GameStop Corp. Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended July 28, 2012 (fiscal 2012 second quarter and first half), not 2011 Q2 as indicated in the request metadata. Amounts below are in millions of dollars except per-share data and percentages.
Business context and reporting period
GameStop was a multichannel video game retailer operating 6,628 stores across the United States, Australia, Canada and Europe, alongside e-commerce, digital gaming and related businesses. Its fiscal year ending February 2, 2013 has 53 weeks. Management cautioned that first-half results are seasonal and are not indicative of full-year results; the fourth quarter typically produces the largest share of sales and operating profit.
Financial performance and position
| Metric | 13 weeks ended July 28, 2012 | 13 weeks ended July 30, 2011 | 26 weeks ended July 28, 2012 | 26 weeks ended July 30, 2011 |
|---|---|---|---|---|
| Net sales | $1,550.2 | $1,743.7 | $3,552.4 | $4,025.1 |
| Gross profit / margin | $519.3 / 33.5% | $543.2 / 31.2% | $1,119.2 / 31.5% | $1,163.4 / 28.9% |
| Operating earnings / margin | $34.5 / 2.3% | $53.6 / 3.1% | $149.5 / 4.2% | $184.8 / 4.6% |
| Net income attributable to GameStop | $21.0 | $30.9 | $93.5 | $111.3 |
| Diluted earnings per share | $0.16 | $0.22 | $0.71 | $0.78 |
- For the first half, operating cash flow was negative $173.8, investing cash flow negative $57.2 and financing cash flow negative $284.9. Cash declined $516.3 to $138.7 from $655.0 at fiscal year-end.
- At July 28, 2012, total assets were $4,131.8, current assets $1,379.4 and current liabilities $1,183.3. Inventory was $980.2.
- No revolver borrowings or senior notes were outstanding. The $400 million asset-based revolver had $320.0 of availability, with $8.9 of letters of credit outstanding. Total liabilities were $1,342.5.
- First-half share repurchases used $246.6 of cash; dividends paid were $40.3. The company repurchased 12.9 million shares during the half at an average $19.92 per share.
Material changes versus prior comparable periods
- Sales fell 11.1% in Q2 and 11.7% in the first half. Comparable-store sales declined 9.3% and 11.1%, respectively. Foreign exchange reduced sales by $50.6 in Q2 and $70.1 in the first half.
- New hardware and software sales weakened amid an aging console cycle and fewer new game releases. First-half new hardware sales fell 24.9%, new software sales 20.4%, and used-product sales 6.1%. “Other” sales, including digital and mobile products, rose 16.5% for the half.
- Gross margin improved year over year, primarily from product mix and improved margins on new software and used products. However, lower sales and fixed-cost deleveraging contributed to operating earnings falling 35.6% in Q2 and 19.1% in the first half. SG&A as a share of sales rose to 28.4% in Q2 and 24.8% year to date.
- Net income declined 31.2% in Q2 and 15.5% for the first half. Lower interest expense, following retirement of the senior notes in fiscal 2011, partially offset weaker operating earnings.
- Europe remained loss-making: operating losses were $10.2 in Q2 and $11.4 for the half, compared with $6.2 and $10.2 in the prior-year periods. U.S. segment operating earnings also declined; Canada improved from a prior-year loss, while Australia’s first-half operating earnings fell.
Outlook, commentary and risks
- Management expected continuing declines in new hardware and software sales during fiscal 2012 because of the mature console cycle, while expecting digital product sales to increase. Digital and mobile initiatives were identified as areas for continued investment.
- Management projected approximately 150 store openings and about $140 of fiscal 2012 capital expenditures, mainly for digital initiatives, new stores, remodels, distribution and information systems.
- Management believed cash, operating cash generation and revolver availability would fund operations and planned investments for at least 12 months. This assessment is notable alongside the first-half cash outflow and lower cash balance.
- Goodwill impairment risk: The company began an interim goodwill impairment test after its market capitalization remained below book equity. Market capitalization at the beginning of Q3 was approximately $780 below stockholders’ equity; goodwill was $1,981.8. Management stated that any impairment from the test’s second step could be material and expected any charge to be concentrated mainly in Canada, Australia and Europe. The test was expected to be completed by the end of fiscal Q3.
- Other risks included competition and digital distribution, console launch timing, weak consumer demand, foreign exchange, international operations, suppliers and product-release schedules, litigation, and the outcome of the impairment test. Management said pending legal proceedings, including wage-and-hour and consumer class actions, were not expected to have a material adverse effect. The IRS was examining several tax years; management did not expect a material impact from those audits.
- Subsequent events: the board approved a $0.25-per-share quarterly dividend payable September 12, 2012, subject to future board approval. By August 28, the company had bought a further 1.1 million shares at an average $15.87.
Important facts for investors to verify
- Confirm the filing period: the document reports July 28, 2012, despite the request’s 2011 Q2 label.
- Review the completed interim goodwill impairment test and any resulting charge, particularly for the international reporting units.
- Track comparable-store sales, product-category trends and whether growth in digital and mobile products can offset ongoing declines in core hardware and software.
- Assess cash generation and liquidity against continued dividends, share repurchases, seasonal working-capital needs and planned capital expenditures.
- Monitor Europe’s operating losses, foreign-exchange effects, and the company’s ability to maintain revolver availability and comply with its facility covenants.