Business context and reporting period
GameStop Corp. is a specialty retailer operating video game, technology and collectibles businesses, with 7,480 company-operated stores at July 29, 2017. The filing covers the 13 weeks and 26 weeks ended July 29, 2017. Although the request labels the period “2016 Q2,” the filing itself is for fiscal 2017 Q2 (fiscal year ending February 3, 2018).
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 periods.
| Metric | 13 weeks | 26 weeks |
|---|---|---|
| Net sales | $1,687.6; up 3.4% | $3,733.5; up 3.6% |
| Gross profit / margin | $623.7 / 37.0%, versus $617.7 / 37.9% | $1,326.2 / 35.5%, versus $1,293.2 / 35.9% |
| Operating earnings | $43.6, down 25.2% | $144.7, down 16.0% |
| Net income | $22.2, down 20.4%; diluted EPS $0.22 versus $0.27 | $81.2, down 13.3%; diluted EPS $0.80 versus $0.90 |
| Interest expense, net | $14.4 versus $13.6 | $28.3 versus $24.4 |
Quarterly sales growth reflected collectibles, new hardware, accessories, digital and Technology Brands. These gains were partly offset by weaker pre-owned products and new software. Nintendo Switch launches supported hardware demand. Higher sales did not translate into stronger earnings: gross margin fell, SG&A rose, and operating earnings declined.
Cash flow, debt and liquidity
- For the first half, operating cash flow was negative $311.7, compared with negative $436.2 a year earlier; management attributed the improvement mainly to timing of vendor and tax payments.
- Investing cash flow was negative $4.1, including $47.2 of capital expenditures and $51.2 of divestiture proceeds. Financing cash flow was negative $103.5, including $78.2 of dividends and $22.0 of share repurchases.
- Cash and cash equivalents were $262.1 at July 29, 2017, down from $669.4 at fiscal year-end. Merchandise inventory was $1,140.6.
- Long-term debt, net, was $816.4: $350 million of 5.50% notes due 2019 and $475 million of 6.75% notes due 2021, less unamortized financing costs. No Revolver borrowings were outstanding; availability was $363.9, with $7.5 of letters of credit.
- Management said cash, operating cash generation and Revolver availability should fund operations and planned capital allocation for at least 12 months. Fiscal 2017 capital expenditures were projected at approximately $110–$120 million. Quarterly dividend was $0.38 per share, subject to future Board approval.
Material changes, outlook and risks
- Comparable store sales increased 1.9% in the quarter and 2.1% year to date, following declines of 10.6% and 8.2%, respectively, in the comparable prior-year periods. U.S. comparable sales remained negative: down 1.4% in the quarter and 2.0% year to date.
- Technology Brands sales rose, partly through acquisitions, but comparable store gross profit declined 13.3% for the quarter and 16.1% year to date amid a slower wireless upgrade cycle and commission changes. The segment had 1,509 stores versus 1,137 a year earlier.
- GameStop sold Kongregate on July 21, 2017, receiving $54.7 million net of transaction costs, including $3.5 million held in escrow. The company recorded a $7.3 million gain, net of tax.
- Management noted seasonality: a major portion of annual sales and operating profit is typically generated in the fourth quarter; first-half results are not indicative of full-year results. The filing provides no specific full-year revenue or earnings guidance.
- A French tax audit could result in approximately €85.5 million of additional tax for certain past periods, with possible further reassessments. GameStop is contesting the claim, has not recorded a reserve, and says an adverse outcome could materially affect its tax provision.
- Management expected the new revenue-recognition standard to affect loyalty rewards and gift-card breakage accounting, but did not expect a material effect on the financial statements. Adoption of the new lease standard was expected to materially increase reported assets and liabilities.
Important facts for investors to verify
- Whether sales growth can continue as new console launches normalize, while software and pre-owned product sales remain weak.
- Whether margin pressure, higher SG&A and declining operating earnings persist despite revenue growth.
- Cash generation and seasonal working-capital needs, given first-half operating cash outflow and the cash balance decline.
- Technology Brands comparable gross profit, acquisition contribution, and store expansion costs.
- Outcome and potential financial exposure from the French tax reassessments, and the status of the Kongregate escrow.
- Dividend sustainability, debt maturities and continued compliance with Revolver availability and covenant requirements.