GameStop Quarterly Report: Q3 2018

Key insights

7 takeaways

01
GameStop reported a net loss of $24.9 million for the 13-week period ending August 4, 2018, compared to a net income of $22.2 million in the same period of the prior year.
02
Net sales for the 13-week period fell to $1.647 billion from $1.688 billion in the prior year, driven by an 18.5% decline in new video game software sales due to weaker title releases.
03
The company significantly reduced its Technology Brands store footprint, closing 173 locations to reach a total of 1,336 stores as of August 4, 2018, down from 1,509 a year prior.
04
New video game hardware sales grew 20.1% ($49.9 million) and accessories sales increased 30.0% ($43.2 million) during the quarter, bolstered by demand for the Xbox One X, Nintendo Switch, and battle royale-related gear.
05
Pre-owned and value video game product sales declined by $49.7 million, or 9.9%, for the 13-week period compared to the previous year.
06
Effective February 4, 2018, the company adopted a new revenue standard (ASC 606), which changed how it accounts for loyalty program points and gift card breakage, shifting these items from cost of sales to deferred revenue.
07
The company maintains a $420 million asset-based revolving credit facility, which was amended in November 2017 to extend the maturity date to November 2022.

Summary

GameStop experienced a challenging fiscal period during the third quarter of 2018, characterized by a notable decline in financial performance and the initiation of a strategic review to address long-term shareholder value. Net sales for the 13-week period ending August 4, 2018, fell to $1.65 billion, representing a 2.4% decrease compared to the previous year. This downturn resulted in a net loss of $24.9 million, a sharp reversal from the $22.2 million net income reported during the same period in 2017. The decline was primarily driven by weaker performance in new software releases and a reduction in the company’s Technology Brands store portfolio, which offset growth observed in the hardware, accessories, and collectibles segments.

The company’s financial position was further complicated by a $29.6 million charge related to an ongoing tax dispute with the French Tax Administration, which is contesting an €80 million reassessment. Beyond these operational pressures, the firm navigated significant accounting transitions, including the adoption of the ASU 2014-09 revenue recognition standard, which necessitated adjustments to loyalty program and gift card breakage reporting. Management is also preparing for the implementation of new lease accounting standards, which are expected to materially alter the balance sheet by increasing reported assets and liabilities.

Despite maintaining sufficient liquidity through $819.2 million in long-term debt and a $420 million revolving credit facility, the company has formally launched a review of strategic alternatives. This process includes the potential sale of the business, though leadership acknowledges that such an evaluation carries inherent risks, including potential operational disruption and challenges regarding employee retention. As the company continues to assess the impacts of the 2017 Tax Cuts and Jobs Act, its primary focus remains on navigating these fiscal headwinds while exploring avenues to stabilize its international and domestic video game retail segments.