GameStop Corp. Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 39 weeks ended October 31, 2015, not 2014 Q3 as stated in the request metadata. It was signed December 8, 2015. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context and reporting period
GameStop operates video-game retail and e-commerce businesses across the United States, Canada, Australia and Europe, alongside Technology Brands businesses including Spring Mobile, Cricket Wireless and Simply Mac. It reported 6,122 Video Game Brands stores and 834 Technology Brands stores at quarter-end. The 13-week quarter is compared with the 13 weeks ended November 1, 2014; year-to-date figures cover 39 weeks. Management notes that results are seasonal, with the majority of sales and operating profit generally occurring in the fourth quarter.
Financial performance and position
- Quarter: Net sales were $2,016.3, down 3.6%; gross profit was $655.6, up 5.4%, and gross margin rose to 32.5% from 29.7%. Operating earnings were $90.7, up 1.0%; net income was $55.9, down 0.9%. Diluted EPS was $0.53, versus $0.50.
- First 39 weeks: Net sales were $5,838.8, up 0.3%; gross profit was $1,875.1, up 4.2%, with gross margin at 32.1% versus 30.9%. Operating earnings increased 14.6% to $266.3; net income rose 4.0% to $155.0. Diluted EPS was $1.45, versus $1.30.
- Cash flow: Operating activities provided $188.1 in the first 39 weeks, compared with $36.6 a year earlier. Investing used $337.7, including acquisitions and $129.4 of capital expenditures; financing used $259.3. Cash declined $423.9 from the fiscal-year start to $186.2. Operating cash flow less reported capital expenditures was $58.7.
- Liquidity and debt: At October 31, cash was $186.2 and inventory was $1,856.3. Current assets of $2,494.4 compared with current liabilities of $2,371.7. Debt included $350.0 of 5.50% senior notes due 2019 and $0.9 of current debt; there were no revolver borrowings and $391.4 of availability under the $400 million asset-based facility. The company reported covenant compliance.
- Capital returns: Dividends declared were $1.08 per share for the 39 weeks, and the board approved a further $0.36 quarterly dividend payable December 15, 2015. GameStop repurchased 3.6 million shares for $152.1 during the 39 weeks.
Material changes versus the prior comparable period
- Quarterly sales fell amid weaker new hardware and software sales and a 1.1% decline in comparable-store sales. Management cited a stronger prior-year software release lineup, console price reductions and foreign-exchange effects. Currency movements reduced quarterly sales by $100.5.
- For the first 39 weeks, comparable-store sales increased 5.0%, but foreign exchange reduced reported sales by $295.4. Growth in Technology Brands, accessories, collectibles and other products offset declines in hardware and digital sales.
- Technology Brands sales grew 64.2% in the quarter and 65.2% year to date, largely from acquisitions and store growth. Segment operating earnings nevertheless declined 34.3% and 56.1%, respectively, as store conversions took longer than expected and expansion costs increased.
- Gross-margin improvement was supported by the higher-margin Technology Brands mix and collectibles. This was partly offset by lower margins on pre-owned products and accessories. SG&A increased 6.3% in the quarter and 3.1% year to date, while net interest expense increased following the 2014 senior-note issuance.
Outlook, risks and unusual items
- Management said cash, operating cash generation and revolver availability should fund operations, planned investments and capital returns for at least 12 months. It projected fiscal 2015 capital expenditures of approximately $150–$170 and expected to open or acquire approximately 500–550 Technology Brands stores during the fiscal year.
- GameStop acquired Geeknet in July 2015 for $126.0 net of cash acquired. Technology Brands acquisitions during the 39 weeks totaled $78.3 net of cash acquired. Purchase-price allocations remained preliminary at quarter-end.
- Management expected a potentially material French tax reassessment related to fiscal years 2008–2012. The company intended to contest it, had recorded no reserve, and stated that an unfavorable outcome could materially affect income tax expense.
- Foreign-currency movements materially affected reported sales and translated results. The filing also identifies risks associated with retail seasonality, console-cycle shifts, digital distribution and product safety or liability claims. Routine legal proceedings were not expected to have a material effect.
- Management cautioned that year-to-date results are not indicative of the full fiscal year because of seasonality. Future dividends remain subject to board approval.
Important facts for investors to verify
- Confirm the reporting period: the filing covers 2015 Q3, despite the 2014 Q3 metadata.
- Track whether Technology Brands growth translates into improved segment earnings as store conversions and expansion costs develop.
- Assess ongoing hardware, software and digital sales trends, comparable-store sales, and the effect of foreign exchange.
- Monitor cash conversion and seasonal inventory and payables changes, given the substantial year-to-date cash decline.
- Follow the French tax reassessment and final purchase accounting for Geeknet and Technology Brands acquisitions.
- Review the assumptions behind planned store growth, capital expenditures, dividends and share repurchases, as well as revolver availability and debt covenants.