GameStop Corp. — Form 10-Q Summary
Period clarification: Although the request metadata says 2019 Q2, this filing covers the 13 and 26 weeks ended August 1, 2020, with comparisons to periods ended August 3, 2019. The interim financial statements are unaudited.
Business context and results
GameStop is a multichannel video game, electronics and collectibles retailer operating in four geographic segments. COVID-19 store closures and the late-stage console cycle pressured sales; next-generation consoles were expected to launch in holiday 2020. By the end of June, 98% of stores were open to the public, with online, curbside and ship-from-store options also used.
| Metric | 13 weeks ended Aug. 1, 2020 | Year-over-year | 26 weeks ended Aug. 1, 2020 | Year-over-year |
|---|---|---|---|---|
| Net sales | $942.0 million | Down 26.7% | $1,963.0 million | Down 30.7% |
| Gross profit / margin | $252.2 million / 26.8% | Margin down 4.2 points | $534.6 million / 27.2% | Margin down 3.5 points |
| Operating loss | $85.6 million | Prior-year loss $446.7 million | $193.6 million | Prior-year loss $429.2 million |
| Net loss | $111.3 million | Prior-year loss $415.3 million | $277.0 million | Prior-year loss $408.5 million |
| Basic loss per share | $1.71 | Prior-year $4.15 | $4.28 | Prior-year $4.04 |
Gross margin declined largely from product mix, including increased sales of lower-margin new hardware and accessories. SG&A fell 27.7% in the quarter and 21.5% year to date, reflecting lower payroll and variable costs during closures and savings from the GameStop Reboot initiative. Prior-year results included a $363.9 million goodwill impairment; no goodwill remained at August 1, 2020. The company recorded a $11.3 million gain on sale of assets in Q2 2020.
Q2 comparable sales decreased 12.7% overall; U.S., Canada and Europe declined, while Australia increased. E-commerce sales rose 800% in the quarter and 644% year to date, but did not offset the overall sales decline.
Cash flow, liquidity and debt
- For the first half, operating cash flow was positive $143.5 million, versus cash used of $646.7 million a year earlier. Management attributed the change primarily to inventory and accounts-payable optimization; inventory reductions were a major source of cash.
- Investing activities provided $36.0 million, including proceeds from property and aircraft sales. Financing activities provided $52.0 million, including net revolver borrowings and French term loans. Cash and cash equivalents were $735.1 million at August 1, 2020; cash plus restricted cash was $758.6 million.
- Total debt, net, was $472.2 million, including $35.0 million drawn on the revolver, $23.5 million of French term loans, $198.2 million of 2021 notes and $216.4 million of 2023 notes. Lease liabilities totaled $694.3 million.
- Revolver availability was reported as $28.4 million after the borrowing-base reduction, with $35.0 million drawn and $27.3 million of standby letters of credit outstanding. The company said it was in compliance with facility requirements, but disclosed that it would not have met the fixed-charge coverage ratio if that covenant had been in effect at August 1.
- Management stated it expected available cash, operating cash flow and revolver funds to provide adequate liquidity for the next 12 months and foreseeable future. This is an expectation, not a quantified earnings forecast.
Material changes, outlook and risks
- COVID-19 caused temporary store closures and reduced customer traffic. The company incurred $21.4 million in pandemic-related costs in the first half and received $9.1 million in rent concessions. Renewed closures, weaker discretionary spending, supply-chain disruption and economic uncertainty could further affect results and asset recoverability.
- In July, GameStop exchanged $216.4 million of 2021 notes for secured 10% notes due 2023, extending maturities for that portion but increasing its stated coupon. The remaining 2021 notes carried a 6.75% coupon. The new notes and revolver impose restrictive covenants.
- Sales of the Texas headquarters, ancillary office space and refurbishment center generated $43.7 million in stated net proceeds and an $11.3 million gain; the facilities were leased back. The aircraft sale generated $8.6 million net proceeds. The filing also reports subsequent sale-leasebacks of Australian and Canadian headquarters.
- On August 28, 2020, the revolver was amended, including a lower availability threshold for the fixed-charge covenant trigger and higher letter-of-credit limits. A separate, lender-discretionary letter-of-credit facility was also established, requiring 103% cash collateral.
- The company established a $53.0 million valuation allowance primarily against U.S. deferred tax assets. First-half tax expense was $68.3 million despite a pretax loss, with valuation allowances, jurisdictional earnings mix, CARES Act effects and sale-leaseback tax effects contributing.
- Management continued to evaluate unprofitable international operations and other strategic alternatives. It cited risks from the pandemic, the console transition, digital substitution, seasonality, competition, supplier availability and indebtedness. No specific revenue or earnings guidance is provided in the filing.
Important facts for investors to verify
- Whether store reopening and e-commerce momentum persist, and whether comparable-sales trends improve beyond the reported Q2 declines.
- Cash generation excluding working-capital releases and asset-sale proceeds, and the cash available after restricted cash, lease obligations and near-term operating needs.
- Revolver borrowing-base availability, covenant headroom and the practical terms and availability of the post-quarter letter-of-credit arrangements.
- Debt maturities, interest costs and refinancing options, especially the remaining 2021 notes and 10% secured 2023 notes.
- Whether the $53.0 million deferred-tax-asset valuation allowance or further store and asset impairments change as operating expectations develop.