GameStop Corp. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 27, 2012, compared with the periods ended October 29, 2011. Although the request metadata says “2011 Q3,” the filing itself is for fiscal 2012 Q3. GameStop operated 6,650 stores across the United States, Canada, Australia and Europe and sold new and used games, hardware, accessories, digital products and other merchandise.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $1,772.8 | $1,946.8 | $5,325.2 | $5,971.9 |
| Gross profit / margin | $557.4 / 31.4% | $572.9 / 29.4% | $1,676.6 / 31.5% | $1,736.3 / 29.1% |
| Operating income (loss) | $(603.5) | $82.6 | $(453.9) | $267.4 |
| Net income (loss) attributable to GameStop | $(624.3) | $53.9 | $(530.8) | $165.2 |
| Diluted EPS | $(5.08) | $0.39 | $(4.13) | $1.16 |
- Impairments drove reported losses: GameStop recorded $678.8 million of impairment charges in Q3: $627.0 million of goodwill, $44.9 million for the Micromania trade name and $6.9 million of property and equipment. The goodwill impairments affected Canada, Australia and Europe; the filing describes them as non-cash and non-tax-deductible. Excluding the impairment charges, management reported Q3 operating earnings of $75.3 million and net income of $47.2 million; for the 39-week period, $224.9 million and $140.7 million, respectively. These are company-presented adjusted figures, not reported GAAP results.
- Margins and expenses: Gross margin improved year over year, chiefly from sales mix and reduced promotions. SG&A fell slightly in dollars but rose to 24.7% of Q3 sales from 22.8% as lower sales reduced fixed-cost leverage. For the 39 weeks, SG&A was 24.8% of sales versus 22.2%.
- Cash flow: Operating cash flow was $203.7 million for the 39 weeks, versus $211.0 million a year earlier; investing cash outflow was $91.9 million versus $162.8 million, and financing cash outflow was $395.4 million versus $327.6 million. Cash declined $288.6 million from $655.0 million at fiscal-year start to $366.4 million at October 27.
- Balance sheet and debt: Cash was $366.4 million; inventory $1,645.7 million; current assets $2,252.4 million; current liabilities $2,100.6 million; total assets $4,349.3 million; and stockholders’ equity $2,097.6 million. No senior notes were outstanding. The $400 million asset-based revolver had no borrowings and $391.0 million available, with $9.0 million of letters of credit outstanding. A separate discretionary foreign line showed $0.6 million of overdrafts and $4.6 million of guarantees.
Material changes versus prior period
- Q3 sales fell 8.9%; comparable-store sales declined 8.3%. For the 39 weeks, sales fell 10.8% and comparable-store sales declined 10.2%.
- New hardware sales decreased 33.4% in Q3, new software 12.4%, and used products 8.9%. Management attributed weakness primarily to the late stage of the console cycle, fewer new software releases and lower store traffic. “Other” sales, including mobile and PC products, grew 31.1% in Q3 and 21.0% for the 39 weeks.
- The improvement in gross margin did not offset lower sales and higher impairment charges. International segments recorded most of the impairment-related operating losses; the U.S. segment remained profitable.
- Interest expense fell to $1.2 million in Q3 and $2.9 million for the 39 weeks, reflecting prior repayments and redemption of senior notes. Share repurchases and dividends materially used cash: $328.2 million of repurchases and $71.4 million of dividends were paid during the 39 weeks.
Outlook, risks and unusual items
- Management said 39-week results are not indicative of the full fiscal year because of seasonality; the 53-week fiscal 2012 ends February 2, 2013, with the fourth quarter typically contributing the largest share of sales and operating profit.
- Management expected approximately 135 store openings for fiscal 2012, following 123 openings in the first 39 weeks, and projected about $130 million in fiscal-year capital expenditures. It stated that cash, operating cash flow and revolver availability should fund operations and planned investment for at least the next 12 months.
- Management expected the November 2012 Wii U launch to pressure gross margin in Q4 and future years. It cited the aging console generation, weaker demand, digital distribution, mobile/social/browser gaming, competition, economic conditions, product-release timing and international operations among material business risks.
- On November 13, 2012, the board approved a $0.25-per-share quarterly dividend and a new $500 million share-repurchase authorization, replacing the remaining prior authorization. The company had repurchased 16.7 million shares for $334.7 million during the 39 weeks; an additional 0.1 million shares were purchased after quarter-end through November 28.
- Management said ordinary-course legal proceedings, including wage-and-hour and consumer class actions, were not expected to have a material adverse effect. The IRS was examining specified tax years; the company did not expect a material impact, though the possible range of changes in certain unrecognized tax benefits could not be estimated.
Key facts for investors to verify
- Whether comparable-store sales and demand stabilize, particularly in new hardware, new software and used products, and whether growth in mobile, PC and digital products can offset declines.
- Assumptions and valuation sensitivity behind the $678.8 million impairment, especially projected sales, margins, discount rates and international reporting-unit cash flows.
- Fourth-quarter holiday performance and the actual margin impact of the Wii U launch, given the filing’s seasonality warning.
- Cash conversion and liquidity through the holiday inventory cycle, including the effect of buybacks, dividends and planned capital expenditures on cash balances and revolver availability.
- Execution of store-opening, digital-investment and international restructuring plans, together with developments in tax audits, legal proceedings and foreign-exchange exposure.