GameStop Corp. — Form 10-K Summary
Reporting-period note: The supplied filing is GameStop’s annual report for fiscal 2019, the 52 weeks ended February 1, 2020, filed March 27, 2020. It is not a filing for “2018 Q4”; the filing does include unaudited fourth-quarter fiscal 2019 results.
Business context
GameStop operated 5,509 stores across 14 countries, alongside e-commerce and Game Informer. Its business spans hardware and accessories, software, collectibles, and pre-owned trade-ins. The company reported four geographic segments: United States, Canada, Australia, and Europe. Sales are seasonal, with 34% of fiscal 2019 sales generated in the fourth quarter.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $6,466.0 million | $8,285.3 million |
| Gross profit / margin | $1,908.7 million / 29.5% | $2,308.1 million / 27.9% |
| Operating loss | $399.6 million | $702.0 million |
| Net loss from continuing operations | $464.4 million | $794.8 million |
| Net loss | $470.9 million | $673.0 million |
| Cash from (used in) operations | $(414.5) million | $325.1 million |
| Capital expenditures | $78.5 million | $93.7 million |
- Net sales fell 22.0%; comparable sales declined 19.4%. The company attributed the decrease chiefly to weak demand for aging Sony and Microsoft consoles, lower software sales and 321 net store closures.
- Gross margin improved 1.6 percentage points, reflecting a mix shift toward higher-margin products and reduced holiday promotions. Collectibles sales rose to $737.5 million from $711.0 million; hardware and accessories and software sales declined.
- Fiscal 2019 included $363.9 million of goodwill impairments and $21.7 million of asset impairments. No goodwill remained at year-end. Goodwill impairments were $970.7 million in fiscal 2018.
- Year-end cash and cash equivalents were $499.4 million, down from $1,624.4 million. The company reported $270.3 million of availability under its $420 million revolving credit facility, which was undrawn at year-end. It subsequently borrowed $150 million in the first quarter of fiscal 2020.
- Total debt, net, was $419.8 million, comprising 6.75% senior notes due March 2021; the $350 million notes due 2019 were redeemed during fiscal 2019. Total liabilities were $2,208.2 million and total assets were $2,819.7 million. Lease liabilities totaled $768.7 million following adoption of the new lease accounting standard.
- Cash used in financing was $644.7 million, including $404.5 million in senior-note repayments, $198.7 million in share repurchases and $40.5 million in dividends paid. The quarterly dividend was eliminated effective June 3, 2019.
Material changes and fourth-quarter results
- Unaudited fiscal 2019 fourth-quarter sales were $2,194.1 million, versus $3,063.0 million in fiscal 2018 Q4. Fourth-quarter operating earnings were $75.2 million versus an operating loss of $232.1 million; continuing-operations income was $24.9 million versus a loss of $268.5 million. Comparisons were affected by impairment charges, including significant fiscal 2018 Q4 charges.
- GameStop closed 333 stores and opened 12 during fiscal 2019, ending with 5,509 stores. It announced a multi-year “GameStop Reboot” initiative focused on core-business efficiency, gaming community engagement, digital capabilities and vendor partnerships.
- Fiscal 2019 share repurchases totaled 38.1 million shares for $198.7 million, an average $5.19 per share. The company had $101.3 million remaining under its authorization at year-end.
- The sale of Spring Mobile generated $727.9 million in net cash proceeds in fiscal 2018; a $5.5 million fiscal 2019 charge followed arbitration over final working-capital adjustments. GameStop sold Simply Mac in September 2019 and fully reserved a $7.7 million note receivable from the buyer.
Outlook, commentary and risks
- The filing provides no quantitative earnings or sales guidance. Management said year-end cash, expected operating cash flows and revolver availability were expected to fund operations based on then-current plans.
- COVID-19 had prompted temporary store closures in parts of Europe and Canada and, from March 22, 2020, U.S. storefront closures with digital orders, curbside pickup and delivery continuing. Management expected a significant reduction in customer traffic and demand and said the financial and cash-flow impact could not be reasonably estimated.
- Management identified the approaching 2020 console transition, continued growth in digital game delivery, weaker physical software demand, competition, store rationalization, vendor concentration, and the seasonal reliance on holiday sales as material business risks.
- The $421.4 million principal amount of 6.75% notes was due in March 2021. The filing also cites debt covenants and refinancing risk. The revolving facility was secured by substantially all company and domestic subsidiary assets; the company reported covenant compliance at year-end.
- Legal proceedings included ordinary-course employee, shareholder and consumer matters; the company did not expect existing proceedings or settlements to materially affect its financial condition, results or liquidity. Management and the auditor reported effective internal control over financial reporting, and the previously identified IT-access material weaknesses were reported remediated.
Important facts for investors to verify
- Whether post-year-end store closures and the $150 million revolver borrowing materially changed liquidity, cash burn or covenant headroom.
- The timing and source of repayment or refinancing for the 2021 notes, and any updated debt terms or restrictions.
- Subsequent sales trends, comparable sales, inventory levels and margin performance, particularly through the console transition and digital-channel shift.
- Execution and costs of GameStop Reboot, international market exits, store closures and lease obligations.
- The status of the Simply Mac note receivable and any other material post-year-end contingencies or impairment risks.