UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
FOR THE QUARTERLY PERIOD ENDED AUGUST 1, 2020
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
COMMISSION FILE NO. 1-32637
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.) | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code:
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ☐ | ☒ | 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 ☒
Number of shares of $.001 par value Class A Common Stock outstanding as of September 2, 2020: 65,161,610
TABLE OF CONTENTS
| Page No. | |||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 6. | |||||||||||
2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par value per share)
| August 1, 2020 | August 3, 2019 | February 1, 2020 | ||||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Receivables, net | ||||||||||||||||||||
| Merchandise inventories, net | ||||||||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||||||||
| Assets held-for-sale | ||||||||||||||||||||
| Total current assets | ||||||||||||||||||||
| Property and equipment, net | ||||||||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||||||||
| Deferred income taxes | ||||||||||||||||||||
| Other noncurrent assets | ||||||||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Accounts payable | $ | $ | $ | |||||||||||||||||
| Accrued liabilities and other current liabilities | ||||||||||||||||||||
| Current portion of operating lease liabilities | ||||||||||||||||||||
| Short-term debt, including current portion of long-term debt, net | ||||||||||||||||||||
| Borrowings under revolving line of credit | ||||||||||||||||||||
| Liabilities held-for-sale | ||||||||||||||||||||
| Total current liabilities | ||||||||||||||||||||
| Long-term debt, net | ||||||||||||||||||||
| Operating lease liabilities | ||||||||||||||||||||
| Other long-term liabilities | ||||||||||||||||||||
| Total liabilities | ||||||||||||||||||||
| Commitments and contingencies (Note 7) | ||||||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||||||
Class A common stock — $ | ||||||||||||||||||||
| Additional paid-in capital | ||||||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ( | |||||||||||||||||
| Retained earnings | ||||||||||||||||||||
| Total stockholders’ equity | ||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | $ | |||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
| 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||
| August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Goodwill and asset impairments | ||||||||||||||||||||||||||
| Gain on sale of assets | ( | ( | ||||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
Loss from continuing operations before income taxes | ( | ( | ( | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | ||||||||||||||||||||||||
| Net loss from continuing operations | ( | ( | ( | ( | ||||||||||||||||||||||
| Loss from discontinued operations, net of tax | ( | ( | ( | ( | ||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Basic loss per share: | ||||||||||||||||||||||||||
| Continuing operations | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Discontinued operations | ( | ( | ( | ( | ||||||||||||||||||||||
| Basic loss per share | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Diluted loss per share: | ||||||||||||||||||||||||||
| Continuing operations | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Discontinued operations | ( | ( | ( | ( | ||||||||||||||||||||||
| Diluted loss per share | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Weighted-average shares outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in millions)
| 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||
| August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | ||||||||||||||||||||||||
| Total comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except for per share data)
| Class A Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive (Loss) Income | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at February 1, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
Settlement of stock-based awards | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Balance at May 2, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | |||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
Settlement of stock-based awards | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Balance at August 1, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Class A Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at February 2, 2019 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
Dividends declared, $ | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
Settlement of stock-based awards | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Balance at May 4, 2019 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Repurchase of common shares | ( | — | ( | — | ( | ( | |||||||||||||||||||||||||||||
| Settlement of stock-based awards | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Balance at August 3, 2019 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| 26 Weeks Ended | ||||||||||||||
| August 1, 2020 | August 3, 2019 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||||||
| Depreciation and amortization (including amounts in cost of sales) | ||||||||||||||
| Goodwill and asset impairments | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||
| Deferred income taxes | ( | |||||||||||||
| (Gain) loss on disposal of property and equipment, net | ( | |||||||||||||
| Other | ( | |||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||
| Receivables, net | ||||||||||||||
| Merchandise inventories | ||||||||||||||
| Prepaid expenses and other current assets | ( | |||||||||||||
| Prepaid income taxes and income taxes payable | ( | |||||||||||||
| Accounts payable and accrued liabilities | ( | ( | ||||||||||||
| Operating lease right-of-use assets and lease liabilities | ( | |||||||||||||
| Changes in other long-term liabilities | ( | |||||||||||||
| Net cash flows provided by (used in) operating activities | ( | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Purchase of property and equipment | ( | ( | ||||||||||||
| Proceeds from sale of property and equipment | ||||||||||||||
| Other | ( | |||||||||||||
| Net cash flows provided by (used in) investing activities | ( | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Repurchase of common shares | ( | |||||||||||||
| Proceeds from French term loans | ||||||||||||||
| Dividends paid | ( | ( | ||||||||||||
| Borrowings from the revolver | ||||||||||||||
| Repayments of revolver borrowings | ( | |||||||||||||
| Repayments of senior notes | ( | ( | ||||||||||||
| Settlement of stock-based awards | ( | ( | ||||||||||||
| Net cash flows provided by (used in) financing activities | ( | |||||||||||||
| Exchange rate effect on cash and cash equivalents and restricted cash | ( | |||||||||||||
| Increase in cash held-for-sale | ( | |||||||||||||
| Increase (decrease) in cash and cash equivalents and restricted cash | ( | |||||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | ||||||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
The Company
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global, multichannel video game, consumer electronics and collectibles retailer. GameStop operates over 5,100 stores across 10 countries. GameStop's consumer product network also includes www.gamestop.com and Game Informer® magazine, the world's leading print and digital video game publication.
GameStop operates its business in four geographic segments: United States, Canada, Australia and Europe. The information contained in these unaudited condensed financial statements refers to continuing operations unless otherwise noted.
Basis of Presentation and Consolidation
The unaudited condensed consolidated financial statements include the Company's accounts and the accounts of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the Company's opinion, necessary for a fair presentation of the information as of and for the periods presented. These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required under GAAP for complete consolidated financial statements.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company's annual report on Form 10-K for the 52 weeks ended February 1, 2020, as filed with the Securities and Exchange Commission on March 27, 2020, (the “2019 Annual Report on Form 10-K”). The preparation of financial statements in conformity with GAAP requires the Company 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, the Company has made its best estimates and judgments of certain amounts included in the financial statements, and changes in the estimates and assumptions used by the Company could have a significant impact on its financial results. Actual results could differ from those estimates. Due to the seasonal nature of the Company's business, the results of operations for the 26 weeks ended August 1, 2020 are not indicative of the results to be expected for the 52 weeks ending January 30, 2021 ("fiscal 2020").
In the Company's consolidated statements of operations, depreciation and amortization of $22.6 45.7 363.9
Significant Accounting Policies
There have been no material changes to the Company's significant accounting policies included in Note 1, "Nature of Operations and Summary of Significant Accounting Policies," within its 2019 Annual Report on Form 10-K.
Restricted Cash
Restricted cash of $23.5 million, $13.7 million and $14.1 million as of August 1, 2020, August 3, 2019 and February 1, 2020, respectively, consists primarily of bank deposits serving as collateral to support landlord and vendor obligations of the Company's foreign subsidiaries and is included in prepaid and other current assets and other noncurrent assets in its unaudited condensed consolidated balance sheets.
6
The following table provides a reconciliation of cash and cash equivalents in the condensed consolidated balance sheets to total cash and cash equivalents and restricted cash in the condensed consolidated statements of cash flows (in millions):
| August 1, 2020 | August 3, 2019 | February 1, 2020 | ||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Restricted cash (included in prepaid expenses and other current assets) | ||||||||||||||||||||
| Restricted cash (included in other noncurrent assets) | ||||||||||||||||||||
| Total cash and cash equivalents and restricted cash in the statements of cash flows | $ | $ | $ | |||||||||||||||||
Assets and Liabilities Held-for-Sale
The Company's corporate aircraft was classified as assets held-for-sale as of February 1, 2020, which had an estimated fair value, less costs to sell, of $11.8 million. The Company recognized impairment charges of $0.5 million and $3.2 million during the 13 and 26 weeks ended August 1, 2020, respectively, which were partially attributable to recent economic impacts associated with the COVID-19 pandemic. On June 5, 2020, the Company completed the sale of its corporate aircraft with net cash proceeds totaling $8.6 million, net of costs to sell. No gain or loss on the sale of the aircraft was recognized.
The assets and liabilities classified as held-for-sale as of August 3, 2019 related to the Company's previously owned Simply Mac business, which was sold to Cool Holdings, Inc. during the third fiscal quarter of 2019. The major classes of assets and liabilities held-for-sale were as follows (in millions):
| August 3, 2019 | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | |||||||
| Receivables, net | ||||||||
| Merchandise inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Total assets held-for-sale | $ | |||||||
| Liabilities: | ||||||||
| Accounts payable | $ | |||||||
| Accrued and other liabilities | ||||||||
| Operating lease liabilities | ||||||||
| Total liabilities held-for-sale | $ | |||||||
Property and Equipment, Net
Accumulated depreciation related to the Company's property and equipment totaled $1,176.5 million, $1,255.3 million and $1,190.1 million as of August 1, 2020, August 3, 2019 and February 1, 2020, respectively.
The Company periodically reviews its property and equipment when events or changes in circumstances indicate that its carrying amounts may not be recoverable or its depreciation or amortization periods should be accelerated. The Company assesses recoverability based on several factors, including its intention with respect to its stores and those stores’ projected undiscounted cash flows. An impairment loss is recognized for the amount by which the carrying amount of the assets exceeds its fair value, determined based on an estimate of discounted future cash flows. Impairment losses were recorded totaling $0.3 million and $1.0 million during the 13 and 26 weeks ended August 1, 2020, respectively. No
Discontinued Operations
During the fourth quarter of fiscal 2018, the Company divested of its Spring Mobile business. The historic results of Spring Mobile are presented as discontinued operations, which primarily consist of residual wind-down costs for all periods presented. The net
7
loss from discontinued operations for the 13 weeks ended August 1, 2020 and August 3, 2019 consisted of $0.4 million and $2.2 million in selling, general and administrative expenses, respectively and $0.1 million and $0.5 million in income tax benefit, respectively. The net loss from discontinued operations for the 26 weeks ended August 1, 2020 and August 3, 2019 consisted of $1.2 million and $3.0 million in selling, general and administrative expenses, respectively and $0.3 million and $0.6 million in income tax benefit, respectively.
Adoption of New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was further updated and clarified by the FASB through the issuance of additional related ASUs. This ASU requires financial assets measured at amortized cost to be presented at the net amount to be collected with the recognition of an allowance for credit losses expected to be incurred over an asset's lifetime based on relevant information about past events, current conditions and reasonable and supportable forecasts. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this new standard, effective February 2, 2020, using the modified-retrospective approach. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is intended to simplify the accounting and disclosure requirements for income taxes by eliminating various exceptions in accounting for income taxes as well as clarifying and amending existing guidance to improve consistency in application of ASC 740. The provisions of ASU 2019-12 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact that ASU 2019-12 will have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides practical expedients for contract modifications with the transition from reference rates, such as LIBOR, that are expected to be discontinued. This guidance is applicable for the Company's revolving line of credit, which uses LIBOR as a reference rate. The provisions of ASU 2020-04 are effective as of March 12, 2020 and may be adopted prospectively through December 31, 2022. The Company is currently evaluating the impact that ASU 2020-04 will have on its consolidated financial statements.
2. COVID-19 Impacts
The near-term macroeconomic conditions continue to be adversely impacted by the emergence of a novel coronavirus, identified as COVID-19, which was declared a global pandemic by the World Health Organization in March 2020. In efforts to mitigate the continued spread of the virus, numerous governments in geographies where the Company operates have imposed quarantines, stay-at-home orders, travel restrictions and other similar measures in attempts to limit physical human interaction, often referred to as social distancing. To comply with these measures, the Company temporarily closed stores in Europe, Canada and New Zealand. In the United States, all storefronts were temporarily closed to customers, however, the Company continued to process orders by offering curbside pick-up, ship from store and e-commerce delivery options in many of its stores. These temporary store closures began in late March 2020 and by the end of fiscal June 2020, 98 % of the Company's stores globally were open to the public following the implementation of the highest level of health and safety protocols recommended by the federal and local health and governmental authorities. GameStop's store locations in Australia remained opened to the public during the 26 weeks ended August 1, 2020 and were not negatively impacted during this period by the COVID-19 restrictions as the Company's other segments and New Zealand. Subsequent to the second quarter of fiscal 2020, approximately 15 % of the Company's stores in Australia were temporarily closed due to an outbreak of COVID-19.
The Company has followed the highest level of health and safety protocols recommended by the federal and local health and governmental authorities and the substantial majority of the Company's stores across the various geographies where it operates were re-opened to the public for the latter portion of the 13 weeks ended August 1, 2020. In addition, many of the Company's stores in the United States continued to offer curbside pick-up, ship from store and e-commerce delivery options during the second quarter of fiscal 2020 while they were open to the public.
Impact on Operating Results and Asset Recoverability
While the gaming industry has not been as severely impacted as certain other consumer businesses, store closures during the stay-at-home orders have adversely impacted the Company's results of operations during the 13 and 26 weeks ended August 1, 2020. As a result, the Company has taken proactive measures to align inventory purchases with demand, reduce discretionary spending and institute temporary pay reductions to partially offset the impact of store closures.
8
During the 26 weeks ended August 1, 2020, the Company incurred $21.4 million to mitigate the impact of the COVID-19 pandemic including incremental wage payments to hourly associates to help offset lost wages due to store closures, enhanced cleaning measures and expanded use of personal protective equipment at its stores, shared service centers and distribution centers across all geographies where the Company operates.
The aggregation of these events caused the Company to reassess potential impairments of long-lived assets, primarily consisting of store-level property and equipment and right-of-use assets under existing operating leases. As a result of this asset impairment analysis, during the 13 and 26 weeks ended August 1, 2020 the Company recognized impairment charges of $0.4 million and $1.6 million, respectively. In addition, during the 13 and 26 weeks ended August 1, 2020, the Company recognized impairment charges of $0.5 million and $3.2 million, respectively, for its corporate aircraft, which were partially attributable to the current economic impacts associated with the COVID-19 pandemic. The corporate aircraft was sold during the second quarter of fiscal 2020 for $8.6 million, net of costs to sell. See Note 1, "General Information" for further details.
During the first and second quarters of fiscal 2020 the Company continued to assess the likelihood of realizing the benefits of its deferred tax assets. The Company estimates its deferred tax assets using several factors, including the weight of available evidence, which takes into consideration cumulative book losses recognized and projections of future taxable income in certain jurisdictions. While the Company's view of the longer-term operating outlook has not been significantly impacted by COVID-19, its ability to recover these deferred tax assets depends on several factors, including the Company's short and long-term results of operations. As a result of this analysis, there remains a valuation allowance primarily associated with U.S. deferred tax assets of $53.0 million as of August 1, 2020. See Note 10, “Income Taxes" for further information.
The Company also evaluated its existing short-term assets, particularly accounts receivable and inventory.
Accounts receivable are mainly comprised of bankcard receivables and vendor allowances. Given the nature of these receivables and the credit worthiness of the applicable payees, the COVID-19 pandemic did not significantly impact the estimates of allowances for doubtful accounts.
Merchandise inventories are carried at the lower of cost or market generally using the average cost method. The Company is required to record valuation adjustments to inventory to reflect potential obsolescence or over-valuation as a result of cost exceeding market. In valuing inventory, the Company considers quantities on hand, recent sales, potential price protections, returns to vendors and other factors. Given the nature of the Company's products and the temporary store closures between March and June 2020, the COVID-19 pandemic did not significantly impact its estimates of inventory valuation.
Liquidity and Other Impacts
As of August 1, 2020, the Company had total cash on hand of $735.1 million and an additional $28.4 million of available borrowing capacity under its $420 million revolving credit facility, which had $35.0 million of outstanding borrowings as of August 1, 2020. The Company's total cash on hand includes $43.2 million proceeds, net of costs to sell and other deductions, from the sale and leaseback of its corporate headquarters, ancillary office space and a nearby refurbishment center in Grapevine, Texas and $8.6 million net proceeds from the sale of the Company's corporate aircraft. See Note 1, "General Information," and Note 5, "Leases," for further information on the sale of the corporate aircraft and the sale and leaseback transactions. As mentioned above, the Company has taken actions to align expenses and inventory levels given the impacts of the current operating environment and has projected it will have adequate liquidity for the next 12 months and the foreseeable future to maintain normal operations. Additionally, during the second quarter of fiscal 2020, the Company completed an exchange offer for its unsecured senior notes due in March 2021 resulting in the replacement of 52 % of such notes for newly issued secured senior notes due in March 2023. See Note 6, "Debt," for further details on the exchange offer and related impacts to scheduled debt maturities.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 pandemic and options to defer the Company's share of Social Security payroll taxes. The Company qualified for the deferral of payroll and other tax payments and, as a result, it has deferred, and continues to defer payroll taxes and other tax payments through the end of the calendar year 2020. The payment of these deferred amounts are required to be made in 2021 and 2022 calendar years. These deferrals are included in accrued liabilities and other current liabilities within the Company's unaudited condensed consolidated balance sheets. In addition, during the second quarter of fiscal 2020, the Company's French subsidiary obtained €20.0 million of unsecured term loans, 90 % of which is guaranteed by the French government pursuant to a state guaranteed loan program instituted in connection with the COVID-19 pandemic. See Note 6, "Debt" for further information.
During the 13 and 26 weeks ended August 1, 2020, the Company received $9.1
9
which represented most of the leases subject to COVID-19-related rent concessions, the Company reduced rent expense in the later of the month in which the landlord issued the rent concession or the month for which the rent concession related. For rent concessions including a deferral of the lease payment, the liability for these rent amounts will remain on the balance sheet until paid.
The COVID-19 pandemic remains an evolving situation and its impact on the Company's business, operating results, cash flows and financial conditions will depend on the geographies impacted by the virus, the ongoing economic effect of the pandemic, the additional economic stimulus programs introduced by governments, and the timing of the post-pandemic economic recovery. Even as the Company continues to comply with all governmental health and safety requirements for its associates and customers while resuming and maintaining full operations, the persistence of the COVID-19 pandemic may require the Company to temporarily close stores again in future periods or introduce modified operating schedules and may impact customer behaviors, including a potential reduction in consumer discretionary spending. These developments could increase asset recovery and valuation risks. Further, the uncertainties in the global economy could impact the financial viability of the Company's suppliers, which may interrupt the Company's supply chain and require other changes to operations. In light of the foregoing, the extent and duration of the COVID-19 pandemic, and responses of governments, customers, suppliers and other third parties, may materially adversely impact the Company's business, financial condition, results of operations and cash flows.
3. Revenue
At the end of fiscal 2019, the Company revised the categories of its similar products, as presented below, to better align with management's view of the business. Prior periods have been reclassified to conform to the current period presentation. Net sales by significant product category for the periods indicated is as follows (in millions):
| 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||
| August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||||||||||||||
Hardware and accessories (1) | $ | $ | $ | $ | ||||||||||||||||||||||
Software (2) | ||||||||||||||||||||||||||
Collectibles | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
__________________________________________________
(1) Includes sales of new and pre-owned hardware, accessories, hardware bundles in which hardware and digital or physical software are sold together in a single SKU, interactive game figures, strategy guides, mobile and consumer electronics, and the operations of Simply Mac stores, which were sold in September 2019.
(2) Includes sales of new and pre-owned video game software, digital software and PC entertainment software.
See Note 9, "Segment Information," for net sales by geographic location.
Performance Obligations
The Company has arrangements with customers where its performance obligations are satisfied over time, which primarily relate to extended warranties and its Game Informer® magazine. Revenues do not include sales tax or other taxes collected from customers. The Company expects to recognize revenue in future periods for remaining performance obligations it has associated with unredeemed gift cards, trade-in credits, reservation deposits and its PowerUp Rewards loyalty program (collectively, "unredeemed customer liabilities"), extended warranties and subscriptions to its Game Informer® magazine.
Performance obligations associated with unredeemed customer liabilities are primarily satisfied at the time customers redeem gift cards, trade-in credits, customer deposits or loyalty program points for products offered by the Company. Unredeemed customer liabilities are generally redeemed within one year of issuance. As of August 1, 2020 and August 3, 2019, the Company's unredeemed customer liabilities totaled $213.0 million and $250.6 million, respectively.
The Company offers extended warranties on certain new and pre-owned video game products with terms generally ranging from 12 to 24 months, depending on the product. Revenues for extended warranties sold are recognized on a straight-line basis over the life of the contract. As of August 1, 2020 and August 3, 2019, the Company's deferred revenue liability related to extended warranties totaled $50.6 million and $63.3 million, respectively.
Performance obligations associated with subscriptions to Game Informer® magazine are satisfied when monthly magazines are delivered in print form or made available in digital format. The significant majority of customer subscriptions are for 12 monthly issues. As of August 1, 2020 and August 3, 2019, the Company had deferred revenue of $29.1 million and $40.6 million, respectively, associated with Game Informer® magazine.
10
Significant Judgments and Estimates
The Company accrues PowerUp Rewards loyalty points at the estimated retail price per point, net of estimated breakage, which can be redeemed by loyalty program members for products offered by the Company. The estimated retail price per point is based on the actual historical retail prices of product(s) purchased through the redemption of loyalty points. The Company estimates breakage of loyalty points and unredeemed gift cards based on historical redemption rates.
Contract Balances
The Company's contract liabilities primarily consist of unredeemed customer liabilities and deferred revenues associated with extended warranties and subscriptions to Game Informer® magazine. The opening balance, current period changes and ending balance of the Company's contract liabilities are as follows (in millions):
| August 1, 2020 | August 3, 2019 | |||||||||||||
| Contract liability beginning balance | $ | $ | ||||||||||||
Increase to contract liabilities (1) | ||||||||||||||
Decrease to contract liabilities (2) | ( | ( | ||||||||||||
Other adjustments (3) | ( | |||||||||||||
| Contract liability ending balance | $ | $ | ||||||||||||
__________________________________________________
(1) Includes issuances of gift cards, trade-in credits and loyalty points, new reservation deposits, new subscriptions to Game Informer® and extended warranties sold.
(2) Includes redemptions of gift cards, trade-in credits, loyalty points and customer deposits as well as revenues recognized for Game Informer® and extended warranties. During the 26 weeks ended August 1, 2020, there were $30.4 million of gift cards redeemed that were outstanding as of February 1, 2020. During the 26 weeks ended August 3, 2019, there were $39.8 million of gift cards redeemed that were outstanding as of February 2, 2019.
(3) Primarily includes foreign currency translation adjustments.
4. Fair Value Measurements and Financial Instruments
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Applicable accounting standards require disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting the Company's assumptions about pricing by market participants.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Assets and liabilities that are measured at fair value on a recurring basis include the Company's foreign currency contracts, Company-owned life insurance policies with a cash surrender value, and certain nonqualified deferred compensation liabilities.
The Company values its foreign currency contracts, life insurance policies with cash surrender values and certain nonqualified deferred compensation liabilities based on Level 2 inputs using quotations provided by major market news services, such as Bloomberg, and industry-standard models that consider various assumptions, including quoted forward prices, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures, all of which are observable in active markets. When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
11
The Company's assets and liabilities measured at fair value on a recurring basis as of August 1, 2020, August 3, 2019 and February 1, 2020, utilize Level 2 inputs and include the following (in millions):
| August 1, 2020 | August 3, 2019 | February 1, 2020 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
Foreign currency contracts(1) | $ | $ | $ | |||||||||||||||||
Company-owned life insurance(2) | ||||||||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||||||
| Liabilities | ||||||||||||||||||||
Foreign currency contracts(3) | $ | $ | $ | |||||||||||||||||
Nonqualified deferred compensation(3) | ||||||||||||||||||||
| Total liabilities | $ | $ | $ | |||||||||||||||||
__________________________________________________
(1) Recognized in prepaid expenses and other current assets in the Company's unaudited condensed consolidated balance sheets.
(2) Recognized in other non-current assets in the Company's unaudited condensed consolidated balance sheets.
(3) Recognized in accrued liabilities and other current liabilities in the Company's unaudited condensed consolidated balance sheets.
The Company uses forward exchange contracts to manage currency risk primarily related to intercompany loans denominated in non-functional currencies. These 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 denominated in foreign currencies. The total gross notional value of derivatives related to the Company's foreign currency contracts was $246.6 million, $223.7 million and $144.6 million as of August 1, 2020, August 3, 2019 and February 1, 2020, respectively.
Activity related to the trading of derivative instruments and the offsetting impact of related intercompany loans denominated in foreign currencies recognized in selling, general and administrative expense is as follows (in millions):
| 13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||||||||||
| August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | |||||||||||||||||||||||
| (Losses) gains on the changes in fair value of derivative instruments | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Gains (losses) on the re-measurement of related intercompany loans denominated in foreign currencies | ( | ( | ||||||||||||||||||||||||
| Net losses | $ | ( | $ | $ | $ | |||||||||||||||||||||
The Company does not use derivative financial instruments for trading or speculative purposes. The Company is exposed to counterparty credit risk on all of its derivative financial instruments and cash equivalent investments. The Company manages counterparty risk according to the guidelines and controls established under comprehensive risk management and investment policies. The Company continuously monitors its counterparty credit risk and utilizes a number of different counterparties to minimize its exposure to potential defaults. The Company does not require collateral under derivative or investment agreements.
Assets that are Measured at Fair Value on a Non-recurring Basis
Assets that are measured at fair value on a non-recurring basis relate primarily to property and equipment and other intangible assets, which are remeasured when the estimated fair value is below its carrying value. For these assets, the Company does not periodically adjust carrying value to fair value; rather, when it determines that impairment has occurred, the carrying value of the asset is reduced to its fair value.
During the 13 and 26 weeks ended August 1, 2020, the Company recognized impairment charges totaling $0.4 million and $1.6 million associated with store-level assets, to reflect their fair values of zero . For further details regarding these store-level impairments, see Note 2, "COVID-19 Impacts." During the 13 and 26 weeks ended August 1, 2020, the Company also recognized impairment charges of $0.5 million and $3.2 million, respectively, related to its corporate aircraft to reflect its fair value of $8.6 million prior to the sale of the aircraft on June 5, 2020.
Other Fair Value Disclosures
The carrying values of the Company's cash equivalents, receivables, net, accounts payable and notes payable approximate their fair values due to their short-term maturities.
12
5. Leases
The Company conducts the substantial majority of its business with leased real estate properties, including retail stores, warehouse facilities and office space. The Company also leases certain equipment and vehicles. These are generally leased under noncancelable agreements and include various renewal options for additional periods. These agreements generally provide for minimum, and in some cases, percentage rentals, and require the Company to pay insurance, taxes and other maintenance costs. Percentage rentals are based on sales performance in excess of specified minimums at various stores and are accounted for in the period in which the amount of percentage rentals can be accurately estimated. All of the Company's lease agreements are classified as operating leases.
Effective February 3, 2019, the Company adopted ASC 842, Leases. Under ASC 842, fixed payments associated with its operating leases are included in operating lease right-of-use ("ROU") assets and both current and noncurrent operating lease liabilities on the balance sheet. The Company determines if an arrangement is considered a lease at inception. ROU assets are recognized on the commencement date based on the present value of future minimum lease payments over the lease term, including reasonably certain renewal options. As the rate implicit in the lease is not readily determinable for most leases, the Company utilizes its incremental borrowing rate ("IBR") to determine the present value of future payments. The incremental borrowing rate represents a significant judgment that is based on an analysis of the Company's credit rating, country risk, corporate bond yields, the effect of collateralization, as well as comparison to its borrowing rates. For real estate leases, the Company does not separate the components of a contract, thus its future payments include minimum rent payments and fixed executory costs. For non-real estate leases, future payments include only fixed minimum rent payments. The Company records the amortization of ROU assets and the accretion of lease liabilities as a single lease cost on a straight-line basis over the lease term, which includes option terms the Company is reasonably certain to exercise. The Company recognizes cash or lease incentives as a reduction to the ROU asset. ROU assets are assessed for impairment in accordance with the Company's long-lived asset impairment policy, which is performed periodically or when events or changes in circumstances indicate that the carrying amount may not be recoverable.
In July of 2020, the Company sold, in separate unrelated transactions, to unaffiliated third parties: i) its corporate headquarters and ancillary office space in Grapevine, Texas for $28.5 million, net of costs to sell and ii) a nearby refurbishment center for $15.2 million, net of costs to sell. The net proceeds from the sale of these assets will be used for general corporate purposes. As a result of these transactions, a gain on sale of assets of $11.3
In connection with each of the sales, the Company leased-back from the applicable purchasers its corporate headquarters for an initial term of ten years , and the ancillary office space and refurbishment center for two years . The leaseback agreement for the corporate headquarters contains three renewal periods of five years each; the Company recognized only the initial term of the lease as part of its right-of-use asset and lease liability for the corporate headquarters. The other facilities do not contain a renewal option. The annual rent for the corporate headquarters will start at $1.7 million, plus taxes, utilities, management fees and other operating and maintenance expenses and will increase by 2.25 % per year. The annual rent for the other facilities will be $1.3 million with no rent escalation, plus taxes, utilities, management fees and other operating and maintenance expenses. These leaseback agreements are accounted for as operating leases.
With respect to the leaseback of the corporate headquarters, the Company agreed to provide a letter of credit to the buyer-lessor within 18 months from the closing date to secure the Company's lease obligation. Given that the purchase price of the corporate headquarters was reduced by $2.8 million to account for the deferred issuance of this letter of credit, as of August 1, 2020 the Company recognized a contract asset for the same amount within “prepaid expenses and other current assets” representing the variable consideration on the purchase price. Upon delivering the letter of credit, the Company will be entitled to a rent credit of an equivalent amount. This variable consideration is included in the total gain on sale of assets recognized during the second quarter of 2020.
Subsequent to the 26 weeks ended August 1, 2020, we sold and leased-back the Company's Australian and Canadian headquarters. See Note 11, "Subsequent Events," for further information.
13
Rent expense under operating leases was as follows (in millions):