Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 Form 10-K
þ    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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)
gslogocolor2a25.jpg
(I.R.S. Employer
Identification No.)
 
 
625 Westport Parkway
76051
Grapevine, Texas
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code: (817) 424-2000
Securities registered pursuant to Section 12(b) of the Act:
(Title of Class)
 
(Name of Exchange on Which Registered)
Class A Common Stock, $.001 par value per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨        No  þ
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 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 such files).    Yes  þ        No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ
 
Accelerated Filer ¨
 
Non-accelerated Filer ¨
 
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of August 3, 2018 was approximately $1.5 billion, based upon the closing market price of $14.85 per share of Class A Common Stock on the New York Stock Exchange. (For purposes of this calculation all of the registrant's directors and officers are deemed affiliates of the registrant.)
Number of shares of $.001 par value Class A Common Stock outstanding as of March 21, 2019: 102,267,435
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the registrant to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, for the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.


TABLE OF CONTENTS
 
 
 
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
PART IV
Item 15.
Item 16.
 


Disclosure Regarding Forward-looking Statements
This Annual Report on Form 10-K (“Form 10-K”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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,” “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. All forward-looking statements included in this Form 10-K are based upon information available to us as of the filing date of this Form 10-K, and we undertake no obligation to update or revise any of these forward-looking statements for any reason, whether as a result of new information, future events or otherwise after the date of this Form 10-K, except as required by law. You should not place undue reliance on these forward-looking statements. The forward-looking statements involve a number of risks and uncertainties. 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. 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. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” which are incorporated herein by reference. You should carefully consider the risks and uncertainties described in this Form 10-K.
PART I
ITEM 1.
BUSINESS
General
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global, multichannel video game and licensed consumer products retailer. We operate over 5,800 stores across 14 countries. Our consumer product network also includes www.gamestop.com; Game Informer® magazine, the world's leading print and digital video game publication; and ThinkGeek, www.thinkgeek.com, the premier retailer for the global geek community featuring exclusive and unique video game and pop culture products, and Simply Mac, which sells the full line of Apple products, including laptops, tablets, and smartphones and offers Apple certified warranty and repair services.
We are a Delaware corporation which, through a predecessor, began operations as a specialty retailer of video games in November 1996. Our corporate office is located in Grapevine, Texas.
Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. Fiscal year 2018 consisted of the 52 weeks ended on February 2, 2019 ("fiscal 2018"). Fiscal year 2017 consisted of the 53 weeks ended on February 3, 2018 ("fiscal 2017") and fiscal year 2016 consisted of the 52 weeks ended on January 28, 2017 ("fiscal 2016").
Divestiture of Spring Mobile
On January 16, 2019, we completed the sale of the Spring Mobile business to Prime Communications, L.P. for cash proceeds of $727.9 million, net of transaction costs and preliminary adjustments. The Spring Mobile business operated over 1,200 AT&T branded wireless retail stores that sold AT&T services and wireless products. See Note 2, "Discontinued Operations and Dispositions," to the consolidated financial statements, included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K ("Annual Report") for further information. Unless otherwise noted, information in this Annual Report excludes our former Spring Mobile business.
Reportable Segments
We operate our business in four geographic segments: United States, Canada, Australia and Europe. Each segment consists primarily of retail operations, with the significant majority of our stores engaged in the sale of new and pre-owned video game systems, software and accessories. As of February 2, 2019, we had a total of 5,830 stores across all of our segments; United States (3,846), Canada (311), Australia (462) and Europe (1,211). Our video game brands operate primarily under the names GameStopTM (“GameStop”), EB GamesTM (“EB Games”) and Micromania. We operate e-commerce sites under the brand names of GameStop, EB Games, Micromania and ThinkGeek. Our video game brands stores sell various types of digital products, including downloadable content, network points cards, prepaid digital, prepaid subscription cards and digitally downloadable software and also sell collectible products.



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Our segments also include 103 pop culture themed stores selling collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers, with 62 collectibles stores in international markets operating under the Zing Pop Culture brand and 41 stores in the United States operating under the ThinkGeek brand. Our video game brands also include Game InformerTM (“Game Informer”) magazine, the world's leading print and digital video game publication.
Our former Technology Brands segment had been comprised of Spring Mobile, Simply Mac and Cricket Wireless branded stores ("Cricket Wireless"). Cricket Wireless was sold in January 2018 and Spring Mobile was sold in January 2019. Simply Mac and the historical results of Cricket Wireless are reported in the United States segment in this Annual Report. The historical results of Spring Mobile, including the gain on sale, are reported as discontinued operations for all periods presented in this Annual Report. Simply Mac operates 43 Simply Mac© branded stores which sell Apple products, including desktop computers, laptops, tablets and smart phones and related accessories and other consumer electronic products.
Financial information about our segments is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 16, "Segment Information," of the notes to the consolidated financial statements, included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Market Size
Based upon estimates compiled by various market research firms, including NPD Group, Inc. ("NPD"), International Development Group ("IDG") and DFC Intelligence ("DFC"), we estimate that the market for new physical video game products was approximately $18 billion in 2018 in the countries in which we operate. This estimated market excludes sales of pre-owned video game products, which are not currently measured by any third-party research firms. Additionally, based on estimates compiled by various market research firms, we estimate that the market in North America for content in digital format (full-game and add-on content downloads for console and PC, subscriptions, mobile games and social network games) was between $25 billion and $32 billion in 2018.
Merchandise
We categorize our sale of products and services as follows:
•
New Video Game Hardware.  We offer video game platforms from the major manufacturers. The current generation of consoles include the Sony PlayStation 4 (2013), Microsoft Xbox One (2013) and the Nintendo Switch (March 2017). In 2016, Sony and Microsoft released refreshes to the PlayStation 4 and Xbox One, respectively. In November 2017, Microsoft released a further enhanced version of its current generation console, the Xbox One X. We also offer extended service agreements. Video game hardware sales are generally driven by the introduction of new platform technology and the reduction in price points as platforms mature.
•
New Video Game Software.  We offer new video game software for current and certain prior generation consoles from the leading manufacturers, including Sony, Nintendo and Microsoft, as well as all other major third-party game publishers, such as Electronic Arts and Activision Blizzard. We are one of the largest retailers of video game titles sold by these publishers. We carry new video game software across a variety of genres, including sports, action, strategy, adventure/role playing and simulation.
•
Pre-owned and Value Video Game Products.  We provide our customers with an opportunity to trade in their pre-owned video game products in our stores in exchange for store credits which can be applied towards the purchase of other products, primarily new merchandise. We believe this process drives our higher market share, particularly at launch. We resell these pre-owned video game products and have the largest selection of pre-owned video game titles. In the U.S., pre-owned video game software titles have an average price of $17, compared to an average price of $48 for new video game software titles, and generate significantly higher gross margins than new video game products. Our trade-in program also allows us to be one of the only suppliers of previous generation platforms and related video games. We also operate refurbishment centers in the United States, Canada, Australia and Europe, where defective video game products can be tested, repaired, relabeled, repackaged and redistributed back to our stores.
•
Video Game Accessories. Video game accessories consist primarily of controllers, gaming headsets, virtual reality products, memory cards and other add-ons for use with video game hardware and software.
•
Digital.  The proliferation of online game play through Microsoft Xbox Live, the PlayStation Network and PC gaming websites has led to consumer demand for subscription, time and points cards (“digital currency”) as well as full-game downloads and digitally downloadable content (“DLC”), for existing console video games. We sell a wide variety of digital currency, and we have developed technology to sell DLC and full-game downloads in our stores and on our U.S. website. We believe we are the worldwide leading retailer of digital currency and DLC for Xbox Live and the PlayStation Network.
•
Collectibles. Collectibles consist of licensed merchandise, primarily related to the video game, television and movie industries and pop culture themes which are sold through our video game stores, ThinkGeek stores, Zing Pop Culture stores and www.thinkgeek.com.


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•
Other Products.  Other products primarily consist of PC entertainment software, gaming-related print media, mobile and consumer electronics, and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in print form. We offer PC entertainment software from many of the largest PC publishers, including Electronic Arts, Take Two and Activision Blizzard across a variety of genres, including sports, action, strategy, adventure/role playing and simulation. We also carry strategy guides, magazines and interactive game figures, such as Amiibos from Nintendo.
Store Operations
We design our video game stores to provide an electronic gaming atmosphere with an engaging and visually captivating layout, with an average size of 1,700 square feet. Our video game stores are typically equipped with several video game sampling areas, which provide our customers the opportunity to play games before purchase, as well as equipment to play video game clips. We use store configuration, in-store signage and product demonstrations to produce marketing opportunities both for our vendors and for us.
Our stores are generally located in high-traffic “power strip centers,” local neighborhood strip centers, high-traffic shopping malls and pedestrian areas, primarily in major metropolitan areas. These locations provide easy access and high frequency of visits and, in the case of strip centers and high-traffic pedestrian stores, high visibility. We target strip centers that are conveniently located, have a mass merchant or supermarket anchor tenant and have a high volume of customers.
Site Selection and Locations
Site Selection.  Site selections for new stores are made after an extensive review of demographic data, including data from our PowerUp Rewards loyalty program, and other information relating to market potential, competitor access and visibility, compatible nearby tenants, accessible parking, location visibility, lease terms and the location of our other stores. In each of our segments, we have a dedicated staff of real estate personnel experienced in selecting store locations.
Domestic Locations.  The table below sets forth the number and locations of our domestic stores included in the United States segment as of February 2, 2019:
Alabama
61

 
Kentucky
71

 
North Dakota
8

Alaska
6

 
Louisiana
61

 
Ohio
169

Arizona
73

 
Maine
11

 
Oklahoma
48

Arkansas
31

 
Maryland
83

 
Oregon
41

California
374

 
Massachusetts
78

 
Pennsylvania
179

Colorado
58

 
Michigan
101

 
Rhode Island
12

Connecticut
47

 
Minnesota
44

 
South Carolina
68

Delaware
15

 
Mississippi
44

 
South Dakota
11

Florida
242

 
Missouri
66

 
Tennessee
94

Georgia
137

 
Montana
12

 
Texas
374

Guam
2

 
Nebraska
21

 
Utah
32

Hawaii
17

 
Nevada
38

 
Vermont
4

Idaho
17

 
New Hampshire
26

 
Virginia
121

Illinois
143

 
New Jersey
114

 
Washington
76

Indiana
94

 
New Mexico
25

 
West Virginia
29

Iowa
31

 
New York
211

 
Wisconsin
56

Kansas
31

 
North Carolina
131

 
Wyoming
8

 
 
 
 
 
 
 
 
Total Domestic Stores
3,846


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International Locations.  The table below sets forth the number and locations of our international stores included in the Video Game Brands segments in Canada, Europe and Australia as of February 2, 2019:
 
Number
of Stores
Canada
311

   Total Stores - Canada Video Game Brands
311

 
 
Australia
419

New Zealand
43

Total Stores - Australia Video Game Brands
462

 
 
Austria
25

Denmark
34

Finland
16

France
420

Germany
208

Ireland
50

Italy
361

Norway
28

Sweden
52

Switzerland
17

Total Stores - Europe Video Game Brands
1,211

Total International Stores
1,984

Total Stores
5,830


PowerUp Rewards
We operate loyalty programs in each of the countries in which we operate our Video Game Brands stores. Our U.S. loyalty program, called PowerUp RewardsTM ("PowerUp Rewards"), had approximately 39.6 million members as of February 2, 2019, of which approximately 16.2 million members have purchased at GameStop in the past year. The PowerUp Rewards membership totals also include 5.6 million paying members and 20.5 million members that we market to on a regular basis. Our loyalty programs in our video game stores in the remaining countries had approximately 20.9 million members as of February 2, 2019. Our loyalty programs generally offer our customers the ability to sign up for a free or paid membership which gives our customers access to exclusive video game related rewards. The programs' paid memberships may also include a subscription to Game Informer magazine, additional discounts on pre-owned merchandise in our stores and additional credit on trade-ins of pre-owned products.
Game Informer
We publish Game Informer, the world’s largest print and digital video game publication and website featuring reviews of new title releases, game tips and news regarding current developments in the video game industry. Print and digital versions of the monthly magazine are sold through subscriptions, digitally and through displays in our domestic and international stores. Game Informer magazine is the fifth largest consumer publication in the U.S. and for its December 2018 issue, the magazine had approximately 6.6 million paid subscribers, including more than 2.1 million paid digital magazine subscribers. The digital version of the magazine is the largest subscription digital magazine in the United States. Game Informer is a part of the PowerUp Rewards Pro loyalty program and is a key feature of each paid PowerUp Rewards membership. Operating results from the English version of Game Informer are included in the United States segment as this represents where the majority of subscriptions and sales are generated. Other international version results from Game Informer operations are included in the segment in which the sales are generated.
Vendors
We purchase substantially all of our new products worldwide from approximately 100 manufacturers, software publishers and several distributors. Purchases from the top ten vendors in our Video Game Brands segments accounted for approximately 78% of our new product purchases in fiscal 2018. Nintendo, Sony, Microsoft, Take-Two Interactive and Activision Blizzard accounted for 23%, 22%, 10%, 6% and 4%, respectively, of our new product purchases in our video game brands during fiscal 2018. We have established price protections with our primary video game product vendors in order to reduce our risk of inventory obsolescence.

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In addition, we have few purchase contracts with video game trade vendors and generally conduct business on an order-by-order basis, a practice that is typical throughout the industry. We purchase collectibles merchandise from a broad base of domestic and international vendors. We believe that maintaining and strengthening our long-term relationships with our vendors is essential to our operations and continued expansion. We believe that we have very good relationships with our vendors.
Distribution and Information Management
Our operating strategy involves providing a broad merchandise selection to our customers as quickly and as cost-effectively as possible. We use our distribution facilities and inventory management systems to maximize the efficiency of the flow of products to our stores, enhance store efficiency and optimize store in-stock and overall investment in inventory.
Competition
The video game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. We compete with mass merchants and regional chains; computer product and consumer electronics stores; other video game and PC software specialty stores; toy retail chains; direct sales by software publishers; the online environments operated by Sony (PlayStation Network), Microsoft (XBox Live), Nintendo (Nintendo Switch Online), as well as other online retailers and game rental companies. Video game products are also distributed through other methods such as digital delivery. We also compete with sellers of pre-owned and value video game products. Additionally, we compete with other forms of entertainment activities, including casual and mobile games, movies, television, theater, sporting events and family entertainment centers.
In the U.S., we compete with Wal-Mart Stores, Inc. (“Wal-Mart”); Target Corporation (“Target”); Amazon.com, Inc. (“Amazon.com”); and Best Buy Co., Inc. (“Best Buy”), among others. Throughout Europe we compete with Sony, Microsoft, Nintendo, and major consumer electronics retailers such as Media Markt, Saturn and FNAC, major hypermarket chains like Carrefour and Auchan, and online retailer Amazon.com. Competitors in Canada include Wal-Mart and Best Buy. In Australia, competitors include K-Mart, Target and JB HiFi stores.
Seasonality
Our business, like that of many retailers, is seasonal, with the major portion of our sales and operating profit realized during the fourth fiscal quarter, which includes the holiday selling season. During fiscal 2018 and 2017, we generated approximately 37% and 39%, respectively, of our sales during the fourth quarter.
Trademarks
We have a number of trademarks and servicemarks, including “GameStop,” “Game Informer,” “EB Games,” “Electronics Boutique,” “ThinkGeek,” “Zing Pop Culture,” “Power to the PlayersTM” and “PowerUp Rewards,” which have been registered by us with the U.S. Patent and Trademark Office. For many of our trademarks and servicemarks, including “Micromania,” we also have registered or have registrations pending with the trademark authorities throughout the world. We maintain a policy of pursuing registration of our principal marks and opposing any infringement of our marks.
Employees
We have approximately 16,000 full-time salaried and hourly employees and between 23,000 and 45,000 part-time hourly employees worldwide, depending on the time of year. Fluctuation in the number of part-time hourly employees is due to the seasonality of our business. We believe that our relationship with our employees is excellent. Some of our international employees are covered by collective bargaining agreements, while none of our U.S. employees are represented by a labor union or are members of a collective bargaining unit.
Sustainability
We are committed to sustainability and to operating our business in a manner that results in a positive impact to the environment and our communities. Through our trade-in program, we take in software (CDs), gaming consoles and consumer electronics that are otherwise destined for landfills and either refurbish them or recycle them. In 2018 alone, through our U.S. refurbishment center, the company refurbished over five million pieces of software (CDs) and over three million consumer electronic devices, and recycled over 2.7 million pounds of e-waste. In addition, we continuously measure, and look for cost-effective ways to reduce, our carbon emissions and have seen both our total emissions and emissions by store decrease over the past seven years. See the Social Responsibility section of our corporate website (http://news.gamestop.com) for further information on our sustainability efforts. We are not incorporating by reference into this Annual Report on Form 10-K information or materials contained on our website or that can be accessed through our website.

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Available Information
We make available on our corporate website (http://news.gamestop.com), under “Investor Relations — Financial Information,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such material to the Securities and Exchange Commission (“SEC”). The SEC also maintains a website that contains reports, proxy statements and other information about issuers, like GameStop, who file electronically with the SEC. The address of that site is http://www.sec.gov. In addition to copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, our Code of Standards, Ethics and Conduct is available on our website under “Investor Relations — Corporate Governance” and is available to our stockholders in print, free of charge, upon written request to the Investor Relations Department at GameStop Corp., 625 Westport Parkway, Grapevine, Texas 76051. The contents of our corporate website are not part of this Annual Report on Form 10-K, or any other report we file, with, or furnish to, the SEC.
ITEM 1A.
RISK FACTORS
An investment in our company involves a high degree of risk. You should carefully consider the risks below, together with the other information contained in this report, before you make an investment decision with respect to our company. The risks described below are not the only ones facing us. Additional risks not presently known to us, or that we consider immaterial, may also impair our business operations. Any of the following risks could materially adversely affect our business, operating results or financial condition, and could cause a decline in the trading price of our common stock and the value of your investment.
Risks Related to Our Business
Economic conditions in the U.S. and in certain international markets could adversely affect demand for the products we sell.
Sales of our products involve discretionary spending by consumers. Consumers are typically more likely to make discretionary purchases, including purchasing video game products, when there are favorable economic conditions. Consumer spending may be affected by many economic factors outside of the Company's control. Some of these factors include consumer disposable income levels, consumer confidence in current and future economic conditions, levels of employment, consumer credit availability, consumer debt levels, inflation, political conditions and the effect of weather, natural disasters, and civil disturbances. These and other economic factors could adversely affect demand for our products, which may negatively impact our business, results of operations and financial condition.
The video game industry has historically been cyclical and is affected by the introduction of next-generation consoles, which could negatively impact the demand for existing products or our pre-owned business.
The video game industry has historically been cyclical in nature in response to the introduction and maturation of new technology. Following the introduction of new video game platforms, sales of these platforms and related software and accessories generally increase due to initial demand, while sales of older platforms and related products generally decrease as customers migrate toward the new platforms. In addition, the features of new consoles or changes to the existing generations of consoles, including any future restrictions or conditions or the ability to play prior generation video games on such consoles, may adversely affect our pre-owned business.
The current generation console cycle began when Sony and Microsoft launched the PlayStation 4 and Xbox One in November 2013. Nintendo introduced the Nintendo Switch in March 2017. If the current video game platforms do not continue to be successful, our sales of video game products could decline. The introduction of new iterations or generations of consoles could negatively impact the demand for existing products or our pre-owned business, which could have a negative impact on results of operations and financial condition.
We depend upon the timely delivery of new and innovative products from our vendors.
We depend on manufacturers and publishers to deliver video game hardware, software, and consumer electronics in quantities sufficient to meet customer demand. In addition, we depend on these manufacturers and publishers to introduce new and innovative products and software titles to drive industry sales. We have experienced sales declines in the past due to a reduction in the number of new software titles available for sale. Any material delay in the introduction or delivery, or limited allocations, of hardware platforms or software titles could result in reduced sales.

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If we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The interactive entertainment industry is characterized by swiftly changing technology, evolving industry standards, frequent new and enhanced product introductions, rapidly changing consumer preferences and product obsolescence. Video games are now played on a wide variety of mediums, including mobile phones, tablets, social networking websites and other devices. The popularity of browser, mobile and social gaming has increased greatly and this popularity is expected to continue to grow. Browser, mobile and social gaming is accessed through hardware other than the consoles and traditional hand-held video game devices we currently sell.
In order to continue to compete effectively in the video game industry, we need to respond quickly to technological changes and to understand their impact on our customers’ preferences. It may take significant time and resources to respond to these technological changes and changes in consumer preferences. Our business and results of operations may be negatively impacted if we fail to keep pace with these changes.
Technological advances in the delivery and types of video games and PC entertainment software, as well as changes in consumer behavior related to these new technologies, could lower our sales.
The current consoles from Sony, Nintendo, and Microsoft have facilitated download technology. In addition, disc-less consoles may be available to consumers in the near term from certain manufacturers. Downloading of video game content to the current generation video game systems continues to grow and take an increasing percentage of new video game sales. If consumers' preference for downloading video game content continues to increase or these consoles and other advances in technology continue to expand our customers’ ability to access and download the current format of video games and incremental content for their games through these and other sources, our customers may no longer choose to purchase video games in our stores or reduce their purchases in favor of other forms of game delivery. As a result, our business and results of operations may be negatively impacted.
Our sales of collectibles depend on popularity of and trends in pop culture, and our ability to react to them.
Our sales of collectibles are heavily dependent upon the continued demand by our customers for collectibles, apparel, toys, gadgets, electronics and other retail products for pop culture and technology enthusiasts. The popularity of such products is often driven by movies, television shows, music, fashion and other pop culture influences. The market for, and appeal of, particular types of music, movies, television shows, artists, actors, styles, trends and brands are constantly changing. Our failure to anticipate, identify and react appropriately to changing trends and preferences of customers could lead to, among other things, excess inventories and higher markdowns. There can be no assurance that the collectibles and related products that we sell will appeal to our customers.
We depend on licensed products for a substantial portion of our sales of collectibles and our inability to maintain such licenses and obtain new licensed products would adversely affect our sales of collectibles.
We license from others the rights to sell certain of our collectibles and many of these products contain a third party’s trademarks, designs and other intellectual property. If we are unable to maintain current licenses or obtain new licensed products with comparable consumer demand, our sales of collectibles would decline. Furthermore, we may not be able to prevent a licensor from choosing not to renew a license with us and/or from licensing a product to one of our competitors.
Our ability to obtain favorable terms from our suppliers may impact our financial results.
Our financial results depend significantly upon the business terms we can obtain from our suppliers, including competitive prices, unsold product return policies, advertising and market development allowances, freight charges and payment terms. We purchase substantially all of our products directly from manufacturers, software publishers and, in some cases, distributors. Our largest vendors are Nintendo, Sony, Microsoft, Take-Two Interactive and Activision Blizzard, which accounted for 23%, 22%, 10%, 6% and 4%, respectively, of our new product purchases in fiscal 2018. If our suppliers do not provide us with favorable business terms, we may not be able to offer products to our customers at competitive prices.
If our vendors fail to provide marketing and merchandising support at historical levels, our sales and earnings could be negatively impacted.
The manufacturers of video game hardware and software have typically provided retailers with significant marketing and merchandising support for their products. As part of this support, we receive cooperative advertising and market development payments from these vendors which enable us to actively promote and merchandise the products we sell and drive sales at our stores and on our websites. We cannot assure you that vendors will continue to provide this support at historical levels. If they fail to do so, our business and results of operations may be negatively impacted.

7

Pressure from our competitors may force us to reduce our prices or increase spending, which could decrease our profitability.
The retail environment is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. We compete with mass merchants and regional chains, including Wal-Mart and Target; computer product and consumer electronics stores, including Best Buy; internet-based retailers such as Amazon.com; other U.S. and international video game and PC software specialty stores located in malls and other locations, such as Carrefour and Media Markt; toy retail chains; direct sales by software publishers; the online environments operated by Sony (PlayStation Network), Microsoft (XBox Live), Nintendo (Nintendo Switch Online), as well as other online retailers and game rental companies. Some of our competitors have longer operating histories and may have greater financial resources than we do or other advantages. In addition, video game products and content are increasingly being digitally distributed and new competitors built to take advantage of these new capabilities are entering the marketplace, and other methods may emerge in the future. We also compete with other sellers of pre-owned video game products and other PC software distribution companies, including Steam. Certain of our mass-merchant competitors are expanding in the market for new and pre-owned video games through aggressive pricing which may negatively affect our margins, sales and earnings for these products. Additionally, we compete with other forms of entertainment activities, including browser, social and mobile games, movies, television, theater, sporting events and family entertainment centers. If we lose customers to our competitors, or if we reduce our prices or increase our spending to maintain our customers, we may be less profitable.
Failure to attract and retain executive officers and other key personnel could materially adversely affect our financial performance.
Our success depends upon our ability to attract, motivate and retain a highly trained and engaged workforce, including key executives, management for our stores and skilled merchandising, marketing, financial and administrative personnel. The turnover rate in the retail industry is relatively high, and there is an ongoing need to recruit and train new store employees. Factors that affect our ability to maintain sufficient numbers of qualified employees include employee morale, our reputation, unemployment rates, competition from other employers and our ability to offer appropriate compensation packages. Our inability to recruit a sufficient number of qualified individuals or our failure to retain key executive officers and other employees in the future may have a negative impact on our business and results of operations.
Damage to our reputation could adversely affect our business and our relationships with our customers.
Our continued success depends upon customers' perception of our Company. Any negative publicity relating to our vendors, products, practices or our Company could damage our reputation. The increased use of social media platforms allows for the rapid dispersal of information, including negative feedback or other commentary, which could negatively impact our reputation and result in declines in customer loyalty and adversely affect our results of operations.
International events could delay or prevent the delivery of products to our suppliers.
Our suppliers rely on foreign sources, primarily in Asia, to manufacture a portion of the products we purchase from them. As a result, any event causing a disruption of imports, including natural disasters or the imposition of import restrictions or trade restrictions in the form of tariffs or quotas, could increase the cost and reduce the supply of products available to us, which may negatively impact our business and results of operations.
Our international operations expose us to numerous risks.
We have international retail operations in Australia, Canada and Europe. Because release schedules for hardware and software introduction in these markets can sometimes differ from release schedules in the United States, the timing of increases and decreases in foreign sales may differ from the timing of increases and decreases in domestic sales. We are also subject to a number of other factors that may affect our current or future international operations. These include:
•
economic downturns, specifically in the regions in which we operate;
•
currency exchange rate fluctuations;
•
international incidents;
•
natural disasters;
•
government instability; and
•
competitors entering our current and potential markets.
Our operations in Europe are also subject to risks associated with the current economic conditions and uncertainties in the European Union (“EU”). In June 2016, voters in the United Kingdom approved the exit of that country from the EU (“Brexit”). The Brexit vote and related developments have created significant economic uncertainty in Europe. In addition, European and global economic conditions have been negatively impacted by the inability of certain EU member states to service their sovereign debt obligations. There continues to be uncertainty over the possibility that other EU member states may experience similar financial troubles, the ultimate outcome of the EU governments’ financial support programs, the possible breakup or restructuring of the EU and the possible elimination or restructuring of the EU monetary system. These continued uncertainties could further disrupt

8

European and global economic conditions. Unfavorable economic conditions could negatively impact consumer demand for our products. These factors could negatively impact our business, results of operations and financial condition.
Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act and other anti-bribery laws applicable to our operations. While we have policies and procedures intended to ensure compliance with these laws, our employees, contractors, representatives and agents may take actions that violate our policies. Moreover, it may be more difficult to oversee the conduct of any such persons who are not our employees, potentially exposing us to greater risk from their actions. Any violations of those laws by any of those persons could have a negative impact on our business.
Changes to tariff and import/export regulations may negatively impact our future financial condition and results of operations.
The United States and other countries have from time to time proposed and enacted protectionist trade policies that could increase the cost or reduce the availability of certain merchandise. In particular, the current U.S. administration has made certain changes to import/export tariffs and international trade agreements. The changes announced and made to date do not impact the merchandise that we offer. Any measures that could impact the cost or availability of the merchandise we offer could have an adverse impact on our business because a significant portion of the products we offer are purchased from foreign vendors and manufactured in foreign countries.
Unfavorable changes in our global tax rate could have a negative impact on our business, results of operations and cash flows.
As a result of our operations in many foreign countries, our global tax rate is derived from a combination of applicable tax rates in the various jurisdictions in which we operate. Depending upon the sources of our income, any agreements we may have with taxing authorities in various jurisdictions and the tax filing positions we take in various jurisdictions, our overall tax rate may be higher than other companies or higher than our tax rates have been in the past. We base our estimate of an annual effective tax rate at any given point in time on a calculated mix of the tax rates applicable to our business and to estimates of the amount of income to be derived in any given jurisdiction. A change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, changes in tax laws in any of the multiple jurisdictions in which we operate or adverse outcomes from the tax audits that regularly are in process in any jurisdiction in which we operate could result in an unfavorable change in our overall tax rate, which could have a material adverse impact on our business and results of our operations.
Restrictions on our ability to purchase and sell pre-owned video game products or pre-owned mobile devices could negatively affect our financial condition and results of operations.
Our financial results depend on our ability to purchase and sell pre-owned video game products and pre-owned mobile devices within our stores. Actions by manufacturers or publishers of video game products or mobile devices, wireless carriers or governmental authorities to prohibit or limit our ability to purchase or sell pre-owned video game products or mobile devices, or to limit the ability of consumers to play pre-owned video games or use pre-owned mobile devices, could have a negative impact on our results of operations.
Sales of video games containing graphic violence may decrease as a result of actual violent events or other reasons, and our financial results may be adversely affected as a result.
Many popular video games contain material with graphic violence. These games receive an “M” or “T” rating from the Entertainment Software Ratings Board. As actual violent events occur and are publicized, or for other reasons, public acceptance of graphic violence in video games may decline. Consumer advocacy groups may increase their efforts to oppose sales of graphically-violent video games and may seek legislation prohibiting their sales. As a result, our sales of those games may decrease, which could negatively impact our results of operations.
An adverse trend in sales during the holiday selling season could impact our financial results.
Our business, like that of many retailers, is seasonal, with the major portion of our sales and operating profit realized during the fourth fiscal quarter, which includes the holiday selling season. During fiscal 2018, we generated approximately 37% of our sales during the fourth quarter. Any adverse trend in sales during the holiday selling season could lower our results of operations for the fourth quarter and the entire fiscal year.
Our results of operations may fluctuate from quarter to quarter.
Our results of operations may fluctuate from quarter to quarter depending upon several factors, some of which are beyond our control. These factors include, but are not limited to:
•
the timing and allocations of new product releases including new console launches;
•
the timing of new store openings or closings;

9

•
shifts in the timing or content of certain promotions or service offerings;
•
the effect of changes in tax rates in the jurisdictions in which we operate;
•
acquisition costs and the integration of companies we acquire or invest in;
•
the mix of earnings in the countries in which we operate;
•
the costs associated with the exit of unprofitable markets, businesses or stores; and
•
changes in foreign currency exchange rates.
These and other factors could affect our business, financial condition and results of operations, and this makes the prediction of our financial results on a quarterly basis difficult. Also, it is possible that our quarterly financial results may be below the expectations of public market analysts.
Failure to successfully transfer customers and sales from closed stores due to under performance to nearby stores could adversely impact our financial results.
We regularly assess stores for closure that are not meeting performance standards or stores at the end of their lease terms with the intent of transferring sales to other nearby locations. We believe that we can ultimately increase profitability by successfully transferring customers and sales to other stores by marketing directly to the PowerUp Rewards members who have shopped in the stores that we plan to close. If we are unsuccessful in marketing to customers of the stores that we plan to close or in transferring sales to nearby stores, our results of operations could be negatively impacted.
If we are unable to renew or enter into new leases on favorable terms, our revenue may be adversely affected.
All of our retail stores are located in leased premises. If the cost of leasing existing stores increases, we cannot assure you that we will be able to maintain our existing store locations as leases expire. In addition, we may not be able to enter into new leases on favorable terms or at all, or we may not be able to locate suitable alternative sites or additional sites for new store expansion in a timely manner. Our revenues and earnings may decline if we fail to maintain existing store locations, enter into new leases, locate alternative sites or find additional sites for new store expansion.
We rely on centralized facilities for refurbishment of our pre-owned products. Any disruption to these facilities could adversely affect our profitability.
We rely on centralized facilities for the refurbishment of many of the pre-owned products that we sell. If any disruption occurred at these facilities, whether due to natural disaster or severe weather, or events such as fire, accidents, power outages, systems failures, or other unforeseen causes, sales of our pre-owned products could decrease. Since we generally obtain higher margins on our pre-owned products, any adverse effect on their sales could adversely affect our profitability.
If our management information systems fail to perform or are inadequate, our ability to manage our business could be disrupted.
We rely on computerized inventory and management systems to coordinate and manage the activities in our distribution centers, as well as to communicate distribution information to the off-site, third-party operated distribution centers with which we work. The third-party distribution centers pick up products from our suppliers, repackage the products for each of our stores and ship those products to our stores by package carriers. We use inventory replenishment systems to track sales and inventory. Our ability to rapidly process incoming shipments of new release titles and deliver them to all of our stores, either that day or by the next morning, enables us to meet peak demand and replenish stores at least twice a week, to keep our stores in stock at optimum levels and to move inventory efficiently. Our systems are subject to damage or interruption from power outages, telecommunications failures, cyber-attacks, security breaches and catastrophic events. If our inventory or management information systems fail to adequately perform their functions, our business could be adversely affected. In addition, if operations in any of our distribution centers were to shut down or be disrupted or if these centers were unable to accommodate stores in a particular region, our business and results of operations may be negatively impacted.

10

If we do not maintain the security of our member, customer, employee or company information, we could damage our reputation, incur substantial additional costs and become subject to litigation.
An important part of our business involves the receipt, processing and storage of personal information of our customers, members and employees, including, in the case of customers, payment information. We have systems and processes in place that are designed to protect against security and data breaches and unauthorized access to confidential information. Nevertheless, cyber-security risks such as malicious software and attempts to gain unauthorized access to data are rapidly evolving and becoming increasingly sophisticated. Techniques or software used to gain unauthorized access, and/or disable, degrade or harm our systems may be difficult to detect for prolonged periods of time, and we may be unable to anticipate these techniques or put in place protective or preventive measures. These attempts to gain unauthorized access could lead to disruptions in our systems, unauthorized release of confidential or otherwise protected information or corruption of data. If individuals are successful in infiltrating, breaking into, disrupting, damaging or otherwise stealing from the computer systems of the Company or its third-party providers, we may have to make a significant investment to fix or replace them, and may suffer interruptions in our operations in the interim, including interruptions in our ability to accept payment from customers and our ability to issue and redeem loyalty points under our Power Up Rewards program. Such an event may also expose us to costly litigation, government investigations, government enforcement actions, fines and/or lawsuits and may significantly harm our reputation with our members and customers. We are continuously working to upgrade our information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to protect our member, customer, employee, and company data against cyber risks and security breaches. Despite these efforts, we have experienced cybersecurity attacks in the past and there is no guarantee that the procedures that we have implemented to protect against unauthorized access to secured data are adequate to safeguard against future data security breaches. While past cybersecurity attacks have not resulted in material losses, a data security breach or any failure by us to comply with applicable privacy and information security laws and regulations could materially impact our business and our results of operations. Moreover, a data security breach or change in applicable privacy or security laws or regulations could require us to devote significant management resources to address the problems created by the breach or such change in laws or regulations and to expend significant additional resources to upgrade further the security measures that we employ to guard against such breaches or to comply with such change in laws or regulations, which could disrupt our business, operations and financial condition.
If our internal control over financial reporting is ineffective, our business may be adversely affected and we may lose market confidence in our reported financial information which could adversely impact our business and stock price.
Effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements because of inherent limitations. These limitations include, among others, the possibility of human error, inadequacy or circumvention of controls and fraud.
During the fourth quarter of fiscal 2018, we identified material weaknesses in internal control related to the principles associated with the control activities component of the Internal Control—Integrated Framework (2013), specifically related to our information technology general control environment. Refer to Part II, Item 9A for additional information. We have been implementing and will continue to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated; however, we cannot provide assurance that these measures will be successful. If we are unable to remediate the material weaknesses or are unable to otherwise maintain effective internal control over financial reporting, our ability to report financial information timely and accurately could be adversely affected. As a result, we could lose investor confidence and become subject to litigation or investigations, which could adversely affect our business, operations, financial condition and our stock price.
Litigation and the outcomes of such litigation could negatively impact our future financial condition and results of operations.
In the ordinary course of our business, we are, from time to time, subject to various litigation and legal proceedings, including matters involving wage and hour employee class actions, stockholder and consumer class actions, tax audits and unclaimed property audits by states. The outcome of litigation and other legal proceedings and the magnitude of potential losses therefrom, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Certain of these legal proceedings, if decided adversely to us or settled by us, may require changes to our business operations that negatively impact our operating results or involve significant liability awards that impact our financial condition. The cost to defend litigation may be significant. As a result, legal proceedings may adversely affect our business, financial condition, results of operations or liquidity. See Item 3. “Legal Proceedings.”

11

Legislative actions and changes in accounting rules may cause our general and administrative and compliance costs to increase and impact our future financial condition and results of operations.
In order to comply with laws adopted by the U.S. government or other U.S. or foreign regulatory bodies, we may be required to increase our expenditures and hire additional personnel and additional outside legal, accounting and advisory services, all of which may cause our general and administrative and compliance costs to increase. Significant workforce-related legislative changes could increase our expenses and adversely affect our operations. Examples of possible workforce-related legislative changes include changes to an employer's obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements, and health care mandates. In addition, changes in the regulatory environment affecting Medicare reimbursements, product safety, supply chain transparency, and increased compliance costs related to enforcement of federal and state wage and hour statutes and common law related to overtime, among others, could cause our expenses to increase without an ability to pass through any increased expenses through higher prices. Environmental legislation or other regulatory changes could impose unexpected costs or impact us more directly than other companies due to our operations as a global retailer. Specifically, environmental legislation or international agreements affecting energy, carbon emissions, and water or product materials are continually being explored by governing bodies. Increasing energy and fuel costs, supply chain disruptions and other potential risks to our business, as well as any significant rule making or passage of any such legislation, could materially increase the cost to transport our goods and materially adversely affect our results of operations. Additionally, regulatory and enforcement activity focused on the retail industry has increased in recent years, increasing the risk of fines and additional operational costs associated with compliance. 
As a seller of certain consumer products, we are subject to various federal, state, local and international laws, regulations, and statutes relating to product safety and consumer protection.
While we take steps to comply with these laws, there can be no assurance that we will be in compliance, and failure to comply with these laws could result in litigation, regulatory action and penalties which could have a negative impact on our business, financial condition and results of operations. In addition, our suppliers might not adhere to product safety requirements and the Company and those suppliers may therefore be subject to involuntary or voluntary product recalls or product liability lawsuits. Direct costs, lost sales and reputational damage associated with product recalls, government enforcement actions or product liability lawsuits, individually or in the aggregate, could have a negative impact on future revenues and results of operations.
Our Board of Directors could change our dividend policy at any time.
We initiated our first cash dividend on our common stock during fiscal 2012. Notwithstanding the foregoing, there is no assurance that we will continue to pay cash dividends on our common stock in the future. Certain provisions in our credit facility and covenants under the indentures for our 5.50% Senior Notes due October 1, 2019 (the “2019 Senior Notes”) and our 6.75% Senior Notes due March 15, 2021 (the "2021 Senior Notes" and, together, the “Senior Notes”), restrict our ability to pay dividends in certain circumstances. In addition, subject to any financial covenants in current or future financing agreements that directly or indirectly restrict our ability to pay dividends, the payment of dividends is within the discretion of our Board of Directors and will depend upon our future earnings and cash flow from operations, our capital requirements, our financial condition and any other factors that the Board of Directors may consider. Unless we continue to pay cash dividends on our common stock in the future, the success of an investment in our common stock will depend entirely upon its future appreciation. Our common stock may not appreciate in value or even maintain the price at which it was purchased.
We recognized substantial impairment charges in fiscal 2018 and any future impairment charges on our goodwill and intangible assets could negatively impact our results of operations.
In fiscal 2018, we recorded impairment charges totaling $970.7 million and $43.1 million associated with our goodwill and intangible assets, respectively. Our consolidated balance sheet at February 2, 2019 included goodwill and intangible assets, net totaling $397.4 million. Goodwill and certain intangible assets arise from acquisitions and are not amortized as they have indefinite useful lives. Other intangible assets are amortized over their estimated economic useful lives. We are required to evaluate goodwill and other intangible assets not subject to amortization for impairment at least annually or when circumstances indicate the carrying value of the goodwill or other intangible assets might be impaired. The impairment tests require numerous assumptions such as, among others, future sales trends, operating margins, store count and capital expenditures. In addition, changes in our market capitalization may impact certain assumptions in our annual impairment test. If our actual financial results in the future are below our projections or if our stock price experiences a sustained decline, we may be required to record significant impairment charges associated with our goodwill and intangible assets, which would negatively impact our results of operations. See "Goodwill" and "Indefinite-lived Intangible Assets" in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Use of Estimates” for additional information.

12

Risks Relating to Indebtedness
Because of our floating rate credit facility, we may be adversely affected by interest rate changes.
Our financial position may be affected by fluctuations in interest rates, as our senior credit facility is subject to floating interest rates.
Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. If we were to borrow against our senior credit facility, a significant increase in interest rates could have a negative impact on our results of operations and financial condition.
The terms of our Senior Notes and senior credit facility may impose significant operating and financial restrictions on us.
The terms of our Senior Notes and our senior credit facility may impose significant operating and financial restrictions on us in certain circumstances. These restrictions, among other things, limit our ability to:
•
incur, assume or permit to exist additional indebtedness or guaranty obligations;
•
incur liens or agree to negative pledges in other agreements;
•
engage in sale and leaseback transactions;
•
make loans and investments;
•
declare dividends, make payments or redeem or repurchase capital stock;
•
engage in mergers, acquisitions and other business combinations;
•
prepay, redeem or purchase certain indebtedness;
•
amend or otherwise alter the terms of our organizational documents and indebtedness;
•
sell assets; and
•
engage in transactions with affiliates.
We cannot assure that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities. A breach of the covenants or restrictions under the indentures for the Senior Notes, or under our senior credit facility, could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the repayment of the related debt and may result in the acceleration of the repayment of any other debt to which a cross-acceleration or cross-default provision applied. In addition, an event of default under our senior credit facility would permit the lenders to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our senior credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event that our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. See Note 10, "Debt," to our consolidated financial statements for a description of our Senior Notes and senior credit facility.
To service our indebtedness, we will require a significant amount of cash. We may not be able to generate sufficient cash flow to meet our debt service obligations.
Our ability to generate sufficient cash flow from operations to make scheduled payments on our indebtedness, including without limitation any payments required to be made under our senior credit facility or to holders of our Senior Notes, and to fund our operations, will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If we do not generate sufficient cash flow from operations to satisfy our debt obligations, including interest payments and the payment of principal at maturity, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, including the Senior Notes, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot provide assurance that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or if that additional financing would be permitted under the terms of our various debt instruments, then in effect.
Our senior credit facility and the indentures governing the Senior Notes restrict our ability to dispose of assets and use the proceeds from those sales and raise debt or equity to meet any debt service obligations then due. Our ability to refinance would also depend upon the condition of the finance and credit markets. Our inability to generate sufficient cash flow to satisfy our debt obligations, including the Senior Notes, or to refinance our obligations on commercially reasonable terms or on a timely basis, would have an negative impact on our business, results of operations and financial condition.

13

Despite current indebtedness levels, we and our subsidiaries may still be able to incur additional debt. This could further increase the risks associated with our leverage.
We are able to incur additional indebtedness. Although our senior credit facility and the indentures for our Senior Notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. Such future indebtedness or obligations may have restrictions similar to, or more restrictive than, those included in the indentures for our Senior Notes or our senior credit facility. The incurrence of additional indebtedness could impact our financial condition and results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
All of our stores are leased. Store leases typically provide for a lease term of one to five years, plus renewal options. This arrangement gives us the flexibility to pursue extension or relocation opportunities that arise from changing market conditions. We believe that, as current leases expire, we will be able to obtain either renewals at present locations, leases for equivalent locations in the same area, or be able to close the stores with expiring leases and transfer enough of the sales to other nearby stores to improve, if not at least maintain, profitability.
The terms of the store leases, including reasonably assured options, for the 5,830 leased stores open as of February 2, 2019 expire as follows:
Lease Terms to Expire During(1)
 
Number
of Stores
Fiscal 2019
 
2,004

Fiscal 2020
 
1,040

Fiscal 2021
 
766

Fiscal 2022
 
646

Fiscal 2023 and later
 
1,374

Total
 
5,830

__________________________________________________
(1)
Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to January 31st.
As of February 2, 2019, we owned seven and leased 13 office and distribution facilities, totaling approximately 2.3 million square feet. The lease expiration dates for the leased facilities range from 2019 to 2028, with an average remaining lease life, including reasonably assured options, of approximately six years. Our principal facilities are as follows:
Location
 
Square
Footage
 
Owned or
Leased
 
Use
Grapevine, Texas, USA
 
519,000

 
Owned
 
Distribution and administration
Grapevine, Texas, USA
 
182,000

 
Owned
 
Manufacturing and distribution
Shepherdsville, Kentucky, USA
 
631,000

 
Leased
 
Distribution
Brampton, Ontario, Canada
 
119,000

 
Owned
 
Distribution and administration
Eagle Farm, Queensland, Australia
 
185,000

 
Owned
 
Distribution and administration
Milan, Italy
 
123,000

 
Owned
 
Distribution and administration
Additional information regarding our properties can be found in Item 1, “Business—Store Operations” and Item 1, “Business—Site Selection and Locations” in this Form 10-K.

14

ITEM 3.
LEGAL PROCEEDINGS
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, stockholder and consumer class actions, tax audits and unclaimed property audits by states. We may enter into discussions regarding settlement of these and other types of legal proceedings, 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.
Certain of our French subsidiaries had been under audit by the French Tax Administration (the "FTA") for fiscal years 2008 through 2015. We received tax reassessment notices pursuant to which the FTA asserted that the French subsidiaries were ineligible to claim certain tax deductions from November 4, 2008, through January 31, 2013, which resulted in a tax collection notice received on January 16, 2018 in the amount of approximately €80.0 million.  Based on the nature of the tax deductions being challenged, collection notices through fiscal year 2018 were anticipated. During fiscal 2018, we settled this matter with the FTA and as a result recognized charges totaling $30.3 million in income tax expense. The final settlement covers fiscal years 2008 through 2018.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

15

PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A Common Stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “GME.”
As of March 21, 2019, there were approximately 1,383 record holders of our Class A Common Stock.
Dividends
We have historically paid cash dividends. Our payment of dividends is and will continue to be restricted by or subject to, among other limitations, applicable provisions of federal and state laws, our earnings and various business considerations, including our financial condition, results of operations, cash flow, the level of our capital expenditures, our future business prospects, our status as a holding company and such other matters that our Board of Directors deems relevant. In addition, the terms of the senior credit facility and of the indentures governing our Senior Notes restrict our ability to pay dividends under certain circumstances. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” herein for further information regarding restrictions on our dividend payments.
Stock Comparative Performance Graph
The following graph compares the cumulative total stockholder return on our Class A Common Stock for the period commencing January 31, 2014 through February 1, 2019 (the last trading date of fiscal 2018) with the cumulative total return on the Standard & Poor’s 500 Stock Index (the “S&P 500”) and the Dow Jones Retailers, Other Specialty Industry Group Index (the “Dow Jones Specialty Retailers Index”) over the same period. Total return values were calculated based on cumulative total return assuming (i) the investment of $100 in our Class A Common Stock, the S&P 500 and the Dow Jones Specialty Retailers Index on January 31, 2014 and (ii) reinvestment of dividends.
The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor should such information be incorporated by reference into any future filings under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference in such filing.
fy18stockgraphxgme.jpg
 
1/31/2014
 
1/30/2015
 
1/29/2016
 
1/27/2017
 
2/2/2018
 
2/1/2019
GME
$
100.00

 
$
104.02

 
$
80.19

 
$
78.41

 
$
56.24

 
$
43.08

S&P 500 Index
$
100.00

 
$
114.21

 
$
113.44

 
$
137.11

 
$
168.40

 
$
168.30

Dow Jones Specialty Retailers Index
$
100.00

 
$
125.19

 
$
128.98

 
$
149.77

 
$
192.75

 
$
220.95


16

ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial and operating data for the periods ended and as of the dates indicated. Our fiscal year is composed of 52 or 53 weeks ending on the Saturday closest to January 31. The fiscal years ended February 2, 2019 ("fiscal 2018"), January 28, 2017 ("fiscal 2016"), January 30, 2016 ("fiscal 2015"), and January 31, 2015 ("fiscal 2014") consisted of 52 weeks. The fiscal year ended February 3, 2018 ("fiscal 2017") consisted of 53 weeks. The “Statement of Operations Data” for fiscal 2018, fiscal 2017 and fiscal 2016 and the “Balance Sheet Data” as of February 2, 2019 and February 3, 2018 are derived from our audited consolidated financial statements which are included elsewhere in this Annual Report. The “Statement of Operations Data” for fiscal 2015 and fiscal 2014, and the “Balance Sheet Data” as of January 28, 2017, January 30, 2016 and January 31, 2015 are derived from unaudited consolidated financial statements not included in this Annual Report. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of this data.
The selected financial data set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K.
 
Fiscal Year
 
2018
 
2017
 
2016
 
2015
 
2014
 
(In millions, except statistical and per share data)
Statement of Operations Data:(1)
 
 
 
 
 
 
 
 
 
Net sales
$
8,285.3

 
$
8,547.1

 
$
7,965.0

 
$
9,018.9

 
$
9,084.0

Cost of sales
5,977.2

 
6,062.2

 
5,465.1

 
6,359.1

 
6,448.0

Gross profit
2,308.1

 
2,484.9

 
2,499.9

 
2,659.8

 
2,636.0

Selling, general and administrative expenses
1,888.6

 
1,909.6

 
1,861.9

 
1,905.5

 
1,906.6

Depreciation and amortization
105.6

 
122.3

 
136.7

 
141.0

 
149.6

Goodwill impairments(2)
970.7

 
—

 
—

 
—

 
—

Asset impairments(3)
45.2

 
13.8

 
19.6

 
4.6

 
2.2

Operating (loss) earnings
(702.0
)
 
439.2

 
481.7

 
608.7

 
577.6

Interest expense, net
51.1

 
55.3

 
53.0

 
23.0

 
10.0

(Loss) earnings from continuing operations before income tax expense
(753.1
)
 
383.9

 
428.7

 
585.7

 
567.6

Income tax expense
41.7

 
153.5

 
124.2

 
206.5

 
198.5

Net (loss) income from continuing operations
(794.8
)
 
230.4

 
304.5

 
379.2

 
369.1

Income (loss) from discontinued operations, net of tax
121.8

 
(195.7
)
 
48.7

 
23.6

 
24.0

Net (loss) income
$
(673.0
)
 
$
34.7

 
$
353.2

 
$
402.8

 
$
393.1

Diluted Per Share Data:(4)
 
 
 
 
 
 
 
 
 
(Loss) earnings per share from continuing operations
$
(7.79
)
 
$
2.27

 
$
2.93

 
$
3.55

 
$
3.26

Earnings (loss) per share from discontinued operations
1.19

 
(1.93
)
 
0.47

 
0.22

 
0.21

Diluted (loss) earnings per share
$
(6.59
)
 
$
0.34

 
$
3.40

 
$
3.78

 
$
3.47

Dividends per common share
$
1.52

 
$
1.52

 
$
1.48

 
$
1.44

 
$
1.32

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
102.1

 
101.4

 
103.4

 
106.0

 
112.2

Diluted
102.1

 
101.5

 
103.8

 
106.7

 
113.2

Store Operating Data:
 
 
 
 
 
 
 
 
 
Comparable store sales (decrease) increase (5)
(0.3
)%
 
5.8
%
 
(11.0
)%
 
4.3
%
 
3.4
%
Inventory turnover
4.5

 
5.0

 
4.7

 
5.3

 
5.2

Number of stores at fiscal year end
5,830

 
5,947

 
6,132

 
6,227

 
6,329

Balance Sheet Data at Fiscal Year End:
 
 
 
 
 
 
 
 
 
Working capital (6)
$
946.6

 
$
478.4

 
$
208.2

 
$
40.5

 
$
387.5

Total assets
$
4,044.3

 
$
5,041.6

 
$
4,975.9

 
$
4,330.3

 
$
4,240.4

Total debt, net (7)
$
820.8

 
$
817.9

 
$
815.0

 
$
345.4

 
$
344.7

Total liabilities
$
2,708.1

 
$
2,827.1

 
$
2,721.8

 
$
2,249.3

 
$
2,172.7

Total stockholders' equity
$
1,336.2

 
$
2,214.5

 
$
2,254.1

 
$
2,081.0

 
$
2,067.7


17

___________________
(1)
We completed the previously announced sale of our Spring Mobile business in January 2019. The historical results of Spring Mobile, including the gain on sale, are reported as discontinued operations for all periods presented.
(2)
In fiscal 2018, we recognized goodwill impairment charges totaling $795.6 million, $28.8 million, $66.4 million and $79.9 million for the United States, Canada, Australia and Europe segments, respectively. See Note 7, "Goodwill and Intangible Assets," to our consolidated financial statements for additional information.
(3)
Asset impairment charges primarily relate to intangible assets and store-level property and equipment. We recognized intangible asset impairment charges totaling $43.1 million, $11.0 million and $14.4 million in fiscal 2018, 2017 and 2016. See Note 7, "Goodwill and Intangible Assets," to our consolidated financial statements for additional information.
(4)
The sum of (loss) earnings per share for continuing operations and discontinued operations may not necessarily total to consolidated (loss) earnings per share as amounts are calculated based on whole numbers.
(5)
Comparable store sales is a measure commonly used in the retail industry and indicates store performance by measuring the growth in sales for certain stores for a particular period over the corresponding period in the prior year. Our comparable store sales are comprised of sales from our video game brands stores, including stand-alone collectible stores, operating for at least 12 full months as well as sales related to our websites and sales we earn from sales of pre-owned merchandise to wholesalers or dealers. Comparable store sales for our international operating segments exclude the effect of changes in foreign currency exchange rates. The calculation of comparable store sales compares the fiscal year ended to the most closely comparable weeks for the prior year period. The method of calculating comparable store sales varies across the retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers’ methods. We believe our calculation of comparable store sales best represents our strategy as an omnichannel retailer who provides its consumers several ways to access its products.
(6)
Net working capital excludes held-for-sale assets and liabilities related to our Spring Mobile business, which was sold in January 2019.
(7)
In March 2016, we issued $475 million aggregate principal of 6.75% unsecured senior notes due in March 2021. In September 2014, we issued $350.0 million aggregate principal of 5.50% unsecured senior notes due in October 2019. On March 4, 2019, we issued a notice of redemption to redeem all of our 2019 Senior Notes on April 4, 2019. See Note 10, "Debt," to our consolidated financial statements for additional information.

18

ITEM 7.
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 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. Certain factors, which may cause actual results to vary materially from these forward-looking statements, accompany such statements or appear elsewhere in this Form 10-K, including the factors disclosed under Part I, Item 1A, “Risk Factors.”
OVERVIEW
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global, multichannel video game and consumer electronics retailer. We operate over 5,800 stores across 14 countries. Our consumer product network also includes www.gamestop.com; Game Informer® magazine, the world's leading print and digital video game publication; and ThinkGeek, www.thinkgeek.com, the premier retailer for the global geek community featuring exclusive and unique video game and pop culture products, and Simply Mac, which sells the full line of Apple products, including laptops, tablets, and smartphones and offers Apple certified warranty and repair services.
We operate our business in four geographic segments: United States, Canada, Australia and Europe. Our former Technology Brands segment had been comprised of Spring Mobile, Simply Mac and Cricket Wireless branded stores ("Cricket Wireless"). Cricket Wireless was sold in January 2018, and Spring Mobile was sold in January 2019. Simply Mac and the historical results of Cricket Wireless are reported in the United States segment in this Annual Report. The historical results of Spring Mobile, including the gain on sale, are reported as discontinued operations for all periods presented in this Annual Report. The discussion and analysis of our results of operations refers to continuing operations unless otherwise noted.
Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. Fiscal year 2018 consisted of the 52 weeks ended on February 2, 2019 ("fiscal 2018"). Fiscal year 2017 consisted of the 53 weeks ended on February 3, 2018 ("fiscal 2017") and fiscal year 2016 consisted of the 52 weeks ended on January 28, 2017 ("fiscal 2016").
Growth in the video 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 include the Sony PlayStation 4 (2013), Microsoft Xbox One (2013) and the Nintendo Switch (March 2017). In 2016, Sony and Microsoft released refreshes to the PlayStation 4 and Xbox One, respectively, and Sony also released the PlayStation VR. In November 2017, Microsoft released a further enhanced version of its current generation console, the Xbox One X.
The sale of video games delivered through digital channels and other forms of gaming continue to grow and take an increasing percentage of physical video game sales. We currently sell various types of products that relate to the digital category, including digitally downloadable content (“DLC”), full-game downloads, Xbox LIVE, PlayStation Plus and Nintendo network points cards, as well as prepaid digital and prepaid subscription cards. We have made significant investments in e-commerce and in-store and website functionality to enable our customers to conveniently access digital content to facilitate the digital sales and delivery process. We continue to invest in these types of processes and channels to grow our digital sales base and enhance our market leadership position in the video game industry and in the digital aggregation and distribution category.
In our discussion of the results of operations, we refer to comparable store sales, which is a measure commonly used in the retail industry and indicates store performance by measuring the growth in sales for certain stores for a particular period over the corresponding period in the prior year. Our comparable store sales are comprised of sales from our video game brands stores, including stand-alone collectible stores, operating for at least 12 full months as well as sales related to our websites and sales we earn from sales of pre-owned merchandise to wholesalers or dealers. Comparable store sales for our international operating segments exclude the effect of changes in foreign currency exchange rates. The calculation of comparable store sales compares the fiscal year ended to the most closely comparable weeks for the prior year period. The method of calculating comparable store sales varies across the retail industry. As a result, our method of calculating comparable store sales may not be the same as other retailers’ methods. We believe our calculation of comparable store sales best represents our strategy as an omnichannel retailer that provides its consumers several ways to access its products.

19



STORE COUNT INFORMATION
The following table presents the number of stores and the number of stores opened, acquired and closed during fiscal 2018:
 
February 3, 2018
 
Opened/Acquired
 
Disposed
 
February 2, 2019
Video Game Stores
5,796

 
24

 
(136
)
 
5,684

Collectibles Stores
103

 
4

 
(4
)
 
103

Simply Mac
48

 
—

 
(5
)
 
43

Total Stores
5,947

 
28

 
(145
)
 
5,830

SEASONALITY
Our business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the fourth quarter which includes the holiday selling season. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other factors, the timing of new product introductions and new store openings, sales contributed by new stores, increases or decreases in comparable store sales, the nature and timing of acquisitions, adverse weather conditions, shifts in the timing of certain holidays or promotions and changes in our merchandise mix.
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: 
 
 
Fiscal Year 2018
 
Fiscal Year 2017
 
Fiscal Year 2016
 
 
Amount
 
Percent of Net Sales
 
Amount
 
Percent of Net Sales
 
Amount
 
Percent of Net Sales
Net sales
 
$
8,285.3

 
100.0
 %
 
$
8,547.1

 
100.0
 %
 
$
7,965.0

 
100.0
%
Cost of sales
 
5,977.2

 
72.1

 
6,062.2

 
70.9

 
5,465.1

 
68.6

Gross profit
 
2,308.1

 
27.9

 
2,484.9

 
29.1

 
2,499.9

 
31.4

Selling, general and administrative expenses
 
1,888.6

 
22.9

 
1,909.6

 
22.4

 
1,861.9

 
23.4

Depreciation and amortization
 
105.6

 
1.3

 
122.3

 
1.4

 
136.7

 
1.7

Goodwill impairments
 
970.7

 
11.7

 
—

 
—

 
—

 
—

Asset impairments
 
45.2

 
0.5

 
13.8

 
0.2

 
19.6

 
0.2

Operating (loss) earnings
 
(702.0
)
 
(8.5
)
 
439.2

 
5.1

 
481.7

 
6.1

Interest expense, net
 
51.1

 
0.6

 
55.3

 
0.6

 
53.0

 
0.7

(Loss) earnings from continuing operations before income taxes
 
(753.1
)
 
(9.1
)
 
383.9

 
4.5

 
428.7

 
5.4

Income tax expense
 
41.7

 
0.5

 
153.5

 
1.8

 
124.2

 
1.6

Net (loss) income from continuing operations
 
(794.8
)
 
(9.6
)
 
230.4

 
2.7

 
304.5

 
3.8

Income (loss) from discontinued operations, net of tax
 
121.8

 
1.5

 
(195.7
)
 
(2.3
)
 
48.7

 
0.6

Net (loss) income
 
$
(673.0
)
 
(8.1
)%
 
$
34.7

 
0.4
 %
 
$
353.2

 
4.4
%
We include certain purchasing, receiving and distribution costs in selling, general and administrative expenses ("SG&A") in the statement of operations. We include processing fees associated with purchases made by check and credit cards in cost of sales 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 SG&A. The net effect of these classifications as a percentage of sales has not historically been material.

20

The following tables set forth, by significant product category, net sales and gross profit information for the periods indicated (dollars in millions):
 
 
Fiscal Year 2018
 
Fiscal Year 2017
 
Fiscal Year 2016
 
 
Net Sales
 
Percent of Net Sales
 
Net Sales
 
Percent of Net Sales
 
Net Sales
 
Percent of Net Sales
New video game hardware(1)
 
$
1,767.8

 
21.3
%
 
$
1,791.8

 
21.0
%
 
$
1,396.7

 
17.5
%
New video game software
 
2,449.7

 
29.6

 
2,582.0

 
30.2

 
2,493.4

 
31.3

Pre-owned and value video game products
 
1,866.3

 
22.5

 
2,149.6

 
25.2

 
2,254.1

 
28.3

Video game accessories
 
956.5

 
11.5

 
784.3

 
9.2

 
676.7

 
8.5

Digital
 
194.0

 
2.3

 
189.2

 
2.2

 
181.0

 
2.3

Collectibles
 
707.5

 
8.5

 
636.2

 
7.4

 
494.1

 
6.2

Other(2)
 
343.5

 
4.3

 
414.0

 
4.8

 
469.0

 
5.9

Total
 
$
8,285.3

 
100.0
%
 
$
8,547.1

 
100.0
%
 
$
7,965.0

 
100.0
%

 
 
Fiscal Year 2018
 
Fiscal Year 2017
 
Fiscal Year 2016
 
 
Gross
Profit
 
Gross
Profit
Percent
 
Gross
Profit
 
Gross
Profit
Percent
 
Gross
Profit
 
Gross
Profit
Percent
New video game hardware(1)
 
$
150.0

 
8.5
%
 
$
163.1

 
9.1
%
 
$
154.2

 
11.0
%
New video game software
 
525.6

 
21.5

 
590.3

 
22.9

 
600.4

 
24.1

Pre-owned and value video game products
 
810.4

 
43.4

 
977.1

 
45.5

 
1,044.1

 
46.3

Video game accessories
 
312.5

 
32.7

 
255.0

 
32.5

 
235.2

 
34.8

Digital
 
171.6

 
88.5

 
162.4

 
85.8

 
155.5

 
85.9

Collectibles
 
233.3

 
33.0

 
208.2

 
32.7

 
171.6

 
34.7

Other(2)
 
104.7

 
30.5

 
128.8

 
31.1

 
138.9

 
29.6

Total
 
$
2,308.1

 
27.9
%
 
$
2,484.9

 
29.1
%
 
$
2,499.9

 
31.4
%
___________________
(1)
Includes sales of hardware bundles, in which physical hardware and digital or physical software are sold together as a single SKU.
(2)
Includes the operations of our Simply Mac stores and Cricket Wireless branded stores. We sold our Cricket Wireless branded stores in January 2018. Also includes sales of PC entertainment software, interactive game figures, strategy guides, mobile and consumer electronics sold through our video game brands, and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in print form.


21

Fiscal 2018 Compared to Fiscal 2017
 
 
Fiscal Year
 
Change
 
 
2018
 
2017
 
$
 
%
 
 
($ in millions)
 
 
 
 
Net sales
 
$
8,285.3

 
$
8,547.1

 
$
(261.8
)
 
(3.1
)%
Cost of sales
 
5,977.2

 
6,062.2

 
(85.0
)
 
(1.4
)
Gross profit
 
2,308.1

 
2,484.9

 
(176.8
)
 
(7.1
)
Selling, general and administrative expenses
 
1,888.6

 
1,909.6

 
(21.0
)
 
(1.1
)
Depreciation and amortization
 
105.6

 
122.3

 
(16.7
)
 
(13.7
)
Goodwill impairments
 
970.7

 
—

 
970.7

 
—

Asset impairments
 
45.2

 
13.8

 
31.4

 
227.5

Operating (loss) earnings
 
(702.0
)
 
439.2

 
(1,141.2
)
 
(259.8
)
Interest expense, net
 
51.1

 
55.3

 
(4.2
)
 
(7.6
)
(Loss) earnings from continuing operations before income taxes
 
(753.1
)
 
383.9

 
(1,137.0
)
 
(296.2
)
Income tax expense
 
41.7

 
153.5

 
(111.8
)
 
(72.8
)
Net (loss) income from continuing operations
 
(794.8
)
 
230.4

 
(1,025.2
)
 
(445.0
)%
Income (loss) from discontinued operations, net of tax
 
121.8

 
(195.7
)
 
317.5

 
(162.2
)%
Net (loss) income
 
$
(673.0
)
 
$
34.7

 
$
(707.7
)
 
(2,039.5
)%
 
 
Net Sales
 
Change
 
 
Fiscal Year 2018
 
Fiscal Year 2017
 
$
 
%
 
 
($ in millions)
 
 
 
 
New video game hardware(1)
 
$
1,767.8

 
$
1,791.8

 
$
(24.0
)
 
(1.3
)%
New video game software
 
2,449.7

 
2,582.0

 
(132.3
)
 
(5.1
)
Pre-owned and value video game products
 
1,866.3

 
2,149.6

 
(283.3
)
 
(13.2
)
Video game accessories
 
956.5

 
784.3

 
172.2

 
22.0

Digital
 
194.0

 
189.2

 
4.8

 
2.5

Collectibles
 
707.5

 
636.2

 
71.3

 
11.2

Other(2)
 
343.5

 
414.0

 
(70.5
)
 
(17.0
)
Total
 
$
8,285.3

 
$
8,547.1

 
$
(261.8
)
 
(3.1
)%
 
 
Gross Profit
 
Change
 
 
Fiscal Year 2018
 
Fiscal Year 2017
 
$
 
%
 
 
($ in millions)
 
 
 
 
New video game hardware(1)
 
$
150.0

 
$
163.1

 
$
(13.1
)
 
(8.0
)%
New video game software
 
525.6

 
590.3

 
(64.7
)
 
(11.0
)
Pre-owned and value video game products
 
810.4

 
977.1

 
(166.7
)
 
(17.1
)
Video game accessories
 
312.5

 
255.0

 
57.5

 
22.5

Digital
 
171.6

 
162.4

 
9.2

 
5.7

Collectibles
 
233.3

 
208.2

 
25.1

 
12.1

Other(2)
 
104.7

 
128.8

 
(24.1
)
 
(18.7
)
Total
 
$
2,308.1

 
$
2,484.9

 
$
(176.8
)
 
(7.1
)%
___________________
(1)
Includes sales of hardware bundles, in which physical hardware and digital or physical software are sold together as a single SKU.
(2)
Includes the operations of our Simply Mac stores and Cricket Wireless branded stores. We sold our Cricket Wireless branded stores in January 2018. Also includes sales of PC entertainment software, interactive game figures, strategy guides, mobile and consumer electronics sold through our video game brands, and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in print form.


22

Net Sales
Net sales decreased $261.8 million, or 3.1%, in fiscal 2018 compared to fiscal 2017. The decrease in net sales was primarily attributable to fiscal 2017 including 53 weeks compared to 52 weeks in fiscal 2018, the impact of 117 store closures (net of openings), the negative impact of foreign exchange rate fluctuations and a decrease in comparable stores sales of 0.3%. Sales for the 53rd week included in fiscal 2017 were approximately $132.7 million. The decrease in comparable store sales was primarily the result of a decrease in sales of pre-owned and value video game products and new video game software, partially offset by an increase in sales of video game accessories and collectibles.
The decrease in net sales was primarily driven by the following:
•
Pre-owned and value video game product sales decreased $283.3 million, or 13.2%, for fiscal 2018 as compared to fiscal 2017. Pre-owned and value video game product sales for the 53rd week included in fiscal 2017 were approximately $37.7 million. The decrease in fiscal 2018 compared to fiscal 2017 was primarily due to a decline in pre-owned software, partially offset by an increase in sales of pre-owned hardware. The decline in pre-owned software sales is primarily due to fewer new title releases and a decline in new video game software sales in the first six months of fiscal 2018, which affects pre-owned inventory levels, weakening demand as a result of increasing digital adoption, including digital access to older titles, and lower promotional activity in fiscal 2018.
•
New video game software sales decreased $132.3 million, or 5.1%, for fiscal 2018 as compared to fiscal 2017. New video game software sales for the 53rd week included in fiscal 2017 were approximately $36.4 million. The decline was primarily due to weaker new title releases in the first six months of fiscal 2018, which was partially offset by an increase in sales of Nintendo Switch titles due to the expansion of the hardware install base and the increase of new release titles.
The decreases described above were partially offset by the following:
•
Video game accessories increased $172.2 million, or 22.0%, for fiscal 2018 as compared to fiscal 2017, due to growth in sales of audio-related and other accessories primarily associated with the battle royale gaming genre.
•
Collectibles sales increased $71.3 million, or 11.2%, for fiscal 2018 as compared to fiscal 2017, primarily driven by new and improved product offerings.
Cost of Sales
Cost of sales decreased $85.0 million, or 1.4%, in fiscal 2018 compared to fiscal 2017, primarily as a result of the change in net sales discussed above as well as the changes in gross profit discussed below.
Gross Profit
Gross profit decreased $176.8 million, or 7.1%, in fiscal 2018 compared to fiscal 2017, and gross profit as a percentage of net sales decreased to 27.9% in fiscal 2018 compared to 29.1% in fiscal 2017. Gross profit for the 53rd week included in fiscal 2017 was approximately $34.7 million. The decrease in gross profit was primarily driven by decreases of $166.7 million in pre-owned and value video game products and $64.7 million in new video game software, which were partially offset by increases of $57.5 million in video game accessories and $25.1 million in collectibles.
The net decrease in gross profit as a percentage of net sales was primarily due to product mix shift between categories and the following product margin rate variances:
•
Pre-owned and value video game products decreased to 43.4% in fiscal 2018 from 45.5% in fiscal 2017 due to a greater mix of sales of pre-owned hardware, which carry lower gross margin than pre-owned software.
•
New video game software decreased to 21.5% in fiscal 2018 from 22.9% in fiscal 2017, primarily due to higher promotional activity in the fiscal 2018 holiday season.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased $21.0 million, or 1.1%, in fiscal 2018 compared to fiscal 2017, primarily due to the impact of the 53rd week in fiscal 2017 and the positive impact of foreign exchange rate fluctuations.
Depreciation and Amortization
Depreciation and amortization expense decreased $16.7 million, or 13.7%, in fiscal 2018 compared to fiscal 2017, primarily due to declining capital expenditures over the past several years.

23

Goodwill and Asset Impairments
During fiscal 2018, we recognized goodwill impairment charges totaling $970.7 million and asset impairment charges totaling $45.2 million. The impairment charges were primarily the result of a sustained decline in our market capitalization and lower forecasted cash flows. During fiscal 2017, we recognized asset impairment charges of $13.8 million, which was primarily comprised of an $11.0 million impairment of our Simply Mac dealer agreement intangible asset. No goodwill impairment charges were recognized during fiscal 2017. See Note 7, “Goodwill and Intangible Assets,” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information.
Income Tax
Income tax expense was $41.7 million, representing an effective tax rate of (5.5)% in fiscal 2018, compared to $153.5 million, representing an effective tax rate of 40.0% in fiscal 2017. The decrease in the effective income tax rate compared to the prior year was primarily driven by non-deductible impairment charges, the settlement of the tax dispute in France, tax reform, revisions to transition taxes and the relative mix of earnings across the jurisdictions within which we operate. See Note 8, "Income Taxes," and Note 12, "Commitments and Contingencies," to our consolidated financial statements included elsewhere in this Annual Report for additional information.
Operating (Loss) Earnings and Net (Loss) Income from Continuing Operations
The factors described above led to an operating loss of $702.0 million for fiscal 2018, compared to operating earnings of $439.2 million for fiscal 2017. Net loss from continuing operations was $794.8 million for fiscal 2018 compared to net income from continuing operations of $230.4 million for fiscal 2017.
Income (Loss) from Discontinued Operations, Net of Tax
On January 16, 2019, we completed the previously announced sale of all of the equity interest in our wholly-owned subsidiary Spring Communications Holding, Inc. ("Spring Mobile") to Prime Acquisition Company, LLC, a wholly-owned subsidiary of Prime Communications, L.P., pursuant to an Equity Purchase Agreement dated as of November 21, 2018. The net cash proceeds received from the sale totaled $727.9 million, which is subject to customary post-closing adjustments. We recognized a gain on sale of $100.8 million ($65.4 million, net of tax) during fiscal 2018. The historical results of Spring Mobile, including the gain on sale, is reported as discontinued operations. Except for customary post-closing adjustments and transition services, we have no contingencies or continuing involvement with Spring Mobile subsequent to the completion of the sale.
Income from discontinued operations, net of tax, totaled $121.8 million in fiscal 2018 compared to a net loss of $195.7 million in fiscal 2017. Income from discontinued operations, net of tax, in fiscal 2018 includes the gain on sale, net of tax, of $65.4 million. Loss from discontinued operations, net of tax, in fiscal 2017 includes goodwill and asset impairment charges totaling $377.0 million. Refer to Note 2, "Discontinued Operations and Dispositions," to our consolidated financial statements for additional information.
Fiscal 2017 Compared to Fiscal 2016
 
 
Fiscal Year
 
Change
 
 
2017
 
2016
 
$
 
%
 
 
($ in millions)
 
 
 
 
Net sales
 
$
8,547.1

 
$
7,965.0

 
$
582.1

 
7.3
 %
Cost of sales
 
6,062.2

 
5,465.1

 
597.1

 
10.9

Gross profit
 
2,484.9

 
2,499.9

 
(15.0
)
 
(0.6
)
Selling, general and administrative expenses
 
1,909.6

 
1,861.9

 
47.7

 
2.6

Depreciation and amortization
 
122.3

 
136.7

 
(14.4
)
 
(10.5
)
Asset impairments
 
13.8

 
19.6

 
(5.8
)
 
(29.6
)
Operating earnings
 
439.2

 
481.7

 
(42.5
)
 
(8.8
)
Interest expense, net
 
55.3

 
53.0

 
2.3

 
4.3

Earnings from continuing operations before income taxes
 
383.9

 
428.7

 
(44.8
)
 
(10.5
)
Income tax expense
 
153.5

 
124.2

 
29.3

 
23.6

Net income from continuing operations
 
230.4

 
304.5

 
(74.1
)
 
(24.3
)
(Loss) income from discontinued operations, net of tax
 
(195.7
)
 
48.7

 
(244.4
)
 
(501.8
)
Net income
 
$
34.7

 
$
353.2

 
$
(318.5
)
 
(90.2
)%

24

 
 
Net Sales
 
Change
 
 
Fiscal Year 2017
 
Fiscal Year 2016
 
$
 
%
 
 
($ in millions)
 
 
 
 
New video game hardware(1)
 
$
1,791.8

 
$
1,396.7

 
$
395.1

 
28.3
 %
New video game software
 
2,582.0

 
2,493.4

 
88.6

 
3.6

Pre-owned and value video game products
 
2,149.6

 
2,254.1

 
(104.5
)
 
(4.6
)
Video game accessories
 
784.3

 
676.7

 
107.6

 
15.9

Digital
 
189.2

 
181.0

 
8.2

 
4.5

Collectibles
 
636.2

 
494.1

 
142.1

 
28.8

Other(2)
 
414.0

 
469.0

 
(55.0
)
 
(11.7
)
Total
 
$
8,547.1

 
$
7,965.0

 
$
582.1

 
7.3
 %
 
 
Gross Profit
 
Change
 
 
Fiscal Year 2017
 
Fiscal Year 2016
 
$
 
%
 
 
($ in millions)
 
 
 
 
New video game hardware(1)
 
$
163.1

 
$
154.2

 
$
8.9

 
5.8
 %
New video game software
 
590.3

 
600.4

 
(10.1
)
 
(1.7
)
Pre-owned and value video game products
 
977.1

 
1,044.1

 
(67.0
)
 
(6.4
)
Video game accessories
 
255.0

 
235.2

 
19.8

 
8.4

Digital
 
162.4

 
155.5

 
6.9

 
4.4

Collectibles
 
208.2

 
171.6

 
36.6

 
21.3

Other(2)
 
128.8

 
138.9

 
(10.1
)
 
(7.3
)
Total
 
$
2,484.9

 
$
2,499.9

 
$
(15.0
)
 
(0.6
)%
___________________
(1)
Includes sales of hardware bundles, in which physical hardware and digital or physical software are sold together as a single SKU.
(2)
Includes the operations of our Simply Mac stores and Cricket Wireless branded stores. We sold our Cricket Wireless branded stores in January 2018. Also includes sales of PC entertainment software, interactive game figures, strategy guides, mobile and consumer electronics sold through our video game brands, and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in print form.
Net Sales
Net sales increased $582.1 million, or 7.3%, in fiscal 2017 compared to fiscal 2016. Sales for the 53rd week included in fiscal 2017 were approximately $132.7 million. The increase in net sales was primarily attributable to an increase in comparable store sales of 5.8% compared to the prior year and the positive impact of foreign exchange rate fluctuations of $104.6 million. The increase in comparable store sales was primarily the result of an increase in sales of new video game hardware, collectibles, video game accessories and new video game software. The increase in sales in collectibles are a result of the Company's diversification strategy. These increases were partially offset by a decrease in sales in pre-owned and value video game products.
The increase in net sales was due to the following:
•
New video game hardware sales increased $395.1 million, or 28.3%, for fiscal 2017 as compared to fiscal 2016, primarily due to the launch of the Nintendo Switch in March 2017, which was partially offset by decreases in sales of other consoles as their cycles mature.
•
Collectibles sales increased $142.1 million, or 28.8%, for fiscal 2017 as compared to fiscal 2016, due to the growth of collectibles sales in our Video Game Brands stores and the growth in the number of stand-alone collectibles stores.
•
Video game accessories increased $107.6 million, or 15.9%, for fiscal 2017 as compared to fiscal 2016, primarily due to the recent release of the Nintendo Switch.
•
New video game software sales increased $88.6 million, or 3.6%, for fiscal 2017 as compared to fiscal 2016, primarily due to the recent release of the Nintendo Switch.
The increases described above were partially offset by a decrease in pre-owned and value video game product sales of $104.5 million, or 4.6%, for fiscal 2017 as compared to fiscal 2016, primarily due to the decrease in store traffic as a result of weaker new release titles mainly in the first half of the current fiscal year.


25

Cost of Sales
Cost of sales increased $597.1 million, or 10.9%, in fiscal 2017 compared to fiscal 2016, primarily as a result of the change in net sales discussed above as well as the changes in gross profit discussed below.
Gross Profit
Gross profit decreased $15.0 million, or 0.6%, in fiscal 2017 compared to fiscal 2016, and gross profit as a percentage of net sales decreased to 29.1% in fiscal 2017 compared to 31.4% in fiscal 2016. The decrease in gross profit was driven by decreases of $67.0 million in pre-owned and value video game products and $10.1 million in new video game software, partially offset by increases of $36.6 million in collectibles and $19.8 million in video game accessories.
The net decrease in gross profit as a percentage of net sales was due to product mix shift between categories and the following product margin rate variances:
•
New video game hardware decreased to 9.1% in fiscal 2017 from 11.0% in fiscal 2016, primarily due to product mix shift in console sales.
•
New video game software decreased to 22.9% in fiscal 2017 from 24.1% in fiscal 2016, primarily due to lower cooperative advertising funds as a percentage of sales combined with higher promotional activity in the fiscal 2017 holiday season.
•
Pre-owned and value video game products decreased to 45.5% in fiscal 2017 from 46.3% in fiscal 2016 due to a greater mix of sales of current generation products, which carry lower gross margin than previous generation products.
•
Video game accessories decreased to 32.5% in fiscal 2017 from 34.8% in fiscal 2016, due to a shift in product mix including PlayStation VR which carry lower margin.
•
Collectibles decreased to 32.7% in fiscal 2017 from 34.7% in fiscal 2016, primarily due to increased promotional activity in the fiscal 2017 holiday season.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") increased $47.7 million, or 2.6%, in fiscal 2017 compared to fiscal 2016. The increase was primarily due to the impact of the 53rd week in fiscal 2017 and the negative impact of foreign exchange rate fluctuations.
Depreciation and Amortization
Depreciation and amortization expense decreased $14.4 million, or 10.5%, in fiscal 2017 compared to fiscal 2016, primarily due to certain corporate assets being fully depreciated and certain intangible assets being fully amortized.
Asset Impairments
During fiscal 2017, we recorded asset impairment charges of $13.8 million, primarily associated with the impairment of Simply Mac's dealer agreement intangible asset. In fiscal 2016, we recognized asset impairment charges primarily consisting of a $7.4 million impairment of our Micromania trade name intangible asset, and a $7.0 million impairment to our Simply Mac dealer agreement intangible asset and $5.2 million impairment to store-level property and equipment . The Micromania trade name is associated with our operations in France.
Income Tax
Income tax expense was $153.5 million, representing an effective tax rate of 40.0% in fiscal 2017, compared to $124.2 million, representing an effective tax rate of 29.0% in fiscal 2016. The increase in the effective income tax rate compared to the prior year was primarily driven by tax reform, the impairment of goodwill, changes in uncertain tax positions and the relative mix of earnings across the jurisdictions in which we operate. Refer to Note 8, "Income Taxes," to our consolidated financial statements for additional information.
Operating Earnings and Net Income from Continuing Operations
The factors described above led to operating earnings of $439.2 million for fiscal 2017, or an 8.8% decrease from operating earnings of $481.7 million for fiscal 2016. Additionally, net income from continuing operations was $230.4 million for fiscal 2017, which represented a 24.3% decrease from net income from continuing operations of $304.5 million for fiscal 2016. The impact of the 53rd week in fiscal 2017 was an increase to operating earnings of approximately $12.0 million.

26

SEGMENT PERFORMANCE
We report our business in four geographic segments: United States, Canada, Australia and Europe. We identified these segments based on a combination of geographic areas, the methods with which we analyze performance, the way in which our sales and profits are derived and how we divide management responsibility. Our sales and profits are driven through our physical stores which are highly integrated with our e-commerce, digital and mobile businesses. Due to this integration, our physical stores are the basis for our segment reporting. Each of the Video Game Brands segments consists primarily of retail operations, with all stores engaged in the sale of new and pre-owned video game systems, software and accessories (which we refer to as video game products). These products are substantially the same regardless of geographic location, with the primary differences in merchandise carried being the timing of the release of new products or technologies in the various segments.
With our presence in international markets, we have operations in several foreign currencies, including the Euro, Australian dollar, New Zealand dollar, Canadian dollar, Swiss franc, Danish kroner, Swedish krona and the Norwegian kroner.
Operating earnings (loss) by operating segment, defined as income from operations before intercompany royalty fees, net interest expense and income taxes, and net sales by reportable segment in U.S. dollars were as follows (in millions):
As of and for the Fiscal Year Ended February 2, 2019
United
States
 
Canada
 
Australia
 
Europe
 
Consolidated
Net sales
$
5,800.2

 
$
434.5

 
$
645.4

 
$
1,405.2

 
$
8,285.3

Goodwill impairments
$
795.6

 
$
28.8

 
$
66.4

 
$
79.9

 
$
970.7

Operating loss
$
(533.9
)
 
$
(19.3
)
 
$
(46.5
)
 
$
(102.3
)
 
$
(702.0
)
Segment Operating data:
 
 
 
 
 
 
 
 
 
Store count
3,846

 
311

 
462

 
1,211

 
5,830

Comparable store sales
1.8
%
 
3.1
%
 
(3.4
)%
 
(7.7
)%
 
(0.3
)%
As of and for the Fiscal Year Ended February 3, 2018
United
States
 
Canada
 
Australia
 
Europe
 
Consolidated
Net sales
$
5,876.0

 
$
434.9

 
$
702.2

 
$
1,534.0

 
$
8,547.1

Operating earnings
$
332.8

 
$
18.5

 
$
34.9

 
$
53.0

 
$
439.2

Segment Operating data:
 
 
 
 
 
 
 
 
 
Store count
3,912

 
321

 
467

 
1,247

 
5,947

Comparable store sales
4.3
%
 
10.0
%
 
8.2
%
 
9.5
%
 
5.8
%
As of and for the Fiscal Year Ended January 28, 2017
United
States
 
Canada
 
Australia
 
Europe
 
Consolidated
Net sales
$
5,660.0

 
$
382.0

 
$
609.5

 
$
1,313.5

 
$
7,965.0

Operating earnings
$
398.4

 
$
22.4

 
$
34.9

 
$
26.0

 
$
481.7

Segment Operating data:
 
 
 
 
 
 
 
 
 
Store count
4,063

 
322

 
464

 
1,283

 
6,132

Comparable store sales
(13.5
)%
 
(12.6
)%
 
(2.0
)%
 
(2.7
)%
 
(11.0
)%
Fiscal 2018 Compared to Fiscal 2017
Video Game Brands
United States
Segment results for the United States include retail operations in 50 states and Guam; our e-commerce websites www.gamestop.com and www.thinkgeek.com; Game Informer magazine; Simply Mac; Kongregate, a web and mobile gaming platform which we sold in July 2017; and Cricket Wireless, which we sold in January 2018. Net sales for fiscal 2018 decreased $75.8 million, or 1.3%, compared to fiscal 2017, primarily due to the impact of the 53rd week in fiscal 2017 of approximately $91.1 million, the impact of 66 store closures (net of openings) and the divestiture of our Cricket Wireless stores in January 2018; which were partially offset by a 1.8% increase in comparable store sales. The increase in comparable store sales was primarily driven by increases in sales of video game accessories, new video game hardware and collectibles. These increases were partially offset by decreases in sales of pre-owned and value video game products and new video game software.


27

The operating loss for fiscal 2018 was $533.9 million compared to operating earnings of $332.8 million for fiscal 2017. The operating loss in fiscal 2018 includes goodwill impairment charges totaling $795.6 million and an intangible asset charge of $11.2 million. Excluding these impairment charges, operating earnings would have declined to $272.9 million for fiscal 2018, primarily as a result of the decline in net sales and gross margin, which were partially offset by lower SG&A expense. The decline in gross margin is primarily due to a shift in sales mix to lower margin categories and higher promotional activity in fiscal 2018.
Canada
Segment results for Canada include retail and e-commerce in Canada. Net sales of $434.5 million for fiscal 2018 was essentially flat compared to net sales of $434.9 million in fiscal 2017. Comparable store sales increased by 3.1%, which was offset by the negative impact of foreign exchange rate fluctuations of $9.2 million and the impact of the 53rd week in fiscal 2017 of approximately $6.4 million. The increase in comparable store sales was primarily driven by increases in sales of collectibles and video game accessories, partially offset by a decline in sales of pre-owned and value video game products and new video game hardware. The operating loss for fiscal 2018 was $19.3 million compared to operating earnings of $18.5 million for fiscal 2017. The operating loss for fiscal 2018 includes goodwill impairment charges totaling $28.8 million. Excluding the goodwill impairment charge, operating earnings would have declined to $9.5 million for fiscal 2018, primarily as a result of a decline in gross profit due to a shift in sales mix to lower margin categories and higher SG&A driven by government-mandated pay increases.
Australia
Segment results for Australia include retail and e-commerce operations in Australia and New Zealand. Net sales for fiscal 2018 decreased $56.8 million, or 8.1%, compared to fiscal 2017. The decrease in net sales was primarily the result of the negative impact of foreign exchange rate fluctuations of $30.6 million, the decrease in comparable store sales of 3.4% and the impact of the 53rd week in fiscal 2017 of approximately $10.1 million. The decrease in comparable store sales was primarily driven by decreases in the sales of new video game software, new video game hardware, collectibles and pre-owned and value video game products; partially offset by an increase in sales of video game accessories. The operating loss for fiscal 2018 was $46.5 million compared to operating earnings of $34.9 million for fiscal 2017. The operating loss for fiscal 2018 includes goodwill impairment charges totaling $66.4 million. Excluding the goodwill impairment charge, operating earnings would have declined to $19.9 million for fiscal 2018, primarily as a result of the decline in net sales.
Europe
Segment results for Europe include retail and e-commerce operations in 10 European countries. Net sales for fiscal 2018 decreased $128.8 million, or 8.4%, compared to fiscal 2017, primarily due to the 7.7% decrease in comparable store sales and the impact of the 53rd week in fiscal 2017 of approximately $25.1 million, partially offset by the positive impact of foreign exchange rate fluctuations of $13.6 million. The decrease in comparable store sales was primarily driven by decreases in sales of new video game hardware, new video game software and pre-owned and value video game products, partially offset by an increase in collectibles sales. The operating loss for fiscal 2018 was $102.3 million compared to operating earnings of $53.0 million for fiscal 2017. The operating loss for fiscal 2018 includes goodwill impairment charges totaling $79.9 million, an intangible asset impairment charge of $31.9 million and the write-off of an investment asset of $6.8 million. Excluding these charges, operating earnings would have declined to $16.3 million for fiscal 2018, primarily as a result of the decline in net sales and higher SG&A expense driven by government-mandates pay increases.
Fiscal 2017 Compared to Fiscal 2016
United States
Segment results for Video Game Brands in the United States include retail GameStop operations in 50 states and Guam, the electronic commerce websites www.gamestop.com and www.thinkgeek.com, Game Informer magazine; Simply Mac; Kongregate, a web and mobile gaming platform which we sold in July 2017; and Cricket Wireless, which we sold in January 2018. Net sales for fiscal 2017 increased $216.0 million, or 3.8%, compared to fiscal 2016, primarily due to the 4.3% increase in comparable store sales and the impact of the 53rd week in fiscal 2017 of approximately $91.1 million. The increase in comparable store sales was primarily driven by the launch of the Nintendo Switch as well as increases in sales of collectibles and video game accessories. These increases were partially offset by a decrease of sales in pre-owned and value video game products. Operating earnings for fiscal 2017 decreased $65.6 million compared to fiscal 2016, primarily driven by declines in gross margin due to a shift in product mix from higher margin pre-owned products to lower margin products, such as hardware, and declines in gross margin rates in several product categories as described previously.

28

Canada
Segment results for Canada include retail and e-commerce in Canada. Net sales in the Canadian segment for fiscal 2017 increased $52.9 million, or 13.8%, compared to fiscal 2016, primarily due to a increase in comparable store sales of 10.0%, the positive impact of foreign exchange rate fluctuations of $11.6 million and the impact of the 53rd week in fiscal 2017 of approximately $6.4 million. The increase in comparable store sales was primarily driven by the launch of the Nintendo Switch as well as an increase in sales of collectibles, partially offset by a decline in sales of pre-owned and value video game products. Operating earnings for fiscal 2017 decreased $3.9 million, or 17.4% primarily driven by a decline in gross profit as a percentage of sales associated with a decline in pre-owned and value video game sales and their gross margin.
Australia
Segment results for Australia include retail and e-commerce operations in Australia and New Zealand. Net sales in the Australian segment for fiscal 2017 increased $92.7 million, or 15.2%, compared to fiscal 2016. The increase in net sales was primarily the result of the increase in comparable store sales of 8.2%, the positive impact of foreign exchange rate fluctuations of $20.6 million, the impact of the 53rd week in fiscal 2017 of approximately $10.1 million. The increase in comparable store sales was primarily driven by the launch of the Nintendo Switch and an increase in the sales of collectibles. Operating earnings for fiscal 2017 were relatively flat at $34.9 million when compared to prior year, as a result of declines in gross profit as a percentage of sales due to a shift in product mix.
Europe
Segment results for Europe include retail and e-commerce operations in 10 European countries. Net sales in the European segment for fiscal 2017 increased $220.5 million, or 16.8%, compared to fiscal 2016, primarily due to the 9.5% increase in comparable store sales, the positive impact of foreign exchange rate fluctuations of $72.4 million and the impact of 53rd week in fiscal 2017 of approximately $25.1 million. The increase in comparable store sales was primarily driven by the launch of the Nintendo Switch and an increase in sales of collectibles, video game accessories and pre-owned and value video game products. Operating earnings for fiscal 2017 increased by $27.0 million compared to the prior year, primarily due to the increase in net sales and a $7.4 million impairment of our Micromania trade name recorded in fiscal 2016.
LIQUIDITY AND CAPITAL RESOURCES
Overview
In September 2018, we announced that our Board of Directors was conducting a comprehensive review of strategic and financial alternatives to enhance stockholder value, including, but not limited to, a potential sale of the Company. On January 29, 2019, we announced that our Board of Directors terminated its efforts to pursue a sale of the Company. As of April 2, 2019, our Board of Directors has concluded its formal review of strategic and financial alternatives. In connection with this review, we have taken the following actions:
•
On January 16, 2019, we completed the sale of Spring Mobile for cash proceeds of $727.9 million, net of transaction costs and preliminary adjustments;
•
On March 4, 2019, we announced that our Board of Directors approved a new $300.0 million share repurchase authorization to replace the previous share repurchase authorization, which had $170.2 million remaining; and
•
We issued a notice of redemption to redeem all of our $350.0 million unsecured senior notes due October 2019. The redemption date will be April 4, 2019, and we expect to use cash on hand.
On an ongoing basis, we evaluate and consider strategic acquisitions, divestitures, repurchasing shares of our common stock or our outstanding debt obligations, as well as other transactions that we believe may enhance stockholder value. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
As of February 2, 2019, we had total cash on hand of $1.6 billion and an additional $385.1 million of available borrowing capacity under our revolving credit facility. Our cash on hand attributable to foreign operations totaled $288.6 million as of February 2, 2019. Although we may, from time to time, evaluate strategies and alternatives with respect to the cash attributable to our foreign operations, we currently anticipate that this cash will remain in those foreign jurisdictions and it therefore may not be available for immediate use in the United States.
Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and funds available under our $420.0 million asset-based revolving credit facility together will provide sufficient liquidity to fund our operations, capital expenditures, store openings and remodeling activities and corporate capital allocation programs, share and debt repurchases and the payment of dividends (if any) declared by the Board of Directors, for at least the next 12 months.


29

Cash Flows
During fiscal 2018, cash provided by operations was $325.1 million, compared to cash provided by operations of $434.9 million in fiscal 2017. The decrease in cash provided by operations of $109.8 million was primarily due to lower earnings, adjusted for non-cash items, in fiscal 2018 compared to the prior year.
During fiscal 2017, cash provided by operations was $434.9 million, compared to cash provided by operations of $537.1 million in fiscal 2016. The decrease in cash provided by operations of $102.2 million from fiscal 2016 to fiscal 2017 was primarily due to the timing of vendor payments and lower earnings in fiscal 2017.
Cash provided by investing activities was $635.5 million in fiscal 2018 compared to cash used in investing activities of $60.6 million in fiscal 2017 and $577.4 million in fiscal 2016. The increase in cash provided by investing activities in fiscal 2018 compared to fiscal 2017 was primarily due to the $727.9 million in proceeds from the sale of Spring Mobile. The decrease in cash used in investing activities in fiscal 2017 compared to 2016 was due to lower acquisition activity and $55.0 million in proceeds from the sale of Kongregate in fiscal 2017. Cash paid for acquisitions totaled $8.5 million in fiscal 2017 and $441.2 million in fiscal 2016 of which the significant majority was related to the Spring Mobile business. We had no acquisitions in fiscal 2018. Capital expenditures totaled $93.7 million, $113.4 million and $142.7 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
In fiscal 2018, our financing activities were a net cash outflow of $174.7 million consisting primarily of dividends paid of $157.4 million and repayment of acquisition-related debt of $12.2 million. The cash flows used in financing activities in fiscal 2017 consisted primarily of dividends paid of $155.2 million, the settlement of share repurchases of $22.0 million that were initiated in fiscal 2016 and repayment of acquisition-related debt of $21.8 million. The cash flows provided by financing activities in fiscal 2016 primarily consisted of $466.9 million in proceeds, net of financing costs, from the issuance of our 2021 Senior Notes, partially offset by dividends paid of $155.5 million and share repurchases of $63.1 million.
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 initiatives. Our cash and cash equivalents are carried at cost and consist primarily of time deposits with commercial banks.
We maintain an asset-based revolving credit facility (the "Revolver") with a borrowing base capacity of $420 million and a maturity date of November 2022. The Revolver has a $200 million expansion feature and $50 million letter of credit sublimit, and allows for an incremental $50 million first-in, last-out facility. The applicable margins for prime rate loans range from 0.25% to 0.50% and, for London Interbank Offered ("LIBO") rate loans, range from 1.25% to 1.50%. The Revolver is secured by substantially all of our assets and the assets of our domestic subsidiaries. We are required to pay a commitment fee of 0.25% for any unused portion of the total commitment under the Amended Revolver. As of February 2, 2019, the applicable margin was 0.25% for prime rate loans and 1.25% for LIBO rate loans. As of February 2, 2019, total availability under the Revolver was $385.1 million, with no outstanding borrowings and outstanding standby letters of credit of $7.2 million.
In March 2016, we issued $475.0 million aggregate principal amount of unsecured 6.75% senior notes due March 15, 2021 (the "2021 Senior Notes"). Interest is payable semi-annually in arrears on March 15 and September 15 of each year. The net proceeds from the offering were used for general corporate purposes, including acquisitions and dividends.
In September 2014, we issued $350.0 million aggregate principal amount of unsecured 5.50% senior notes due October 1, 2019 (the "2019 Senior Notes," and together with the 2021 Senior Notes, the “Senior Notes”). Interest is payable semi-annually in arrears on April 1 and October 1 of each year. The net proceeds from the offering were used for general corporate purposes, including acquisitions and dividends. On March 4, 2019, we issued a notice of redemption to redeem all of our $350.0 million unsecured senior notes due October 2019. The redemption date will be April 4, 2019 and the redemption price will be equal to $1,000 per $1,000 principal amount of the 2019 Senior Notes, representing 100.0% of the aggregate principal amount being redeemed, plus accrued but unpaid interest. We expect to use cash on hand for the redemption of the 2019 Senior Notes.
The agreement governing our Revolver and the indentures governing our Senior Notes place certain restrictions on us and our subsidiaries, including, among others, limitations on asset sales, additional liens, investments, incurrence of additional debt and share repurchases. In addition, the indentures governing our Revolver and Senior Notes contain customary events of default, including, among others, payment defaults, breaches of covenants and certain events of bankruptcy, insolvency and reorganization. The Revolver is also subject to a fixed charge coverage ratio covenant if excess availability is below certain thresholds. We are currently in compliance with all covenants under our indentures governing the Senior Notes and our Revolver.
See Note 10, “Debt,” to our consolidated financial statements for additional information related to our Revolver and Senior Notes.

30

Our Luxembourg subsidiary maintains 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 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 February 2, 2019, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $9.4 million.
Share Repurchase Program
From time to time, we have repurchased our common shares through open market transactions under share repurchase authorizations approved by our Board of Directors. We have not repurchased any shares of common stock since fiscal 2016. Our share repurchase authorizations do not require us to acquire any specific number of shares and may be terminated at any time. Shares repurchased have been subsequently retired. On March 4, 2019, our Board of Directors approved a new share repurchase authorization allowing our management to repurchase up to $300 million of our Class A Common Stock with no expiration date. The new share repurchase authorization replaces the previous share repurchase authorization, which had $170.2 million remaining. We did not repurchase shares during fiscal 2018 or fiscal 2017. Share repurchase activity for fiscal 2016 is as follows (in millions, except for per share data):
 
 
Fiscal Year 2016
Total number of shares purchased
 
3.0

Average price per share
 
$
24.94

Aggregate value of shares purchased
 
$
75.1

Dividends
We paid cash dividends of $157.4 million, $155.2 million and $155.5 million in fiscal 2018, 2017 and 2016. On March 4, 2019, our Board of Directors authorized a quarterly cash dividend of $0.38 per share of Class A Common Stock. The first quarterly dividend of fiscal 2019 was paid on March 29, 2019 to stockholders of record on March 15, 2019. Future dividends will be subject to approval by our Board of Directors. Our payment of dividends is and will continue to be restricted by or subject to, among other limitations, applicable provisions of federal and state laws, our earnings and various business considerations, including our financial condition, results of operations, cash flow, the level of our capital expenditures, our future business prospects, our status as a holding company and such other matters that our Board of Directors deems relevant. In addition, the terms of the senior credit facility and of the indentures governing our Senior Notes restrict our ability to pay dividends under certain circumstances as stated above. See Note 10, "Debt," to our consolidated financial statements for further information regarding our Senior Notes.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations as of February 2, 2019 (in millions):
 
 
Payments Due by Period
 
 
Total
 
Less Than
1 Year
 
1-3 Years
 
3-5 Years
 
More Than
5 Years
Operating leases
 
$
947.0

 
$
296.2

 
$
357.8

 
$
176.8

 
$
116.2

Purchase obligations(1)
 
595.8

 
595.7

 
0.1

 
—

 
—

2019 Senior Notes
 
350.0

 
350.0

 
—

 
—

 
—

2021 Senior Notes
 
475.0

 
—

 
475.0

 
—

 
—

Interest payments on senior notes
 
99.4

 
51.3

 
48.1

 
—

 
—

Total(2)
 
$
2,467.2

 
$
1,293.2

 
$
881.0

 
$
176.8

 
$
116.2

___________________
(1)
Purchase obligations represent outstanding purchase orders for merchandise from vendors. These purchase orders are generally cancelable until shipment of the products.
(2)
As of February 2, 2019, we had $17.7 million of income tax liability related to unrecognized tax benefits in other long-term liabilities in our consolidated balance sheet. At the time of this filing, the settlement period for the noncurrent portion of our income tax liability (and the timing of any related payments) cannot be reasonably determined and therefore these liabilities are excluded from the table above. In addition, certain payments related to unrecognized tax benefits would be partially offset by reductions in payments in other jurisdictions. See Note 8, "Income Taxes," to our consolidated financial statements for further information regarding our uncertain tax positions.
We lease retail stores, warehouse facilities, office space and equipment. These are generally leased under noncancelable agreements that expire at various dates with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for minimum and, in some cases, percentage rentals and require us to pay all insurance, taxes and other maintenance costs. Percentage rentals are based on sales performance in excess of specified minimums at various stores.

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As of February 2, 2019, we had standby letters of credit outstanding in the amount of $7.2 million and had bank guarantees outstanding in the amount of $24.1 million, $8.1 million of which are cash collateralized.
OFF-BALANCE SHEET ARRANGEMENTS
Other than operating leases entered into in the normal course of business, we had no material off-balance sheet arrangements as of February 2, 2019.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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, and actual results could differ from those estimates. Our senior management has discussed the development and selection of these critical accounting policies, as well as the significant accounting policies disclosed in Note 1, "Nature of Operations and Summary of Significant Accounting Policies," to our consolidated financial statements, with the Audit Committee of our Board of Directors. We believe the following accounting policies are the most critical to aid in fully understanding and evaluating our reporting of transactions and events, and the estimates these policies involve require our most difficult, subjective or complex judgments.
Valuation of Merchandise Inventories
Estimate Description. Our merchandise inventories are carried at the lower of cost or market generally using the average cost method. Under the average cost method, as new product is received from vendors, its current cost is added to the existing cost of product on-hand and this amount is re-averaged over the cumulative units. Pre-owned video game products traded in by customers are recorded as inventory at the amount of the store credit given to the customer.
Judgment and/or Uncertainty. In valuing inventory, we are required to make assumptions regarding the necessity of reserves required to value potentially obsolete or over-valued items at the lower of cost or market. We consider quantities on hand, recent sales, potential price protections and returns to vendors, among other factors, when making these assumptions.
Potential Impact if Results Differ. Our ability to gauge these factors is dependent upon our ability to forecast customer demand and to provide a well-balanced merchandise assortment. Any inability to forecast customer demand properly could lead to increased costs associated with write-downs of inventory to reflect volumes or pricing of inventory which we believe represents the net realizable value. A 10% change in our obsolescence reserve percentage at February 2, 2019 would have affected net earnings by approximately $2.6 million in fiscal 2018.
Cash Consideration Received from Vendors
Estimate Description. We participate in cooperative advertising programs and other vendor marketing programs in which our vendors provide us with cash consideration in exchange for marketing and advertising the vendors’ products. The cooperative advertising programs and other vendor marketing programs generally cover a period from a few weeks up to a month and include items such as product in-store display promotions and placement, internet advertising, co-op print advertising and other programs. The allowance for each event is negotiated with the vendor and requires specific performance by us to be earned.
Judgment and/or Uncertainty. Our accounting for cooperative advertising arrangements and other vendor marketing programs results in a significant portion of the consideration received from our vendors reducing the product costs in inventory rather than as an offset to our marketing and advertising costs. The consideration serving as a reduction in inventory is recognized in cost of sales as inventory is sold. We estimate the amount of vendor allowances to be deferred as a reduction of inventory based on the nature of the consideration received and the merchandise inventory to which the consideration relates.
We apply a sell-through rate to determine the timing in which the consideration should be recognized in cost of sales. Consideration received that relates to video game products that have not yet been released to the public is deferred.
Potential Impact if Results Differ. Although we consider our advertising and marketing programs to be effective, we do not believe that we would be able to incur the same level of advertising expenditures if the vendors decreased or discontinued their allowances. Additionally, if actual results are not consistent with our estimated deferrals and sell-through rates, we may be exposed to additional adjustments that could materially impact our gross profit rates and inventory balances. A 10% difference in our vendor allowances deferral at February 2, 2019 would have affected net earnings by approximately $1.8 million in fiscal 2018.


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Customer Liabilities
Estimate Description. Our PowerUp Rewards loyalty program allows enrolled members to earn points on purchases in our stores and on some of our websites that can be redeemed for rewards and discounts. We allocate the transaction price between the product and loyalty points earned based on the relative stand-alone selling prices and expected point redemption. The portion allocated to the loyalty points is initially recorded as deferred revenue and subsequently recognized as revenue upon redemption or expiration. The two primary estimates utilized to record the deferred revenue for loyalty points earned by members are the estimated retail price per point and estimated amount of points that will never be redeemed, which is a concept known in the retail industry as "breakage."
Additionally, we sell gift cards to our customers in our retail stores, through our website and through selected third parties. At the point of sale, a liability is established for the value of the gift card. We recognize revenue from gift cards when the card is redeemed by the customer and recognize estimated breakage on gift cards in proportion to historical redemption patterns, regardless of the age of the unredeemed gift cards.
Judgment and/or Uncertainty. The two primary estimates utilized to record the balance sheet liability for loyalty points earned by members are the estimated redemption rate and the estimated weighted-average retail price per point redeemed. We use historical redemption rates experienced under our loyalty program as a basis for estimating the ultimate redemption rate of points earned. The estimated retail price per point is based on the actual historical retail prices of product purchased through the redemption of loyalty points. We estimate breakage of loyalty points and unredeemed gift cards based on historical redemption rates. A weighted-average retail price per point redeemed is used to estimate the value of our deferred revenue associated with loyalty points. The weighted-average retail price per point redeemed is based on our most recent actual loyalty point redemptions and is adjusted as appropriate for recent changes in redemption values, including the mix of rewards redeemed. Our estimate of the amount and timing of gift card redemptions is based primarily on historical transaction experience.
Potential Impact if Results Differ. We continually evaluate our methodology and assumptions based on developments in redemption patterns, retail price per point redeemed and other factors. Changes in the ultimate redemption rate and weighted-average retail price per point redeemed have the effect of either increasing or decreasing the deferred revenue balance through current period revenue by an amount estimated to cover the retail value of all points previously earned but not yet redeemed by loyalty program members as of the end of the reporting period. A 10% change in our customer loyalty program redemption rate or a 10% change in our weighted-average retail value per point redeemed at February 2, 2019, in each case, would have affected net earnings by approximately $3.4 million in fiscal 2018. A 10% change in our gift card breakage rate at February 2, 2019 would have affected net earnings by approximately $13.9 million in fiscal 2018.
Goodwill
Estimate Description. Goodwill results from acquisitions and represents the excess purchase price over the net identifiable assets acquired. We are required to evaluate our goodwill for impairment at least annually or whenever indicators of impairment are present. Our annual test is completed as of the beginning of the fourth fiscal quarter, and interim tests are conducted when circumstances indicate the carrying value of the goodwill may not be recoverable. As of February 2, 2019, our goodwill totaled $363.9 million. See Note 7, "Goodwill and Intangible Assets," to our consolidated financial statements for the allocation of our goodwill balance by reporting unit. In order to test goodwill for impairment, we compare a reporting unit's carrying amount to its estimated fair value. If the reporting unit’s carrying value exceeds its estimated fair value, then an impairment charge is recorded in the amount of the excess.
Based on the results of our impairment tests performed in fiscal 2018, we recognized goodwill impairment charges totaling $795.6 million, $28.8 million, $66.4 million and $79.9 million for the United States, Canada, Australia and Europe segments, respectively. As of February 2, 2019, the United States is the only remaining segment with goodwill. The impairment charges were primarily the result of a sustained decline in our market capitalization and lower forecasted cash flows. See Note 7, "Goodwill and Intangible Assets" to our consolidated financial statements for additional information.
Judgment and/or Uncertainty. Considerable management judgment is necessary to estimate the fair value of our reporting units. The discounted cash flows analyses utilize a five- to seven-year cash flow projection with a terminal value, which are discounted using a risk-adjusted weighted-average cost of capital. The projected cash flows include numerous assumptions such as, among others, future sales trends, operating margins, store count and capital expenditures, all of which are derived from our long-term financial forecasts. The projected sales trends include estimates related to the growth rate of the digital distribution of new video game software. In addition, we corroborate the aggregate fair value of our reporting units with our market capitalization, which may impact certain assumptions in our discounted cash flows analyses.

33

Potential Impact if Results Differ. Variations in any of the assumptions used in the discounted cash flow analyses may arrive at different estimated fair values that could result in a material impairment charge. Assuming all other factors unchanged, a 10% decrease in the projected net cash flows in our United States segment would result in additional impairment charges of approximately $50 million. Alternatively, assuming all other factors unchanged, an increase of 250 basis points to the discount rates utilized in the test of our United States segment would result in an additional impairment charge of approximately $10 million. Sustained declines in our stock price and related market capitalization could impact key assumptions and the estimated fair values of our reporting units that could result in material goodwill impairment charges. We can provide no assurance that we will not have impairment charges in future periods as a result of changes in our operating results, our assumptions or in our stock price.
Indefinite-lived Intangible Assets
Estimate Description. Indefinite-lived intangible assets were recorded as a result of acquisitions and primarily consist of the Micromania trade name. As this intangible asset is expected to contribute to cash flows indefinitely, it is not subject to amortization. We assess our indefinite-lived intangible assets for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our test is completed as of the beginning of the fourth quarter each fiscal year or whenever there are indicators that the indefinite-lived intangible assets may be impaired.
We value our trade names using a relief-from-royalty approach, which assumes the value of the trade name is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the trade name and instead licensed the trade name from another company. As of February 2, 2019, our indefinite-lived intangible assets totaled $8.8 million.
As a result of our fiscal 2018 impairment tests, we recognized an impairment charge of $31.9 million associated with our Micromania trade name. The impairment charge was primarily the result of increases in discount rate assumptions, consistent with those utilized in the valuation of our segments for goodwill impairment testing. See Note 7, "Goodwill and Intangible Assets" to our consolidated financial statements for additional information.
Judgment and/or Uncertainty. In valuing our trade names, we are required to make certain assumptions regarding future cash flow projections to ensure that such projections represent reasonable market participant assumptions, to which an assumed marked-based royalty rate is applied. Additionally, management judgment is necessary in selecting an appropriate discount rate which is reflective of the inherent risk of holding a standalone intangible asset.
Potential Impact if Results Differ. Regarding our Micromania trade name, assuming all other factors unchanged, a 10% decline in sales in each forecast period, including the terminal period, would not result in an additional impairment charge. Alternatively, assuming all other factors unchanged, an increase of 250 basis points to the discount rate utilized in the test of Micromania trade name would not result in an additional impairment charge either. We can provide no assurance that we will not have impairment charges in future periods as a result of changes in our operating results or our assumptions.
Income Taxes
Estimate Description. We account for income taxes utilizing an asset and liability approach, and deferred taxes are determined based on the estimated future tax effect of differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates. As a result of our operations in many foreign countries, our global tax rate is derived from a combination of applicable tax rates in the various jurisdictions in which we operate. We maintain accruals for uncertain tax positions until examination of the tax year is completed by the taxing authority, available review periods expire or additional facts and circumstances cause us to change our assessment of the appropriate accrual amount. Our liability for uncertain tax positions was $17.7 million as of February 2, 2019.
Additionally, a valuation allowance is recorded against a deferred tax asset if it is not more likely than not that the asset will be realized. Several factors are considered in evaluating the realizability of our deferred tax assets, including the remaining years available for carry forward, the tax laws for the applicable jurisdictions, the future profitability of the specific business units, and tax planning strategies. Our valuation allowance was $32.9 million as of February 2, 2019. See Note 8, "Income Taxes" to our consolidated financial statements for further information regarding income taxes.
Judgment and/or Uncertainty. Considerable management judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulations and taxing authority rulings, as well as to the expiration of statutes of limitations in the jurisdictions in which we operate. We base our estimate of an annual effective tax rate at any given point in time on a calculated mix of the tax rates applicable to our operations and to estimates of the amount of income to be derived in any given jurisdiction. We file our tax returns based on our understanding of the appropriate tax rules and regulations. However, complexities in the tax rules and our operations, as well as positions taken publicly by the taxing authorities, may lead us to conclude that accruals for uncertain tax positions are required. Additionally, several factors are considered in evaluating the realizability of our deferred tax assets, including the remaining years available for carry forward, the tax laws for the applicable jurisdictions, the future profitability of the specific business units, and tax planning strategies.

34

Potential Impact if Results Differ. Our judgments and estimates concerning uncertain tax positions may change as a result of evaluation of new information, such as the outcome of tax audits or changes to or further interpretations of tax laws and regulations. Our judgments and estimates concerning realizability of deferred tax assets could change if any of the evaluation factors change. If such changes take place, there is a risk that our effective tax rate could increase or decrease in any period, impacting our net earnings.
On December 22, 2017, the U.S. government passed the Tax Cuts and Jobs Act, significantly changing income tax law that affects U.S corporations. Key changes included a corporate tax rate reduction from 35 percent to 21 percent effective January 1, 2018, expensing of certain qualified property, significant changes to the U.S international tax system such as a one-time transition tax on accumulated foreign earnings, and how foreign earnings are subject to U.S. tax. We are required to recognize the effects of the tax law changes in the period of enactment, including the determination of the transition tax and the re-measurement of deferred taxes as well as to re-assess the realizability of our deferred tax assets. Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows companies to record provisional amounts related to the effects of the Tax Act during a measurement period not to extend beyond one year of the enactment date. We have since completed our analysis of the income tax effects of the Tax Act. Our provisional estimates were reduced by $22.7 million during the measurement period defined under SAB 118, based upon our analysis of our data and tax positions along with the new guidance from regulators and interpretations of the law.
RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
See Note 1, "Nature of Operations and Summary of Significant Accounting Policies," to our consolidated financial statements for recent accounting standards and pronouncements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk due to foreign currency and interest rate fluctuations, each as described more fully below.
Foreign Currency Risk
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. For the fiscal year ended February 2, 2019, we recognized a $9.6 million gain in selling, general and administrative expenses related to derivative instruments. The aggregate fair value of the foreign currency contracts as of February 2, 2019 was a net liability of $0.2 million as measured by observable inputs obtained from market news reporting 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. A hypothetical strengthening or weakening of 10% in the foreign exchange rates underlying the foreign currency contracts from the market rate as of February 2, 2019 would result in a gain of $5.9 million or a loss of $4.8 million in value of the forwards, options and swaps.
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 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.
Interest Rate Risk
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. Our Senior Notes' per annum interest rate is fixed. We do not use derivative financial instruments to hedge interest rate exposure. We limit our interest rate risks 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. Additionally, a hypothetical 10% adverse movement in interest rates would not have a material impact on our financial condition, results of operations or cash flows and we therefore believe that we do not have significant interest rate exposure.

35



ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a)(1) and (2) of this Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective because of the material weaknesses described below.
Notwithstanding the material weaknesses described below in Management’s Annual Report on Internal Control Over Financial Reporting, management, including the principal executive officer and principal financial officer, believes that the consolidated financial statements included in this Annual Report on Form 10-K fairly present, in all material respects our financial condition, results of operations and cash flows as of and for the periods presented in accordance with GAAP.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP.
A company’s internal control over financial reporting includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as of February 2, 2019, based on the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, known as (COSO). Based on such evaluation, the company’s management concluded that as of February 2, 2019, the Company’s internal control over financial reporting was not effective due to the material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
We have identified design and operating effectiveness deficiencies that constitute a material weakness in the principles associated with the control activities component of the COSO framework. These control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels, (ii) selecting and developing control activities over information technology that contribute to the mitigation of risks and support achievement of objectives and (iii) deploying information technology control activities through policies that establish what is expected and procedures that put policies into action. Specifically, these control deficiencies primarily relate to end-user and privileged access to certain information technology systems that support our financial

36

reporting process. As a result of these deficiencies, the related process-level manual and automated application controls that rely on information generated from the affected information technology systems were also deemed ineffective. These material weaknesses did not result in any identified misstatements to the financial statements, and there were no changes to previously released financial results.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of February 2, 2019. Deloitte & Touche LLP’s opinion, as stated in their report which appears on page F-2 of this Annual Report on Form 10-K, is consistent with management’s report on internal control over financial reporting as set forth above.
Remediation
Our management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, including establishing and improving policies, procedures and control activities primarily associated with end-user and privileged access to certain information technology systems that support our financial reporting process.    
We believe that these actions will remediate the material weaknesses. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of these material weaknesses will be completed by the end of fiscal 2019.
As we implement these remediation efforts, we may determine that additional steps may be necessary to remediate the material weaknesses. We cannot provide assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
Except for identification of the material weaknesses described above, there were no changes during the quarter ended February 2, 2019, in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of GameStop Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of GameStop Corp. and subsidiaries (the “Company”) as of February 2, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of February 2, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the 52 week period ended February 2, 2019, of the Company and our report dated April 2, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment:

Design and operating effectiveness deficiencies that constitute a material weakness in the principles associated with the control activities component of the COSO framework. These control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels, (ii) selecting and developing control activities over information technology that contribute to the mitigation of risks and support achievement of objectives and (iii) deploying information technology control activities through policies that establish what is expected and procedures that put policies into action. Specifically, these control deficiencies primarily relate to end-user and privileged access to certain information technology systems that support the financial reporting process. As a result of these deficiencies, the related process-level manual and automated application controls that rely on information generated from the affected information technology systems were also deemed ineffective.


38

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the 52 week period ended February 2, 2019, of the Company, and this report does not affect our report on such financial statements.


/s/  DELOITTE & TOUCHE LLP
Dallas, Texas
April 2, 2019


39

ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE*
Code of Ethics
We have adopted a Code of Ethics for Senior Financial and Executive Officers that is applicable to our Executive Chairman, Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, any Executive Vice President and any Vice President employed in a finance or accounting role. We have also adopted a Code of Standards, Ethics and Conduct applicable to all of our management-level employees. Each of the Code of Ethics and Code of Standards, Ethics and Conduct are available on our website at www.gamestop.com.
In accordance with SEC rules, we intend to disclose any amendment (other than any technical, administrative, or other non-substantive amendment) to either of the above Codes, or any waiver of any provision thereof with respect to any of the executive officers listed in the paragraph above, on our website (www.gamestop.com) within four business days following such amendment or waiver.
ITEM 11.
EXECUTIVE COMPENSATION*
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*
ITEM 13.