GAMESTOP CORP. 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 disclosures under Part I, Item 1A, "Risk Factors." In Management's Discussion and Analysis of Financial Condition and Results of Operations, we provide a detailed analysis for fiscal 2022 compared to fiscal 2021. For a comparison of our results of operations for fiscal 2021 compared to fiscal 2020, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year endedJanuary 29, 2022 , as filed with theSEC onMarch 17, 2022 . OVERVIEWGameStop Corp. ("GameStop ," "we," "us," "our," or the "Company"), aDelaware corporation established in 1996, is a leading specialty retailer offering games and entertainment products through its thousands of stores and ecommerce platforms. 24 --------------------------------------------------------------------------------
BUSINESS PRIORITIES
The initial phase ofGameStop's transformation largely occurred over the course of 2021 and the first half of 2022. This period was primarily focused on rebuilding the Company's decaying infrastructure and strengtheningGameStop's value proposition, including investing in the Company's enterprise systems, technology capabilities, store leaders and store associates, and product catalog and offerings.GameStop entered a new phase of its transformation during the back half of 2022. As a result,GameStop is focused on three overarching goals: establishing omnichannel retail excellence, achieving profitability, and leveraging brand equity to support growth.
We are taking the following steps, with a significant emphasis on cost containment:
•Improving margins through operational discipline and increased emphasis on higher margin collectibles and pre-owned product categories;
•Ensuring the Company's cost structure is sustainable relative to revenue, including taking steps to optimize our workforce to operate efficiently and nimbly;
•Prudently increasing the size of our addressable market by growing our product catalog across PC gaming, collectibles, consumer electronics, toys, augmented reality, virtual reality and other categories that represent natural extensions of our business; and
•Sustaining a favorable customer experience through seamless in-store and ecommerce platforms and speedy delivery to our customers.
In connection with our cost reduction efforts, we expect to see favorable
impacts to our selling, general, and administrative ("SG&A") expenses in the
quarters to come as we pursue profitability. We also maintain and continue to
strengthen our strong balance sheet.
In our pursuit of profitability we seek to improve the efficiency and
effectiveness of operations across the organization globally. While we expect
our intense focus on expense reductions to yield decreases in SG&A expenses we
continue to explore strategic options, which may include further store closings
and exiting unprofitable businesses. As a result of these actions, we have
incurred and may continue to incur severance, store closure costs and other
related expenses.
By executing on these priorities, we believe we can create a compelling
experience for customers and be positioned to invest pragmatically in growth
initiatives. In May 2022 , we announced the launch of our non-custodial digital
asset wallet to allow gamers and others to store, send, receive, and use
cryptocurrencies and NFTs across decentralized apps. In July 2022 , we launched
our NFT marketplace to allow gamers, creators, collectors and others to buy,
sell and trade NFTs. Our NFT marketplace enables parties to own their digital
assets, which are represented and secured on the blockchain, and allows parties
to connect to their own digital asset wallets to enable transactions. In
November 2022 , we launched the integration of the Immutable X blockchain
protocol, which provides access to various Web 3.0 products and NFT gaming
assets to our customers.
We believe the combination of these efforts to stabilize and optimize our core
business are critical to achieve sustained profitability to enable long-term
value creation for our stockholders.
STORE COUNT INFORMATION
The following table presents the number of stores by segment as of the end of fiscal 2022 compared to the end of fiscal 2021.
January 29, 2022 Openings Disposals January 28, 2023
United States 3,018 - (69) 2,949
Canada 231 - (15) 216
Australia 417 6 (4) 419
Europe 907 2 (80) 829
Total Stores 4,573 8 (168) 4,413
25--------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents certain statement of operations items (in millions) and as a percentage of net sales:
Fiscal 2022 Fiscal 2021 Change
Amount Percent of Amount Percent of $ %
Net Sales Net Sales
Net sales $ 5,927.2 100.0 % $ 6,010.7 100.0 % $ (83.5) (1.4) %
Cost of sales 4,555.1 76.9 4,662.9 77.6 (107.8) (2.3)
Gross profit 1,372.1 23.1 1,347.8 22.4 24.3 1.8
Selling, general, and administrative 1,681.0 28.4 1,709.6 28.4 (28.6) (1.7)
expenses
Asset impairments 2.7 - 6.7 0.1 (4.0) (59.7)
Operating loss (311.6) (5.3) (368.5) (6.1) 56.9 15.4
Interest (income) expense and other, net (9.5) (0.2) 26.9 0.4 (36.4) 135.3
Loss before income taxes (302.1) (5.1) (395.4) (6.6) 93.3 23.6
Income tax expense (benefit) 11.0 0.2 (14.1) (0.2) 25.1 (178.0)
Net loss $ (313.1) (5.3) % $ (381.3) (6.3) % $ 68.2 17.9 %
Net Sales
The following table presents net sales by significant product category:
Fiscal 2022 Fiscal 2021 Change
Net Sales Percent of Net Sales Percent of $ %
Net Sales Net Sales
Hardware and accessories $ 3,140.0 53.0 % $ 3,171.7 52.8 % $ (31.7) (1.0) %
Software 1,822.6 30.7 2,014.8 33.5 (192.2) (9.5)
Collectibles 964.6 16.3 824.2 13.7 140.4 17.0
Total $ 5,927.2 100.0 % $ 6,010.7 100.0 % $ (83.5) (1.4) %
The following table presents net sales by reportable segment:
Fiscal 2022 Fiscal 2021 Change
Net Sales Percent of Net Sales Percent of $ %
Net Sales Net Sales
United States $ 4,093.0 69.1 % $ 4,186.5 69.7 % $ (93.5) (2.2) %
Canada 344.1 5.8 332.3 5.5 11.8 3.6
Australia 588.7 9.9 591.8 9.8 (3.1) (0.5)
Europe 901.4 15.2 900.1 15.0 1.3 0.1
Total $ 5,927.2 100.0 % $ 6,010.7 100.0 % $ (83.5) (1.4) %
26-------------------------------------------------------------------------------- Net sales decreased$83.5 million , or 1.4%, in fiscal 2022 compared to fiscal 2021. Net sales during fiscal 2022 in ourCanada andEurope segments increased by 3.6% and 0.1%, respectively, while net sales in ourUnited States andAustralia segments decreased by 2.2% and 0.5%, respectively, when compared to fiscal 2021. The decrease in consolidated net sales in fiscal 2022 compared to fiscal 2021 was primarily attributable to the translation impact of a strongerU.S. dollar, a decline in sales from new software releases as a result of fewer significant title launches in fiscal 2022, and a decline in sales of video game accessories, partially offset by an increase in sales of new gaming hardware and an increase in sales of toys and collectibles.
Gross Profit
Gross profit increased$24.3 million , or 1.8%, in fiscal 2022 compared to fiscal 2021, and gross profit as a percentage of net sales increased to 23.1% in fiscal 2022 compared to 22.4% in fiscal 2021. The increase in gross profit is primarily attributable to a decrease in freight expense as a result of lower ecommerce volume and added cost optimizations, partially offset by the translation impact of a strongerU.S. dollar.
Selling, General, and Administrative Expenses
SG&A expenses decreased$28.6 million , or 1.7%, in fiscal 2022 compared to fiscal 2021, and SG&A as a percentage of net sales for fiscal 2022 and 2021 remained constant at 28.4%. SG&A expenses decreased primarily due to the translation impact of a strongerU.S. dollar, a decrease in marketing expenses, and reduction in labor-related and consulting service costs driven by our focus on cost structure optimization efforts, and the recognition of deferred income related to our partnership withImmutable X Pty Limited ("IMX").
Asset Impairments
Asset impairments related to store-level assets decreased$4.0 million , or 59.7% in fiscal 2022 compared to fiscal 2021. During fiscal 2022 and 2021, we recognized$2.7 million and$6.7 million , respectively, in asset impairment charges related to store-level assets. See Item 8, Notes to the Consolidated Financial Statements, Note 9 , "Asset Impairments," for additional information related to the impact on our segments.
Interest (Income) Expense and Other, Net
Interest (income) expense and other, net decreased by$36.4 million , or 135.3%, shifting from net interest expense in fiscal 2021 to net interest income in fiscal 2022. The change is primarily due to interest income increasing by$13.1 million in fiscal 2022 as a result of higher returns on invested cash, and interest expense decreasing in fiscal 2022 as a result of lower debt. In the first quarter of fiscal 2021, we repaid$73.2 million aggregate principal of our then outstanding 6.75% Senior Notes due 2021 (the "2021 Senior Notes") and the remaining$216.4 million aggregate principal of our then outstanding 10% Senior Notes due 2023 (the "2023 Senior Notes") including a$17.8 million make-whole premium. Income Tax We recognized an income tax expense of$11.0 million representing an effective tax rate of (3.6)% in fiscal 2022, compared to an income tax benefit of$14.1 million representing an effective tax rate of 3.6% in fiscal 2021. The effective tax rate of (3.6)% in fiscal 2022 is primarily due to not recognizing benefits on certain current period losses, as well as income taxes due in certain foreign and state jurisdictions in which we operate. The effective tax rate of 3.6% in fiscal 2021 is primarily due to not recognizing benefits on certain current period losses, the release of a valuation allowance on deferred tax assets inAustralia and New Zealand , incremental tax benefits recognized in association with the CARES Act, as well as income taxes due in certain foreign and state jurisdictions in which we operate. See Item 8, Notes to the Consolidated Financial Statements, Note 15 , "Income Taxes," for additional information. 27 --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities
January 28, January 29,
2023 2022
Cash and cash equivalents $ 1,139.0 $ 1,271.4
Marketable securities 251.6 -
Cash, cash equivalents and marketable securities
1,271.4
Sources of Liquidity; Uses of Capital
Our principal sources of liquidity are cash from operations, cash on hand, and
borrowings from the capital markets, which include our revolving credit
facilities. As of
Our cash and cash equivalents are carried at fair value and consist primarily ofU.S. government bonds and notes, money market funds, cash deposits with commercial banks, and highly rated direct short-term instruments that mature in 90 days or less. Our marketable securities are also carried at fair value and include investments in certain highly-rated short-term government bonds and notes that mature in less than one year. Our investment policy is designed to preserve principal and liquidity of our short-term investments. InAugust 2022 , the Company opened investment portfolios consisting ofU.S. government treasury notes and bills in an aggregate amount of$250.0 million . As ofJanuary 28, 2023 , the investment portfolios aggregate balance was$252.6 million , of which$251.6 million are recognized in marketable securities and$1.0 million are recognized in cash and cash equivalents on our Consolidated Balance Sheets. In fiscal 2021, we sold an aggregate of 34,000,000 shares of our common stock under our at-the market equity offering program (the "ATM Transactions"). We generated$1.67 billion in aggregate net proceeds from sales under the ATM Transactions. The net proceeds generated from sales under the ATM Transactions have been, and are expected to be, used for working capital and general corporate purposes, including repayment of indebtedness, funding our transformation, growth initiatives and product category expansion efforts, capital expenditures and the satisfaction of our tax withholding obligations upon the vesting of shares of restricted stock held by our executive officers and other employees. Additionally, during fiscal 2021, we repaid the remaining$73.2 million aggregate principal amount of our then outstanding 2021 Senior Notes and the remaining$216.4 million aggregate principal amount of our then outstanding 2023 Senior Notes. Also, in fiscal 2021, the six separate unsecured term loans held by our French subsidiary, Micromania SAS, for a total of €40.0 million were extended for five years. As ofJanuary 28, 2023 , €36.3 million, or$39.5 million , remains outstanding. InNovember 2021 we entered into a credit agreement for a secured asset-based credit facility comprised of a$500 million revolving line of credit which matures inNovember 2026 ("2026 Revolver"). As ofJanuary 28, 2023 , no loan amounts were outstanding under the 2026 Revolver and$119.3 million of standby letters of credit were issued and undrawn under the 2026 Revolver. See Item 8, Notes to the Consolidated Financial Statements, Note 14 , "Debt," for additional information. Separate from the 2026 Revolver, we maintain uncommitted facilities with certain lenders that provide for the issuance of letters of credit and bank guarantees, at times supported by cash collateral. As ofJanuary 28, 2023 , we had bank guarantees outstanding in the amount of$14.5 million outside of the 2026 Revolver, and$57.0 million of collateralized cash which is classified as restricted cash in prepaid expenses and other current assets and other noncurrent assets on our Consolidated Balance Sheets. On an ongoing basis, we evaluate and consider certain strategic operating alternatives, including divestitures, restructuring or dissolution of unprofitable business segments, uses for our excess cash in low-risk, short-term investments, as well as equity and debt financing alternatives that we believe may enhance stockholder value. The nature, amount and timing of any strategic operational change, or financing transactions that we might pursue will depend on a variety of factors, including, as of the applicable time, our available cash and liquidity and operating performance, our commitments and obligations, our capital requirements, limitations imposed under our credit facilities and overall market conditions. 28 -------------------------------------------------------------------------------- Certain vendors have been impacted by volatility in the supply chain financing market. Some of our vendors have requested and may continue to request credit support collateral for our inventory purchase obligations and the levels of such collateral will depend on a variety of factors including our inventory purchase levels, available payment terms for inventories, availability of borrowing capacity under our credit facilities, favorable credit terms and costs of providing collateral.
Cash Flows
The following table presents a summary of our cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows:
2022 2021 Change
Cash provided by (used in) operating activities $ 108.2 $ (434.3) $ 542.5
Cash used in investing activities (222.7) (64.8) (157.9)
Cash (used in) provided by financing activities (7.9) 1,200.6 (1,208.5)
Exchange rate effect on cash, cash equivalents and restricted cash
(1.5) (16.6) 15.1
(Decrease) increase in cash, cash equivalents and
restricted cash $ (123.9) Operating Activities
In fiscal 2022, cash flows provided by operating activities were an inflow of$108.2 million , compared with an outflow of$434.3 million in fiscal 2021. The increase in cash provided by operating activities during fiscal 2022 was primarily due to a reduction in merchandise inventory levels and collection of$176.0 million in tax refunds, partially offset by the impact of our net loss. The reduction in merchandise inventory was due to improved inventory management, including a more disciplined purchasing strategy, more advantageous product mix ahead of the fiscal 2022 holiday season, and an improvement in supply chain constraints. Cash used in operating activities in fiscal 2021 was primarily attributable to an increase in merchandise inventory levels when compared to prior year to, among other things, support our product category expansion efforts, and to mitigate the full impact of global supply chain issues.
Investing activities
In fiscal 2022, cash flows used in investing activities were an outflow of$222.7 million compared to an outflow of$64.8 million in fiscal 2021. Cash used in investing activities during fiscal 2022 was primarily attributable to purchases of marketable securities and ongoing technological investments, partially offset by proceeds from the sale of digital assets and proceeds from the maturity of marketable securities. Cash used in investing activities during fiscal 2021 was primarily attributable to technological investments, and investments in our fulfillment operations.
Financing activities
In fiscal 2022, cash flows from financing activities were an outflow of$7.9 million compared to an inflow of$1.2 billion in fiscal 2021. Cash used in financing activities in fiscal 2022 was primarily attributable to settlement of stock-based awards. Cash provided by financing activities during fiscal 2021 was primarily due to the sale of shares of our common stock in connection with the ATM transactions for aggregate net proceeds of approximately$1.7 billion . These proceeds were partially offset by payments of$136.8 million for withholding obligations upon the vesting of shares of restricted stock, repayment of$73.2 million of our then outstanding 2021 Senior Notes, and the voluntary early redemption of our outstanding 2023 Senior Notes for an aggregate of$234.2 million (inclusive of a$17.8 million make-whole premium). We also repaid$25.0 million of outstanding borrowings under our then existing revolving credit facility in 2021. Share Repurchases
On
We did not repurchase shares during fiscal 2022, fiscal 2021, or fiscal 2020. As
of
OFF-BALANCE SHEET ARRANGEMENTS
We had no material off-balance sheet arrangements as of
Note 16 , "Commitments and Contingencies".
29
--------------------------------------------------------------------------------CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 Item 8, Notes to the Consolidated Financial Statements, Note 2 , "Summary of Significant Accounting Policies," 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 our most difficult, subjective or complex judgments.
Valuation of Merchandise Inventories
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 gaming systems traded in by customers are recorded as inventory at the amount of the store credit given to the customer. 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. 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 atJanuary 28, 2023 would have affected net earnings by approximately$2.5 million in fiscal 2022.
Customer Liabilities
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. 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. We estimate breakage of loyalty points and unredeemed gift cards based on historical redemption rates. 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. 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 atJanuary 28, 2023 , in each case, would have affected net earnings by approximately$2.8 million in fiscal 2022. A 10% change in our gift card breakage rate atJanuary 28, 2023 would have affected net earnings by approximately$11.9 million in fiscal 2022. 30 --------------------------------------------------------------------------------
Income Taxes
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.
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. We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. 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. Based on our analysis, we have determined that it is more likely than not that some portion of our deferred tax assets will not be realized. Our valuation allowances increased to$408.5 million as ofJanuary 28, 2023 , primarily due to cumulative losses in certain jurisdictions. See Item 8, Notes to the Consolidated Financial Statements, Note 15 , "Income Taxes," for additional information. 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$13.2 million as ofJanuary 28, 2023 . 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. 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.
RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
See Item 8, Notes to the Consolidated Financial Statements, Note 3 , "New Accounting Pronouncements," for recent accounting standards and pronouncements.
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