-end, with $8.2 million of letters of credit issued. The company reported compliance with debt covenants.
- Strategic priorities include growing digital sales and distribution, developing Kongregate, and increasing loyalty-program participation. Management cautioned that digital delivery, mobile, social and browser gaming could divert demand from physical products, and that its transition efforts may not succeed or be profitable.
- Key exposures include reliance on a small number of suppliers (the top five represented 72% of new-product purchases), product-release timing, intense competition, seasonal holiday demand, foreign exchange, international operations, leased-store economics and the ability to sustain trade-ins and used-product sales.
- Senior Notes and the revolver include restrictive covenants; the revolver has variable rates. Operating lease commitments totaled $1,337.6, and vendor purchase obligations totaled $903.7, generally cancelable before shipment.
- Management said ordinary-course litigation, including wage-and-hour class actions, was not expected to have a material adverse effect. Unrecognized tax benefits were $24.9; the timing and range of possible changes from ongoing audits were uncertain.
- Goodwill was $1,996.3; annual impairment testing found no impairment. The filing reports a $7.1 loss on foreign-currency derivatives for FY2010. The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether comparable-store growth and software/used-product demand can offset continued weakness in hardware and physical-game sales.
- Whether operating cash flow recovers as inventory investment normalizes, and how liquidity and cash balances evolve amid repurchases and capital spending.
- The timing and funding of the $250 million Senior Notes maturity, and the effect of debt covenants and the $500 million authorization on capital allocation.
- Progress and returns from digital initiatives and Kongregate, including exposure to competition from digital distribution and mobile, social and browser gaming.
- Performance of international segments excluding currency effects, and developments in tax audits, legal matters and goodwill impairment indicators.