GameStop Corp. — Form 10-Q Summary
Period clarification: The request identifies “2016 Q1,” but the filing is for the 13 weeks ended April 29, 2017 (fiscal 2017 first quarter), compared with the 13 weeks ended April 30, 2016. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Business context and reporting period
GameStop operated 7,503 stores across its video-game and Technology Brands businesses. Its five reportable segments were the United States, Canada, Australia, Europe, and Technology Brands, which includes Spring Mobile, Simply Mac, and AT&T- and Cricket-branded retail stores. Management notes that sales and operating profit are seasonal, typically concentrated in the holiday quarter, so first-quarter results are not indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $2,045.9 | $1,971.5 |
| Gross profit / margin | $702.5 / 34.3% | $675.5 / 34.3% |
| Operating earnings / margin | $101.1 / 4.9% | $114.0 / 5.8% |
| Net income | $59.0 | $65.8 |
| Diluted EPS | $0.58 | $0.63 |
| Net cash used in operations | $256.8 | $376.1 |
- Sales rose 3.8% and gross profit rose 4.0%, while SG&A increased 8.2% to $563.5. Net income fell 10.3%. Interest expense, net, increased to $13.9 from $10.8; the filing attributes the increase principally to the $475 million 2021 senior notes issued in March 2016.
- Cash and cash equivalents were $311.9 at April 29, 2017, down from $669.4 at January 28, 2017. Current assets were $1,847.0 and current liabilities $1,465.6. Cash used in investing activities was $27.2; cash used in financing was $65.0, including $39.7 of dividends paid and $22.0 of share repurchases.
- Long-term debt, net, was $815.7, comprising $350 million of 5.50% notes due 2019 and $475 million of 6.75% notes due 2021. The $400 million asset-based revolver had no borrowings and $392.5 of availability; standby letters of credit were $7.5. The company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Comparable sales increased 2.3%, compared with a 6.2% decline a year earlier. U.S. comparable sales fell 2.4%; Canada, Australia, and Europe increased 17.6%, 18.2%, and 16.5%, respectively. Technology Brands comparable store gross profit declined 18.7%.
- Hardware sales increased 24.6%, primarily on the Nintendo Switch launch; Technology Brands sales rose 21.5%, and collectibles sales rose 39.1%. These gains were partly offset by declines in new software sales (8.2%) and pre-owned/value products (6.2%).
- Operating earnings declined 11.3%. Higher SG&A, including costs associated with Technology Brands growth, more than offset higher gross profit. Operating margin contracted from 5.8% to 4.9%, while gross margin was unchanged.
- Operating cash use improved by $119.3 year over year, primarily due to the timing of tax payments. The first-quarter cash outflow remained substantial and management cautions that the business is seasonal.
Outlook, management commentary, risks, and unusual items
- 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 million to $120 million, principally for Technology Brands, distribution and information systems, digital initiatives, store openings, and remodels. No earnings or sales guidance was provided in the supplied filing text.
- The company increased its annual dividend from $1.48 to $1.52 per share and declared a $0.38 quarterly dividend payable June 20, 2017, subject to board approval of future dividends.
- Management cited the Nintendo Switch launch as a sales driver, while weaker new game releases weighed on software and pre-owned sales. Technology Brands growth from acquisitions and new stores was partly offset by a slower wireless upgrade cycle, commission changes, and an 18.7% decline in comparable store gross profit.
- A French tax dispute presents a material contingency: tax reassessments assert approximately €85.5 million of potential additional tax for fiscal years 2008–2012. GameStop is contesting the assessments, has recorded no reserve, and says an adverse outcome could materially affect income tax expense. It may face additional reassessments for later years.
- Acquisition-related contingent consideration was $43.2 million, with estimated future consideration ranging from $40 million to $50 million. The company reported no material change in the liability during the quarter. It also expects the forthcoming lease-accounting standard to materially increase reported assets and liabilities.
Most important facts for investors to verify
- Confirm the reporting-period discrepancy: this is a quarter ended April 29, 2017, not a 2016 first-quarter filing.
- Track whether sales growth and international comparable-sales gains continue, and whether U.S. comparable sales and Technology Brands comparable gross profit recover.
- Assess whether SG&A growth and lower operating margin persist as Technology Brands expands, and monitor the profitability of acquisitions and new stores.
- Review seasonal working-capital cash outflows, cash levels, dividend and repurchase spending, debt-service costs, and revolver availability.
- Monitor developments in the French tax reassessments, including potential additional years and any reserve or financial-statement impact.