GameStop Corp. — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended November 2, 2013 (fiscal 2013 third quarter and year to date), compared with periods ended October 27, 2012. The request metadata says “2012 Q3,” but the filing itself is for 2013 Q3.
Business context and reporting period
GameStop operated 6,488 stores across the United States, Australia, Canada and Europe, alongside e-commerce and digital businesses. Sales include new and pre-owned games and hardware, digital content, mobile products and other merchandise. The quarter coincided with strong new-title releases; PlayStation 4 and Xbox One launched in November 2013. The company cautions that its business is seasonal, with a major share of sales and operating profit typically earned in the holiday quarter.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $2,106.7 million | $1,772.8 million | $5,355.7 million | $5,325.2 million |
| Gross profit / margin | $598.4 million / 28.4% | $557.4 million / 31.4% | $1,658.1 million / 31.0% | $1,676.6 million / 31.5% |
| Operating earnings (loss) | $109.1 million | ($603.5 million) | $215.1 million | ($453.9 million) |
| Net income (loss) attributable to GameStop | $68.6 million | ($624.3 million) | $133.7 million | ($530.8 million) |
| Diluted earnings (loss) per share | $0.58 | ($5.08) | $1.12 | ($4.13) |
| Operating cash flow | — | $406.0 million | $203.7 million |
Q3 sales rose 18.8%, primarily on comparable-store sales growth of 20.5% and strong new software releases. Year-to-date sales rose 0.6%, with comparable-store sales up 1.3%. Q3 gross margin fell 3.0 percentage points, principally because new video game software made up a larger share of sales; pre-owned product margins also declined. SG&A was $448.5 million in Q3, or 21.3% of sales, versus $438.2 million, or 24.7%, a year earlier. Year-to-date SG&A was essentially flat at $1,319.3 million.
The prior-year comparisons are materially affected by $678.8 million of Q3 2012 goodwill and asset impairment charges. Excluding those charges, management reported prior-year Q3 operating earnings of $75.3 million and net income of $47.2 million; for the 39-week period, prior-year operating earnings would have been $224.9 million and net income $140.7 million.
At November 2, 2013, cash and cash equivalents were $649.1 million; current assets were $2,634.7 million and current liabilities $2,492.8 million. The company reported no revolver borrowings outstanding and $391.0 million of revolver availability, with $9.0 million of standby letters of credit. It reported $2,594.9 million of total liabilities, but no separate long-term debt balance on the balance sheet. Year-to-date investing cash outflow was $137.3 million, including a $62.6 million acquisition-related investment; financing cash outflow was $237.7 million, including $204.9 million of share repurchases and $98.7 million of dividends. Cash increased $13.3 million over the 39 weeks.
Material changes versus the prior comparable period
- Q3 revenue growth was led by new video game software sales, up 47.2% to $1,133.1 million; pre-owned product sales fell 2.0% and hardware sales fell 1.6%.
- Year-to-date new software sales increased 14.8%, while hardware sales declined 20.3% and pre-owned sales declined 5.4%, reflecting the late stage of the prior console cycle.
- Digital and mobile product sales increased $98.0 million year to date, partially offsetting declines in other categories.
- Operating cash flow increased year over year, mainly from working-capital movements, including higher accounts payable and accrued liabilities associated with inventory purchases and new-console reservations.
- Year-to-date share repurchases totaled 5.2 million shares for $204.9 million of cash. Dividends declared were $0.275 per share in each of the first three fiscal 2013 quarters.
Outlook, commentary, risks and unusual items
- Management anticipated lower overall gross margin in Q4 because of the new-console launches, which typically increase lower-margin hardware sales. It also expected digital sales to continue growing.
- Fiscal 2013 capital expenditures were projected at approximately $135 million, mainly for digital initiatives, store openings and remodels, distribution and information systems. The company expected to open approximately 100 stores during fiscal 2013, including 44 stores acquired in France during Q1.
- Management said cash, operating cash generation and revolver availability should be sufficient for operations and planned spending, including declared dividends, for at least the next 12 months.
- On November 19, 2013, the board authorized a new $500 million share-repurchase program, replacing the remaining prior authorization. A $0.275-per-share dividend was also approved for payment on December 19, 2013, subject to the stated record date.
- On November 3, 2013, GameStop completed its acquisition of Spring Communications for $62.6 million and assumed $34.5 million of loans and a line of credit; $31.9 million was repaid on November 15. Management did not expect a material fiscal 2013 impact.
- Key risks include next-generation console features or restrictions that could affect existing-product demand and the pre-owned business; digital and alternative distribution; competition; supplier dependence; international operations; and the integration and performance of acquisitions. Foreign-exchange movements affected reported sales, and currency derivatives carried a net fair-value liability of $13.6 million at quarter-end.
- Ordinary-course legal matters include wage-and-hour and consumer class actions; management did not expect them to have a material financial effect. The company said disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether holiday-quarter console sales deliver sufficient volume to offset the expected hardware-driven pressure on gross margin.
- Whether recent comparable-store growth and new-title demand persist beyond the unusually strong Q3 release calendar.
- Whether pre-owned sales and margins stabilize amid aggressive trade offers and possible changes in console compatibility or restrictions.
- How much of operating cash flow reflects sustainable operations versus seasonal working-capital timing, particularly inventory, payables and console reservations.
- The funding, integration and performance of Spring Communications, and the effect of continued repurchases and dividends on cash and liquidity.
- Revolver availability and covenant headroom as seasonal cash needs change; the filing reports no outstanding revolver borrowings at November 2, 2013.