UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JULY 28, 2012AUGUST 3, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO |
COMMISSION FILE NO. 1-32637
GameStop Corp.
(Exact name of registrant as specified in its Charter)
Delaware | 20-2733559 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
625 Westport Parkway, | 76051 (Zip Code) | |
Grapevine, Texas | ||
(Address of principal executive offices) |
Registrant’s telephone number, including area code:
(817) 424-2000
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||||||||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Number of shares of $.001 par value Class A Common Stock outstanding as of August 28, 2012: 123,429,414September 4, 2013: 116,896,851
Page No. | ||||||
PART I — FINANCIAL INFORMATION | ||||||
Item 1. | ||||||
Notes to Condensed Consolidated Financial Statements (unaudited) | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | ||||||
Item 4. | ||||||
PART II — OTHER INFORMATION | ||||||
Item 1. | ||||||
Item 1A. | ||||||
Item 2. | ||||||
Item 6. | ||||||
PART I — FINANCIAL INFORMATION
GAMESTOP CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 28, 2012 | July 30, 2011 | January 28, 2012 | August 3, 2013 | July 28, 2012 | February 2, 2013 | |||||||||||||||||||
(Unaudited) | (Unaudited) | (In millions, except per share data) | ||||||||||||||||||||||
(In millions, except per share data) | (Unaudited) | |||||||||||||||||||||||
ASSETS: | ASSETS: | ASSETS: | ||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 138.7 | $ | 224.8 | $ | 655.0 | $ | 199.5 | $ | 138.7 | $ | 635.8 | ||||||||||||
Receivables, net | 40.2 | 44.2 | 64.4 | 55.7 | 40.2 | 73.6 | ||||||||||||||||||
Merchandise inventories, net | 980.2 | 1,059.9 | 1,137.5 | 1,004.4 | 980.2 | 1,171.3 | ||||||||||||||||||
Deferred income taxes — current | 43.3 | 24.6 | 44.7 | |||||||||||||||||||||
Deferred income taxes – current | 55.2 | 43.3 | 61.7 | |||||||||||||||||||||
Prepaid taxes | 61.5 | 49.3 | — | 50.9 | 61.5 | — | ||||||||||||||||||
Prepaid expenses | 88.4 | 87.4 | 79.9 | 96.2 | 88.4 | 61.2 | ||||||||||||||||||
Other current assets | 27.1 | 19.7 | 15.8 | 2.6 | 27.1 | 7.3 | ||||||||||||||||||
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Total current assets | 1,379.4 | 1,509.9 | 1,997.3 | 1,464.5 | 1,379.4 | 2,010.9 | ||||||||||||||||||
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Property and equipment: | ||||||||||||||||||||||||
Land | 22.1 | 25.6 | 22.8 | 20.7 | 22.1 | 22.5 | ||||||||||||||||||
Buildings and leasehold improvements | 594.5 | 592.8 | 602.2 | 594.3 | 594.5 | 606.4 | ||||||||||||||||||
Fixtures and equipment | 889.7 | 867.8 | 876.3 | 939.2 | 889.7 | 926.0 | ||||||||||||||||||
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Total property and equipment | 1,506.3 | 1,486.2 | 1,501.3 | 1,554.2 | 1,506.3 | 1,554.9 | ||||||||||||||||||
Less accumulated depreciation and amortization | 976.9 | 871.3 | 928.0 | 1,074.8 | 976.9 | 1,030.1 | ||||||||||||||||||
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Net property and equipment | 529.4 | 614.9 | 573.3 | 479.4 | 529.4 | 524.8 | ||||||||||||||||||
Goodwill, net | 1,981.8 | 2,073.2 | 2,019.0 | |||||||||||||||||||||
Other intangible assets | 189.5 | 278.1 | 209.1 | |||||||||||||||||||||
Goodwill | 1,365.1 | 1,981.8 | 1,383.1 | |||||||||||||||||||||
Other intangible assets, net | 144.4 | 189.5 | 153.4 | |||||||||||||||||||||
Other noncurrent assets | 51.7 | 63.3 | 48.7 | 57.0 | 51.7 | 61.4 | ||||||||||||||||||
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Total noncurrent assets | 2,752.4 | 3,029.5 | 2,850.1 | 2,045.9 | 2,752.4 | 2,122.7 | ||||||||||||||||||
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Total assets | $ | 4,131.8 | $ | 4,539.4 | $ | 4,847.4 | $ | 3,510.4 | $ | 4,131.8 | $ | 4,133.6 | ||||||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY: | LIABILITIES AND STOCKHOLDERS’ EQUITY: | LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||
Accounts payable | $ | 462.1 | $ | 469.7 | $ | 804.3 | $ | 356.8 | $ | 462.1 | $ | 870.9 | ||||||||||||
Accrued liabilities | 721.2 | 662.0 | 749.8 | 843.1 | 721.2 | 741.0 | ||||||||||||||||||
Taxes payable | — | — | 79.8 | |||||||||||||||||||||
Income taxes payable | — | — | 103.4 | |||||||||||||||||||||
Revolver debt outstanding | — | 10.0 | — | 50.0 | — | — | ||||||||||||||||||
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Total current liabilities | 1,183.3 | 1,141.7 | 1,633.9 | 1,249.9 | 1,183.3 | 1,715.3 | ||||||||||||||||||
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Senior notes payable, long-term portion, net | — | 249.3 | — | |||||||||||||||||||||
Deferred taxes | 60.9 | 69.3 | 67.1 | |||||||||||||||||||||
Deferred income taxes | 27.3 | 60.9 | 31.5 | |||||||||||||||||||||
Other long-term liabilities | 98.3 | 99.0 | 106.2 | 76.5 | 98.3 | 100.5 | ||||||||||||||||||
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Total long-term liabilities | 159.2 | 417.6 | 173.3 | 103.8 | 159.2 | 132.0 | ||||||||||||||||||
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Total liabilities | 1,342.5 | 1,559.3 | 1,807.2 | 1,353.7 | 1,342.5 | 1,847.3 | ||||||||||||||||||
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Commitments and contingencies (Note 8) | ||||||||||||||||||||||||
Commitments and contingencies (Note 7) | ||||||||||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||||||
Preferred stock — authorized 5.0 shares; no shares issued or outstanding | — | — | — | — | — | — | ||||||||||||||||||
Class A common stock — $.001 par value; authorized 300.0 shares; 124.5, 140.2 and 136.8 shares outstanding, respectively | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||
Class A common stock — $.001 par value; authorized 300.0 shares; 127.1, 134.5 and 128.2 shares issued, 117.1, 124.5 and 118.2 shares outstanding, respectively | 0.1 | 0.1 | 0.1 | |||||||||||||||||||||
Additional paid-in-capital | 479.1 | 799.4 | 726.6 | 286.3 | 479.1 | 348.3 | ||||||||||||||||||
Accumulated other comprehensive income | 111.4 | 265.9 | 169.7 | 98.3 | 111.4 | 164.4 | ||||||||||||||||||
Retained earnings | 2,198.7 | 1,917.1 | 2,145.7 | 1,772.0 | 2,198.7 | 1,773.5 | ||||||||||||||||||
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Equity attributable to GameStop Corp. stockholders | 2,789.3 | 2,982.5 | 3,042.1 | |||||||||||||||||||||
Deficit attributable to noncontrolling interest | — | (2.4 | ) | (1.9 | ) | |||||||||||||||||||
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Total equity | 2,789.3 | 2,980.1 | 3,040.2 | |||||||||||||||||||||
Total stockholders’ equity | 2,156.7 | 2,789.3 | 2,286.3 | |||||||||||||||||||||
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Total liabilities and stockholders’ equity | $ | 4,131.8 | $ | 4,539.4 | $ | 4,847.4 | $ | 3,510.4 | $ | 4,131.8 | $ | 4,133.6 | ||||||||||||
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See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Net sales | $ | 1,550.2 | $ | 1,743.7 | $ | 3,552.4 | $ | 4,025.1 | ||||||||
Cost of sales | 1,030.9 | 1,200.5 | 2,433.2 | 2,861.7 | ||||||||||||
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Gross profit | 519.3 | 543.2 | 1,119.2 | 1,163.4 | ||||||||||||
Selling, general and administrative expenses | 440.9 | 442.5 | 881.3 | 885.2 | ||||||||||||
Depreciation and amortization | 43.9 | 47.1 | 88.4 | 93.4 | ||||||||||||
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Operating earnings | 34.5 | 53.6 | 149.5 | 184.8 | ||||||||||||
Interest income | (0.2 | ) | (0.4 | ) | (0.4 | ) | (0.5 | ) | ||||||||
Interest expense | 1.1 | 6.7 | 1.7 | 13.0 | ||||||||||||
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Earnings before income tax expense | 33.6 | 47.3 | 148.2 | 172.3 | ||||||||||||
Income tax expense | 12.6 | 16.7 | 54.8 | 61.8 | ||||||||||||
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Consolidated net income | 21.0 | 30.6 | 93.4 | 110.5 | ||||||||||||
Net loss attributable to noncontrolling interests | — | 0.3 | 0.1 | 0.8 | ||||||||||||
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Consolidated net income attributable to GameStop | $ | 21.0 | $ | 30.9 | $ | 93.5 | $ | 111.3 | ||||||||
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Basic net income per common share1 | $ | 0.16 | $ | 0.22 | $ | 0.71 | $ | 0.78 | ||||||||
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Diluted net income per common share1 | $ | 0.16 | $ | 0.22 | $ | 0.71 | $ | 0.78 | ||||||||
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Dividends per common share | $ | 0.15 | $ | — | $ | 0.30 | $ | — | ||||||||
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Weighted average shares of common stock — basic | 128.7 | 141.0 | 131.3 | 141.9 | ||||||||||||
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Weighted average shares of common stock — diluted | 129.1 | 142.2 | 132.0 | 142.9 | ||||||||||||
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13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Net sales | $ | 1,383.7 | $ | 1,550.2 | $ | 3,249.0 | $ | 3,552.4 | ||||||||
Cost of sales | 902.3 | 1,030.9 | 2,189.3 | 2,433.2 | ||||||||||||
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Gross profit | 481.4 | 519.3 | 1,059.7 | 1,119.2 | ||||||||||||
Selling, general and administrative expenses | 421.6 | 440.9 | 870.8 | 881.3 | ||||||||||||
Depreciation and amortization | 41.0 | 43.9 | 82.9 | 88.4 | ||||||||||||
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Operating earnings | 18.8 | 34.5 | 106.0 | 149.5 | ||||||||||||
Interest income | (0.1 | ) | (0.2 | ) | (0.2 | ) | (0.4 | ) | ||||||||
Interest expense | 1.4 | 1.1 | 2.4 | 1.7 | ||||||||||||
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Earnings before income tax expense | 17.5 | 33.6 | 103.8 | 148.2 | ||||||||||||
Income tax expense | 7.0 | 12.6 | 38.7 | 54.8 | ||||||||||||
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Consolidated net income | 10.5 | 21.0 | 65.1 | 93.4 | ||||||||||||
Net loss attributable to noncontrolling interests | — | — | — | 0.1 | ||||||||||||
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Consolidated net income attributable to GameStop Corp. | $ | 10.5 | $ | 21.0 | $ | 65.1 | $ | 93.5 | ||||||||
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Basic net income per common share attributable to GameStop Corp. | $ | 0.09 | $ | 0.16 | $ | 0.55 | $ | 0.71 | ||||||||
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Diluted net income per common share attributable to GameStop Corp. | $ | 0.09 | $ | 0.16 | $ | 0.55 | $ | 0.71 | ||||||||
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Dividends per common share | $ | 0.275 | $ | 0.15 | $ | 0.55 | $ | 0.30 | ||||||||
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Weighted average shares of common stock outstanding — basic | 117.9 | 128.7 | 118.1 | 131.3 | ||||||||||||
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Weighted average shares of common stock outstanding — diluted | 119.2 | 129.1 | 119.3 | 132.0 | ||||||||||||
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See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||||||||||
Consolidated net income | $ | 21.0 | $ | 30.6 | $ | 93.4 | $ | 110.5 | $ | 10.5 | $ | 21.0 | $ | 65.1 | $ | 93.4 | ||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||
Foreign currency translation | (59.0 | ) | (26.5 | ) | (58.4 | ) | 103.2 | |||||||||||||||||||||||||
Foreign currency translation adjustment | (48.0 | ) | (59.0 | ) | (66.1 | ) | (58.4 | ) | ||||||||||||||||||||||||
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Total comprehensive income | (38.0 | ) | 4.1 | 35.0 | 213.7 | |||||||||||||||||||||||||||
Total comprehensive income (loss) | (37.5 | ) | (38.0 | ) | (1.0 | ) | 35.0 | |||||||||||||||||||||||||
Comprehensive loss attributable to noncontrolling interests | — | 0.4 | 0.2 | 1.0 | — | — | — | 0.2 | ||||||||||||||||||||||||
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Comprehensive income attributable to GameStop | $ | (38.0 | ) | $ | 4.5 | $ | 35.2 | $ | 214.7 | |||||||||||||||||||||||
Comprehensive income (loss) attributable to GameStop Corp. | $ | (37.5 | ) | $ | (38.0 | ) | $ | (1.0 | ) | $ | 35.2 | |||||||||||||||||||||
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See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
GameStop Corp. Stockholders | ||||||||||||||||||||||||||||
Class A Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | |||||||||||||||||||||||||
Shares | Common Stock | Noncontrolling Interest | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
Balance at January 28, 2012 | 136.8 | $ | 0.1 | $ | 726.6 | $ | 169.7 | $ | 2,145.7 | $ | (1.9 | ) | $ | 3,040.2 | ||||||||||||||
Purchase of subsidiary shares from noncontrolling interest | — | — | (2.1 | ) | — | — | 2.1 | — | ||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income (loss) for the 26 weeks ended July 28, 2012 | — | — | — | — | 93.5 | (0.1 | ) | 93.4 | ||||||||||||||||||||
Foreign currency translation | — | — | — | (58.3 | ) | — | (0.1 | ) | (58.4 | ) | ||||||||||||||||||
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Total comprehensive income | 35.0 | |||||||||||||||||||||||||||
Dividends | — | — | — | — | (40.5 | ) | — | (40.5 | ) | |||||||||||||||||||
Stock-based compensation | — | — | 10.4 | — | — | — | 10.4 | |||||||||||||||||||||
Purchase of treasury stock | (13.0 | ) | — | (257.9 | ) | — | — | — | (257.9 | ) | ||||||||||||||||||
Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax benefit of $0.4) | 0.7 | — | 2.1 | — | — | — | 2.1 | |||||||||||||||||||||
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Balance at July 28, 2012 | 124.5 | $ | 0.1 | $ | 479.1 | $ | 111.4 | $ | 2,198.7 | $ | — | $ | 2,789.3 | |||||||||||||||
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Class A Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total | ||||||||||||||||||||
Shares | Common Stock | |||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
Balance at February 2, 2013 | 118.2 | $ | 0.1 | $ | 348.3 | $ | 164.4 | $ | 1,773.5 | $ | 2,286.3 | |||||||||||||
Net income for the 26 weeks ended August 3, 2013 | — | — | — | — | 65.1 | 65.1 | ||||||||||||||||||
Foreign currency translation | — | — | — | (66.1 | ) | — | (66.1 | ) | ||||||||||||||||
Dividends1 | — | — | — | — | (66.6 | ) | (66.6 | ) | ||||||||||||||||
Stock-based compensation | — | — | 11.5 | — | — | 11.5 | ||||||||||||||||||
Purchase of treasury stock | (3.4 | ) | — | (114.4 | ) | — | — | (114.4 | ) | |||||||||||||||
Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax benefit of $1.6) | 2.3 | — | 40.9 | — | — | 40.9 | ||||||||||||||||||
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Balance at August 3, 2013 | 117.1 | $ | 0.1 | $ | 286.3 | $ | 98.3 | $ | 1,772.0 | $ | 2,156.7 | |||||||||||||
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1 | Dividends declared per common share were $0.55 in the 26 weeks ended August 3, 2013. |
GameStop Corp. Stockholders | Noncontrolling Interest | Total | ||||||||||||||||||||||||||
Class A Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | |||||||||||||||||||||||||
Shares | Common Stock | |||||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||
Balance at January 28, 2012 | 136.8 | $ | 0.1 | $ | 726.6 | $ | 169.7 | $ | 2,145.7 | $ | (1.9 | ) | $ | 3,040.2 | ||||||||||||||
Purchase of subsidiary shares from noncontrolling interest | — | — | (2.1 | ) | — | — | 2.1 | — | ||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||
Net income (loss) for the 26 weeks ended July 28, 2012 | — | — | — | — | 93.5 | (0.1 | ) | 93.4 | ||||||||||||||||||||
Foreign currency translation | — | — | — | (58.3 | ) | — | (0.1 | ) | (58.4 | ) | ||||||||||||||||||
Dividends2 | — | — | — | — | (40.5 | ) | — | (40.5 | ) | |||||||||||||||||||
Stock-based compensation | — | — | 10.4 | — | — | — | 10.4 | |||||||||||||||||||||
Purchase of treasury stock | (13.0 | ) | — | (257.9 | ) | — | — | — | (257.9 | ) | ||||||||||||||||||
Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax benefit of $0.4) | 0.7 | — | 2.1 | — | — | — | 2.1 | |||||||||||||||||||||
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Balance at July 28, 2012 | 124.5 | $ | 0.1 | $ | 479.1 | $ | 111.4 | $ | 2,198.7 | $ | — | $ | 2,789.3 | |||||||||||||||
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2 | Dividends declared per common share were $0.30 in the 26 weeks ended July 28, 2012. |
See accompanying notes to condensed consolidated financial statements.
GAMESTOP CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
26 Weeks Ended | 26 Weeks Ended | |||||||||||||||
July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | |||||||||||||
(In millions) | (In millions) | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Consolidated net income | $ | 93.4 | $ | 110.5 | $ | 65.1 | $ | 93.4 | ||||||||
Adjustments to reconcile net income to net cash flows used in operating activities: | ||||||||||||||||
Depreciation and amortization (including amounts in cost of sales) | 89.6 | 94.5 | 84.2 | 89.6 | ||||||||||||
Amortization and retirement of deferred financing fees and issue discounts | 0.6 | 1.2 | ||||||||||||||
Stock-based compensation expense | 10.4 | 9.8 | 11.5 | 10.4 | ||||||||||||
Deferred income taxes | (3.4 | ) | (2.5 | ) | 1.0 | (3.4 | ) | |||||||||
Excess tax (benefits) expense realized from exercise of stock-based awards | (0.4 | ) | 0.4 | |||||||||||||
Loss on disposal of property and equipment | 2.0 | 6.9 | 3.4 | 2.0 | ||||||||||||
Other, net | (2.5 | ) | 0.2 | |||||||||||||
Changes in other long-term liabilities | (6.7 | ) | 1.2 | (22.4 | ) | (6.7 | ) | |||||||||
Changes in operating assets and liabilities, net: | ||||||||||||||||
Receivables, net | 23.5 | 22.6 | 16.9 | 23.5 | ||||||||||||
Merchandise inventories | 133.6 | 217.5 | 142.2 | 133.6 | ||||||||||||
Prepaid expenses and other current assets | (20.9 | ) | (12.7 | ) | (31.8 | ) | (20.9 | ) | ||||||||
Prepaid income taxes and accrued income taxes payable | (145.2 | ) | (112.0 | ) | (152.9 | ) | (145.2 | ) | ||||||||
Accounts payable and accrued liabilities | (350.3 | ) | (563.1 | ) | (389.3 | ) | (350.3 | ) | ||||||||
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Net cash flows used in operating activities | (173.8 | ) | (225.7 | ) | (274.6 | ) | (173.8 | ) | ||||||||
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Cash flows from investing activities: | ||||||||||||||||
Purchase of property and equipment | (53.6 | ) | (87.9 | ) | (47.3 | ) | (53.6 | ) | ||||||||
Acquisitions, net of cash acquired | (1.5 | ) | (27.4 | ) | — | (1.5 | ) | |||||||||
Other | (2.1 | ) | (5.7 | ) | 1.4 | (2.1 | ) | |||||||||
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Net cash flows used in investing activities | (57.2 | ) | (121.0 | ) | (45.9 | ) | (57.2 | ) | ||||||||
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Cash flows from financing activities: | ||||||||||||||||
Purchase of treasury shares | (246.6 | ) | (174.4 | ) | (114.4 | ) | (246.6 | ) | ||||||||
Dividends paid | (40.3 | ) | — | (66.2 | ) | (40.3 | ) | |||||||||
Borrowings from the revolver | 36.0 | 35.0 | 130.0 | 36.0 | ||||||||||||
Repayments of revolver borrowings | (36.0 | ) | (25.0 | ) | (80.0 | ) | (36.0 | ) | ||||||||
Issuance of shares relating to stock options | 1.6 | 13.2 | 39.3 | 1.6 | ||||||||||||
Excess tax benefits (expense) realized from exercise of stock-based awards | 0.4 | (0.4 | ) | |||||||||||||
Excess tax benefits realized from exercise of stock-based awards | 3.1 | 0.4 | ||||||||||||||
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Net cash flows used in financing activities | (284.9 | ) | (151.6 | ) | (88.2 | ) | (284.9 | ) | ||||||||
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Exchange rate effect on cash and cash equivalents | (0.4 | ) | 12.3 | (27.6 | ) | (0.4 | ) | |||||||||
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Net decrease in cash and cash equivalents | (516.3 | ) | (486.0 | ) | (436.3 | ) | (516.3 | ) | ||||||||
Cash and cash equivalents at beginning of period | 655.0 | 710.8 | 635.8 | 655.0 | ||||||||||||
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Cash and cash equivalents at end of period | $ | 138.7 | $ | 224.8 | $ | 199.5 | $ | 138.7 | ||||||||
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See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Summary of Significant Accounting Policies |
Basis of Presentation
GameStop Corp. (together with its predecessor companies, “GameStop,” “we,” “us,” “our,” or the “Company”), a Delaware corporation, is the world’s largest multichannel video game retailer. The Company sellsWe sell new and usedpre-owned video game hardware, physical and digital video game software, accessories, as well as PC entertainment software, new and pre-owned mobile and consumer electronics products and other merchandise. The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in theour opinion, of the Company’s management, necessary for a fair presentation of the information for the periods presented. These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required under GAAP for complete consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Company’sour annual report on Form 10-K for the 5253 weeks ended January 28, 2012February 2, 2013 (“fiscal 2011”2012”). The preparation of financial statements in conformity with GAAP requires managementus to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, management haswe have made itsour best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by managementus could have a significant impact on the Company’sour financial results. Actual results could differ from those estimates.
Due to the seasonal nature of the business, the results of operations for the 26 weeks ended July 28, 2012August 3, 2013 are not indicative of the results to be expected for the 5352 weeks ending February 1, 2014 (“fiscal 2013”).
Restricted Cash
Restricted cash of $10.4 million, $12.0 million and $13.4 million as of August 3, 2013, July 28, 2012 and February 2, 2013, (“fiscal 2012”).
Certain reclassifications have been made to conform the prior period data to the current interim period presentation.respectively, consists primarily of bank deposits serving as collateral for bank guarantees issued on behalf of our foreign subsidiaries and is included in other noncurrent assets in our condensed consolidated balance sheets.
Recently AdoptedIssued Accounting Standards
DuringIn July 2013, accounting standards update (“ASU”) 2013-11“Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” was issued requiring an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carry forward, a similar tax loss, or a tax credit carry forward. This ASU will be effective for us beginning the first quarter of fiscal 2012, we adopted the accounting standard update regarding the presentation of comprehensive income. This accounting standard update was issued to increase the prominence of items reported in other comprehensive income. The accounting standard update requires2014. We do not expect that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. In connection with the adoption of this accounting standard update, our condensed consolidated financial statements now include separate statements of comprehensive income.
During the first quarter of fiscal 2012, we adopted the accounting standard update regarding fair value measurement and disclosure. This accounting standard update was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This accounting standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The adoption of this accounting standard update did notASU will have a significantan impact on our condensed consolidated financial statements.statements as we currently do not have any unrecognized tax benefits in the same jurisdictions in which we have tax loss or credit carryovers.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In March 2013, ASU 2013-05“Foreign Currency Matters (Topic 830)” was issued providing guidance with respect to the release of cumulative translation adjustments into net income when a parent company sells either a part or all of an investment in a foreign entity. The ASU requires the release of cumulative translation adjustments when a company no longer holds a controlling financial interest in a foreign subsidiary or a group of assets that constitutes a business within a foreign entity. This ASU will be effective for us beginning the first quarter of 2014. We are evaluating the effect of this ASU, but do not expect it to have a significant impact on our condensed consolidated financial statements.
In February 2013, ASU 2013-02“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” was issued regarding disclosure of amounts reclassified out of accumulated other comprehensive income by component. An entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU was effective for our annual and interim periods beginning in fiscal 2013. The ASU had no effect on our condensed consolidated financial statements.
2. | Accounting for Stock-Based Compensation |
The following is a summary of the stock-based awards granted during the periods indicated:
26 Weeks Ended August 3, 2013 | 26 Weeks Ended July 28, 2012 | |||||||||||||||
Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Stock options – time-vested | 457 | $ | 7.10 | — | — | |||||||||||
Restricted stock awards – time-vested | 916 | $ | 24.82 | 784 | $ | 23.66 | ||||||||||
Restricted stock awards – performance-based | 262 | $ | 24.82 | 626 | $ | 23.66 | ||||||||||
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Total stock-based awards | 1,635 | 1,410 | ||||||||||||||
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For stock options granted, the Company records share-basedwe record stock-based compensation expense in earnings based on the grant-date fair value. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This valuation model requires the use of subjective assumptions, including expected option life, expected volatility, expected dividend yield and the expected employee forfeiture rate. The Company usesWe use historical data to estimate the option life, dividend yield and the employee forfeiture rate, and usesuse historical volatility when estimating the stock price volatility. ThereThe following assumptions were noused with respect to the stock options granted during the 26 weeks ended July 28, 2012 and July 30, 2011.granted:
In the 13 weeks ended July 28, 2012 and July 30, 2011, the Company included compensation expense relating to stock option grants of $0.7 million and $1.6 million, respectively, in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. In the 26 weeks ended July 28, 2012 and July 30, 2011, the Company included compensation expense relating to stock option grants of $1.4 million and $3.2 million, respectively, in selling, general and administrative expenses. As of July 28, 2012, the unrecognized compensation expense related to the unvested portion of our stock options was $1.4 million, which is expected to be recognized over a weighted average period of 0.6 years. The total intrinsic value of options exercised during the 13 weeks ended July 28, 2012 and July 30, 2011 was $0.7 million and $2.4 million, respectively. The total intrinsic value of options exercised during the 26 weeks ended July 28, 2012 and July 30, 2011 was $1.1 million and $10.0 million, respectively.
During the 13 weeks ended July 28, 2012, the Company granted 13,674 shares of restricted stock at a weighted average grant date fair value of $16.45, which vest in equal annual installments over three years. During the 13 weeks ended July 30, 2011, the Company granted 4,620 shares of restricted stock at a weighted average grant date fair value of $25.95, which vest in equal annual installments over three years. During the 26 weeks ended July 28, 2012, the Company granted 1,409,674 shares of restricted stock with a fair value of $23.66 per common share. Of these shares, 783,474 vest in equal annual installments over three years and 626,200 shares are subject to performance measures. Of the performance related restricted shares granted, 125,700 vest in equal annual installments over three years subject to performance targets based on fiscal 2012 operating results. The remaining 500,500 shares of performance based restricted shares granted are subject to performance targets which will be measured following the completion of the 52 weeks ending January 31, 2015. During the 26 weeks ended July 30, 2011, the Company granted 452,270 shares of restricted stock with a fair value of $20.90 per share. Of these shares, 371,770 vest in equal annual installments over three years, 76,475 vest over three years based on performance targets achieved, and 4,025 were forfeited based on fiscal 2011 performance. During the 13 weeks ended July 28, 2012 and July 30, 2011, the Company included compensation expense relating to the restricted stock grants in the amount of $4.8 million and $3.3 million, respectively, in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. During the 26 weeks ended July 28, 2012 and July 30, 2011, the Company included compensation expense relating to the restricted stock grants in the amount of $9.0 million and $6.6 million, respectively, in selling, general and administrative expenses. As of July 28, 2012, there was $34.4 million of unrecognized compensation expense related to nonvested restricted stock awards that is expected to be recognized over a weighted average period of 2.3 years.
26 Weeks Ended August 3, 2013 | ||||
Volatility | 46.4 | % | ||
Risk-free interest rate | 1.0 | % | ||
Expected life (years) | 5.6 | |||
Expected dividend yield | 4.3 | % |
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total stock-based compensation recognized in selling, general and administrative expenses was as follows for the periods indicated:
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||
(In millions) | ||||||||||||||||
Stock-based compensation expense | $ | 6.0 | $ | 5.5 | $ | 11.5 | $ | 10.4 |
As of August 3, 2013, the unrecognized compensation expense related to the unvested portion of our stock–based awards was $44.9 million, which is expected to be recognized over a weighted average period of 2.2 years. The total intrinsic value of options exercised during the 13 weeks ended August 3, 2013 and July 28, 2012 was $10.5 million and $0.7 million, respectively. The total intrinsic value of options exercised during the 26 weeks ended August 3, 2013 and July 28, 2012 was $21.1 million and $1.1 million, respectively.
3. | Computation of Net Income |
A reconciliation of shares used in calculating basic and diluted net income per common share is as follows:
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
Net income attributable to GameStop | $ | 21.0 | $ | 30.9 | $ | 93.5 | $ | 111.3 | ||||||||
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Weighted average common shares outstanding | 128.7 | 141.0 | 131.3 | 141.9 | ||||||||||||
Dilutive effect of options and restricted shares on common stock | 0.4 | 1.2 | 0.7 | 1.0 | ||||||||||||
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Common shares and dilutive potential common shares | 129.1 | 142.2 | 132.0 | 142.9 | ||||||||||||
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Net income per common share: | ||||||||||||||||
Basic | $ | 0.16 | $ | 0.22 | $ | 0.71 | $ | 0.78 | ||||||||
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Diluted | $ | 0.16 | $ | 0.22 | $ | 0.71 | $ | 0.78 | ||||||||
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The following table contains information on restricted shares and options to purchase shares of Class A Common Stock which were excluded from the computation of diluted earnings per share because they were anti-dilutive:
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
Consolidated net income attributable to GameStop Corp. | $ | 10.5 | $ | 21.0 | $ | 65.1 | $ | 93.5 | ||||||||
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Weighted average common shares outstanding | 117.9 | 128.7 | 118.1 | 131.3 | ||||||||||||
Dilutive effect of options and restricted shares on common stock(1) | 1.3 | 0.4 | 1.2 | 0.7 | ||||||||||||
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Common shares and dilutive potential common shares | 119.2 | 129.1 | 119.3 | 132.0 | ||||||||||||
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Net income per common share: | ||||||||||||||||
Basic | $ | 0.09 | $ | 0.16 | $ | 0.55 | $ | 0.71 | ||||||||
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Diluted | $ | 0.09 | $ | 0.16 | $ | 0.55 | $ | 0.71 | ||||||||
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(1) | ||||||||||||
Excludes 1.6 million, 5.5 million, 1.8 million and 3.9 million share-based awards for the 13 | ||||||||||||
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4. | Fair Value Measurements and Financial Instruments |
Recurring Fair Value Measurements and Derivative Financial Instruments
The Company defines fairFair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value accounting guidance applies to our forward exchange contracts, foreign currency options and cross-currency swaps (together, the “Foreign Currency Contracts”), Company-owned life insurance policies with a cash surrender value and certain nonqualified deferred compensation liabilities that are measured at fair value on a recurring basis in periods subsequent to initial recognition.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair value accounting guidance requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
We value our Foreign Currency Contracts, Company-owned life insurance policies with cash surrender values and certain nonqualified deferred compensation liabilities based on Level 2 inputs using quotations provided by major market news services, such as Bloomberg, and The Wall Street Journal, and industry-standard
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
models that consider various assumptions, including quoted forward prices, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures. When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
The following table provides the fair value of our assets and liabilities measured at fair value on a recurring basis and recorded on our condensed consolidated balance sheets (in millions):
July 28, 2012 | July 30, 2011 | January 28, 2012 | ||||||||||||||||||||||
Level 2 | Level 2 | Level 2 | August 3, 2013 | July 28, 2012 | February 2, 2013 | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Foreign Currency Contracts | $ | 33.1 | $ | 18.2 | $ | 17.0 | ||||||||||||||||||
Company-owned life insurance | 3.2 | 3.1 | 3.1 | |||||||||||||||||||||
Other current assets | $ | 2.6 | $ | 27.1 | $ | 7.3 | ||||||||||||||||||
Other noncurrent assets | 0.3 | 6.0 | 0.9 | |||||||||||||||||||||
Company-owned life insurance(1) | 5.4 | 3.2 | 3.5 | |||||||||||||||||||||
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Total assets | $ | 36.3 | $ | 21.3 | $ | 20.1 | 8.3 | 36.3 | 11.7 | |||||||||||||||
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Liabilities | ||||||||||||||||||||||||
Foreign Currency Contracts | $ | 1.7 | $ | 15.8 | $ | 2.5 | ||||||||||||||||||
Nonqualified deferred compensation | 0.9 | 1.0 | 0.8 | |||||||||||||||||||||
Accrued liabilities | 12.8 | 1.7 | 9.1 | |||||||||||||||||||||
Other long-term liabilities | 8.0 | — | 4.4 | |||||||||||||||||||||
Nonqualified deferred compensation(2) | 1.0 | 0.9 | 0.9 | |||||||||||||||||||||
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Total liabilities | $ | 2.6 | $ | 16.8 | $ | 3.3 | $ | 21.8 | $ | 2.6 | $ | 14.4 | ||||||||||||
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The Company uses
(1) | Recognized in other non-current assets in our condensed consolidated balance sheets. |
(2) | Recognized in accrued liabilities in our condensed consolidated balance sheets. |
We use Foreign Currency Contracts to manage currency risk primarily related to intercompany loans denominated in non-functional currencies and certain foreign currency assets and liabilities. These Foreign Currency Contracts are not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign currency assets and liabilities. The total gross notional value of derivatives related to our Foreign Currency Contracts was $576.4$692.3 million and $488.5$576.4 million as of August 3, 2013 and July 28, 2012, and July 30, 2011, respectively. The total net notional value of derivatives related to our Foreign Currency Contracts was $91.5$60.5 million and $192.8$91.5 million as of August 3, 2013 and July 28, 2012, and July 30, 2011, respectively.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Activity related to the trading of derivative instruments and the offsetting impact of related intercompany loans and foreign currency assets and liabilities recognized in selling, general and administrative expense is as follows (in millions):
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | |||||||||||||
Gains on the changes in fair value of derivative instruments | $ | 18.7 | $ | 11.3 | $ | 16.9 | $ | 2.0 | ||||||||
Losses on the re-measurement of related intercompany loans and foreign currency assets and liabilities | (20.5 | ) | (12.0 | ) | (18.0 | ) | (0.2 | ) | ||||||||
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Total | $ | (1.8 | ) | $ | (0.7 | ) | $ | (1.1 | ) | $ | 1.8 | |||||
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13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||
Gains (losses) on the changes in fair value of derivative instruments | $ | (19.7 | ) | $ | 18.7 | $ | (10.3 | ) | $ | 16.9 | ||||||
Gains (losses) on the re-measurement of related intercompany loans and foreign currency assets and liabilities | 22.2 | (20.5 | ) | 13.4 | (18.0 | ) | ||||||||||
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Total, net | $ | 2.5 | $ | (1.8 | ) | $ | 3.1 | $ | (1.1 | ) | ||||||
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We do not use derivative financial instruments for trading or speculative purposes. We are exposed to counterparty credit risk on all of our derivative financial instruments and cash equivalent investments. The Company managesWe manage counterparty risk according to the guidelines and controls established under our comprehensive risk management and investment policies. We continuously monitor our counterparty credit risk and utilize a number of different counterparties to minimize our exposure to potential defaults. We do not require collateral under derivative or investment agreements.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of derivative instruments not receiving hedge accounting treatment in the condensed consolidated balance sheets presented herein were as follows (in millions):
July 28, 2012 | July 30, 2011 | January 28, 2012 | ||||||||||
Assets | ||||||||||||
Foreign Currency Contracts | ||||||||||||
Other current assets | $ | 27.1 | $ | 16.0 | $ | 12.3 | ||||||
Other noncurrent assets | 6.0 | 2.2 | 4.7 | |||||||||
Liabilities | ||||||||||||
Foreign Currency Contracts | ||||||||||||
Accrued liabilities | (1.7 | ) | (14.3 | ) | (2.0 | ) | ||||||
Other long-term liabilities | — | (1.5 | ) | (0.5 | ) | |||||||
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Total derivatives | $ | 31.4 | $ | 2.4 | $ | 14.5 | ||||||
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Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company recordswe record certain assets and liabilities at fair value on a nonrecurring basis as required by GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. The CompanyWe did not record any significant impairment charges related to assets measured at fair value on a nonrecurring basis during the 26 weeks ended August 3, 2013 or July 28, 2012 and July 30, 2011.2012.
Other Fair Value Disclosures
The Company’s carrying value of financial instruments such as cash andour cash equivalents, receivables, net, and accounts payable and revolver debt outstanding approximates theirthe fair value except for differences with respectdue to the Company’s senior notes that were outstanding until December 2011. The fair value of the senior notes payable in the accompanying condensed consolidated balance sheet as of July 30, 2011 was estimated using Level 2 inputs based on quoted prices for those instruments. As of July 28, 2012, there were no senior notes outstanding. As of July 30, 2011, the senior notes payable had a carrying value of $249.3 million and a fair value of $252.8 million.their short maturities.
5. |
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During fiscal 2011, the Company announced a restructuring initiative related to the exit of certain markets in Europe and the closure of under-performing stores in the international segments, as well as the consolidation of European home office sites and back-office functions affecting our northern Europe and Spain operations. These restructuring charges were a result of management’s plan to rationalize the international store base and improve profitability.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the balance of accrued expenses related to the restructuring initiative and the changes in the accrued expenses as of and for the 13 weeks ended July 28, 2012 (in millions):
Activity for the 13 Weeks Ended July 28, 2012 | ||||||||||||||||||||
Accrued Balance as of April 28, 2012 | Charges | Cash Payments | Non-cash and Foreign Currency Changes | Accrued Balance as of July 28, 2012 | ||||||||||||||||
Termination benefits | $ | 2.6 | $ | — | $ | (0.9 | ) | $ | (0.1 | ) | $ | 1.6 | ||||||||
Facility closure and other costs | 2.1 | — | (0.4 | ) | (0.1 | ) | 1.6 | |||||||||||||
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Total | $ | 4.7 | $ | — | $ | (1.3 | ) | $ | (0.2 | ) | $ | 3.2 | ||||||||
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The following table summarizes the balance of accrued expenses related to the restructuring initiative and the changes in the accrued expenses as of and for the 26 weeks ended July 28, 2012 (in millions):
Activity for the 26 Weeks Ended July 28, 2012 | ||||||||||||||||||||
Accrued Balance as of January 28, 2012 | Charges | Cash Payments | Non-cash and Foreign Currency Changes | Accrued Balance as of July 28, 2012 | ||||||||||||||||
Termination benefits | $ | 5.6 | $ | — | $ | (4.0 | ) | $ | — | $ | 1.6 | |||||||||
Facility closure and other costs | 3.9 | — | (1.8 | ) | (0.5 | ) | 1.6 | |||||||||||||
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Total | $ | 9.5 | $ | — | $ | (5.8 | ) | $ | (0.5 | ) | $ | 3.2 | ||||||||
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The balance is recorded as a current liability within accrued liabilities on the Company’s condensed consolidated balance sheets.
Debt |
On January 4, 2011, the Companywe entered into a $400 million credit agreement (the “Revolver”), which amended and restated, in its entirety, the Company’sour prior credit agreement entered into in October 2005 (the “Credit Agreement”). The Revolver provides for a five-year, $400 million asset-based facility, including a $50 million letter of credit sublimit, secured by substantially all of the Company’s and its domestic subsidiaries’ assets. The Company hasWe have the ability to increase the facility, which matures in January 2016, by $150 million under certain circumstances. The extension of the Revolver to 2016 reduces our exposure to potential tightening or other adverse changes in the credit markets.
The availability under the Revolver is limited to a borrowing base which allows the Companyus to borrow up to 90% of the appraisal value of the inventory, in each case plus 90% of eligible credit card receivables, net of certain reserves. Letters of credit reduce the amount available to borrow by their face value. The Company’sOur ability to pay cash dividends, redeem options and repurchase shares is generally permitted, except under certain circumstances, including if Revolver excess availability is less than 20%, or is projected to be within 12 months after such
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payment. In addition, if Revolver usage is projected to be equal to or greater than 25% of the borrowing basetotal commitments during the prospective 12-month period, the Company iswe are subject to meeting a fixed charge coverage ratio of 1.1:1.0 prior to making such payments. In the event that excess availability under the Revolver is at any time less than the greater of (1) $40.0 million or (2) 12.5% of the lesser of the total commitment or the borrowing base, the Companywe will be subject to a fixed charge coverage ratio covenant of 1.1:1.0.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Revolver places certain restrictions on the Companyus and itsour subsidiaries, including limitations on asset sales, additional liens, investments, loans, guarantees, acquisitions and the incurrence of additional indebtedness. Absent consent from itsour lenders, the Companywe may not incur more than $750 million of additional unsecured indebtedness to be limited to $250 million in general unsecured obligations and $500 million in unsecured obligations to finance acquisitions valued at $500 million or more.
The per annum interest rate under the Revolver is variable and is calculated by applying a margin (1) for prime rate loans of 1.25% to 1.50% above the highest of (a) the prime rate of the administrative agent, (b) the federal funds effective rate plus 0.50% or (c) the London Interbank Offered (“LIBO”) rate for a 30-day interest period as determined on such day plus 1.00%, and (2) for LIBO rate loans of 2.25% to 2.50% above the LIBO rate. The applicable margin is determined quarterly as a function of the Company’sour average daily excess availability under the facility. In addition, the Company iswe are required to pay a commitment fee of 0.375% or 0.50%, depending on facility usage, for any unused portion of the total commitment under the Revolver. As of July 28, 2012,August 3, 2013, the applicable margin was 1.25% for prime rate loans and 2.25% for LIBO rate loans, while the required commitment fee was 0.50% for the unused portion of the Revolver.
The Revolver provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with covenants, any material representation or warranty made by the Companyus or the borrowers proving to be false in any material respect, certain bankruptcy, insolvency or receivership events affecting the Companyus or itsour subsidiaries, defaults relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of the Company or certain of its subsidiaries. During the 26 weeks ended August 3, 2013, we borrowed $130.0 million under the Revolver and repaid $80.0 million, leaving an outstanding balance of $50.0 million as of August 3, 2013. During the 26 weeks ended July 28, 2012, the Companywe borrowed and repaid $36.0 million under the Revolver. DuringAverage borrowings under the Revolver for the 13 weeks and 26 weeks ended July 30, 2011,August 3, 2013 were $44.2 million and $22.1 million, respectively. Our average interest rates on those outstanding borrowings for the Company borrowed $35.0 million from the Revolver13 weeks and repaid $25.0 million, leaving an outstanding balance of $10.0 million as of July 30, 2011.26 weeks ended August 3, 2013 were 2.9% for both periods. As of July 28, 2012,August 3, 2013, total availability under the Revolver was $320.0$253.3 million, there were nowas $50.0 million of borrowings outstanding and standby letters of credit outstanding totaled $8.9$9.0 million. We are currently in compliance with the requirements of the Revolver.
In September 2007, the Company’sour Luxembourg subsidiary entered into a discretionary $20.0 million Uncommitted Line of Credit (the “Line of Credit”) with Bank of America. There is no term associated with the Line of Credit and Bank of America may withdraw the facility at any time without notice. The Line of Credit is available to the Company’sour foreign subsidiaries for use primarily as a bank overdraft facility for short-term liquidity needs and for the issuance of bank guarantees and letters of credit to support operations. As of July 28, 2012,August 3, 2013, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $4.3$4.6 million.
In September 2005, the Company, along with GameStop, Inc. as co-issuer (together with the Company, the “Issuers”), completed the offering of $300 million aggregate principal amount of Senior Floating Rate Notes due 2011 (the “Senior Floating Rate Notes”) and $650 million aggregate principal amount of Senior Notes due 2012 (the “Senior Notes” and, together with the Senior Floating Rate Notes, the “Notes”). The Notes were issued under an indenture, dated September 28, 2005, by and among the Issuers, the subsidiary guarantors party thereto, and Citibank, N.A., as trustee. In November 2006, Wilmington Trust Company was appointed as the new Trustee for the Notes (the “Trustee”).
The Senior Notes bore interest at 8.0% per annum, were to mature on October 1, 2012 and were priced at 98.688%, resulting in a discount at the time of issue of $8.5 million. The discount was amortized using the effective interest method. The Issuers paid interest on the Senior Notes semi-annually, in arrears, every April 1 and October 1, to holders of record on the immediately preceding March 15 and September 15. Between May 2006 and December 2011, the Company repurchased and redeemed the $300 million of Senior Floating Rate Notes and the $650 million of Senior Notes under previously announced buybacks authorized by the Company’s Board of Directors. The repurchased Notes were delivered to the Trustee for cancellation. None of the debt was retired or redeemed during the 26-week period ended July 30, 2011. As of July 30, 2011, the only long-term debt outstanding was the $250 million in Senior Notes, gross of the unamortized original issue discount of $0.7 million. As of January 28, 2012, the Senior Notes had been fully redeemed.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Taxes |
The Company and its subsidiariesWe file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Internal Revenue Service (“IRS”) is currently examining the Company’sour U.S. income tax returns for the fiscal years ended on January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009, February 2, 2008 and February 3, 2007. The Company does2009. We do not anticipate any adjustments that would result in a material impact on itsour condensed consolidated financial statements as a result of these audits. The Company is no longer subject to U.S. federal income tax examination by the IRS for years before and including the fiscal year ended January 28, 2006.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We accrue for the effects of uncertain tax positions and the related potential penalties and interest. Our recorded liability for unrecognized tax benefits decreased by $8.5 million during the 13 weeks ended August 3, 2013 and by $17.9 million during the 26 weeks ended August 3, 2013. The decrease in the liability for unrecognized tax benefits was primarily the result of payments made to settle certain U.S. federal income tax items and did not have a material impact on our income tax provision. There were no net material adjustments to our recorded liability for unrecognized tax benefits during the 13 and 26 weeks ended July 28, 2012. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions could significantly increase or decrease during the next 12 months. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.
The income tax provisions for the 13 weeks and 26 weeks ended August 3, 2013 and July 28, 2012 and July 30, 2011 are based upon management’s estimate of the Company’sour annualized effective tax rate.
Commitments and Contingencies |
In the ordinary course of the Company’s business, the Company is,we are, from time to time, subject to various legal proceedings, including matters involving wage and hour employee class actions and consumer class actions. The CompanyWe may enter into discussions regarding settlement of these and other types of lawsuits, and may enter into settlement agreements, if it believeswe believe settlement is in the best interest of the Company’sour stockholders. Management doesWe do not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material adverse effect on the Company’sour financial condition, results of operations or liquidity.
Significant Products |
The following table sets forth net sales (in millions) by significant product category for the periods indicated:
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
New video game hardware | $ | 183.3 | 11.8 | % | $ | 275.6 | 15.8 | % | $ | 531.8 | 15.0 | % | $ | 708.0 | 17.6 | % | $ | 147.8 | 10.7 | % | $ | 183.3 | 11.8 | % | $ | 389.6 | 12.0 | % | $ | 531.8 | 15.0 | % | ||||||||||||||||||||||||||||||||
New video game software | 473.8 | 30.6 | % | 599.8 | 34.4 | % | 1,204.9 | 33.9 | % | 1,514.5 | 37.6 | % | 429.8 | 31.1 | % | 473.8 | 30.6 | % | 1,133.0 | 34.9 | % | 1,204.9 | 33.9 | % | ||||||||||||||||||||||||||||||||||||||||
Used video game products | 562.3 | 36.3 | % | 633.1 | 36.3 | % | 1,181.4 | 33.3 | % | 1,258.1 | 31.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Pre-owned video game products | 528.7 | 38.2 | % | 562.3 | 36.3 | % | 1,101.3 | 33.9 | % | 1,181.4 | 33.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 330.8 | 21.3 | % | 235.2 | 13.5 | % | 634.3 | 17.8 | % | 544.5 | 13.5 | % | 277.4 | 20.0 | % | 330.8 | 21.3 | % | 625.1 | 19.2 | % | 634.3 | 17.8 | % | ||||||||||||||||||||||||||||||||||||||||
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Total | $ | 1,550.2 | 100.0 | % | $ | 1,743.7 | 100.0 | % | $ | 3,552.4 | 100.0 | % | $ | 4,025.1 | 100.0 | % | $ | 1,383.7 | 100.0 | % | $ | 1,550.2 | 100.0 | % | $ | 3,249.0 | 100.0 | % | $ | 3,552.4 | 100.0 | % | ||||||||||||||||||||||||||||||||
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GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth gross profit (in millions) and gross profit percentages by significant product category for the periods indicated:
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | |||||||||||||||||||||||||||||||||||||||||||||||||
Gross Profit: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
New video game hardware | $ | 16.4 | 8.9 | % | $ | 20.8 | 7.5 | % | $ | 39.3 | 7.4 | % | $ | 51.0 | 7.2 | % | $ | 15.5 | 10.5 | % | $ | 16.4 | 8.9 | % | $ | 35.7 | 9.2 | % | $ | 39.3 | 7.4 | % | ||||||||||||||||||||||||||||||||
New video game software | 107.7 | 22.7 | % | 132.0 | 22.0 | % | 257.7 | 21.4 | % | 306.8 | 20.3 | % | 98.9 | 23.0 | % | 107.7 | 22.7 | % | 247.1 | 21.8 | % | 257.7 | 21.4 | % | ||||||||||||||||||||||||||||||||||||||||
Used video game products | 269.5 | 47.9 | % | 292.4 | 46.2 | % | 573.8 | 48.6 | % | 592.4 | 47.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Pre-owned video game products | 250.6 | 47.4 | % | 269.5 | 47.9 | % | 521.4 | 47.3 | % | 573.8 | 48.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 125.7 | 38.0 | % | 98.0 | 41.7 | % | 248.4 | 39.2 | % | 213.2 | 39.2 | % | 116.4 | 42.0 | % | 125.7 | 38.0 | % | 255.5 | 40.9 | % | 248.4 | 39.2 | % | ||||||||||||||||||||||||||||||||||||||||
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Total | $ | 519.3 | 33.5 | % | $ | 543.2 | 31.2 | % | $ | 1,119.2 | 31.5 | % | $ | 1,163.4 | 28.9 | % | $ | 481.4 | 34.8 | % | $ | 519.3 | 33.5 | % | $ | 1,059.7 | 32.6 | % | $ | 1,119.2 | 31.5 | % | ||||||||||||||||||||||||||||||||
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Segment Information |
The Company operates itsWe operate our business in the following segments: United States, Canada, Australia and Europe. Segment results for the United States include retail operations in all 50 states, the District of Columbia, Guam and Puerto Rico, the electronic commerce Web sitewww.gamestop.com,Game Informer magazine, the online video gaming Web sitewww.kongregate.com, a digital PC game distribution platform available atwww.gamestop.com/pcgames, the streaming technology company Spawn Labs, and an online consumer electronics marketplace Web siteavailable atwww.buymytronics.com. Segment results for Canada include retail and e-commerce operations in Canada and segment results for Australia include retail and e-commerce operations in Australia and New Zealand. Segment results for Europe for the 26-week period ended July 28, 2012 include retail store operations in 11 European countries and e-commerce operations in six countries. Segment results for Europe for the 26-week period ended July 30, 2011 include retail store operations in 13 European countries and e-commerce operations in five countries. The Company measuresWe measure segment profit using operating earnings, which is defined as income from continuing operations before intercompany royalty fees, net interest expense and income taxes. There has been no material change in total assets by segment since January 28, 2012.February 2, 2013. Transactions between reportable segments consist primarily of royalties, management fees, intersegment loans and related interest. Information on segments appears in the following tables:tables.
Net sales by operating segment were as follows (in millions):
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||
United States | $ | 1,058.5 | $ | 1,156.9 | $ | 2,517.8 | $ | 2,857.7 | $ | 942.4 | $ | 1,058.5 | $ | 2,295.3 | $ | 2,517.8 | ||||||||||||||||
Canada | 76.9 | 87.8 | 174.5 | 195.9 | 67.7 | 76.9 | 155.7 | 174.5 | ||||||||||||||||||||||||
Australia | 128.9 | 138.1 | 235.4 | 256.9 | 112.4 | 128.9 | 226.5 | 235.4 | ||||||||||||||||||||||||
Europe | 285.9 | 360.9 | 624.7 | 714.6 | 261.2 | 285.9 | 571.5 | 624.7 | ||||||||||||||||||||||||
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Total | $ | 1,550.2 | $ | 1,743.7 | $ | 3,552.4 | $ | 4,025.1 | $ | 1,383.7 | $ | 1,550.2 | $ | 3,249.0 | $ | 3,552.4 | ||||||||||||||||
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GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment operatingOperating earnings (loss) by segment were as follows (in millions):
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||
United States | $ | 40.6 | $ | 58.1 | $ | 155.7 | $ | 189.3 | $ | 43.4 | $ | 40.6 | $ | 136.2 | $ | 155.7 | ||||||||||||||||
Canada | 0.4 | (1.8 | ) | 2.9 | (1.5 | ) | (0.7 | ) | 0.4 | 1.8 | 2.9 | |||||||||||||||||||||
Australia | 3.7 | 3.5 | 2.3 | 7.2 | 1.1 | 3.7 | 2.6 | 2.3 | ||||||||||||||||||||||||
Europe | (10.2 | ) | (6.2 | ) | (11.4 | ) | (10.2 | ) | (25.0 | ) | (10.2 | ) | (34.6 | ) | (11.4 | ) | ||||||||||||||||
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Total | $ | 34.5 | $ | 53.6 | $ | 149.5 | $ | 184.8 | ||||||||||||||||||||||||
Total operating earnings | 18.8 | 34.5 | 106.0 | 149.5 | ||||||||||||||||||||||||||||
Interest income | 0.1 | 0.2 | 0.2 | 0.4 | ||||||||||||||||||||||||||||
Interest expense | (1.4 | ) | (1.1 | ) | (2.4 | ) | (1.7 | ) | ||||||||||||||||||||||||
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Earnings before income tax expense | $ | 17.5 | $ | 33.6 | $ | 103.8 | $ | 148.2 | ||||||||||||||||||||||||
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Supplemental Cash Flow Information |
26 Weeks Ended | 26 Weeks Ended | |||||||||||||||
July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | |||||||||||||
Cash paid (in millions) during the period for: | ||||||||||||||||
Interest | $ | 1.1 | $ | 11.2 | $ | 1.2 | $ | 1.1 | ||||||||
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Income taxes | $ | 199.8 | $ | 170.0 | $ | 206.1 | $ | 199.8 | ||||||||
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Subsequent Events |
Dividend
On August 14, 2012, the20, 2013, our Board of Directors of the Company approved a quarterly cash dividend to itsour stockholders of $0.25$0.275 per share of Class A Common Stock payable on September 12, 201219, 2013 to stockholders of record at the close of business on August 28, 2012.September 3, 2013. Future dividends will be subject to approval by theour Board of Directors of the Company.Directors.
Share Repurchase
As of August 28, 2012, the Company hasSeptember 4, 2013, we have purchased an additional 1.10.3 million shares of itsour Class A Common Stock for an average price per share of $15.87$50.27 since July 28, 2012.
Interim Goodwill Impairment Test
Under the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 350 (“ASC 350”), the Company is required to test its goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performs its annual impairment test as of the beginning of the fourth quarter each fiscal year. The Company has determined that the recent decrease in its market capitalization below the total equity on its condensed consolidated balance sheet for a sustained period of time indicated that an interim impairment test of its goodwill was required under the provisions of ASC 350. Accordingly, the Company has begun the work to perform the interim impairment test of its goodwill and expects to complete the test by the end of the third quarter of fiscal 2012.
GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
To perform step one of the two-step goodwill impairment test, the Company must estimate the fair value of each reporting unit. Because quoted market prices for the Company’s reporting units are not available, the Company must exercise judgment in determining the estimated fair value of each reporting unit. The Company uses all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets. A key component of these fair value determinations is a reconciliation of the sum of these net present value calculations to the Company’s market capitalization. Given that the Company’s market capitalization as of the beginning of the third quarter of fiscal 2012 was approximately $780 million below its stockholders’ equity and the balance of the Company’s goodwill recorded on its consolidated balance sheet as of July 28, 2012 is $1,981.8 million (comprised of goodwill of $1,153.5 million, $137.2 million, $206.5 million and $484.6 million in its United States, Canada, Australia and Europe reporting units, respectively), any impairment charge resulting from performing step two of the impairment test would be material to the Company’s consolidated financial statements. Given the amount of the excess of calculated fair value over carrying value for each reporting unit as of the fiscal 2011 annual goodwill impairment test, the Company believes that any impairment charge resulting from the goodwill impairment test would be substantially concentrated in its Canada, Australia and Europe reporting units.August 3, 2013.
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the information contained in our condensed consolidated financial statements, including the notes thereto. Statements regarding future economic performance, management’s plans and objectives, and any statements concerning assumptions related to the foregoing contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements. CertainSee our Annual Report on Form 10-K for the fiscal year ended February 2, 2013 filed with the Securities and Exchange Commission (the “SEC”) on April 3, 2013 (the “Form 10-K”), including the factors disclosed under “Item 1A. Risk Factors,” as well as “Disclosure Regarding Forward-looking Statements” and “Item 1A. Risks Factors” below, for certain factors which may cause actual results to vary materially from these forward-looking statements, accompany such statements or appear in GameStop’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012 filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2012 (the “Form 10-K”), including the factors disclosed under “Item 1A. Risk Factors.”statements.
General
GameStop Corp. (together with its predecessor companies, “GameStop,” “we,” “us,” “our,” or the “Company”) is the world’s largest multichannel video game retailer. We sell new and usedpre-owned video game hardware, physical and digital video game software, accessories, as well as PC entertainment software, new and pre-owned mobile and consumer electronics products and other merchandise primarily through our GameStop, EB Games and Micromania stores. As of July 28, 2012,August 3, 2013, we operated 6,6286,505 stores in the United States, Australia, Canada and Europe. We also operate electronic commerce Web sites includingwww.gamestop.com,www.ebgames.com.au,www.ebgames.co.nz,www.gamestop.ca,www.gamestop.it,www.gamestop.es,www.gamestop.ie www.gamestop.ie,www.gamestop.de,www.gamestop.co.uk andwww.micromania.fr. The network also includes:www.kongregate.com, a leading browser-based game site;Game Informermagazine, the leading multi-platform video game publication; Spawn Labs, a streaming technology company; a digital PC distribution platform available at www.gamestop.com/pcgames; iOS and Android mobile applications; and an online consumer electronics marketplace available atwww.buymytronics.com.
Our fiscal year is composed of 52 or 53 weeks ending on the Saturday closest to January 31. The fiscal year ending February 2, 20131, 2014 (“fiscal 2012”2013”) consists of 5352 weeks and the fiscal year ended January 28, 2012February 2, 2013 (“fiscal 2011”2012”) consistsconsisted of 5253 weeks.
Growth in the videoelectronic game industry is generally driven by the introduction of new technology. Gaming consoles are typically launched in cycles as technological developments in both chip processing speeds and data storage provide significant improvements in advanced graphics, audio quality and other entertainment capabilities beyond video gaming. The current generation of hardware consoles (the Sony PlayStation 3, the Microsoft Xbox 360 and the Nintendo Wii) werewas introduced between 2005 and 2007. The Nintendo DSi XL was introduced in early 2010, the Nintendo 3DS was introduced in March 2011 and the Sony PlayStation Vita was introduced in February 2012. A new console cycle is developing as Nintendo launched the Wii U in November 2012 as the next generation of the Wii and Sony and Microsoft have announced their next generation of consoles with the PlayStation 4 and Xbox One, respectively. These new consoles are expected to come to market by the holiday period of 2013. Typically, following the introduction of new video game platforms, sales of new video game hardware increase as a percentage of total sales in the first full year following introduction. As video game platforms mature, the sales mix attributable to complementary video game software and accessories, which generate higher gross margins, generally increases in the subsequent years. The net effect is generally a decline in gross marginsmargin percentage in the first full year following new platform releases and an increase in gross marginsmargin percentage in the years subsequent to the first full year following the launch period. The planned launches of the next-generation Sony PlayStation 4 and Microsoft Xbox One by the holiday period of 2013 are anticipated to reduce our overall gross margin percentage in the fourth quarter of fiscal 2013. Unit sales of maturing video game platforms are typically also driven by manufacturer-funded retail price reductions, further driving sales of related software and accessories. Historically, new hardware consoles are typically introduced every four to five years. However, the current generation of hardware consoles is now over fivesix years old and consumer demand is abating.declining. We have seen and expect to continue to see declines in new hardware and software sales in fiscal 2012 and fiscal 2013 before the next-generation product launches due to the age of the current console cycle. The introduction of new consoles or further price cuts on the current generation of consoles could partially offset these sales declines.
We expect that future growth in the videoelectronic game industry will also be driven by the sale of video games delivered in digital form and the expansion of other forms of gaming. We currently sell various types of products that relate to the digital category, including digitally downloadable content, Xbox LIVE, PlayStation and Nintendo network pointpoints cards, as well as prepaid digital and online timecards. We expect our sales of digital products to continue to increase in the second half of fiscal 2012.2013. We have made significant investments in e-commerce digital kiosks and in-store and Web site functionality to enable our customers to access digital content easily and eliminate friction infacilitate the digital sales and delivery process. We plan to continue to invest in these types of processes and channels to grow
our digital sales base and enhance our market leadership position in the videoelectronic game industry and in the digital aggregation and distribution category. In fiscal 2011,addition, we also launched our mobile business, selling an assortment of gaming-certified tablets and accessories in approximately 1,600 stores in the United States and approximately 800 international stores. We also began accepting trades of pre-owned mobile devices in all of our United States stores, and, as of July 28, 2012, approximately 3,800 stores are selling these refurbished devices. More stores will be added as inventory levels increase. We also intend to continue to invest in customer loyalty programs designed to attract and retain customers.
In fiscal 2011, we also launched our mobile business and began selling an assortment of tablets and accessories. We currently sell tablets and accessories in all of our stores in the United States and in a majority of stores in our international markets. We also sell and accept trades of pre-owned mobile devices in our stores.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and do not include all disclosures required under GAAP for complete financial statements. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. For a summary of significant accounting policies and the means by which we develop estimates thereon, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K.
Goodwill.Under the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 350 (“ASC 350”), the Company is required to test its goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performs its annual impairment test as of the beginning of the fourth quarter each fiscal year. The Company has determined that the recent decrease in its market capitalization below the total equity on its condensed consolidated balance sheet for a sustained period of time indicated that an interim impairment test of its goodwill was required under the provisions of ASC 350. Accordingly, the Company has begun the work to perform the interim impairment test of its goodwill and expects to complete the test by the end of the third quarter of fiscal 2012.
To perform step one of the two-step goodwill impairment test, the Company must estimate the fair value of each reporting unit. Because quoted market prices for the Company’s reporting units are not available, the Company must exercise judgment in determining the estimated fair value of each reporting unit. The Company uses all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets. A key component of these fair value determinations is a reconciliation of the sum of these net present value calculations to the Company’s market capitalization. Given that the Company’s market capitalization as of the beginning of the third quarter of fiscal 2012 was approximately $780 million below its stockholders’ equity and the balance of the Company’s goodwill recorded on its consolidated balance sheet as of July 28, 2012 is $1,981.8 million (comprised of goodwill of $1,153.5 million, $137.2 million, $206.5 million and $484.6 million in its United States, Canada, Australia and Europe reporting units, respectively), any impairment charge resulting from performing step two of the impairment test would be material to the Company’s consolidated financial statements. Given the amount of the excess of calculated fair value over carrying value for each reporting unit as of the fiscal 2011 annual goodwill impairment test, the Company believes that any impairment charge resulting from the goodwill impairment test would be substantially concentrated in its Canada, Australia and Europe reporting units.
Consolidated Results of Operations
The following table sets forth certain statement of operations items as a percentage of net sales for the periods indicated:
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July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Cost of sales | 66.5 | 68.8 | 68.5 | 71.1 | 65.2 | 66.5 | 67.4 | 68.5 | ||||||||||||||||||||||||
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Gross profit | 33.5 | 31.2 | 31.5 | 28.9 | 34.8 | 33.5 | 32.6 | 31.5 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 28.4 | 25.4 | 24.8 | 22.0 | 30.5 | 28.4 | 26.8 | 24.8 | ||||||||||||||||||||||||
Depreciation and amortization | 2.8 | 2.7 | 2.5 | 2.3 | 2.9 | 2.8 | 2.5 | 2.5 | ||||||||||||||||||||||||
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Operating earnings | 2.3 | 3.1 | 4.2 | 4.6 | 1.4 | 2.3 | 3.3 | 4.2 | ||||||||||||||||||||||||
Interest expense, net | 0.1 | 0.4 | — | 0.3 | 0.1 | 0.1 | 0.1 | — | ||||||||||||||||||||||||
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Earnings before income tax expense | 2.2 | 2.7 | 4.2 | 4.3 | 1.3 | 2.2 | 3.2 | 4.2 | ||||||||||||||||||||||||
Income tax expense | 0.8 | 0.9 | 1.6 | 1.5 | 0.5 | 0.8 | 1.2 | 1.6 | ||||||||||||||||||||||||
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Consolidated net income | 1.4 | 1.8 | 2.6 | 2.8 | 0.8 | 1.4 | 2.0 | 2.6 | ||||||||||||||||||||||||
Net loss attributable to noncontrolling interests | — | — | — | — | ||||||||||||||||||||||||||||
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Consolidated net income attributable to GameStop | 1.4 | % | 1.8 | % | 2.6 | % | 2.8 | % | ||||||||||||||||||||||||
Consolidated net income attributable to GameStop Corp. | 0.8 | % | 1.4 | % | 2.0 | % | 2.6 | % | ||||||||||||||||||||||||
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The Company includesWe include purchasing, receiving and distribution costs in selling, general and administrative expenses, rather than in cost of sales, in the statement of operations. The Company includesWe include processing fees associated with purchases
made by check and credit cards in cost of sales, rather than in selling, general and administrative expenses, in the statement of operations. As a result of these classifications, our gross margins are not comparable to those retailers that include purchasing, receiving and distribution costs in cost of sales and include processing fees associated with purchases made by check and credit cards in selling, general and administrative expenses. The net effect of these classifications as a percentage of net sales has not historically been material.
The following table sets forth net sales (in millions) and percentage of total net sales by significant product category for the periods indicated:
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | Net Sales | Percent of Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
New video game hardware | $ | 183.3 | 11.8 | % | $ | 275.6 | 15.8 | % | $ | 531.8 | 15.0 | % | $ | 708.0 | 17.6 | % | $ | 147.8 | 10.7 | % | $ | 183.3 | 11.8 | % | $ | 389.6 | 12.0 | % | $ | 531.8 | 15.0 | % | ||||||||||||||||||||||||||||||||
New video game software | 473.8 | 30.6 | % | 599.8 | 34.4 | % | 1,204.9 | 33.9 | % | 1,514.5 | 37.6 | % | 429.8 | 31.1 | % | 473.8 | 30.6 | % | 1,133.0 | 34.9 | % | 1,204.9 | 33.9 | % | ||||||||||||||||||||||||||||||||||||||||
Used video game products | 562.3 | 36.3 | % | 633.1 | 36.3 | % | 1,181.4 | 33.3 | % | 1,258.1 | 31.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Pre-owned video game products | 528.7 | 38.2 | % | 562.3 | 36.3 | % | 1,101.3 | 33.9 | % | 1,181.4 | 33.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 330.8 | 21.3 | % | 235.2 | 13.5 | % | 634.3 | 17.8 | % | 544.5 | 13.5 | % | 277.4 | 20.0 | % | 330.8 | 21.3 | % | 625.1 | 19.2 | % | 634.3 | 17.8 | % | ||||||||||||||||||||||||||||||||||||||||
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Total | $ | 1,550.2 | 100.0 | % | $ | 1,743.7 | 100.0 | % | $ | 3,552.4 | 100.0 | % | $ | 4,025.1 | 100.0 | % | $ | 1,383.7 | 100.0 | % | $ | 1,550.2 | 100.0 | % | $ | 3,249.0 | 100.0 | % | $ | 3,552.4 | 100.0 | % | ||||||||||||||||||||||||||||||||
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Other products include PC entertainment and other software, digital products and currency, mobile products, including tablets and refurbished mobile devices, accessories and revenues associated withGame Informermagazine and the Company’s PowerUp Rewards program.
(1) | Other products include PC entertainment and other software, digital products and currency, mobile products, including tablets and refurbished mobile devices, accessories and revenues associated withGame Informer magazine and our PowerUp Rewards and other loyalty programs. |
The following table sets forth gross profit (in millions) and gross profit percentages by significant product category for the periods indicated:
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | Gross Profit | Gross Profit Percent | |||||||||||||||||||||||||||||||||||||||||||||||||
Gross Profit: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
New video game hardware | $ | 16.4 | 8.9 | % | $ | 20.8 | 7.5 | % | $ | 39.3 | 7.4 | % | $ | 51.0 | 7.2 | % | $ | 15.5 | 10.5 | % | $ | 16.4 | 8.9 | % | $ | 35.7 | 9.2 | % | $ | 39.3 | 7.4 | % | ||||||||||||||||||||||||||||||||
New video game software | 107.7 | 22.7 | % | 132.0 | 22.0 | % | 257.7 | 21.4 | % | 306.8 | 20.3 | % | 98.9 | 23.0 | % | 107.7 | 22.7 | % | 247.1 | 21.8 | % | 257.7 | 21.4 | % | ||||||||||||||||||||||||||||||||||||||||
Used video game products | 269.5 | 47.9 | % | 292.4 | 46.2 | % | 573.8 | 48.6 | % | 592.4 | 47.1 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Pre-owned video game products | 250.6 | 47.4 | % | 269.5 | 47.9 | % | 521.4 | 47.3 | % | 573.8 | 48.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 125.7 | 38.0 | % | 98.0 | 41.7 | % | 248.4 | 39.2 | % | 213.2 | 39.2 | % | 116.4 | 42.0 | % | 125.7 | 38.0 | % | 255.5 | 40.9 | % | 248.4 | 39.2 | % | ||||||||||||||||||||||||||||||||||||||||
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Total | $ | 519.3 | 33.5 | % | $ | 543.2 | 31.2 | % | $ | 1,119.2 | 31.5 | % | $ | 1,163.4 | 28.9 | % | $ | 481.4 | 34.8 | % | $ | 519.3 | 33.5 | % | $ | 1,059.7 | 32.6 | % | $ | 1,119.2 | 31.5 | % | ||||||||||||||||||||||||||||||||
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13 weeks ended July 28, 2012August 3, 2013 compared with the 13 weeks ended July 30, 201128, 2012
Net Sales
Net sales decreased by $193.5$166.5 million, or 11.1%10.7%, from $1,743.7 million in the 13 weeks ended July 30, 2011 to $1,550.2 million in the 13 weeks ended July 28, 2012.2012 to $1,383.7 million in the 13 weeks ended August 3, 2013. The decrease in net sales was primarily attributable to a decrease in comparable store sales of 9.3%10.7% for the second quarter of fiscal 2012 and2013 offset slightly by changes related to foreign exchange rates, which had the effect of decreasingincreasing net sales by $50.6$2.0 million when compared to the second quarter of fiscal 2011. Stores are included in our comparable store sales base beginning in the thirteenth month of operation and exclude the effect of changes in foreign exchange rates.2012. The decrease in comparable store sales was primarily attributabledue to decreasesa decrease in new video game hardware sales new video game software sales and used video game product sales, offset partially by an increaseacross all categories related to the late stages of the current console cycle. Refer to the note to the Selected
Financial Data table in other product“Item 6. Selected Financial Data” in our Form 10-K for a discussion of the calculation of comparable store sales.
New video game hardware sales decreased $92.3$35.5 million, or 33.5%19.4%, from $275.6 million in the 13 weeks ended July 30, 2011 to $183.3 million in the 13 weeks ended July 28, 2012.2012 to $147.8 million in the 13 weeks ended August 3, 2013. The decrease in new video game hardware sales is primarily due to a decrease in hardware unit sell-through related to being in the late stages of the current console cycle. The new video game hardware sales declines were offset partially by sales of the Nintendo Wii U which launched in the fourth quarter of fiscal 2012.
New video game software sales decreased $126.0$44.0 million, or 21.0%9.3%, from $599.8 million in the 13 weeks ended July 30, 2011 to $473.8 million in the 13 weeks ended July 28, 2012 to $429.8 million in the 13 weeks ended August 3, 2013, primarily due to a lackreduced number of new release video game titlestitle releases in the second quarter of fiscal 2012 when2013 as compared to the secondprior year quarter coupled with a reduction in consumer demand due to the late stages of fiscal 2011. Usedthe current console cycle.
Pre-owned video game product sales decreased by $70.8$33.6 million, or 11.2%6.0%, from $633.1 million in the 13 weeks ended July 30, 2011 to $562.3 million in the 13 weeks ended July 28, 2012.2012 to $528.7 million in the 13 weeks ended August 3, 2013. The decrease in usedpre-owned video game product sales was primarily due to a decrease in store traffic related to the lack of new releaselower video game titles in the second quarter of fiscal 2012 when compared to the second quarter of fiscal 2011 and lower hardware demand due to the late stages of the current console cycle.
Other product sales increased $95.6decreased $53.4 million, or 40.6%16.1%, from the 13 weeks ended July 30, 2011 to$330.8 million in the 13 weeks ended July 28, 2012.2012 to $277.4 million in the 13 weeks ended August 3, 2013. The increasedecrease in other product sales was primarily due to an increasedecreases in accessories sales ofassociated with hardware sales declines and lower PC entertainment software sales due primarily to the releaselaunch ofDiablo III in the secondprior year comparable quarter, of fiscal 2012 andpartially offset by increases in sales of mobile devices and digital products in the second quarteras we continue to focus on expanding these lines of fiscal 2012 compared to the second quarter of fiscal 2011.business.
As a percentage of net sales, new video game hardware sales and other product sales decreased and new video game software sales decreased and otherpre-owned video game product sales increased in the 13 weeks ended July 28, 2012August 3, 2013 compared to the 13 weeks ended July 30, 2011.28, 2012. The change in the mix of sales was primarily due primarily to the increasedecreases in other product sales as a result of the investments the Company has made in its digital initiatives and the expansion of the mobile sales category. These new initiatives have shown significant growth while sales of new video game hardware sales and new video game software have decreased due to fewer new software title launches and lower hardwareother product sales due to the late stagesdiscussed above.
Cost of the console cycle.Sales
Cost of sales decreased by $169.6$128.6 million, or 14.1%12.5%, from $1,200.5 million in the 13 weeks ended July 30, 2011 to $1,030.9 million in the 13 weeks ended July 28, 2012 to $902.3 million in the 13 weeks ended August 3, 2013 as a result of athe decrease in sales discussed above and the changes in gross profit discussed below.
Gross Profit
Gross profit decreased by $23.9$37.9 million, or 4.4%7.3%, from $543.2 million in the 13 weeks ended July 30, 2011 to $519.3 million in the 13 weeks ended July 28, 2012.2012 to $481.4 million in the 13 weeks ended August 3, 2013. Gross profit as a percentage of net sales increased from 31.2% in the 13 weeks ended July 30, 2011 to 33.5% in the 13 weeks ended July 28, 2012.2012 to 34.8% in the 13 weeks ended August 3, 2013. The gross profit percentage increase was primarily due to thea shift in sales from new hardware to pre-owned and an increase in sales of other products as a percentage of total salesour mobile and the increase in gross profit as a percentage of sales on new video game hardware sales, new video game software sales and used video game products sales in the 13 weeks ended July 28, 2012 when compared to the 13 weeks ended July 30, 2011. digital products.
Gross profit as a percentage of sales on new video game hardware increased from 7.5% in the 13 weeks ended July 30, 2011 to 8.9% in the 13 weeks ended July 28, 2012 to 10.5% in the 13 weeks ended August 3, 2013, primarily due to a decreasean increase in promotional activitiesthe attachment rate of product replacement plan sales on new hardware units when compared to the prior year. Gross profit as a percentage of sales on new video game software increased slightly from 22.0% in the 13 weeks ended July 30, 2011 to 22.7% in the 13 weeks ended July 28, 2012 primarily due to a decrease23.0% in promotional activities when compared to the second quarter of the prior year.13 weeks ended August 3, 2013. Gross profit as a percentage of sales on usedpre-owned video game products increaseddecreased from 46.2% in the 13 weeks ended July 30, 2011 to 47.9% in the 13 weeks ended July 28, 2012 to 47.4% in the 13 weeks ended August 3, 2013 due to a decreasean increase in promotional activities and improvements in margin rates throughout most of our international operations when compared to the prior year. Gross profit as a percentage of sales on other product sales decreasedincreased from 41.7% in the 13 weeks ended July 30, 2011 to 38.0% in the 13 weeks ended July 28, 2012 to 42.0% in the 13 weeks ended August 3, 2013 primarily due to an increase in the high mix of PC entertainment software sales in the prior year
comparable quarter due to total other product sales.the launch ofDiablo III in that quarter. New PC entertainment software has a lower gross profit percentage than total other productaccessories, mobile or digital sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased slightly by $1.6$19.3 million, or 0.4%4.4%, from $442.5 million in the 13 weeks ended July 30, 2011 to $440.9 million in the 13 weeks ended July 28, 2012.2012 to $421.6 million in the 13 weeks ended August 3, 2013. This decrease was primarily attributabledue to cost control activities as a result of the decline in sales at the end of the current console cycle and lower store count. This was partially offset by changes in foreign exchange rates which had the effect of decreasingincreasing expenses by $16.9$1.4 million when compared to the second quarter of fiscal 2011.2012. Selling, general and administrative expenses as a percentage of net sales increased from 25.4% in the 13 weeks ended July 30, 2011 to 28.4% in the 13 weeks ended July 28, 2012.2012 to 30.5% in the 13 weeks ended August 3, 2013. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to deleveraging of fixed costs as a result of the decrease in comparable store sales during the second quarter of fiscal 2012.2013. Included in selling, general and administrative expenses are $5.4is $6.0 million and $4.9$5.4 million in stock-based compensation expense for the 13-week periods ended August 3, 2013 and July 28, 2012, respectively.
Depreciation and July 30, 2011, respectively.Amortization
Depreciation and amortization expense decreased $3.2$2.9 million, or 6.6%, from $47.1 million in the 13 weeks ended July 30, 2011 to $43.9 million in the 13 weeks ended July 28, 2012.2012 to $41.0 million in the 13 weeks ended August 3, 2013. This decrease was primarily due to a decrease in capital expenditures in recent years when compared to prior years, which included significant investments in our loyalty and digital initiatives, as well as a decrease in new store openings and investments in management information systems.
Interest Income and Expense
Interest income from the investment of excess cash balances decreased $0.2 millionslightly from $0.4 million in the 13 weeks ended July 30, 2011 to $0.2 million in the 13 weeks ended July 28, 2012. Interest expense decreased $5.6 million from $6.72012 to $0.1 million in the 13 weeks ended July 30, 2011 toAugust 3, 2013. Interest expense increased slightly from $1.1 million in the 13 weeks ended July 28, 2012 primarily due to $1.4 million in the retirement of the Company’s senior notes in fiscal 2011.13 weeks ended August 3, 2013.
Income Tax
Income tax expense was $7.0 million, or 40.0% of earnings before income tax expense, for the 13 weeks ended July 30, 2011 and the 13 weeks ended July 28, 2012 was based upon management’s estimate of the Company’s annualized effective tax rate. Income tax expense wasAugust 3, 2013 compared to $12.6 million, or 37.5% of earnings before income tax expense, for the 13 weeks ended July 28, 2012 compared to $16.7 million, or 35.3%and was based upon an estimate of our annualized effective tax rate. The higher effective tax rate for the second quarter of fiscal 2013 was a result of the earnings mix in the foreign countries where we operate against overall lower earnings before income tax expense, for the 13 weeks ended July 30, 2011. The increase in the income tax rate was due primarily to differences in the expected sources of the Company’s earnings used in estimating the Company’s annualized effective tax rate.taxes.
Operating Earnings and Net Income
The factors described above led to a decrease in operating earnings of $19.1$15.7 million from $53.6 million in the 13 weeks ended July 30, 2011 to $34.5 million in the 13 weeks ended July 28, 2012 to $18.8 million in the 13 weeks ended August 3, 2013, and a decrease in consolidated net income of $9.6$10.5 million from $30.6 million in the 13 weeks ended July 30, 2011 to $21.0 million in the 13 weeks ended July 28, 2012.
The $0.32012 to $10.5 million net loss attributable to noncontrolling interests forin the 13 weeks ended July 30, 2011 represents the portion of the minority interest stockholders’ net loss of the Company’s non-wholly owned subsidiaries included in the Company’s consolidated net income. The remaining noncontrolling interests were purchased during the second quarter of fiscal 2012.August 3, 2013.
26 weeks ended July 28, 2012August 3, 2013 compared with the 26 weeks ended July 30, 201128, 2012
Net Sales
Net sales decreased by $472.7$303.4 million, or 11.7%8.5%, from $4,025.1 million in the 26 weeks ended July 30, 2011 to $3,552.4 million in the 26 weeks ended July 28, 2012.2012 to $3,249.0 million in the 26 weeks ended August 3, 2013. The decrease in net sales was primarily attributable to a decrease in comparable store sales of 11.1%8.4% for the 26 weeks ended July 28, 2012August 3, 2013 when compared to the 26 weeks ended July 30, 201128, 2012 and changes related to foreign exchange rates, which had the effect of decreasing sales by $70.1$4.1 million offset partially byfor the addition of non-comparable store sales from26 weeks ended August 3, 2013 when compared to the 363 stores opened since January 29, 2011.26 weeks ended July 28, 2012. The decrease in comparable store sales was primarily attributabledue to decreasesa decrease in new video game hardware sales new video game software sales and used video game product sales, offset partially by an increase in other product sales.across all categories related to the late stages of the current console cycle.
New video game hardware sales decreased $176.2$142.2 million, or 24.9%26.7%, from $708.0 million in the 26 weeks ended July 30, 2011 to $531.8 million in the 26 weeks ended July 28, 2012.2012 to $389.6 million in the 26 weeks ended August 3, 2013. The decrease in new video game hardware sales is primarily due to a decrease in hardware unit sell-through related to being in the late stages of the current console cycle and higher sales from the launch of the Nintendo 3DS in the first quarter of fiscal 2011 which exceeded the sales from the launch of the Sony PlayStation Vita in the first half of fiscal 2012 due to its launch in the first quarter of that year. These sales declines were offset partially by sales of the Nintendo Wii U which launched in the fourth quarter of fiscal 2012.
New video game software sales decreased $309.6$71.9 million, or 20.4%6.0%, from $1,514.5 million in the 26 weeks ended July 30, 2011 to $1,204.9 million in the 26 weeks ended July 28, 2012 to $1,133.0 million in the 26 weeks ended August 3, 2013, primarily due to a lackdeclines in sales of catalog software (software beyond its initial launch period) due to the late stages of the console cycle, partially offset by stronger sales of new release video game titles in fiscal 2012the 26 weeks ended August 3, 2013 when compared to fiscal 2011. Usedthe 26 weeks ended July 28, 2012.
Pre-owned video game product sales decreased $76.7$80.1 million, or 6.1%6.8%, from $1,258.1 million in the 26 weeks ended July 30, 2011 to $1,181.4 million in the 26 weeks ended July 28, 2012.2012 to $1,101.3 million in the 26 weeks ended August 3, 2013. The decrease in usedpre-owned video game product sales was primarily due to a decrease in store traffic related to the lack of new releaselower video game titles in the 26 weeks ended July 28, 2012 when compared to the 26 weeks ended July 30, 2011 and lower hardware demand due to the late stages of the current console cycle.
Other product sales increaseddecreased by $89.8$9.2 million, or 16.5%1.5%, from $544.5 million in the 26 weeks ended July 30, 2011 to $634.3 million in the 26 weeks ended July 28, 2012.2012 to $625.1 million in the 26 weeks ended August 3, 2013. The increaseslight decrease in other product sales was primarily due to an increasedecreases in accessories sales ofassociated with hardware sales declines and lower PC entertainment software sales due primarily to the releaselaunch ofDiablo III in the prior year second quarter, of fiscal 2012 andalmost entirely offset by increases in sales of mobile devices and digital products in the 26 weeks ended July 28, 2012 when comparedas we continue to the 26 weeks ended July 30, 2011.focus on expanding these lines of business.
As a percentage of net sales, new video game hardware sales and new video game software sales, decreased and usedpre-owned video game product sales and other product sales increased and new video game hardware sales decreased in the 26 weeks ended July 28, 2012August 3, 2013 compared to the 26 weeks ended July 30, 2011.28, 2012. The change in the mix of sales was primarily due primarily to the increasedecreases in other product sales as a result of the investments the Company has made in its digital initiatives and the expansion of the mobile sales category. These new initiatives have shown significant growth while sales of new video game hardware and new video game software have decreased due to fewer new software title launches and lower hardware sales due to the late stagesas discussed above.
Cost of the console cycle.Sales
Cost of sales decreased by $428.5$243.9 million, or 15.0%10.0%, from $2,861.7 million in the 26 weeks ended July 30, 2011 to $2,433.2 million in the 26 weeks ended July 28, 2012 to $2,189.3 million in the 26 weeks ended August 3, 2013, primarily as a result of the decrease in sales discussed above and the changes in gross profit discussed below.
Gross Profit
Gross profit decreased by $44.2$59.5 million, or 3.8%5.3%, from $1,163.4 million in the 26 weeks ended July 30, 2011 to $1,119.2 million in the 26 weeks ended July 28, 2012.2012 to $1,059.7 million in the 26 weeks ended August 3, 2013. Gross profit as a percentage of net sales increased from 28.9% in the 26 weeks ended July 30, 2011 to 31.5% in the 26 weeks ended July 28, 2012.2012 to 32.6% in the 26 weeks ended August 3, 2013. The gross profit percentage increase was primarily due to the increasechange in sales of usedmix driven by the decrease in new video
game products and other productshardware sales as a percentage of total net sales and the increase in gross profit as a percentage of sales on new video game software saleshardware products and usedother video game product sales in the 26 weeks ended July 28, 2012 compared to the 26 weeks ended July 30, 2011.products. Gross profit as a percentage of sales on new video game hardware increased slightly from 7.2% in the 26 weeks
ended July 30, 2011 to 7.4% in the 26 weeks ended July 28, 2012. Gross profit as a percentage of sales on new video game software increased from 20.3%2012 to 9.2% in the 26 weeks ended July 30, 2011August 3, 2013 primarily due to 21.4%an increase in the 26 weeks ended July 28, 2012, due primarily to a decrease in promotional activities compared to the prior year. Gross profit as a percentageattachment rate of product replacement plan sales on used video game products increased from 47.1% in the 26 weeks ended July 30, 2011 to 48.6% in the 26 weeks ended July 28, 2012 due to a decrease in promotional activities and improvements in margin rates throughout most of our international operationsnew hardware units when compared to the prior year. Gross profit as a percentage of sales on new video game software increased slightly from 21.4% in the 26 weeks ended July 28, 2012 to 21.8% in the 26 weeks ended August 3, 2013. Gross profit as a percentage of sales on pre-owned video game products decreased from 48.6% in the 26 weeks ended July 28, 2012 to 47.3% in the 26 weeks ended August 3, 2013 primarily due to an increase in promotional activities when compared to the prior year. Gross profit as a percentage of sales on other product sales category remained flat atincreased from 39.2% in the 26 weeks ended July 30, 201128, 2012 to 40.9% in the 26 weeks ended August 3, 2013 primarily due to the increase in mobile and July 28,digital sales and a decrease in sales of PC entertainment software in the second quarter of 2013 when compared to the second quarter of 2012. New PC entertainment software has a lower gross profit percentage than accessories, mobile or digital sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $3.9$10.5 million, or 0.4%1.2%, from $885.2 million in the 26 weeks ended July 30, 2011 to $881.3 million in the 26 weeks ended July 28, 2012.2012 to $870.8 million in the 26 weeks ended August 3, 2013. This decrease was primarily due to cost control activities as a result of the changesdecline in foreign exchange rates which hadsales at the effectend of decreasing expenses by $23.2 million when compared to fiscal 2011.the current console cycle and lower store count. Selling, general and administrative expenses as a percentage of net sales increased from 22.0% in the 26 weeks ended July 30, 2011 to 24.8% in the 26 weeks ended July 28, 2012.2012 to 26.8% in the 26 weeks ended August 3, 2013. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to deleveraging of fixed costs as a result of the decrease in comparable store sales. Selling,Included in selling, general and administrative expenses include $10.4is $11.5 million and $9.8$10.4 million in stock-based compensation expense for the 26 weeks ended August 3, 2013 and July 28, 2012, respectively.
Depreciation and July 30, 2011, respectively.Amortization
Depreciation and amortization expense decreased $5.0$5.5 million, or 6.2%, from $93.4 million in the 26 weeks ended July 30, 2011 to $88.4 million in the 26 weeks ended July 28, 2012.2012 to $82.9 million in the 26 weeks ended August 3, 2013. This decrease was primarily due to a decrease in capital expenditures in recent years when compared to prior years, which included significant investments in our loyalty and digital initiatives, as well as a decrease in new store openings and investments in management information systems.
Interest Income and Expense
Interest income from the investment of excess cash balances decreased slightly from $0.5 million in the 26 weeks ended July 30, 2011 to $0.4 million in the 26 weeks ended July 28, 2012. Interest expense decreased from $13.02012 to $0.2 million in the 26 weeks ended July 30, 2011 toAugust 3, 2013. Interest expense increased from $1.7 million in the 26 weeks ended July 28, 2012 primarily due to $2.4 million in the retirement of the Company’s senior notes in fiscal 2011.26 weeks ended August 3, 2013.
Income Tax
Income tax expense was $38.7 million, or 37.3% of earnings before income tax expense, for the 26 weeks ended July 28, 2012 and the 26 weeks ended July 30, 2011 was based upon management’s estimate of the Company’s annualized effective tax rate. Income tax expense wasAugust 3, 2013 compared to $54.8 million, or 37.0% of earnings before income tax expense, for the 26 weeks ended July 28, 2012 compared to $61.8 million, or 35.9%and was based upon an estimate of earnings before income tax expense, for the 26 weeks ended July 30, 2011. The increase in the income tax rate was due primarily to differences in the expected sources of the Company’s earnings used in estimating the Company’sour annualized effective tax rate.
Operating Earnings and Net Income
The factors described above led to a decrease in operating earnings of $35.3$43.5 million from $184.8 million in the 26 weeks ended July 30, 2011 to $149.5 million in the 26 weeks ended July 28, 2012 to $106.0 million in the 26 weeks ended August 3, 2013, and a decrease in consolidated net income of $17.1$28.3 million from $110.5 million in the 26 weeks ended July 30, 2011 to $93.4 million in the 26 weeks ended July 28, 2012.2012 to $65.1 million in the 26 weeks ended August 3, 2013.
Noncontrolling Interests
The $0.1 million and $0.8 million net loss attributable to noncontrolling interests for the 26 weeks ended July 28, 2012 and July 30, 2011, respectively, represents the portion of the minority interest stockholders’ net loss of the Company’sour non-wholly owned subsidiaries included in the Company’sour consolidated net income. The remaining noncontrolling interests were purchased during the second quarter of fiscal 2012.
Segment Performance
The Company operates itsWe operate our business in the following segments: United States, Australia, Canada and Europe. The following tables provide a summary of our net sales and operating earnings (loss) by reportable segment:
Net sales by operating segment are as follows:
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||||||||
United States | $ | 1,058.5 | $ | 1,156.9 | $ | 2,517.8 | $ | 2,857.7 | $ | 942.4 | $ | 1,058.5 | $ | 2,295.3 | $ | 2,517.8 | ||||||||||||||||
Canada | 76.9 | 87.8 | 174.5 | 195.9 | 67.7 | 76.9 | 155.7 | 174.5 | ||||||||||||||||||||||||
Australia | 128.9 | 138.1 | 235.4 | 256.9 | 112.4 | 128.9 | 226.5 | 235.4 | ||||||||||||||||||||||||
Europe | 285.9 | 360.9 | 624.7 | 714.6 | 261.2 | 285.9 | 571.5 | 624.7 | ||||||||||||||||||||||||
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Total | $ | 1,550.2 | $ | 1,743.7 | $ | 3,552.4 | $ | 4,025.1 | $ | 1,383.7 | $ | 1,550.2 | $ | 3,249.0 | $ | 3,552.4 | ||||||||||||||||
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Operating earnings (loss) by operating segment are as follows:
13 Weeks Ended | 26 Weeks Ended | 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||||
July 28, 2012 | July 30, 2011 | July 28, 2012 | July 30, 2011 | August 3, 2013 | July 28, 2012 | August 3, 2013 | July 28, 2012 | |||||||||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||||||||||
United States | $ | 40.6 | $ | 58.1 | $ | 155.7 | $ | 189.3 | $ | 43.4 | $ | 40.6 | $ | 136.2 | $ | 155.7 | ||||||||||||||||
Canada | 0.4 | (1.8 | ) | 2.9 | (1.5 | ) | (0.7 | ) | 0.4 | 1.8 | 2.9 | |||||||||||||||||||||
Australia | 3.7 | 3.5 | 2.3 | 7.2 | 1.1 | 3.7 | 2.6 | 2.3 | ||||||||||||||||||||||||
Europe | (10.2 | ) | (6.2 | ) | (11.4 | ) | (10.2 | ) | (25.0 | ) | (10.2 | ) | (34.6 | ) | (11.4 | ) | ||||||||||||||||
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Total | $ | 34.5 | $ | 53.6 | $ | 149.5 | $ | 184.8 | $ | 18.8 | $ | 34.5 | $ | 106.0 | $ | 149.5 | ||||||||||||||||
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United States
Segment results for the United States include retail operations in all 50 states, the District of Columbia, Puerto Rico and Guam, the electronic commerce Web sitewww.gamestop.com,Game Informermagazine,www.kongregate.com, a digital PC game distribution platform available atwww.gamestop.com/pcgames, Spawn Labs and an online consumer electronics marketplace available atwww.buymytronics.com. As of July 28, 2012,August 3, 2013, the United States segment included 4,4484,290 GameStop stores, compared to 4,4404,448 stores on July 30, 2011. 28, 2012.
Net sales for the 13 weeks ended July 28, 2012August 3, 2013 decreased $98.4$116.1 million, or 8.5%11.0%, compared to the 13 weeks ended July 30, 201128, 2012 due primarily to a 9.6%10.2% decrease in comparable store sales. The decrease in comparable store sales was primarily due to decreasesa decrease in new video game hardware sales new video game software sales and used video game product sales, offset partially by an increase in other product sales.across all categories due to the late stages of the current console cycle. The decrease in new video game hardware sales is primarily due to a decrease in hardware unit sell-through related to being in the late stages of the current console cycle.cycle and higher sales of the Sony PlayStation Vita which launched in the first quarter of fiscal 2012. These sales declines were partially offset by the sales of the Nintendo Wii U which launched in the fourth quarter of fiscal 2012. The decrease in new video
game software sales is primarily due to a lack of new release video game titles in the second quarter of fiscal 2012 when2013 is primarily due to a reduction in new software title launches as compared to the second quarter of fiscal 2011.2012 coupled with declining consumer demand due to the late stages of the console cycle. The decrease in usedpre-owned video game product sales isin the second quarter of fiscal 2013 was primarily due primarily to a decrease in store traffic related to the lack of new releaselower video game titles in the second quarter of fiscal 2012 when compared to the second quarter of fiscal 2011 and lower hardware demand due to the late stages of the current console cycle. The increasedecrease in other product sales is due primarily to an increase in sales of PC entertainment software due primarily to the release ofDiablo III in the second quarter of fiscal 2012 and increases2013 was primarily due to decreases in sales of mobile devicesaccessories and digital products in the second quarterlower sales of fiscal 2012PC entertainment software as compared to the second quarter of fiscal 2011. 2012 due to the launch ofDiablo III, offset partially by increases in sales of mobile and digital products.
Net sales for the 26 weeks ended July 28, 2012August 3, 2013 decreased $339.9$222.5 million, or 11.9%8.8%, compared to the 26 weeks ended July 30, 201128, 2012 due primarily to a 12.7%8.2% decrease in comparable store sales. The decrease in comparable store sales was primarily due to
decreases a decrease in new video game hardware sales new video game software sales and used video game product sales, offset partially by an increase in other product sales.across all categories. The decrease in new video game hardware sales is primarily due to a decrease in hardware unit sell-through related to being in the late stages of the current console cycle.cycle and higher sales of the Sony PlayStation Vita which launched in the first quarter of fiscal 2012. The decrease in new video game software sales is primarily due to a lackdeclines in sales of new release video game titlescatalog software due to the late stages of the current console cycle in the 26 weeks ended July 28, 2012August 3, 2013 when compared to the 26 weeks ended July 30, 2011.28, 2012. The decrease in usedpre-owned video game product sales is due primarily to a decrease in store traffic related to the lack of new release video game titles in the 26 weeks ended July 28, 2012August 3, 2013 when compared to the 26 weeks ended July 30, 201128, 2012 and lower hardware demand due to the late stages of the current console cycle. The increasedecrease in other product sales is due primarily to an increasedecreases in sales of accessories and lower sales of PC entertainment software as compared to the second quarter of fiscal 2012 due to the launch ofDiablo III, almost entirely offset by increases in sales of mobile and digital products.
Segment operating earnings for the 13 weeks ended August 3, 2013 increased by $2.8 million compared to the 13 weeks ended July 28, 2012, driven primarily by cost control and a higher product margin. Segment operating income decreased $19.5 million for the 26 weeks ended August 3, 2013 compared to the 26 weeks ended July 28, 2012, driven primarily by the decrease in comparable store sales.
Canada
Segment results for Canada include retail operations in Canada and their e-commerce site. As of August 3, 2013, the Canadian segment had 334 stores compared to 341 stores as of July 28, 2012. Net sales in the Canadian segment in the 13 and 26 weeks ended August 3, 2013 decreased 12.0% and 10.8%, respectively, compared to the 13 and 26 weeks ended July 28, 2012. The decrease in net sales was primarily due to a decrease in comparable store sales of 8.7% and 7.3%, respectively, and the impact of changes in exchange rates, which had the effect of decreasing sales by $1.0 million and $3.0 million, respectively, in the 13 and 26 weeks ended August 3, 2013 when compared to the same periods in fiscal 2012. Excluding the impact of changes in exchange rates, net sales in the Canadian segment decreased by 10.7% and 9.1% in the 13 and 26 weeks ended August 3, 2013, respectively, compared to the same periods in fiscal 2012. The decrease in comparable store sales was primarily due to a decrease in store traffic related to lower video game demand due to the late stages of the current console cycle and a decrease in sales of PC entertainment software due primarily to the release ofDiablo III in the second quarter of fiscal 20122012.
Segment operating earnings for both the 13 and increases in sales of mobile devices and digital products in the 26 weeks ended July 28, 2012August 3, 2013 decreased by $1.1 million, compared to the 26 weeks ended July 30, 2011. Segment operating income for the 13 and 26 weeks ended July 28, 2012, decreased by $17.5 million and $33.6 million, respectively, compared to the 13 and 26 weeks ended July 30, 2011, drivendue primarily by the decrease in comparable store sales.
Canada
Segment results for Canada include retail operations in Canada and their e-commerce site. Net sales in the Canadian segment in the 13 and 26 weeks ended July 28, 2012 decreased 12.4% and 10.9%, respectively, compared to the 13 and 26 weeks ended July 30, 2011. The decrease in net sales was primarily attributable to a decrease in comparable store sales of 7.9% and 8.0%, respectively, and the impact of changes in exchange rates, which had the effect of decreasing sales by $3.9 million and $5.8 million, respectively, in the 13 and 26 weeks ended July 28, 2012 when compared to the same periods in fiscal 2011. Excluding the impact of changes in exchange rates, net sales in the Canadian segment decreased by 8.0% both in the 13 and 26 weeks ended July 28, 2012 compared to the same periods in fiscal 2011. The decrease in comparable store sales was primarilygross profit due to weak consumer traffic and a slow-down in hardware unit sell-through as a result of being in the late stages of the current console cycle, as well as a lack of new release video game software titles in fiscal 2012 when compared to fiscal 2011. As of July 28, 2012, the Canadian segment had 341 stores compared to 344 stores at July 30, 2011.
Segment operating incomelower sales for the 13 and 26 weeks ended July 28, 2012 increased by $2.2 million and $4.4 million, respectively, compared to the 13 and 26 weeks ended July 30, 2011, driven by an increase in gross margin due primarily to lower promotional activities and a decrease in operating expenses for the 13 and 26 weeks ended July 28, 2012August 3, 2013 when compared to the prior year periods.
Australia
Segment results for Australia include retail operations and e-commerce sites in Australia and New Zealand. As of July 28, 2012,August 3, 2013, the Australian segment included 416414 stores, compared to 411416 stores atas of July 30, 2011.28, 2012. Net sales for the 13 and 26 weeks ended July 28, 2012August 3, 2013 decreased 6.7%12.8% and 8.4%3.8%, respectively, compared to the 13 and 26 weeks ended July 30, 2011.28, 2012. The decrease in net sales for the 13 weeks ended August 3, 2013 was
primarily attributabledue to a decrease in comparable store sales of 2.1% and 8.0%6.5%, respectively, and the impact of changes in exchange rates, which had the effect of decreasing sales by $7.6$7.3 million and $4.6 million, respectively, in the 13 and 26 weeks ended July 28, 2012 when compared to the same periodsperiod in fiscal 2011.2012. The decrease in comparable store sales in the second quarter of fiscal 2013 was primarily due to a decrease in store traffic related to lower video game demand due to the late stages of the current console cycle and a decrease in sales of PC entertainment software due primarily to the release ofDiablo III in the second quarter of fiscal 2012. The decrease in net sales for the 26 weeks ended August 3, 2013 was attributable to the impact of exchange rates, which had the effect of decreasing sales by $9.2 million when compared to the same period in fiscal 2012. Excluding the impact of changes in exchange rates, net sales in the Australian segment decreased by 1.2%7.1% and 6.6%increased by 0.1% in the 13 and 26 weeks ended July 28, 2012,August 3, 2013, respectively, compared to the same periods in fiscal 2011. The decrease in net sales at comparable stores was primarily due to weak consumer traffic and a slow-down in hardware unit sell-through as a result of being in the late stages of the current console cycle, as well as a lack of new release video game software titles in fiscal 2012 when compared to fiscal 2011.2012.
Segment operating income in the 13 and 26 weeks ended July 28, 2012August 3, 2013 decreased by $2.6 million and increased by $0.2 million and decreased by $4.9$0.3 million, respectively, when compared to the 13 and 26 weeks ended July 30, 2011.28, 2012. The increasedecrease in segment operating income for the 13 weeks ended July 28, 2012August 3, 2013 when compared to the same period of the prior year is primarily due to a decrease in selling, general and administrative expenses. The decrease in
segmentgross margin due to lower sales for the 13 weeks ended August 3, 2013. Segment operating income for the 26 weeks ended July 28, 2012August 3, 2013 was relatively flat when compared to the same period in fiscal 2011 is primarily due to the decrease in comparable store sales and the deleveraging of selling, general and administrative expenses. In addition, the unfavorable impact of changes in exchange rates had the effect of decreasing operating earnings by $0.2 million and $0.3 million, respectively, for the 13 and 26 weeks ended July 28, 2012 when compared to the 13 and 26 weeks ended July 30, 2011.2012.
Europe
Segment results for Europe during the 26 weeks ended July 28, 2012 include retail store operations in 11 European countries and e-commerce sites in six countries. Segment results for Europe during the 26 weeks ended July 30, 2011 include retail operations in 13 European countries and e-commerce operations in five countries. As of July 28, 2012,August 3, 2013, the European segment operated 1,423included 1,467 stores compared to 1,3871,423 stores as of July 30, 2011.28, 2012. For the 13 and 26 weeks ended July 28, 2012,August 3, 2013, European net sales decreased 20.8%8.6% and 12.6%8.5%, respectively, compared to the 13 and 26 weeks ended July 30, 2011. The decrease in net sales was primarily due to the impact of the changes in exchange rates, which had the effect of decreasing sales by $39.1 million and $59.7 million, respectively, in the 13 and 26 weeks ended July 28, 2012 when compared to the prior year periods.2012. Excluding the impact of changes in exchange rates, net sales in the European segment decreased 9.9%12.2% and 4.2%9.8%, respectively, in the 13 and 26 weeks ended July 28, 2012August 3, 2013 when compared to the prior year periods. This decrease in sales is primarily due to a decrease in comparable store sales of 11.8%14.5% and 6.3%12.5%, respectively, in the 13 and 26 weeks ended July 28, 2012.August 3, 2013. The decrease in sales at comparable stores was primarily due to weak consumer traffic and a slow-down in hardware unit sell-through as a result of being in the late stages of the current console cycle, as well asand a lackdecrease in sales of newPC entertainment software due primarily to the release video game software titlesofDiablo III in the second quarter of fiscal 2012 when compared to fiscal 2011.2012.
The segment operating loss in Europe was $10.2 million in the 13 and 26 weeks ended July 28, 2012August 3, 2013 compared to the operating loss in the 13 and 26 weeks ended July 30, 2011 of $6.2 million.28, 2012 increased by $14.8 million and $23.2 million, respectively. The increase in the operating loss for the 13 and 26 weeks ended August 3, 2013 compared to the 13 and 26 weeks ended July 28, 2012 comparedis primarily due to the 13 weeks ended July 30, 2011 is driven by the decrease in sales at comparable storesstore sales discussed above. The increase in the operating loss was partially offset byalso included the favorableunfavorable impact of changes in exchange rates, which had the effect of decreasingincreasing the operating loss by $1.7$0.7 million when compared toand $0.5 million, respectively for the prior year period. The segment operating loss in Europe for the13 and 26 weeks ended July 28, 2012 was $11.4 million compared to the operating loss in the 26 weeks ended July 30, 2011 of $10.2 million. The increase in the operating loss for the 26 weeks ended July 28, 2012 compared to the 26 weeks ended July 30, 2011 is primarily due to the decrease in sales at comparable stores discussed above. The increase in the operating loss was partially offset by the favorable impact of changes in exchange rates, which had the effect of decreasing the operating loss by $1.5 million when compared to the prior year period.August 3, 2013.
Seasonality
The Company’sOur business, like that of many retailers, is seasonal, with the major portion of the net sales and operating profit realized during the fourth fiscal quarter which includes the holiday selling season.
Liquidity and Capital Resources
Cash Flows
During the 26 weeks ended July 28, 2012,August 3, 2013, cash used in operations was $173.8$274.6 million, compared to cash used in operations of $225.7$173.8 million during the 26 weeks ended July 30, 2011.28, 2012. The decreaseincrease in cash used in operations of $51.9$100.8 million was primarily due to an $88.4 million decrease related to working capital, offset partially by a $28.6 million decreaseincrease in net income adjusted for noncash items and a $7.9 million decrease in cash flows related to the changes in payments of other long-term liabilities. Cash used in operations related tofor working capital decreased $88.4which increased $55.6 million from $447.7 million in the 26 weeks ended July 30, 2011 to $359.3 million in the 26 weeks ended July 28, 2012 to $414.9 million in the 26 weeks ended August 3, 2013. The increase in cash used in operations for working capital was due primarily to changes
the change in cash related to accounts payable and accrued liabilities and the change in the payment of income taxes and changes in inventory and related accounts payable from year to year. The increase in cash used related to accounts payable and accrued liabilities for the 26 weeks ended August 3, 2013 compared to the 26 weeks ended July 28, 2012 was primarily due to changes in the timing of trade payable payments. Our business is highly seasonal, with a
disproportionate amount of sales and purchases occurring in the fourth quarter of each year. We purchase inventory in anticipation of these fourth quarter sales and, as a result, have higher accounts payable at year-end compared to the end of the second quarter. During the first 26 weeks of each fiscal year, we have traditionally had a significant use of cash associated with the pay down of accounts payable from year end.year-end. Due to the late stages of the current console cycle, we have decreased purchases of new products and our inventory mix is shifting towards more pre-owned products, including pre-owned mobile products that do not have offsetting accounts payable. These factors also negatively impacted our accounts payable leverage during the quarter. Cash used in operations was also impacted by a $15.7 million increase in cash used for other long-term liabilities. This increase is primarily a result of a $17.9 million payment made to settle certain U.S. federal income tax items. Additionally, the increase in cash used in operations was also attributed to a $29.5 million decrease in net income adjusted for noncash items.
Cash used in investing activities was $57.2$45.9 million and $121.0$57.2 million during the 26 weeks ended August 3, 2013 and July 28, 2012, respectively. During the 26 weeks ended August 3, 2013, $47.3 million of cash was used primarily to invest in information systems, invest in digital initiatives and July 30, 2011, respectively.open new stores and remodel existing stores in the U.S. and internationally. During the 26 weeks ended July 28, 2012, $53.6 million of cash was used primarily to invest in information systems, invest in digital initiatives and open new stores and remodel existing stores in the U.S. and internationally and to invest in information systems and digital initiatives. During the 26 weeks ended July 30, 2011, $87.9 million of cash was used primarily to invest in information systems and e-commerce, to invest in digital and loyalty program initiatives and to open new stores in the U.S. and internationally. In addition, during the 26 weeks ended July 30, 2011, the Company used $27.4 million for acquisitions in support of the Company’s digital initiatives.
Cash used in financing activities was $284.9$88.2 million and $151.6$284.9 million for the 26 weeks ended August 3, 2013 and July 28, 2012, respectively. The cash used in financing activities for the 26 weeks ended August 3, 2013 was primarily due to the purchase of $114.4 million of treasury shares and July 30, 2011, respectively.the payment of dividends on our Class A Common Stock of $66.2 million, offset partially by the cash received from net Revolver (as defined below) borrowings of $50 million and the issuance of shares associated with stock option exercises of $39.3 million. The cash used in financing activities for the 26 weeks ended July 28, 2012 was primarily due to the purchase of $246.6 million of treasury shares pursuant to the Board of Directors’ authorizations from November 2011 and March 2012 and the payment of dividends on the Company’sour Class A Common Stock of $40.3 million. In addition, the Companywe borrowed and repaid $36.0 million against itsour Revolver (as defined below) during the 26 weeks ended July 28, 2012. The cash used in financing activities for the 26 weeks ended July 30, 2011 was primarily due to the purchase of $174.4 million of treasury shares pursuant to the Board of Directors’ $500 million authorization in February 2011. Of this amount, $22.0 million of cash was used to settle treasury share purchases that were initiated prior to January 29, 2011. In addition, $13.2 million of cash was received due to the issuance of shares relating to stock option exercises and the Company borrowed $35.0 million against its Revolver (as defined below) during the 26 weeks ended July 30, 2011 and subsequently repaid $25.0 million of the borrowings before July 30, 2011.
Sources of Liquidity
We utilize cash generated from operations and have funds available to us under our revolving credit facility to cover seasonal fluctuations in cash flows and to support our various growth initiatives. Our cash and cash equivalents are carried at cost and consist primarily of time deposits with highly rated commercial banks and money market investment funds holding direct U.S. Treasury obligations.banks.
On January 4, 2011, the Companywe entered into a $400 million credit agreement (the “Revolver”), which amended and restated, in its entirety, the Company’sour prior credit agreement entered into in October 2005 (the “Credit Agreement”). The Revolver provides for a five-year, $400 million asset-based facility, including a $50 million letter of credit sublimit, secured by substantially all of the Company’s and its domestic subsidiaries’ assets. The Company hasWe have the ability to increase the facility, which matures in January 2016, by $150 million under certain circumstances. The extension of the Revolver to 2016 reduces our exposure to potential tightening or other adverse changes in the credit markets.
The availability under the Revolver is limited to a borrowing base which allows the Companyus to borrow up to 90% of the appraisal value of the inventory, in each case plus 90% of eligible credit card receivables, net of certain reserves. Letters of credit reduce the amount available to borrow by their face value. The Company’sOur ability to pay cash dividends, redeem options and repurchase shares is generally permitted, except under certain circumstances, including if Revolver excess availability is less than 20%, or is projected to be within 12 months after such payment. In addition, if Revolver usage is projected to be equal to or greater than 25% of the borrowing basetotal commitments during the prospective 12-month period, the Company iswe are subject to meeting a fixed charge coverage ratio of 1.1:1.0 prior to making such payments. In the event that excess availability under the Revolver is at any time less than the
greater of (1) $40.0 million or (2) 12.5% of the lesser of the total commitment or the borrowing base, the Companywe will be subject to a fixed charge coverage ratio covenant of 1.1:1.0.
The Revolver places certain restrictions on the Companyus and itsour subsidiaries, including limitations on asset sales, additional liens, investments, loans, guarantees, acquisitions and the incurrence of additional
indebtedness. Absent consent from itsour lenders, the Companywe may not incur more than $750 million of additional unsecured indebtedness to be limited to $250 million in general unsecured obligations and $500 million in unsecured obligations to finance acquisitions valued at $500 million or more. The per annum interest rate under the Revolver is variable and is calculated by applying a margin (1) for prime rate loans of 1.25% to 1.50% above the highest of (a) the prime rate of the administrative agent, (b) the federal funds effective rate plus 0.50% or (c) the London Interbank Offered (“LIBO”) rate for a 30-day interest period as determined on such day plus 1.00%, and (2) for LIBO rate loans of 2.25% to 2.50% above the LIBO rate. The applicable margin is determined quarterly as a function of the Company’sour average daily excess availability under the facility. In addition, the Company iswe are required to pay a commitment fee of 0.375% or 0.50%, depending on facility usage, for any unused portion of the total commitment under the Revolver. As of July 28, 2012,August 3, 2013, the applicable margin was 1.25% for prime rate loans and 2.25% for LIBO rate loans, while the required commitment fee was 0.50% for the unused portion of the Revolver.
The Revolver provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with covenants, any material representation or warranty made by the Companyus or the borrowers proving to be false in any material respect, certain bankruptcy, insolvency or receivership events affecting the Companyus or itsour subsidiaries, defaults relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of the Company or certain of its subsidiaries. As of July 28, 2012,August 3, 2013, total availability under the Revolver was $320.0$253.3 million, there were nowas $50.0 million of borrowings outstanding under the Revolver and standby letters of credit outstanding totaled $8.9$9.0 million. During the 26 weeks ended July 28, 2012, we borrowed and repaid $36.0 million under the Revolver. Average borrowings under the Revolver for the 13 weeks and 26 weeks ended August 3, 2013 were $44.2 million and $22.1 million, respectively. Our average interest rate on those borrowings for the 13 weeks and 26 weeks ended August 3, 2013 was 2.9% for both periods. We are currently in compliance with the requirements of the Revolver.
In September 2007, the Company’sour Luxembourg subsidiary entered into a discretionary $20.0 million Uncommitted Line of Credit (the “Line of Credit”) with Bank of America. There is no term associated with the Line of Credit and Bank of America may withdraw the facility at any time without notice. The Line of Credit is available to the Company’sour foreign subsidiaries for use primarily as a bank overdraft facility for short-term liquidity needs and for the issuance of bank guarantees and letters of credit to support operations. As of July 28, 2012,August 3, 2013, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $4.3 million.
In September 2005, the Company, along with GameStop, Inc. as co-issuer (together with the Company, the “Issuers”), completed the offering of $300 million aggregate principal amount of Senior Floating Rate Notes due 2011 (the “Senior Floating Rate Notes”) and $650 million aggregate principal amount of Senior Notes due 2012 (the “Senior Notes” and, together with the Senior Floating Rate Notes, the “Notes”). The Notes were issued under an indenture, dated September 28, 2005, by and among the Issuers, the subsidiary guarantors party thereto, and Citibank, N.A., as trustee. In November 2006, Wilmington Trust Company was appointed as the new Trustee for the Notes (the “Trustee”).
The Senior Notes bore interest at 8.0% per annum, were to mature on October 1, 2012 and were priced at 98.688%, resulting in a discount at the time of issue of $8.5 million. The discount was amortized using the effective interest method. The Issuers paid interest on the Senior Notes semi-annually, in arrears, every April 1 and October 1, to holders of record on the immediately preceding March 15 and September 15. As of January 28, 2012, the Senior Notes had been fully redeemed. As of July 30, 2011, the only long-term debt outstanding was the Senior Notes, gross of the unamortized original issue discount of $0.7$4.6 million.
Uses of Capital
Our future capital requirements will depend on the number of new stores openedwe open and the timing of those openings within a given fiscal year, as well as the investments we will make in e-commerce, digital and other strategic initiatives. The CompanyWe opened 7872 stores in the 26 weeks ended July 28, 2012August 3, 2013 and expectswe expect to open approximately 150115 stores in fiscal 2012.2013, including the 44 stores acquired in France during the first quarter. Capital expenditures for fiscal 20122013 are projected to be approximately $140$135 million, to be used primarily to fund continued digital initiatives, new store openings, store remodels and invest in distribution and information systems in support of operations.
Between May 2006 and December 2011, the Company repurchased and redeemed the $300 million of Senior Floating Rate Notes and the $650 million of Senior Notes under previously announced buybacks authorized by the Company’s Board of Directors. The repurchased Notes were delivered to the Trustee for cancellation. None of the debt was retired or redeemed during the 26-week period ended July 30, 2011.
At the beginning of fiscal 2011, $22.0 million of treasury share purchases made during fiscalSince 2010, were settled. In February 2011, theour Board of Directors has from time to time authorized the Companyrepurchase of our common stock. Our current authorization, made in November 2012, allows us to userepurchase up to $500 million to repurchase shares of the Company’s common stock and/or retire the Company’s Senior Notes. Under the repurchase program, the Company could purchase the Company’s Senior Notes and/or shares of issued and outstanding Class A Common Stock through open market purchases, debt calls or privately negotiated transactions.shares. During the 26 weeks ended July 30, 2011, the CompanyAugust 3, 2013, we repurchased 7.3 million shares of the Company’s common stock at an average purchase price of $20.91. For the remainder of fiscal 2011, the Company purchased an additional 3.9 million shares at an average price per share of $22.24.
In November 2011, the Board of Directors authorized the Company to use $500 million to repurchase shares of the Company’s common stock and/or retire the Company’s Senior Notes, replacing the remaining $180.1 million authorization. On March 20, 2012, the Board of Directors authorized the Company to use $500 million to repurchase shares of the Company’s common stock, replacing the remaining $253.4 million of the November 2011 authorization. During the 26 weeks ended July 28, 2012, the Company repurchased 12.9 million shares at an average price per share of $19.92. As of July 28, 2012, $318.4 million remained available under the current authorization. As of August 28, 2012, the Company has purchased an additional 1.13.4 million shares for an average price per share of $15.87$33.58, leaving $310.9 million available under the November 2012 authorization. As of September 4, 2013, we have purchased an additional 0.3 million shares of our Class A Common Stock for an average price per share of $50.27 since July 28, 2012.August 3, 2013, leaving $296.9 million available under this authorization. The amounts, timing and
On February 8,
prices of share repurchases that are effected under the Company’s share repurchase programs, pursuant to such authorizations, are directed by our senior management.
During the first quarter of fiscal 2012, theour Board of Directors of the Company approved the initiation of a quarterly cash dividend to itsour stockholders of Class A Common Stock. TheDuring the 26 week periods ended August 3, 2013 and July 28, 2012, we paid $66.2 million and $40.3 million, respectively, in dividends. During the first quarterlyand second quarters of fiscal 2012, we declared cash dividenddividends of $0.15 per share was paid on March 12, 2012 to all common stockholdersfor each quarter. During the first and second quarters of record asfiscal 2013, we declared cash dividends of February 21, 2012. The second quarterly cash dividend of $0.15$0.275 per share was paid on June 12, 2012 to all common stockholders of record as of May 29, 2012. On August 14, 2012, thefor each quarter. Our Board of Directors of the Company approved a quarterly cash dividend to itsour stockholders of $0.25$0.275 per Class A common share payable on September 12, 201219, 2013 to stockholders of record at the close of business on August 28, 2012.September 3, 2013. Future dividends will be subject to approval by theour Board of Directors of the Company.Directors.
Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and funds available under the Revolver will be sufficient to fund our operations, digital initiatives, store openings and remodeling activities and corporate capital expenditure programs, including the payment of dividends declared by the Board of Directors, for at least the next 12 months.
Recent Accounting Pronouncements
DuringIn July 2013, accounting standards update (“ASU”) 2013-11“Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” was issued requiring an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carry forward, a similar tax loss, or a tax credit carry forward. This ASU will be effective for us beginning the first quarter of fiscal 2012, we adopted the accounting standard update regarding the presentation of comprehensive income. This accounting standard update was issued to increase the prominence of items reported in other comprehensive income. The accounting standard update requires2014. We do not expect that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate, but consecutive statements. In connection with the adoption of this accounting standard update,ASU will have an impact on our condensed consolidated financial statements now include separate statementsas we currently do not have any unrecognized tax benefits in the same jurisdictions in which we have tax loss or credit carryovers.
In March 2013, ASU 2013-05“Foreign Currency Matters (Topic 830)” was issued providing guidance with respect to the release of comprehensive income.
Duringcumulative translation adjustments into net income when a parent company sells either a part or all of an investment in a foreign entity. The ASU requires the release of cumulative translation adjustments when a company no longer holds a controlling financial interest in a foreign subsidiary or a group of assets that constitutes a business within a foreign entity. This ASU will be effective for us beginning the first quarter of fiscal 2012, we adopted2014. We are evaluating the accounting standard update regarding fair value measurement and disclosure. This accounting standard update was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This accounting standard update also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The adoptioneffect of this accounting standard update didASU, but do not expect it to have a significant impact on our condensed consolidated financial statements.
In February 2013, ASU 2013-02“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” was issued regarding disclosure of amounts reclassified out of accumulated other comprehensive income by component. An entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU was effective for our annual and interim periods beginning in fiscal 2013. The ASU had no effect on our condensed consolidated financial statements.
Disclosure Regarding Forward-looking Statements
This report on Form 10-Q and other oral and written statements made by the Company to the public contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or
achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to:
the introduction of next-generation consoles, the features of such consoles, including any restrictions or conditions that may adversely affect our pre-owned business or the ability to play prior generation video games on such consoles, and the impact on demand for existing products;
our reliance on suppliers and vendors for sufficient quantities of their products and for new product releases;
general economic conditions in the U.S. and internationally and specifically, economic conditions affecting Europe, the electronic game industry and the retail industry;
the launch of next generation consoles and the timing and features of such consoles;
alternate sources of distribution of video game software and content;
alternate means to play video games;
the competitive environment in the electronic game industry;
the growth of mobile, social and browser gaming;
the results of the Company’s asset impairment analysis;
our ability to open and operate new stores and to efficiently close underperforming stores;
our ability to attract and retain qualified personnel;
our ability to effectively integrate and operate acquired companies, including digital gaming and technology-based companies that are outside of the Company’s historical operating expertise;
the impact and costs of litigation and regulatory compliance;
unanticipated litigation results, including third-party litigation;
the amounts, timing and prices of any share repurchases made by the Company under its share repurchase programs;
the risks involved with our international operations, including continued efforts to consolidate back-office support and close under-performing stores; and
other factors described in the Form 10-K, including those set forth under the caption “Item 1A. Risk Factors.”
In some cases, forward-looking statements can be identified by the use of terms such as “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “pro forma,” “should,“seeks,” “seeks,“should,” “will” or similar expressions. These statements are only predictions based on current expectations and assumptions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. You should not place undue reliance on these forward-looking statements.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Form 10-Q. In light of these risks and uncertainties, the forward-looking events and circumstances contained in this Form 10-Q may not occur, causing actual results to differ materially from those anticipated or implied by our forward-looking statements.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Exposure
Our Revolver’s per annum interest rate is variable and is based on one of (i) the U.S. prime rate, (ii) the LIBO rate or (iii) the U.S. federal funds rate. We do not use derivative financial instruments to hedge interest rate exposure. We limit our interest rate risksrisk by investing our excess cash balances in short-term, highly-liquid instruments with a maturity of one year or less. We do not expect any material losses from our invested cash balances, and we believe that our interest rate exposure is modest.
Foreign Currency Risk
The Company usesWe use forward exchange contracts, foreign currency options and cross-currency swaps (together, the “Foreign Currency Contracts”) to manage currency risk primarily related to intercompany loans denominated in non-functional currencies and certain foreign currency assets and liabilities. The Foreign Currency Contracts are not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign currency assets and liabilities. For the 13 and 26 week periodsweeks ended July 28, 2012, the CompanyAugust 3, 2013, we recognized gainslosses of $18.7$19.7 million and $16.9$10.3 million, respectively, in selling, general and administrative expenses related to the trading of derivative instruments. These gainslosses were offset by lossesgains related to the re-measurement of intercompany loans and foreign currency assets and liabilities of $20.5$22.2 million and $18.0$13.4 million, respectively. The aggregate fair value of the Foreign Currency Contracts as of July 28, 2012August 3, 2013 was a net assetliability of $31.4$17.9 million as measured by observable inputs obtained from market news reporting services, such as Bloomberg and The Wall Street Journal, and industry-standard models that consider various assumptions, including quoted forward prices, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures. A hypothetical strengthening or weakening of 10% in the foreign exchange rates underlying the Foreign Currency Contracts from the market rate as of July 28, 2012August 3, 2013 would result in a (loss)gain or gainloss in value of the forwards, options and swaps of ($8.9) million or $8.9 million, respectively.$9.2 million.
We do not use derivative financial instruments for trading or speculative purposes. We are exposed to counterparty credit risk on all of our derivative financial instruments and cash equivalent investments. The Company managesWe manage counterparty risk according to the guidelines and controls established under comprehensive risk management and investment policies. We continuously monitor our counterparty credit risk and utilize a number of different counterparties to minimize our exposure to potential defaults. We do not require collateral under derivative or investment agreements.
ITEM 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company’s management conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at the reasonable assurance level. Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and that the Company’s disclosure controls and procedures are effective at the reasonable assurance level. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
(b) Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. | Legal Proceedings |
In the ordinary course of the Company’s business, the Company is, from time to time, subject to various legal proceedings, including matters involving wage and hour employee class actions and consumer class actions. The Company may enter into discussions regarding settlement of these and other types of lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interest of the Company’s stockholders. Management does not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
ITEM 1A.Risk | Factors |
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in “Item 1A. Risk Factors” in our Form 10-K for the fiscal year ended January 28, 2012February 2, 2013 filed with the SEC on March 27, 2012.April 3, 2013. These risks could materially and adversely affect our business, financial condition and results of operations. The risks described in our Form 10-K have not changed materially however, theyother than as set forth below:
The introduction of next-generation consoles could negatively impact the demand for existing products or our pre-owned business.
The introduction of next-generation consoles, the features of such consoles, including any restrictions or conditions that may adversely affect our pre-owned business or the ability to play prior generation video games on such consoles, and the impact on demand for existing products could have a negative impact on our sales and earnings.
These are not the only risks we face. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases by the Company of itsour equity securities during the fiscal quarter ended July 28, 2012August 3, 2013 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |||||||||||||
(In millions of dollars) | ||||||||||||||||
April 29 through May 26, 2012 | 1,621,900 | $ | 19.07 | 1,621,900 | $ | 423.9 | ||||||||||
May 27 through June 30, 2012 | 3,955,252 | $ | 18.14 | 3,955,252 | $ | 352.2 | ||||||||||
July 1 through July 28, 2012 | 2,016,608 | $ | 16.72 | 2,016,608 | $ | 318.4 | ||||||||||
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Total | 7,593,760 | $ | 17.96 | 7,593,760 | ||||||||||||
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| (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||
(In millions of dollars) | ||||||||||||||||
May 5 through June 1, 2013 | — | $ | — | — | $ | 399.8 | ||||||||||
June 2 through July 6, 2013 | 2,000,600 | $ | 35.97 | 2,000,600 | $ | 327.8 | ||||||||||
July 7 through August 3, 2013 | 389,200 | $ | 43.58 | 389,200 | $ | 310.9 | ||||||||||
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Total | 2,389,800 | $ | 37.21 | 2,389,800 | ||||||||||||
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ITEM 6. | Exhibits |
Exhibits
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3.2 | Third Amended and Restated Bylaws. | |
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31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
(1) | Incorporated by reference to |
(2) | Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on |
(3) | Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GAMESTOP CORP. | ||||||
By: | /s/ ROBERT A. LLOYD | |||||
ROBERT A. LLOYD | ||||||
Executive Vice President and Chief Financial Officer | ||||||
(Principal Financial Officer) | ||||||
Date: September |
GAMESTOP CORP. | ||||||||||
By: | /s/ TROY W. CRAWFORD | |||||||||
TROY W. CRAWFORD | ||||||||||
Senior Vice President and Chief Accounting Officer | ||||||||||
(Principal Accounting Officer) | ||||||||||
Date: September |
EXHIBIT INDEX
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31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
101.INS | XBRL Instance Document. | ||
101.SCH | XBRL Taxonomy Extension Schema. | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase. | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase. | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
(1) | Incorporated by reference to |
(2) | Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on |
(3) | Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on |
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