GameStop Quarterly Report: Q3 2016

Key insights

7 takeaways

01
GameStop's Technology Brands segment, which includes Spring Mobile (AT&T/Cricket) and Simply Mac, saw significant growth with gross profit rising to $380.0 million for the 39 weeks ended October 29, 2016, up from $195.8 million in the prior year period.
02
Total gross profit for the 39 weeks ended October 29, 2016, reached $2,001.4 million (36.0% margin), compared to $1,875.1 million (32.1% margin) for the same period in 2015.
03
Interest expense increased by $21.7 million for the 39-week period due to the March 2016 issuance of $475.0 million in 6.75% senior notes due in 2021.
04
The company reported a net decrease in cash and cash equivalents of $94.3 million for the 39 weeks ended October 29, 2016, ending the period with $356.1 million in cash.
05
Comparable store sales for the 39 weeks ended October 29, 2016, declined by 7.6% across the consolidated business, with the U.S. video game segment down 8.9%.
06
Collectibles revenue showed strong growth, contributing $103.0 million in gross profit for the 39 weeks ended October 29, 2016, compared to $56.1 million for the same period in 2015.
07
Depreciation and amortization expenses rose by 9.5% ($10.8 million) for the 39-week period, primarily driven by the acquisition and opening of new stores within the Technology Brands segment.

Summary

GameStop’s financial performance for the third quarter of 2016 reflects a period of strategic transition as the company navigates a maturing console cycle. While net sales declined 2.8% to $1.96 billion compared to the same period in 2015, the company successfully leveraged its diversification strategy to mitigate losses in its core video game segment. Despite lower demand for new hardware and software, gross profit increased by 8% to $708.2 million, largely driven by the rapid expansion of the Technology Brands and collectibles segments.

The company’s operational footprint remains extensive, encompassing 7,586 stores globally. A significant portion of this growth was fueled by the $436.4 million acquisition of 507 AT&T authorized retail stores, which contributed to a 54.4% surge in Technology Brands revenue. To support these capital-intensive initiatives, the company utilized a mix of senior notes and revolving credit facilities. As of October 2016, GameStop maintained $825 million in outstanding senior notes and $391.5 million in available liquidity, remaining in full compliance with all debt covenants.

Financial reporting for this period also highlights adjustments to accounting practices, specifically the anticipation of new lease standards that will significantly alter the balance sheet by increasing reported assets and liabilities. Furthermore, the company faces ongoing regulatory scrutiny, most notably a contested €85.5 million tax reassessment from the French Tax Administration. Despite these challenges and the broader decline in traditional gaming retail, the company maintains a stable financial position, utilizing its diversified portfolio to offset cyclical downturns in the video game industry while continuing to fund long-term growth through strategic acquisitions and share repurchase programs.