Gamestop Corp. quarterly report, Q3 FY2021

GameStop Corp. — Form 10-Q Summary

Period clarification: The request identifies “2020 Q3,” but the supplied filing is for the 13-week quarter ended October 30, 2021, and compares it with the quarter ended October 31, 2020. The nine-month figures cover 39 weeks.

Business context

GameStop sells games, entertainment products and technology through stores and e-commerce in the United States, Canada, Australia and Europe. Management describes a shift toward a technology company, with investment in broader product selection, fulfillment, customer experience and technology. Results are seasonal, with the largest share of sales generally in the holiday-season fourth quarter.

Financial results

MetricQ3 2021Q3 2020Nine months 2021Nine months 2020
Net sales$1,296.6 million$1,004.7 million$3,756.8 million$2,967.7 million
Gross profit / margin$318.6 million / 24.6%$276.3 million / 27.5%$969.6 million / 25.8%$810.9 million / 27.3%
Operating loss$102.9 million$63.0 million$201.7 million$256.6 million
Net loss$105.4 million$18.8 million$233.8 million$295.8 million
Loss per diluted share$1.39$0.29$3.27$4.56
  • Q3 sales rose 29.1% year over year; nine-month sales rose 26.6%. Q3 growth reflected demand for new Sony and Microsoft consoles, Nintendo products and increased store traffic.
  • Q3 hardware and accessories sales rose to $669.9 million from $413.4 million; software sales were $434.5 million versus $444.4 million; collectibles sales were $192.2 million versus $146.9 million.
  • Gross margin contracted 290 basis points in Q3 and 150 basis points for the nine-month period. Management cited a sales mix shift toward lower-margin console hardware and higher freight and credit-card fees tied to e-commerce.
  • SG&A increased 17.0% in Q3 to $421.5 million and 6.9% for the nine months to $1,170.7 million. As a share of sales, SG&A improved to 32.5% in Q3 from 35.9%, and to 31.2% for the nine months from 36.9%. Transformation-related labor, severance, marketing and customer-care costs contributed to expenses.

Cash flow, debt and liquidity

  • For the nine months, operating cash outflow was $324.0 million, compared with $41.1 million a year earlier. The principal stated driver was a $545.2 million increase in inventory, partly accompanied by higher payables.
  • Investing cash outflow was $41.1 million, including capital expenditures of $40.7 million. Financing cash inflow was $1,203.7 million, primarily reflecting net proceeds from share issuance.
  • At October 30, 2021, cash and cash equivalents were $1,413.0 million; restricted cash was $55.1 million. Merchandise inventory was $1,140.9 million, up from $861.0 million a year earlier.
  • Total debt was $46.2 million, consisting of French term loans; no borrowings were outstanding under the old revolving facility. Availability under that facility was $202.4 million after the stated availability reduction. On November 3, 2021, GameStop replaced it with a $500 million revolving facility maturing in November 2026.
  • GameStop repaid its 6.75% notes at maturity and redeemed its 10.00% notes early in 2021. The early redemption included a $17.8 million make-whole premium recorded in interest expense. The French loans were extended for five years, with principal amortization starting October 2022.

Changes, outlook and risks

  • The company sold 8.5 million shares through its at-the-market program during the nine months, generating $1.68 billion gross proceeds. The issuance materially strengthened cash and equity but increased shares outstanding.
  • Management said it will continue investing in its transformation and growth initiatives while prioritizing a strong balance sheet. It expects continued transformation-related costs. The filing provides no specific sales, earnings or margin guidance.
  • Management attributed weaker margins to product mix and higher fulfillment-related costs, while noting continuing supply-chain disruption, product shortages and possible delays. COVID-19-related closures persisted in parts of Australia during the quarter; the pandemic’s future effects remain uncertain.
  • Key stated risks include holiday-season dependence, supply and console allocation constraints, competition and digital game downloads, execution and costs of the transformation, discretionary consumer spending, and stock-price volatility. The filing also identifies potential legal, regulatory and reputational uncertainty around emerging blockchain, NFT and Web 3.0 initiatives.
  • The company reported that the SEC requested documents in May 2021 concerning trading activity in its securities and those of other companies, then issued a subpoena in August. GameStop said it was cooperating and did not expect the inquiry to adversely affect it.
  • Management concluded disclosure controls were effective as of October 30, 2021. It stated that ordinary-course legal proceedings were not expected to have a material effect on financial condition, results or liquidity.

Investor verification priorities

  1. Track whether sales growth translates into improved gross margins and operating performance, given the quarter’s larger loss and margin decline.
  2. Monitor inventory levels, supply availability and operating cash use, especially through the holiday quarter.
  3. Assess whether transformation, e-commerce and fulfillment investments produce durable revenue and cost benefits relative to their ongoing expense.
  4. Review the terms, borrowing base and availability under the new $500 million revolver, and the restrictions and repayment terms on French loans.
  5. Verify future share issuance and dilution, and follow developments in the SEC inquiry and any material legal or regulatory matters.