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 AUGUST 1, 2015 | ||
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 Regulation S-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, a non-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 September 1, 2015: 105,489,060
TABLE OF CONTENTS
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Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 6. | |||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
August 1, 2015 | August 2, 2014 | January 31, 2015 | ||||||||||
(In millions, except par value per share) | ||||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 136.2 | $ | 193.0 | $ | 610.1 | ||||||
Receivables, net | 118.3 | 91.2 | 113.5 | |||||||||
Merchandise inventories, net | 988.3 | 1,061.0 | 1,144.8 | |||||||||
Deferred income taxes — current | 65.9 | 59.2 | 65.6 | |||||||||
Prepaid expenses and other current assets | 192.9 | 181.9 | 128.5 | |||||||||
Total current assets | 1,501.6 | 1,586.3 | 2,062.5 | |||||||||
Property and equipment: | ||||||||||||
Land | 17.7 | 21.0 | 18.3 | |||||||||
Buildings and leasehold improvements | 627.9 | 621.9 | 609.2 | |||||||||
Fixtures and equipment | 926.3 | 864.0 | 888.2 | |||||||||
Total property and equipment | 1,571.9 | 1,506.9 | 1,515.7 | |||||||||
Less accumulated depreciation | 1,108.6 | 1,057.2 | 1,061.5 | |||||||||
Net property and equipment | 463.3 | 449.7 | 454.2 | |||||||||
Goodwill | 1,472.0 | 1,420.6 | 1,390.4 | |||||||||
Other intangible assets, net | 301.6 | 222.0 | 237.8 | |||||||||
Other noncurrent assets | 100.3 | 84.9 | 101.4 | |||||||||
Total noncurrent assets | 2,337.2 | 2,177.2 | 2,183.8 | |||||||||
Total assets | $ | 3,838.8 | $ | 3,763.5 | $ | 4,246.3 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 481.1 | $ | 460.8 | $ | 815.6 | ||||||
Accrued liabilities | 847.4 | 743.1 | 803.6 | |||||||||
Income taxes payable | 3.5 | 29.7 | 15.4 | |||||||||
Current portion of debt | 12.5 | 214.1 | 5.1 | |||||||||
Total current liabilities | 1,344.5 | 1,447.7 | 1,639.7 | |||||||||
Deferred income taxes | 96.0 | 58.9 | 95.9 | |||||||||
Long-term debt | 350.0 | 0.3 | 350.6 | |||||||||
Other long-term liabilities | 81.0 | 75.2 | 92.4 | |||||||||
Total long-term liabilities | 527.0 | 134.4 | 538.9 | |||||||||
Total liabilities | 1,871.5 | 1,582.1 | 2,178.6 | |||||||||
Commitments and contingencies (Note 7) | ||||||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock — 5.0 shares authorized; no shares issued or outstanding | — | — | — | |||||||||
Class A common stock — $.001 par value; 300.0 shares authorized; 105.9, 112.8 and 107.7 shares issued and outstanding | 0.1 | 0.1 | 0.1 | |||||||||
Additional paid-in-capital | — | 65.8 | — | |||||||||
Accumulated other comprehensive income (loss) | (55.4 | ) | 104.1 | (25.4 | ) | |||||||
Retained earnings | 2,022.6 | 2,011.4 | 2,093.0 | |||||||||
Total stockholders’ equity | 1,967.3 | 2,181.4 | 2,067.7 | |||||||||
Total liabilities and stockholders’ equity | $ | 3,838.8 | $ | 3,763.5 | $ | 4,246.3 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
Net sales | $ | 1,761.9 | $ | 1,731.4 | $ | 3,822.5 | $ | 3,727.7 | ||||||||
Cost of sales | 1,181.4 | 1,180.5 | 2,603.0 | 2,550.4 | ||||||||||||
Gross profit | 580.5 | 550.9 | 1,219.5 | 1,177.3 | ||||||||||||
Selling, general and administrative expenses | 490.8 | 475.4 | 970.1 | 956.4 | ||||||||||||
Depreciation and amortization | 38.0 | 38.8 | 73.8 | 78.3 | ||||||||||||
Operating earnings | 51.7 | 36.7 | 175.6 | 142.6 | ||||||||||||
Interest income | (0.1 | ) | (0.1 | ) | (0.3 | ) | (0.3 | ) | ||||||||
Interest expense | 5.7 | 1.2 | 11.3 | 2.0 | ||||||||||||
Earnings before income tax expense | 46.1 | 35.6 | 164.6 | 140.9 | ||||||||||||
Income tax expense | 20.8 | 11.0 | 65.5 | 48.3 | ||||||||||||
Net income | $ | 25.3 | $ | 24.6 | $ | 99.1 | $ | 92.6 | ||||||||
Basic net income per common share | $ | 0.24 | $ | 0.22 | $ | 0.92 | $ | 0.81 | ||||||||
Diluted net income per common share | $ | 0.24 | $ | 0.22 | $ | 0.92 | $ | 0.80 | ||||||||
Dividends per common share | $ | 0.36 | $ | 0.33 | $ | 0.72 | $ | 0.66 | ||||||||
Weighted average shares of common stock outstanding — basic | 106.5 | 113.6 | 107.2 | 114.3 | ||||||||||||
Weighted average shares of common stock outstanding — diluted | 107.2 | 114.3 | 107.8 | 115.1 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||
(In millions) | ||||||||||||||||
Net income | $ | 25.3 | $ | 24.6 | $ | 99.1 | $ | 92.6 | ||||||||
Other comprehensive income: | ||||||||||||||||
Foreign currency translation adjustment | (40.4 | ) | (7.6 | ) | (30.0 | ) | 21.6 | |||||||||
Total comprehensive (loss) income | $ | (15.1 | ) | $ | 17.0 | $ | 69.1 | $ | 114.2 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Class A Common Stock | |||||||||||||||||||||||
Shares | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Balance at February 1, 2015 | 107.7 | $ | 0.1 | $ | — | $ | (25.4 | ) | $ | 2,093.0 | $ | 2,067.7 | |||||||||||
Net income for the 26 weeks ended August 1, 2015 | — | — | — | — | 99.1 | 99.1 | |||||||||||||||||
Foreign currency translation | — | — | — | (30.0 | ) | — | (30.0 | ) | |||||||||||||||
Dividends(1) | — | — | — | — | (78.4 | ) | (78.4 | ) | |||||||||||||||
Stock-based compensation expense | — | — | 17.9 | — | — | 17.9 | |||||||||||||||||
Repurchase of common shares | (2.6 | ) | — | (16.0 | ) | — | (91.1 | ) | (107.1 | ) | |||||||||||||
Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax benefit of $6.6) | 0.8 | — | (1.9 | ) | — | — | (1.9 | ) | |||||||||||||||
Balance at August 1, 2015 | 105.9 | $ | 0.1 | $ | — | $ | (55.4 | ) | $ | 2,022.6 | $ | 1,967.3 | |||||||||||
(1) | Dividends declared per common share were $0.72 in the 26 weeks ended August 1, 2015. |
Class A Common Stock | |||||||||||||||||||||||
Shares | Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Retained Earnings | Total | ||||||||||||||||||
(In millions) | |||||||||||||||||||||||
Balance at February 2, 2014 | 115.3 | $ | 0.1 | $ | 172.9 | $ | 82.5 | $ | 1,995.9 | $ | 2,251.4 | ||||||||||||
Net income for the 26 weeks ended August 2, 2014 | — | — | — | — | 92.6 | 92.6 | |||||||||||||||||
Foreign currency translation | — | — | — | 21.6 | — | 21.6 | |||||||||||||||||
Dividends(2) | — | — | — | — | (77.1 | ) | (77.1 | ) | |||||||||||||||
Stock-based compensation expense | — | — | 12.6 | — | — | 12.6 | |||||||||||||||||
Repurchase of common shares | (3.2 | ) | — | (127.7 | ) | — | — | (127.7 | ) | ||||||||||||||
Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax benefit of $4.4) | 0.7 | — | 8.0 | — | — | 8.0 | |||||||||||||||||
Balance at August 2, 2014 | 112.8 | $ | 0.1 | $ | 65.8 | $ | 104.1 | $ | 2,011.4 | $ | 2,181.4 | ||||||||||||
(2) | Dividends declared per common share were $0.66 in the 26 weeks ended August 2, 2014. |
See accompanying notes to unaudited condensed consolidated financial statements.
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GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
26 Weeks Ended | ||||||||
August 1, 2015 | August 2, 2014 | |||||||
(In millions) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 99.1 | $ | 92.6 | ||||
Adjustments to reconcile net income to net cash flows used in operating activities: | ||||||||
Depreciation and amortization (including amounts in cost of sales) | 74.6 | 79.4 | ||||||
Stock-based compensation expense | 17.9 | 12.6 | ||||||
Deferred income taxes | — | (13.2 | ) | |||||
Excess tax benefits related to stock-based awards | (6.6 | ) | (4.4 | ) | ||||
Loss on disposal of property and equipment | 3.3 | 2.1 | ||||||
Other | 0.3 | 20.1 | ||||||
Changes in operating assets and liabilities: | ||||||||
Receivables, net | 1.2 | (4.8 | ) | |||||
Merchandise inventories | 158.9 | 125.8 | ||||||
Prepaid expenses and other current assets | (19.8 | ) | (19.9 | ) | ||||
Prepaid income taxes and income taxes payable | (44.5 | ) | (115.7 | ) | ||||
Accounts payable and accrued liabilities | (302.2 | ) | (450.1 | ) | ||||
Changes in other long-term liabilities | (5.2 | ) | 0.2 | |||||
Net cash flows used in operating activities | (23.0 | ) | (275.3 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (75.8 | ) | (51.5 | ) | ||||
Acquisitions, net of cash acquired of $13.9 and $2.5 million, respectively | (200.0 | ) | (43.1 | ) | ||||
Other | 2.3 | (0.9 | ) | |||||
Net cash flows used in investing activities | (273.5 | ) | (95.5 | ) | ||||
Cash flows from financing activities: | ||||||||
Repurchase of common shares | (104.1 | ) | (123.8 | ) | ||||
Dividends paid | (77.2 | ) | (75.7 | ) | ||||
Borrowings from the revolver | 126.0 | 476.0 | ||||||
Repayments of revolver borrowings | (115.0 | ) | (266.0 | ) | ||||
Payments of financing costs | — | (1.3 | ) | |||||
Issuance of common stock, net of share repurchases for withholdings taxes | (2.4 | ) | (2.0 | ) | ||||
Excess tax benefits related to stock-based awards | 6.6 | 4.4 | ||||||
Net cash flows (used in) provided by financing activities | (166.1 | ) | 11.6 | |||||
Exchange rate effect on cash and cash equivalents | (11.3 | ) | 16.0 | |||||
Net decrease in cash and cash equivalents | (473.9 | ) | (343.2 | ) | ||||
Cash and cash equivalents at beginning of period | 610.1 | 536.2 | ||||||
Cash and cash equivalents at end of period | $ | 136.2 | $ | 193.0 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | Nature of Operations and Summary of Significant Accounting Policies |
Background
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global family of specialty retail brands that makes the most popular technologies affordable and simple. We operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe; and a Technology Brands segment, which includes the operations of our Spring Mobile managed AT&T and Cricket Wireless branded stores and our Simply Mac business.
Our Video Game Brands segments make us the world's largest multichannel video game retailer. We sell new and pre-owned video game hardware, physical and digital video game software, video game accessories, as well as new and pre-owned mobile and consumer electronics products and other merchandise primarily through our GameStopTM, EB GamesTM and Micromania stores. Additionally, we recently acquired Geeknet, Inc. ("Geeknet"), an online and wholesale retailer and developer that sells collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers through the www.thinkgeek.com website. Geeknet also sells certain exclusive products to wholesale channel customers. As of August 1, 2015, our Video Game Brands segments operated 6,133 stores, in the United States, Australia, Canada and Europe, which are primarily located in major shopping malls and strip centers. We also operate the electronic commerce websites www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, www.gamestop.ca, www.gamestop.it, www.gamestop.ie, www.gamestop.de, www.gamestop.co.uk and www.micromania.fr. Our network also includes: www.kongregate.com, a leading browser-based game site; www.thinkgeek.com, a leading retailer of exclusive and unique video game and pop culture products; Game InformerTM magazine, the world's leading print and digital video game publication; and iOS and Android mobile applications.
Our Technology Brands segment owns and operates Spring Mobile©, an authorized AT&T® reseller operating AT&T branded wireless retail stores and pre-paid wireless stores under the name Cricket WirelessTM (an AT&T brand) in the United States, as well as a certified Apple© reseller selling Apple consumer electronic products in the United States under the name Simply Mac©. As of August 1, 2015, our Technology Brands segment operated 731 stores.
Basis of Presentation and Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our subsidiaries. All 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 our opinion, necessary for a fair presentation of the information as of and 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 unaudited condensed consolidated financial statements should be read in conjunction with our annual report on Form 10-K for the 52 weeks ended January 31, 2015 (the “2014 Annual Report on Form 10-K”). The preparation of financial statements in conformity with GAAP requires us 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, we have made our 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 us could have a significant impact on our financial results. Actual results could differ from those estimates. Due to the seasonal nature of our business, the results of operations for the 26 weeks ended August 1, 2015 are not indicative of the results to be expected for the 52 weeks ending January 30, 2016 (“fiscal 2015”).
Restricted Cash
Restricted cash of $9.9 million, $13.6 million and $12.7 million as of August 1, 2015, August 2, 2014 and January 31, 2015, 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 unaudited condensed consolidated balance sheets.
Recently Issued Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, "Simplifying the Measurement of Inventory." This standard changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the
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ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact that adoption of this standard will have on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." This standard provides guidance about whether a cloud computing arrangement includes a software license and is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. This standard will be applied prospectively and we do not expect the adoption of this standard to materially impact our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with early application permitted. This standard will be applied retrospectively, and we do not expect the adoption of this standard to materially impact our consolidated financial statements.
In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the FASB issued ASU 2014-09 related to revenue recognition. The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The ASU provides alternative methods of initial adoption. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and to permit early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact that adoption of this standard will have on our consolidated financial statements as well as the appropriate method of adoption.
2. | Acquisitions |
United States Video Game Brands
On July 17, 2015, we purchased Geeknet, an online and wholesale retailer and developer that sells collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers through the www.thinkgeek.com website and certain exclusive products to wholesale channel customers. The addition of Geeknet provides an expansion of our global multichannel platform and enables us to broaden our product offering in the collectibles category and deepen relationships with our existing customer base.
Total consideration was $126.0 million, net of $13.9 million of cash acquired. The following table summarizes our preliminary allocation of the consideration and the respective fair values of the assets acquired and liabilities assumed in the Geeknet acquisition as of the purchase date:
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As of July 17, 2015 | ||||
(In millions) | ||||
Receivables, net | $ | 6.9 | ||
Merchandise inventories, net | 25.0 | |||
Prepaid expenses and other current assets | 12.5 | |||
Fixtures and equipment | 0.9 | |||
Deferred income taxes | 2.8 | |||
Other non-current assets | 0.1 | |||
Goodwill | 67.2 | |||
Other intangibles assets, net | 30.9 | |||
Total assets acquired | 146.3 | |||
Accounts payable | 3.6 | |||
Accrued liabilities | 16.6 | |||
Other long-term liabilities | 0.1 | |||
Total liabilities assumed | 20.3 | |||
Net assets acquired | $ | 126.0 | ||
The goodwill of $67.2 million resulting from the acquisition is not deductible for tax purposes and represents the value we paid for the knowledge and expertise of, and established presence in, the collectibles market. We incurred $5.6 million of transaction costs during the 13 weeks ended August 1, 2015 related to the Geeknet acquisition which were recorded in selling, general and administrative expenses in our unaudited condensed consolidated statements of operations. The operating results of Geeknet have been included in our consolidated financial statements beginning on the closing date of July 17, 2015 and are reported in our United States Video Game Brands segment. The pro forma effect assuming this acquisition was made at the beginning of the earliest period presented herein is not material to our consolidated financial statements. As of August 1, 2015, we had not completed the final fair value assignments and continue to analyze certain matters primarily related to the valuation of deferred income taxes.
Technology Brands
During the first half of fiscal 2015, in connection with the continued expansion of our Technology Brands segment, Spring Mobile completed acquisitions of certain AT&T resellers and Simply Mac completed an acquisition of an authorized Apple retailer for total combined consideration of $74.0 million (net of cash acquired). We recorded $21.6 million of goodwill and $40.9 million of other intangible assets related to these acquisitions. The operating results of these acquisitions are included in our consolidated financial statements beginning on the respective closing dates of each acquisition and are reported in our Technology Brands segment. The pro forma effect assuming these acquisitions were made at the beginning of the earliest period presented herein is not material to our consolidated financial statements. As of August 1, 2015, we had not completed the final fair value assignments related to these acquisitions and continue to analyze certain matters related to the valuation of intangible assets and deferred income taxes.
We continue to believe that our Spring Mobile and Simply Mac businesses represent important strategic growth opportunities for us within the specialty retail marketplace and also provide avenues for diversification relative to our core operations in the video game retail marketplace.
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3. | Accounting for Stock-Based Compensation |
The following is a summary of the stock-based awards granted during the periods indicated:
26 Weeks Ended August 1, 2015 | 26 Weeks Ended August 2, 2014 | |||||||||||||
Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||
(In thousands, except per share data) | ||||||||||||||
Stock options – time-vested | — | $ | — | 283 | $ | 12.37 | ||||||||
Restricted stock awards – time-vested | 457 | 40.42 | 437 | 38.64 | ||||||||||
Restricted stock awards – performance-based | 189 | 40.16 | 182 | 38.52 | ||||||||||
Total stock-based awards | 646 | 902 | ||||||||||||
For restricted stock awards and stock options granted, we record stock-based compensation expense in earnings based on the grant-date fair value. The fair value of each restricted stock award grant is based on the closing price of our Class A Common Stock on the grant date. The fair value of each stock 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 expected employee forfeiture rate. We use historical data to estimate the option life, dividend yield and the employee forfeiture rate, and use historical volatility when estimating the stock price volatility. No stock options were granted during the 26 weeks ended August 1, 2015.
The following assumptions were used with respect to the stock options granted for the 26 weeks ended August 2, 2014:
Volatility | 46.5 | % | |
Risk-free interest rate | 1.7 | % | |
Expected term (years) | 5.5 | ||
Expected dividend yield | 3.4 | % | |
During the first quarter of 2015, we recorded additional compensation expense of $3.8 million related to employees whose equity based long-term incentive awards are subject to certain accelerated vesting provisions, based on age and years of service, upon adoption of the Company's retirement policy, which became effective in February 2015. 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 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||
(In millions) | ||||||||||||||||
Stock-based compensation expense | $ | 7.6 | $ | 6.8 | $ | 17.9 | $ | 12.6 | ||||||||
As of August 1, 2015, the unrecognized compensation expense related to the unvested portion of our stock options was $1.9 million, which is expected to be recognized over a weighted average period of 1.3 years, and the unrecognized compensation expense related to unvested restricted shares was $34.2 million, which is expected to be recognized over a weighted average period of 1.9 years. The total intrinsic value of options exercised during the 13 weeks ended August 1, 2015 and the 13 weeks ended August 2, 2014 was $1.3 million and $5.1 million, respectively. The total intrinsic value of options exercised during the 26 weeks ended August 1, 2015 and the 26 weeks ended August 2, 2014 was $4.9 million and $6.3 million, respectively.
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4. | Computation of Net Income per Common Share |
Basic net income per common share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period. Under the treasury stock method, potentially dilutive securities include stock options and unvested restricted stock outstanding during the period. Potentially dilutive securities are excluded from the computations of diluted earnings per share if their effect would be antidilutive.
A reconciliation of shares used in the computation of basic and diluted net income per common share is as follows:
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||
(In millions, except per share data) | ||||||||||||||||
Net income | $ | 25.3 | $ | 24.6 | $ | 99.1 | $ | 92.6 | ||||||||
Weighted average common shares outstanding | 106.5 | 113.6 | 107.2 | 114.3 | ||||||||||||
Dilutive effect of options and restricted shares on common stock(1) | 0.7 | 0.7 | 0.6 | 0.8 | ||||||||||||
Common shares and dilutive potential common shares | 107.2 | 114.3 | 107.8 | 115.1 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.24 | $ | 0.22 | $ | 0.92 | $ | 0.81 | ||||||||
Diluted | $ | 0.24 | $ | 0.22 | $ | 0.92 | $ | 0.80 | ||||||||
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(1) | Excludes 0.9 million, 1.5 million, 0.9 million, and 1.6 million stock-based awards for the 13 weeks ended August 1, 2015, the 13 weeks ended August 2, 2014, the 26 weeks ended August 1, 2015 and the 26 weeks ended August 2, 2014, respectively, because their effects were antidilutive. |
5. | Fair Value Measurements and Financial Instruments |
Recurring Fair Value Measurements and Derivative Financial Instruments
Fair 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 foreign currency contracts, which include forward exchange contracts, foreign currency options and cross-currency swaps, our 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.
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 quoted prices for similar instruments in active markets, quoted prices for similar or identical instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
We classify our foreign currency contracts, Company-owned life insurance policies with cash surrender values and certain nonqualified deferred compensation liabilities within Level 2 of the fair value hierarchy, as their fair values are derived using quotes provided by major market news services, such as Bloomberg, 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, all of which are observable in active markets. When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
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The following table provides the fair value of our assets and liabilities measured at fair value on a recurring basis and recorded in our unaudited condensed consolidated balance sheets (in millions):
August 1, 2015 Level 2 | August 2, 2014 Level 2 | January 31, 2015 Level 2 | ||||||||||
Assets | ||||||||||||
Foreign currency contracts | ||||||||||||
Other current assets | $ | 44.4 | $ | 2.0 | $ | 32.0 | ||||||
Other noncurrent assets | 12.2 | 3.2 | 22.7 | |||||||||
Company-owned life insurance(1) | 8.9 | 7.2 | 8.7 | |||||||||
Total assets | $ | 65.5 | $ | 12.4 | $ | 63.4 | ||||||
Liabilities | ||||||||||||
Foreign currency contracts | ||||||||||||
Accrued liabilities | $ | 37.2 | $ | 7.6 | $ | 23.3 | ||||||
Other long-term liabilities | 6.0 | 1.6 | 13.0 | |||||||||
Nonqualified deferred compensation(2) | 1.2 | 1.1 | 1.2 | |||||||||
Total liabilities | $ | 44.4 | $ | 10.3 | $ | 37.5 | ||||||
___________________
(1) | Recognized in other non-current assets in our unaudited condensed consolidated balance sheets. |
(2) | Recognized in accrued liabilities in our unaudited condensed consolidated balance sheets. |
We 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. The total gross notional value of derivatives related to our foreign currency contracts was $1,192.5 million, $713.4 million and $1,128.5 million as of August 1, 2015, August 2, 2014 and January 31, 2015, respectively.
Activity related to 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 | |||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||
Gains (Losses) on the change in fair value of derivative instruments | $ | (8.1 | ) | $ | 9.1 | $ | (1.1 | ) | $ | 10.4 | ||||||
Gains (Losses) on the remeasurement of related intercompany loans and foreign currency assets and liabilities | 9.7 | (8.4 | ) | 2.7 | (9.1 | ) | ||||||||||
Total | $ | 1.6 | $ | 0.7 | $ | 1.6 | $ | 1.3 | ||||||||
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. We 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.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we 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. We did not record any significant impairment charges related to assets measured at fair value on a nonrecurring basis during the 26 weeks ended August 1, 2015 or August 2, 2014, respectively.
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Additionally, we recorded the fair value of net assets acquired and liabilities assumed in connection with the Geeknet acquisition and our Technology Brands acquisitions during the 13 weeks ended August 1, 2015. The fair value measurements were primarily based on significant unobservable inputs (Level 3) developed using company-specific information. See Note 3 for further information associated with the values recorded in the acquisitions.
Other Fair Value Disclosures
The carrying values of our cash equivalents, receivables, net and accounts payable approximate the fair value due to their short-term maturities.
As of August 1, 2015, our 5.50% Senior Notes due 2019 had a carrying value of $350.0 million and a fair value of $364.9 million. The fair value of the Senior Notes was determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined this to be a Level 2 measurement as all significant inputs into the quote provided by our external pricing source are observable in active markets.
6. | Debt |
Issuance of 5.50% Senior Notes due 2019. On September 24, 2014, we issued $350.0 million aggregate principal amount of unsecured 5.50% senior notes due October 1, 2019 (the "Senior Notes"). The Senior Notes bear interest at the rate of 5.50% per annum with interest payable semi-annually in arrears on April 1 and October 1 of each year beginning on April 1, 2015. The Senior Notes were sold in a private placement and will not be registered under the U.S. Securities Act of 1933. The Senior Notes were offered in the U.S. to “qualified institutional buyers” pursuant to the exemption from registration under Rule 144A of the Securities Act and in exempted offshore transactions pursuant to Regulation S under the Securities Act. The outstanding balance of the Senior Notes at August 1, 2015 was $350.0 million.
The indenture governing the Senior Notes does not contain financial covenants but does contain covenants which place certain restrictions on us and our subsidiaries, including limitations on asset sales, additional liens, investments, stock repurchases, dividends, distributions, the incurrence of additional debt and the repurchase of debt that is junior to the Senior Notes. These covenants are subject to certain exceptions and qualifications.
The indenture contains customary events of default, including payment defaults, breaches of covenants, failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is continuing, the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, may be declared immediately due and payable. These amounts automatically become due and payable if an event of default relating to certain events of bankruptcy, insolvency or reorganization occurs.
Revolving Credit Facility. On January 4, 2011, we entered into a $400 million credit agreement, which we amended and restated on March 25, 2014 and further amended on September 15, 2014 (the “Revolver”). The Revolver is a five-year, asset-based facility that is secured by substantially all of our assets and the assets of our domestic subsidiaries. Availability under the Revolver is subject to a monthly borrowing base calculation. The Revolver includes a $50 million letter of credit sublimit. The amendments extended the maturity date to March 25, 2019; increased the expansion feature under the Revolver from $150 million to $200 million, subject to certain conditions; and revised certain other terms, including a reduction of the fee we are required to pay on the unused portion of the total commitment amount.
Borrowing availability under the Revolver is limited to a borrowing base which allows us 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. The borrowing base provides for borrowing of up to 92.5% of the appraisal value during the fiscal months of August through October. Letters of credit reduce the amount available to borrow under the Revolver by an amount equal to the face value of the letters of credit. Our ability to pay cash dividends, redeem options and repurchase shares is generally permitted, except under certain circumstances, including if either 1) excess availability under the Revolver is less than 30%, or is projected to be within 12 months after such payment or 2) if excess availability under the Revolver is less than 15%, or is projected to be within 12 months after such payment, and the fixed charge coverage ratio, as calculated on a pro-forma basis for the prior 12 months is 1.1:1.0 or less. In the event that excess availability under the Revolver is at any time less than the greater of (1) $30 million or (2) 10% of the lesser of the total commitment or the borrowing base, we will be subject to a fixed charge coverage ratio covenant of 1.0:1.0.
The Revolver places certain restrictions on us and our subsidiaries, including limitations on asset sales, additional liens, investments, loans, guarantees, acquisitions and the incurrence of additional indebtedness. Absent consent from our lenders, we
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may not incur more than $1 billion of senior secured debt and $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 0.25% to 0.75% 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 1.25% to 1.75% above the LIBO rate. The applicable margin is determined quarterly as a function of our average daily excess availability under the facility. In addition, we are required to pay a commitment fee of 0.25% for any unused portion of the total commitment under the Revolver. As of August 1, 2015, the applicable margin was 0.25% for prime rate loans and 1.25% for LIBO rate loans.
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 us or the borrowers proving to be false in any material respect, certain bankruptcy, insolvency or receivership events affecting us or our 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 1, 2015, we cumulatively borrowed $126.0 million and subsequently repaid $115.0 million under the Revolver. Average borrowings under the Revolver for the 26 weeks ended August 1, 2015 were $3.4 million, and our average interest rate on those borrowings was 3.5%. As of August 1, 2015, total availability under the Revolver was $328.2 million, with outstanding borrowings of $11.0 million and outstanding standby letters of credit of $8.3 million.
In September 2007, our Luxembourg subsidiary entered into a discretionary $20 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 our 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 August 1, 2015, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $2.2 million.
We are currently in compliance with all covenants under our indenture governing the Senior Notes and our credit agreement.
7. | Commitments and Contingencies |
In the ordinary course of business, we are, from time to time, subject to various legal proceedings, including matters involving wage and hour employee class actions, shareholder actions and consumer class actions. We 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 our stockholders. We do not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material effect on our financial condition, results of operations or liquidity.
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8. | Significant Products |
The following tables set forth net sales (in millions), percentages of total net sales, gross profit (in millions) and gross profit percentages by significant product category for the periods indicated:
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||||||||||||||
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(1) | $ | 324.9 | 18.4 | % | $ | 332.3 | 19.2 | % | $ | 764.6 | 20.0 | % | $ | 770.3 | 20.7 | % | ||||||||||||
New video game software | 467.2 | 26.5 | % | 497.0 | 28.7 | % | 1,080.8 | 28.3 | % | 1,056.9 | 28.4 | % | ||||||||||||||||
Pre-owned and value video game products | 560.8 | 31.8 | % | 558.0 | 32.2 | % | 1,143.2 | 29.9 | % | 1,160.9 | 31.1 | % | ||||||||||||||||
Video game accessories | 125.8 | 7.1 | % | 107.5 | 6.2 | % | 276.3 | 7.2 | % | 252.6 | 6.8 | % | ||||||||||||||||
Digital | 41.6 | 2.4 | % | 52.3 | 3.0 | % | 87.6 | 2.3 | % | 108.4 | 2.9 | % | ||||||||||||||||
Mobile and consumer electronics | 142.2 | 8.1 | % | 112.1 | 6.5 | % | 279.0 | 7.3 | % | 214.3 | 5.7 | % | ||||||||||||||||
Other(2) | 99.4 | 5.7 | % | 72.2 | 4.2 | % | 191.0 | 5.0 | % | 164.3 | 4.4 | % | ||||||||||||||||
Total | $ | 1,761.9 | 100.0 | % | $ | 1,731.4 | 100.0 | % | $ | 3,822.5 | 100.0 | % | $ | 3,727.7 | 100.0 | % | ||||||||||||
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||||||||||||||
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(1) | $ | 33.4 | 10.3 | % | $ | 31.6 | 9.5 | % | $ | 70.6 | 9.2 | % | $ | 76.2 | 9.9 | % | ||||||||||||
New video game software | 110.8 | 23.7 | % | 115.7 | 23.3 | % | 249.5 | 23.1 | % | 242.9 | 23.0 | % | ||||||||||||||||
Pre-owned and value video game products | 257.8 | 46.0 | % | 262.1 | 47.0 | % | 543.8 | 47.6 | % | 560.5 | 48.3 | % | ||||||||||||||||
Video game accessories | 45.7 | 36.3 | % | 41.9 | 39.0 | % | 101.5 | 36.7 | % | 96.9 | 38.4 | % | ||||||||||||||||
Digital | 32.8 | 78.8 | % | 34.0 | 65.0 | % | 68.2 | 77.9 | % | 69.8 | 64.4 | % | ||||||||||||||||
Mobile and consumer electronics | 64.5 | 45.4 | % | 40.5 | 36.1 | % | 119.0 | 42.7 | % | 77.6 | 36.2 | % | ||||||||||||||||
Other(2) | 35.5 | 35.7 | % | 25.1 | 34.8 | % | 66.9 | 35.0 | % | 53.4 | 32.5 | % | ||||||||||||||||
Total | $ | 580.5 | 32.9 | % | $ | 550.9 | 31.8 | % | $ | 1,219.5 | 31.9 | % | $ | 1,177.3 | 31.6 | % | ||||||||||||
___________________
(1) | Includes sales of hardware bundles, in which physical hardware and digital or physical software are sold together as a single SKU. |
(2) | Other products include revenues from the sales of PC entertainment software, interactive toys, collectibles (including sales from our newly acquired ThinkGeek operations, beginning in July 2015), strategy guides and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in physical form. |
9. | Segment Information |
We report our business in four Video Game Brands segments: United States, Canada, Australia and Europe; and a Technology Brands segment, which includes the operations of our Spring Mobile managed AT&T and Cricket Wireless branded stores and our Simply Mac business. We identify segments based on a combination of geographic areas and management responsibility. Each of the segments includes significant retail operations with all Video Game Brands stores engaged in the sale of new and pre-owned
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video game systems, software and related accessories and collectibles, and Technology Brands stores engaged in the sale of wireless products and services and other consumer electronics. Segment results for the United States include retail operations in 50 states, the District of Columbia, Guam and Puerto Rico; our electronic commerce websites www.gamestop.com and www.thinkgeek.com; Game Informer magazine; and Kongregate, our leading web and mobile gaming platform. 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 include retail operations in 10 European countries and e-commerce operations in five countries. The Technology Brands segment includes retail operations in the United States. We measure segment profit using operating earnings, which is defined as income from continuing operations before intercompany royalty fees, net interest expense and income taxes. Transactions between reportable segments consist primarily of royalties, management fees, intersegment loans and related interest. There were no material intersegment sales during the 26 weeks ended August 1, 2015 and August 2, 2014.
The reconciliation of segment profit to earnings before income taxes for the 26 weeks ended August 1, 2015 and August 2, 2014, respectively, is as follows (in millions):
13 weeks ended August 1, 2015 | United States | Canada | Australia | Europe | Technology Brands | Consolidated | ||||||||||||||||||
Net sales | $ | 1,187.4 | $ | 78.2 | $ | 130.6 | $ | 251.9 | $ | 113.8 | $ | 1,761.9 | ||||||||||||
Segment operating earnings (loss) | 51.9 | 1.8 | 4.6 | (7.0 | ) | 0.4 | 51.7 | |||||||||||||||||
Interest income | 0.1 | |||||||||||||||||||||||
Interest expense | (5.7 | ) | ||||||||||||||||||||||
Earnings before income taxes | $ | 46.1 | ||||||||||||||||||||||
13 weeks ended August 2, 2014 | United States | Canada | Australia | Europe | Technology Brands | Consolidated | ||||||||||||||||||
Net sales | $ | 1,101.0 | $ | 82.9 | $ | 142.1 | $ | 335.3 | $ | 70.1 | $ | 1,731.4 | ||||||||||||
Segment operating earnings (loss) | 35.6 | 1.2 | 4.8 | (12.0 | ) | 7.1 | 36.7 | |||||||||||||||||
Interest income | 0.1 | |||||||||||||||||||||||
Interest expense | (1.2 | ) | ||||||||||||||||||||||
Earnings before income taxes | $ | 35.6 | ||||||||||||||||||||||
26 weeks ended August 1, 2015 | United States | Canada | Australia | Europe | Technology Brands | Consolidated | ||||||||||||||||||
Net sales | $ | 2,680.1 | $ | 167.9 | $ | 242.6 | $ | 515.9 | $ | 216.0 | $ | 3,822.5 | ||||||||||||
Segment operating earnings (loss) | 172.4 | 5.5 | 6.3 | (12.2 | ) | 3.6 | 175.6 | |||||||||||||||||
Interest income | 0.3 | |||||||||||||||||||||||
Interest expense | (11.3 | ) | ||||||||||||||||||||||
Earnings before income taxes | $ | 164.6 | ||||||||||||||||||||||
26 weeks ended August 2, 2014 | United States | Canada | Australia | Europe | Technology Brands | Consolidated | ||||||||||||||||||
Net sales | $ | 2,498.7 | $ | 173.2 | $ | 258.6 | $ | 667.0 | $ | 130.2 | $ | 3,727.7 | ||||||||||||
Segment operating earnings (loss) | 142.2 | 3.6 | 6.5 | (22.8 | ) | 13.1 | 142.6 | |||||||||||||||||
Interest income | 0.3 | |||||||||||||||||||||||
Interest expense | (2.0 | ) | ||||||||||||||||||||||
Earnings before income taxes | $ | 140.9 | ||||||||||||||||||||||
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10. | Subsequent Events |
Dividend
On August 25, 2015, our Board of Directors approved a quarterly cash dividend to our stockholders of $0.36 per share of Class A Common Stock payable on September 22, 2015 to stockholders of record at the close of business on September 9, 2015. Future dividends will be subject to approval by our Board of Directors.
Share Repurchases
As of September 1, 2015, we have purchased an additional 0.4 million shares of our Class A Common Stock for an average price per share of $45.50 since August 1, 2015.
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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 unaudited 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. See our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2015 (the “2014 Annual Report on Form 10-K”), including the factors disclosed under “Item 1A. Risk Factors,” as well as “Disclosure Regarding Forward-looking Statements” and “Item 1A. Risk Factors” below, for certain factors which may cause actual results to vary materially from these forward-looking statements.
General
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global family of specialty retail brands that makes the most popular technologies affordable and simple. We operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe; and a Technology Brands segment, which includes the operations of our Spring Mobile managed AT&T and Cricket Wireless branded stores and our Simply Mac business.
Our Video Game Brands segments make us the world's largest multichannel video game retailer. We sell new and pre-owned video game hardware, physical and digital video game software, video game accessories, as well as new and pre-owned mobile and consumer electronics products and other merchandise primarily through our GameStopTM, EB GamesTM and Micromania stores. Additionally, we recently acquired Geeknet, Inc. ("Geeknet"), an online and wholesale retailer and developer that sells collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers through the www.thinkgeek.com website. Geeknet also sells certain exclusive products to wholesale channel customers. As of August 1, 2015, our Video Game Brands segments operated 6,133 stores, in the United States, Australia, Canada and Europe, which are primarily located in major shopping malls and strip centers. We also operate the electronic commerce websites www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, www.gamestop.ca, www.gamestop.it, www.gamestop.ie, www.gamestop.de, www.gamestop.co.uk and www.micromania.fr. Our network also includes: www.kongregate.com, a leading browser-based game site; www.thinkgeek.com, a leading retailer of exclusive and unique video game and pop culture products; Game InformerTM magazine, the world's leading print and digital video game publication; and iOS and Android mobile applications.
Our Technology Brands segment owns and operates Spring Mobile©, an authorized AT&T® reseller operating AT&T branded wireless retail stores and pre-paid wireless stores under the name Cricket WirelessTM (an AT&T brand) in the United States, as well as a certified Apple© reseller selling Apple consumer electronic products in the United States under the name Simply Mac©. As of August 1, 2015, our Technology Brands segment operated 731 stores.
Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. The fiscal year ending January 30, 2016 ("fiscal 2015") and the fiscal year ended January 31, 2015 ("fiscal 2014") each consists of 52 weeks.
Growth in the electronic game industry is generally driven by the introduction of new technology. Gaming consoles are typically launched in cycles as technological developments provide significant improvements in graphics, audio quality, game play, internet connectivity and other entertainment capabilities beyond video gaming. The current generation of consoles (the Sony PlayStation 4, the Microsoft Xbox One and the Nintendo Wii U) was introduced between November 2012 and November 2013. With the introduction of the new consoles in the fourth quarter of fiscal 2013, sales of new hardware have increased, which has also led to an increase in video game software and accessories sales. The mix of these sales and their differing margins has impacted and will continue to impact our gross margin percentage in fiscal 2015.
We expect that future growth in the electronic 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 (“DLC”), full game downloads, and Xbox LIVE, PlayStation Plus and Nintendo network points cards, as well as prepaid digital and online timecards. We have made significant investments in e-commerce and in-store and website functionality to enable our customers to access digital content easily and facilitate 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 electronic game industry and in the digital aggregation and distribution category.
We continue to diversify our business by seeking out opportunities to extend our core competencies to other businesses and retail categories, including mobile and consumer electronics and collectibles, to continue to grow and to help mitigate the financial impact from the cyclical nature of the video game console cycle. In fiscal 2013, we completed our acquisitions of Simply Mac, an authorized Apple reseller currently operating in 72 stores, and Spring Mobile, an authorized AT&T reseller currently operating in 590 AT&T branded stores and 69 Cricket Wireless branded stores. We intend to continue to expand the number of our Technology Brands stores in the near future. Additionally, in July 2015, we acquired Geeknet to broaden our product offerings in the collectibles category, and we intend to continue investing in this category going forward.
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We accept trades of pre-owned mobile devices in most of our stores. In addition, we intend to continue to invest in customer loyalty programs designed to attract and retain our customers.
Recent Developments
Acquisition activity. On July 17, 2015, we purchased Geeknet, an online and wholesale retailer and developer that sells collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers through the www.thinkgeek.com website and certain exclusive products to wholesale channel customers. Total consideration was $126.0 million, net of $13.9 million of cash acquired. The addition of Geeknet provides an expansion of our global multichannel platform and enables us to broaden our product offering in the collectibles category and deepen relationships with our existing customer base.
During the first half of fiscal 2015, in connection with the continued expansion of our Technology Brands segment, Spring Mobile completed acquisitions of certain AT&T resellers and Simply Mac completed an acquisition of an authorized Apple retailer for total combined consideration of $74.0 million (net of cash acquired). We recorded $21.6 million of goodwill and $40.9 million of other intangible assets related to these acquisitions. The pro forma effect assuming these acquisitions were made at the beginning of the earliest period presented herein is not material to our consolidated financial statements. As of August 1, 2015, we had not completed the final fair value assignments related to these acquisitions and continue to analyze certain matters related to the valuation of intangible assets and deferred income taxes. We continue to believe that our Spring Mobile and Simply Mac businesses represent important strategic growth opportunities for us within the specialty retail marketplace and also provide avenues for diversification relative to our core operations in the video game retail marketplace.
Additionally, as part of our efforts to drive long-term shareholder value, we have accomplished the following return of capital activities in fiscal 2015:
Quarterly cash dividend. On March 3, 2015, our Board of Directors authorized an increase in our annual cash dividend from $1.32 to $1.44 per share of Class A Common Stock, which represents an increase of 9%. On March 24, 2015 and June 23, 2015, we made quarterly dividend payments of $0.36 per share of Class A Common Stock to stockholders of record on March 17, 2015 and June 10, 2015, respectively. Additionally, on August 25, 2015, our Board of Directors approved a quarterly cash dividend to our stockholders of $0.36 per share of Class A Common Stock payable on September 22, 2015 to stockholders of record at the close of business on September 9, 2015. Future dividends will be subject to approval by our Board of Directors.
Share repurchase activity. During the first half of fiscal 2015, we repurchased 2.6 million shares of our Class A Common Stock at an average price per share of $41.21 for a total of $107.1 million. Between August 2, 2015 and September 1, 2015, we repurchased 0.4 million shares at an average price per share of $45.50 for a total of $20.0 million, and we have $320.2 million remaining under our latest authorization from November 2014.
Critical Accounting Policies
Our unaudited 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 us 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 “Part 2 - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2014 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies from those included in our 2014 Annual Report on Form 10-K.
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Consolidated Results of Operations
The following table sets forth certain statement of operations items (in millions) and as a percentage of net sales, for the periods indicated:
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||||||||||||||
Dollars | Percent | Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||
Net sales | $ | 1,761.9 | 100.0 | % | $ | 1,731.4 | 100.0 | % | $ | 3,822.5 | 100.0 | % | $ | 3,727.7 | 100.0 | % | ||||||||||||
Cost of sales | 1,181.4 | 67.1 | 1,180.5 | 68.2 | 2,603.0 | 68.1 | 2,550.4 | 68.4 | ||||||||||||||||||||
Gross profit | 580.5 | 32.9 | 550.9 | 31.8 | 1,219.5 | 31.9 | 1,177.3 | 31.6 | ||||||||||||||||||||
Selling, general and administrative expenses | 490.8 | 27.8 | 475.4 | 27.5 | 970.1 | 25.4 | 956.4 | 25.7 | ||||||||||||||||||||
Depreciation and amortization | 38.0 | 2.2 | 38.8 | 2.2 | 73.8 | 1.9 | 78.3 | 2.1 | ||||||||||||||||||||
Operating earnings | 51.7 | 2.9 | 36.7 | 2.1 | 175.6 | 4.6 | 142.6 | 3.8 | ||||||||||||||||||||
Interest expense, net | 5.6 | 0.3 | 1.1 | 0.1 | 11.0 | 0.3 | 1.7 | — | ||||||||||||||||||||
Earnings before income tax expense | 46.1 | 2.6 | 35.6 | 2.0 | 164.6 | 4.3 | 140.9 | 3.8 | ||||||||||||||||||||
Income tax expense | 20.8 | 1.2 | 11.0 | 0.6 | 65.5 | 1.7 | 48.3 | 1.3 | ||||||||||||||||||||
Net income | $ | 25.3 | 1.4 | % | $ | 24.6 | 1.4 | % | $ | 99.1 | 2.6 | % | $ | 92.6 | 2.5 | % | ||||||||||||
We include purchasing, receiving and distribution costs in selling, general and administrative expenses, rather than in cost of sales, in the statement of operations. We include processing fees associated with purchases made by credit cards in cost of sales, rather than 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 credit cards in selling, general and administrative expenses. The net effect of these classifications as a percentage of sales has not historically been material.
The following tables set forth net sales (in millions), percentages of total net sales, gross profit (in millions) and gross profit percentages by significant product category for the periods indicated:
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||||||||||||||
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(1) | $ | 324.9 | 18.4 | % | $ | 332.3 | 19.2 | % | $ | 764.6 | 20.0 | % | $ | 770.3 | 20.7 | % | ||||||||||||
New video game software | 467.2 | 26.5 | % | 497.0 | 28.7 | % | 1,080.8 | 28.3 | % | 1,056.9 | 28.4 | % | ||||||||||||||||
Pre-owned and value video game products | 560.8 | 31.8 | % | 558.0 | 32.2 | % | 1,143.2 | 29.9 | % | 1,160.9 | 31.1 | % | ||||||||||||||||
Video game accessories | 125.8 | 7.1 | % | 107.5 | 6.2 | % | 276.3 | 7.2 | % | 252.6 | 6.8 | % | ||||||||||||||||
Digital | 41.6 | 2.4 | % | 52.3 | 3.0 | % | 87.6 | 2.3 | % | 108.4 | 2.9 | % | ||||||||||||||||
Mobile and consumer electronics | 142.2 | 8.1 | % | 112.1 | 6.5 | % | 279.0 | 7.3 | % | 214.3 | 5.7 | % | ||||||||||||||||
Other(2) | 99.4 | 5.7 | % | 72.2 | 4.2 | % | 191.0 | 5.0 | % | 164.3 | 4.4 | % | ||||||||||||||||
Total | $ | 1,761.9 | 100.0 | % | $ | 1,731.4 | 100.0 | % | $ | 3,822.5 | 100.0 | % | $ | 3,727.7 | 100.0 | % | ||||||||||||
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13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||||
August 1, 2015 | August 2, 2014 | August 1, 2015 | August 2, 2014 | |||||||||||||||||||||||||
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(1) | $ | 33.4 | 10.3 | % | $ | 31.6 | 9.5 | % | $ | 70.6 | 9.2 | % | $ | 76.2 | 9.9 | % | ||||||||||||
New video game software | 110.8 | 23.7 | % | 115.7 | 23.3 | % | 249.5 | 23.1 | % | 242.9 | 23.0 | % | ||||||||||||||||
Pre-owned and value video game products | 257.8 | 46.0 | % | 262.1 | 47.0 | % | 543.8 | 47.6 | % | 560.5 | 48.3 | % | ||||||||||||||||
Video game accessories | 45.7 | 36.3 | % | 41.9 | 39.0 | % | 101.5 | 36.7 | % | 96.9 | 38.4 | % | ||||||||||||||||
Digital | 32.8 | 78.8 | % | 34.0 | 65.0 | % | 68.2 | 77.9 | % | 69.8 | 64.4 | % | ||||||||||||||||
Mobile and consumer electronics | 64.5 | 45.4 | % | 40.5 | 36.1 | % | 119.0 | 42.7 | % | 77.6 | 36.2 | % | ||||||||||||||||
Other(2) | 35.5 | 35.7 | % | 25.1 | 34.8 | % | 66.9 | 35.0 | % | 53.4 | 32.5 | % | ||||||||||||||||
Total | $ | 580.5 | 32.9 | % | $ | 550.9 | 31.8 | % | $ | 1,219.5 | 31.9 | % | $ | 1,177.3 | 31.6 | % | ||||||||||||
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(1) | Includes sales of hardware bundles, in which physical hardware and digital or physical software are sold together as a single SKU. |
(2) | Other products include revenues from the sales of PC entertainment software, interactive toys, collectibles (including sales from our newly acquired ThinkGeek operations, beginning in July 2015), strategy guides and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in physical form. |
13 weeks ended August 1, 2015 compared w