UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 2021
☐ 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)
|625 Westport Parkway||76051|
|(Address of principal executive offices)|| ||(Zip Code)|
Registrant’s telephone number, including area code: (817) 424-2000
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading symbol||Name of each exchange |
on which registered
|Class A Common Stock||GME||NYSE|
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 ☒ 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 ☒
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 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 ☒ No ☐
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||☐||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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 762(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of July 31, 2020 was approximately $244.4 million, based upon the closing market price of $4.01 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 17, 2021: 69,935,828
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 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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.
ITEM 1. BUSINESS
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”), a Delaware corporation established in 1996, is a leading specialty retailer offering games and entertainment products through its e-commerce properties and thousands of stores.
Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. Fiscal year 2020 consisted of the 52 weeks ended on January 30, 2021 ("fiscal 2020"). Fiscal year 2019 consisted of the 52 weeks ended on February 1, 2020 ("fiscal 2019") and fiscal year 2018 consisted of the 52 weeks ended on February 2, 2019 ("fiscal 2018").
We operate our business in four geographic segments: United States, Canada, Australia and Europe. We identified these segments based on a combination of geographic areas, which is the basis of how we manage the organization and analyze performance. Our sales and profits are driven through both our physical stores and broad e-commerce capabilities. Each segment consists primarily of retail operations, with the significant majority of our stores and e-commerce properties 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. Through all of our channels, we 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.
As of January 30, 2021, we had a total of 4,816 stores across all of our segments; 3,192 in the United States, 253 in Canada, 417 in Australia and 954 in Europe. Our stores and e-commerce sites operate primarily under the names GameStop® (“GameStop”), EB Games® (“EB Games”) and MicromaniaTM.
Our segments also include 73 pop culture themed stores selling collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers, with 48 collectibles stores in international markets operating under the Zing Pop Culture® brand and 25 stores in the United States operating under the ThinkGeek® brand. Our brands also include Game Informer® (“Game Informer”) magazine, the world's leading print and digital video game publication.
Financial information about our segments is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 17, "Segment Information," of the notes to the consolidated financial statements, included in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.
We categorize our sale of products as follows:
•Hardware and Accessories. We offer new and pre-owned video game platforms from the major console and PC manufacturers. The current generation of consoles include the Sony PlayStation 5 (2020), Microsoft Xbox Series X
(2020) and the Nintendo Switch (2017). Accessories consist primarily of controllers, gaming headsets, virtual reality products and memory cards.
•Software. We offer new and pre-owned video game software for current and certain prior generation consoles. We also sell a wide variety of in-game digital currency, digital downloadable content (“DLC”) and full-game downloads in our stores and e-commerce properties.
•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 and e-commerce properties, and ThinkGeek® and Zing Pop Culture® stores.
We provide our customers with an opportunity to trade-in their pre-owned video game products in our stores in exchange for cash or in-store credit which can be applied towards the purchase of other products. We believe this process drives our higher market share, particularly at new title releases and console launches. We resell these pre-owned video game products, which 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, sanitized, repackaged and redistributed for resale back to our stores and e-commerce properties.
Our retail stores are generally located in strip centers, shopping malls and pedestrian 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. As of January 30, 2021, we offered games and entertainment products in 4,816 stores worldwide.
Domestic Locations. The table below sets forth the number and locations of our domestic stores included in the United States segment as of January 30, 2021:
|Alabama||52 ||Kentucky||64 ||North Dakota||7 |
|Alaska||6 ||Louisiana||59 ||Ohio||145 |
|Arizona||65 ||Maine||7 ||Oklahoma||42 |
|Arkansas||28 ||Maryland||59 ||Oregon||33 |
|California||287 ||Massachusetts||58 ||Pennsylvania||136 |
|Colorado||52 ||Michigan||86 ||Rhode Island||10 |
|Connecticut||33 ||Minnesota||40 ||South Carolina||63 |
|Delaware||14 ||Mississippi||40 ||South Dakota||7 |
|Florida||202 ||Missouri||59 ||Tennessee||85 |
|Georgia||112 ||Montana||10 ||Texas||326 |
|Guam||2 ||Nebraska||19 ||Utah||25 |
|Hawaii||13 ||Nevada||35 ||Vermont||4 |
|Idaho||16 ||New Hampshire||20 ||Virginia||100 |
|Illinois||111 ||New Jersey||87 ||Washington||65 |
|Indiana||80 ||New Mexico||22 ||West Virginia||25 |
|Iowa||26 ||New York||151 ||Wisconsin||48 |
|Kansas||29 ||North Carolina||121 ||Wyoming||6 |
|Total Domestic Stores||3,192 |
International Locations. The table below sets forth the number and locations of our international stores included in our segments in Canada, Europe and Australia as of January 30, 2021:
| Total Stores - Canada||253 |
|New Zealand||42 |
|Total Stores - Australia||417 |
|Total Stores - Europe||954 |
|Total International Stores||1,624 |
Business and Growth Strategies
In 2019, we announced our multi-year transformation initiative, which we refer to as GameStop Reboot to position GameStop on a strategic path to fully leverage our unique position and brand in gaming. Our strategic plan is designed to stabilize and optimize our core business while at the same time pursuing strategic initiatives to transform GameStop for the future by expanding our addressable market and product offerings to drive growth in the gaming and entertainment industries. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Business Strategy.”
We utilize cash generated from operations, cash on hand and funds available to us under our revolving credit facility to fund our operations and in 2019 and 2020, Reboot transformation initiatives. We may also fund our operations and potential costs related to the acceleration of future transformation initiatives, such as product catalogue expansion efforts, as circumstances warrant, from other sources of capital, including sales of our equity and debt securities. In December 2020, we established an "at-the-market" offering program (the "ATM Program") that provides for the sale of shares of our Class A Common Stock having an aggregate offering price of up to $100 million, from time to time, through Jeffries LLC, as the sales agent under the ATM Program. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” Through the date of this Form 10-K, we have not sold any shares of our Class A Common Stock under the ATM Program. Since January 2021, we have been evaluating whether to increase the size of the ATM Program and whether to potentially sell shares of our Class A Common Stock under the increased ATM Program during the course of fiscal 2021, primarily to fund the acceleration of our future transformation initiatives and general working capital needs. The timing and amount of sales under the ATM Program would depend on, among other factors, our capital needs and alternative sources and costs of capital available to us, market perceptions about us, and the then current trading price of our Class A Common Stock.
We operate loyalty programs in each of the countries in which we operate our stores. Our U.S. loyalty program, called PowerUp Rewards® ("PowerUp Rewards"), had approximately 47.1 million members as of January 30, 2021, of which approximately 15.2 million members have purchased or traded at GameStop® in the past year. The PowerUp Rewards membership totals include 4.4 million paying members. Our loyalty programs in our video game stores in the remaining countries had approximately 22.8 million members as of January 30, 2021. 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 generally include a subscription to Game Informer® magazine and additional discounts and benefits in our stores and e-commerce properties.
We publish Game Informer®, the world’s leading video game publication featuring reviews of new title releases, game tips and news regarding current developments in the video game industry. Print and digital versions of the magazine are sold through
subscriptions, digitally and through displays in our domestic and international stores. 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 and other international version results from Game Informer® operations are included in the segment in which the sales are generated.
We purchase our new products worldwide from a broad number of manufacturers, software publishers and distributors. Purchases from the top ten vendors accounted for approximately 79% of our new product purchases in fiscal 2020. Nintendo, Sony, Microsoft, U&I Entertainment and Ubisoft Entertainment accounted for 31%, 22%, 9%, 3% and 3%, respectively, of our new product purchases during fiscal 2020. We have established price protections and return rights with our primary video game product vendors in order to reduce our risk of inventory obsolescence.
In addition, we 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 for our customers to purchase what they want and how and when they want it. We use our distribution facilities, store locations, and inventory management systems to optimize the efficiency of the flow of products to our stores and customers, enhance fulfillment efficiency and optimize in-stock and overall investment in inventory. In 2020, we introduced same day delivery service in certain markets to enhance the customer shopping and delivery experience. See Item 1A. Risk Factors -- Risks Related to Our Ability to Grow Our Business – “We depend on third-party delivery services to deliver products to our retail locations, processing centers and customers on a timely and consistent basis, and deterioration in our relationship with these third-party providers or increases in the fees that they charge could reduce our margins, harm our reputation and adversely affect our business and financial condition.”
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 related 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 and 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”); Best Buy Co., Inc. ("Best Buy") and Amazon.com, Inc. (“Amazon.com”), 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 JB HiFi stores, Big W, and Target.
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 console video game products was approximately $18.0 billion in 2020 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 DFC, 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 approximately $26.0 billion in 2020.
Our business, like that of many retailers, is seasonal, with a major portion of our sales and operating profit realized during the fourth fiscal quarter, which includes the holiday selling season. During fiscal 2020 and 2019, we generated approximately 42% and 34%, respectively, of our sales during the fourth quarter.
We have a number of trademarks and servicemarks, including “GameStop®,” “Game Informer®,” “EB Games®,” “Electronics Boutique®,” “ThinkGeek®,” “Zing Pop Culture®,” “Power to the Players®” 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 “MicromaniaTM,” 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.
We believe our business model provides our associates with many opportunities to develop and grow their careers at GameStop. We are committed to the ongoing talent development of all GameStop associates and offer rewarding learning opportunities through our proprietary training programs and high-potential talent development programs as well as educational assistance programs. At GameStop, we advocate working actively to build understanding and collaboration across our family of brands. We believe a more diverse workforce provides many benefits in drawing upon a greater richness of resources, experiences, ideas and talents. We believe these measures help us retain our associates and attract new talent to support our strategy.
We have approximately 12,000 full-time salaried and hourly associates and between 17,000 and 23,000 part-time hourly associates worldwide, depending on the time of year. The number of part-time hourly associates fluctuates due to the seasonality of our business. We believe that our relationship with our associates is good.
Given our global operations, we monitor local labor and employment laws in order to offer our associates wages and benefits packages that are in line with respective local labor markets and laws. While some of our international associates are covered by collective bargaining agreements, none of our U.S. associates are represented by a labor union or are members of a collective bargaining unit.
In response to the COVID-19 pandemic, we prioritized the health and safety of our associates and implemented significant changes that we determined were in the best interests of our associates as well as the communities in which we operate. These changes included encouraging the vast majority of our corporate associates to work from home, while implementing additional safety measures for associates continuing critical on-site work. During fiscal year 2020, we incurred approximately $25 million in costs to mitigate the impact of the COVID-19 pandemic including costs related to 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 our stores, shared service centers and distribution centers across all geographies where we operate. We anticipate that we will continue to incur these costs well into the fiscal year 2021.
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 2020 alone, through our U.S. refurbishment center, we refurbished over 2.7 million pieces of software (CDs) and over 2.2 million consumer electronic devices, and recycled over 0.5 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 our baseline year of 2009, as well as a 20% reduction in year over year carbon emissions achieved through both operational reductions and renewable sourcing. See the Social Responsibility section of our corporate website (http://news.gamestop.com/social-responsibility) for further information on our sustainability efforts. We are not incorporating by reference into this Form 10-K information or materials contained on our website or that can be accessed through our website.
We make available on our corporate website (http://news.gamestop.com), under “Investor Relations — Financial Information,” 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. Any amendments to or waivers of our Code of Standards, Ethics and Conduct or our Code of Ethics for Senior Financial and Executive Officers that apply to our principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions and that relate to any matter enumerated in Item 406(b) of Regulation S-K promulgated by the SEC will be disclosed on our
website. 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 Class A Common Stock and the value of your investment.
Risks Related to Our Ability to Grow Our Business
Macroeconomic pressures in the markets in which we operate, including, but not limited to, the effects of the COVID-19 pandemic may adversely affect consumer spending and our financial results.
To varying degrees, our products are sensitive to changes in macroeconomic conditions that impact consumer spending. As a result, consumers may be affected in many different ways, including for example:
•their determination of whether or not to make a purchase;
•their choice of brand, model or price-point; and
•how frequently they upgrade or replace their gaming products.
Real GDP growth, consumer confidence, the COVID-19 pandemic discussed in the following risk factor, inflation, employment levels, oil prices, interest rates, tax rates, housing market conditions, foreign currency exchange rate fluctuations, costs for items such as fuel and food and other macroeconomic trends can adversely affect consumer demand for the products and services that we offer. Geopolitical issues around the world and how our markets are positioned can also impact the macroeconomic conditions and could have a material adverse impact on our financial results.
The impact of the COVID-19 pandemic has had, and is expected to continue to have, an adverse effect on our business and our financial results.
The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains and created significant volatility and disruption of financial markets. The COVID-19 pandemic has had and is expected to continue to have an adverse effect on our business and financial performance. The extent of the impact of the COVID-19 pandemic, including our ability to execute our business strategies as planned, will depend on future developments, including the duration and severity of the pandemic, which are highly uncertain and cannot be predicted.
In response to mandates and/or recommendations from federal, state and local authorities, across all of the countries in which we operate, as well as decisions we have made to protect the health and safety of our associates and consumers with respect to the COVID-19 pandemic, we have temporarily closed or reduced operations and are continuing to do so in many of our stores. Throughout fiscal 2020, we temporarily closed stores at various times across our U.S., Europe, Canada and Australia regions.
As a result of these closures and reductions, we may reduce hours of a significant number of our associates. We may face store closure requirements and other operation restrictions with respect to some or all of our physical locations for prolonged periods of time due to, among other factors, evolving and stringent public health directives, quarantine policies, social distancing measures, or other governmental restrictions, which could have a further material impact on our sales and profits.
Concerns have rapidly grown regarding the COVID-19 pandemic. Consumer fears about exposure to the coronavirus may continue, which will adversely affect traffic to our stores. Consumer spending generally may also be negatively impacted by general macroeconomic conditions and consumer confidence, including the impacts of any recession, resulting from the COVID-19 pandemic or other economic events. This may negatively impact sales at our stores and on our websites. Any reduction in customer visits to our stores, and/or spending at our stores or on our websites, will likely result in a loss of sales and profits and other material adverse effects.
The COVID-19 pandemic could impact our supply chain for products we sell, particularly as a result of mandatory shutdowns in locations where our products are manufactured or held for distribution. We could also see significant disruptions of the operations of our logistics service providers, delays in shipments and negative impacts to pricing of certain of our products. Certain “big box” retailers with which we compete in the gaming market remained open during the shelter-in-place phase of the pandemic, and we believe this allowed such competitors to gain market share.
In addition, we have incurred, and expect to continue to incur costs in our response to the COVID-19 pandemic that we expect to be significant in total, including, but not limited to, costs incurred to implement operational changes adopted in response to the COVID-19 pandemic and certain payments to or other costs related to associates who were not working as a result of the pandemic. If we do not respond appropriately to the pandemic, or if customers do not perceive our response to be
adequate for a particular region or our company as a whole, we could suffer damage to our reputation and our brand, which could adversely affect our business in the future.
We have taken certain actions and may take additional actions with respect to many of our existing leases during the COVID-19 pandemic, including negotiating with landlords for rent abatement or deferral, terminating certain leases, or discontinuing rent payments, which may subject us to legal, reputational and financial risks. We can provide no assurances that any rent deferrals or abatements will be provided to us.
The COVID-19 pandemic could also adversely affect our liquidity and ability to access the capital markets. Uncertainty regarding the duration of the COVID-19 pandemic may adversely impact our ability to raise additional capital, or require additional capital, or require additional reductions in capital expenditures that are otherwise needed to implement our strategies. While our business is seasonal and we typically anticipate cash usage in the first half of our fiscal year, such usage could continue for a longer duration if the severity of the pandemic does not abate. In September 2020, Standard and Poor’s Ratings Service affirmed their corporate credit rating of us at B- with a stable outlook. In July 2020, Moody’s Investors Service upgraded their corporate credit rating of us from Caa1 to B3 stable outlook. These current ratings, and any potential future downgrade in our credit ratings, could result in reduced access to the credit and capital markets, more restrictive covenants in documents governing future financial instruments and higher interest costs, and potentially increased lease costs. Furthermore, as a result of the impact of the COVID-19 pandemic on our financial performance, we expect in future periods that our ability to borrow under our revolving credit facility will continue to be reduced to the extent that an additional borrowing or letter of credit would trigger the financial covenant if we would not be in compliance with such covenant at such time.
The extent of the impact of the COVID-19 pandemic on our business and financial results will also depend on future developments, including the duration and spread of the pandemic, the implementation or recurrence of shelter in place or similar orders in the future, its impact on the financial markets in which we operate and spread to other regions, new information that may emerge concerning the severity of the coronavirus and the related impact on consumer confidence and spending, all of which are highly uncertain. Therefore, we cannot reasonably estimate the full extent of the COVID-19 pandemic’s impact on our business and financial results.
Economic, social and political conditions or civil unrest in the U.S. and in certain international markets could adversely affect demand for the products we sell and the ability of our stores to remain open.
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 and other factors outside our 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, the occurrence of civil unrest, and the effect of weather, natural disasters, public health crises, including the COVID-19 pandemic and the related reduced consumer demand, decreased sales and widespread temporary closures. Adverse economic changes in any of the regions in which we sell our products could reduce consumer confidence. The extent to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. Socio-political factors, such as civil unrest or other economic or political uncertainties that contribute to consumer unease or harm to our store base, may also result in decreased discretionary spending. These and other social, political and economic factors could adversely affect demand for our products or cause certain of our stores to close, which would 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. A new console cycle began with the launch of the Sony PlayStation 5 in November 2020, the Microsoft Xbox Series X in November 2020, and the Nintendo Switch in March 2017.
The COVID-19 pandemic could potentially cause material disruptions or delays in our supply chains that develop, manufacture and distribute new consoles and other products we sell. Such disruptions could result in lower levels of sales of next generation consoles as well as the accompanying video games and other products we sell, which could have a material adverse impact on our financial results.
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. Any reduction in allocation of new hardware
platforms or titles by vendors in preference to competitors, such as big box retailers, could have a material adverse impact on our financial results.
Disruptions and delays in our supply chains as a result of severe weather, natural disasters, information technology upgrades, operating issues, public health crises, pandemics, including the COVID-19 pandemic, or other unanticipated events could continue to adversely impact manufacturers’ and publishers’ ability to meet our customer demand. Additionally, the prioritization of shipments of certain products as a result of the pandemic could cause delays in the shipment or delivery of our products. Such disruptions could result in reduced sales.
Technological advances in the delivery and types of video games and PC entertainment hardware and software, as well as changes in consumer behavior related to these new technologies, have and may continue to lower our sales.
The current consoles from Sony, Nintendo, and Microsoft have facilitated download technology. In addition, Microsoft and Sony sell disc-less consoles that are currently available to consumers. 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. As a result of quarantine policies and social distancing measures enacted in response to the COVID-19 pandemic, consumers may increasingly download video game content, and any such changes to consumer behavior may continue after such policies and measures are rescinded. 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.
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 video game consoles, personal computers, mobile phones, tablets, social networking websites and other devices. 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 must respond effectively to market and technological changes and 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.
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, public health crises, including the ongoing COVID-19 pandemic, or the imposition of import 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. Furthermore, the COVID-19 pandemic has resulted in work stoppages at certain suppliers that are part of our supply chain. We have experienced shortages in supply as a result of the interruptions, but if the work stoppages or raw material supply were to be prolonged or expanded in scope, there could be resulting supply shortages which could impact our ability to import certain products on schedule and, accordingly, could have an adverse effect on our business, financial condition and results of operations.
Our ability to obtain favorable terms from our suppliers and service providers may impact our financial results.
Our financial results depend significantly upon the business terms we can obtain from our suppliers and service providers, 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, U&I Entertainment and Ubisoft Entertainment, which accounted for 31%, 22%, 9%, 3% and 3%, respectively, of our new product purchases in fiscal 2020. If our suppliers and service providers do not provide us with favorable business terms or allocate reduced volumes of their products to us, we may not be able to offer products to our customers in sufficient volumes or at competitive prices. Vendors may request credit support which could require us to either use cash on hand or collateralize letters of credit with restricted cash or other credit support mechanisms, which would reduce our liquidity available for other purposes.
We depend on third-party delivery services to deliver products to our retail locations, processing centers and customers on a timely and consistent basis, and deterioration in our relationship with these third-party providers or increases in the fees that they charge could reduce our margins, harm our reputation and adversely affect our business and financial condition.
We rely on third parties for the transportation of products and we cannot be sure that these relationships will continue on terms favorable to us, or at all. Delivery and shipping costs have increased from time to time and may continue to increase, and we may not be able to pass these costs directly to our customers. Any increased delivery and shipping costs could harm our business, prospects, financial condition and results of operations by increasing our costs of doing business and reducing
our margins, which would negatively affect our operating results. As we continue to reduce the number of our retail locations and increase our e-commerce capabilities, we expect our reliance on third party delivery services will increase.
In addition, if our relationships with these third parties, especially the carriers we rely upon for the majority of our shipping needs, are terminated or impaired, if we are unable to negotiate acceptable terms with these third parties or if these third parties are unable to deliver products for us, whether due to a labor shortage, slow down or stoppage, deteriorating financial or business conditions, responses to the COVID-19 pandemic, terrorist attacks or for any other reason, we would be required to use alternative carriers for the shipment of products to our customers. Changing carriers could have a negative effect on our business and operating results due to the negative impact on customer experience, including reduced visibility of order status and package tracking and delays in order processing and product delivery, and we may be unable to engage alternative carriers on a timely basis, upon terms favorable to us, or at all. See Item 1A. Risk Factors – Risk Related to Our Retail Operations – “Disruptions to our logistics capability or supply chain may have an adverse impact on our 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 and sovereign debt crises;
•international incidents, including public health crises such as the COVID-19 pandemic;
•government instability; and
•competitors entering our current and potential markets.
Our operations in Europe are also subject to risks associated with the withdrawal of the United Kingdom from the European Union (“EU”). On January 31, 2020, the United Kingdom of Great Britain and Northern Ireland officially exited the EU (“Brexit”) and entered into a transition period to negotiate the final terms of Brexit. The transition period ended on December 31, 2020. The continued uncertainty regarding the impact of the withdrawal and any resulting increases in tariffs, importation restrictions, out of stocks, volatility in currency exchange rates, including the valuation of the euro and the British pound in particular, changes in the laws and regulations applied in the United Kingdom or impacts on economic and market conditions in the United Kingdom, the EU and its member states and elsewhere may have an adverse impact on consumer demand for our products, unfavorably impact our 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 associates, contractors, representatives and agents may take actions that violate our policies. Any violations of these laws by any of these persons could have a negative impact on our business.
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 2020 and 2019, we generated approximately 42% and 34%, respectively, of our sales during the fourth quarter. Any adverse trend in sales during the holiday selling season (for example, because of the continuing and unknown duration and impact of the COVID-19 pandemic and/or related supply chain and other economic effects) could lower our results of operations for the fourth quarter and the entire fiscal year and adversely impact our liquidity.
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.
The manner in which we fund tax withholding obligations that will arise upon vesting of outstanding restricted stock awards may require us to use a substantial amount of cash, which would reduce our liquidity, or may result in sales of shares of our Class A Common Stock into the market, which could cause the market price of our Class A Common Stock to decline.
As of January 30, 2021, our executive officers and other employees held an aggregate of 4.6 million unvested shares of restricted stock, including 0.3 million unvested shares of restricted stock that are scheduled to vest in the ordinary course in the first quarter of fiscal 2021. The vesting of shares of restricted stock may accelerate in connection with certain events (such
as the cessation of the grantee’s employment due to death or disability, termination by us without cause or resignation by the grantee with good reason), whether under the terms of employment agreements, our severance plans or policies, or otherwise. Such accelerated vesting could occur in connection with the separation of individuals holding these unvested shares, the vesting of which could be accelerated in accordance with the terms of their employment agreements and the separation conditions.
Tax withholding obligations arise upon the vesting of shares of restricted stock and these obligations must be satisfied at the time they arise through cash payments to the applicable taxing authorities. The amount of the tax withholding obligations due upon the vesting of shares of restricted stock is dependent on the price of our shares of Class A Common Stock on the New York Stock Exchange on the applicable vesting date. The higher the price of the shares of our Class A Common Stock on the vesting date, the higher the tax withholding amount that will be due.
If we were to elect to satisfy tax withholding obligations by withholding and canceling a portion of the shares subject to vesting (sometimes referred to as “share withholding”) and remitting cash to the taxing authorities at the applicable statutory rates on behalf of the holder(s) of applicable awards then, depending on the price of our Class A Common Stock on the vesting date, the amount of these cash payments could be substantial and could have a negative impact on our liquidity and ability to use funds for operational purposes.
We may seek to implement “sell-to-cover” arrangements with one or more holders of shares of restricted stock to minimize our expenditure of cash to satisfy tax withholding obligations. Under such arrangements, a broker would assist the holder to sell, in the open market, all or a portion of the shares subject to vesting and would remit a portion of the sales proceeds to us. We would in turn remit such amounts to the taxing authorities. Such “sell-to-cover” arrangements would enable us to satisfy tax withholding obligations and remain in a net neutral cash position but would result in the sales of shares of our Class A Common Stock into the market and such sales could cause the market price of our Class A Common Stock to decline.
Our Class A Common Stock price has recently experienced extreme price fluctuations. For example, on January 28, 2021, our Class A Common Stock experienced an intra-day trading high of $483.00 per share and a low of $112.25 per share. Assuming, solely for illustration purposes, a stock price of $209.81 per share (the price of our shares of our Class A Common Stock on the New York Stock Exchange on March 17, 2021) upon vesting of all of the shares of restricted stock scheduled to vest in the ordinary course during the first quarter of fiscal 2021 (0.3 million shares), we estimate that the aggregate amount of our tax withholdings obligations on account of these awards would be approximately $18.6 million. Accordingly, if we arranged for share withholding for all such awards, we would be required to expend such dollar amount in cash. Alternatively, if we arranged with the applicable employees for “sales-to-cover” for all such awards, then our net cash balances would not change materially and approximately 0.1 million shares of our Class A Common Stock would be sold on the open market (assuming each share were sold at $209.81). The foregoing amounts are illustrative and the actual amount of the tax obligations and the number of shares to be delivered or sold could be higher or lower, depending on the price of our Class A Common Stock upon vesting, the applicable tax withholding rates then in effect, the price at which any sales to cover were to occur and the number (if any) of restricted stock awards that are forfeited prior to vesting.
Risks Related to Our Retail Operations
An important element of our business strategy is to de-densify our global store base. Failure to successfully transfer customers and sales from closed stores to nearby stores or our e-commerce channels could adversely impact our financial results.
As a part of our business strategy, we are de-densifying our global store base, which includes closing stores 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 or online. We believe that we can ultimately increase profitability by successfully transferring customers and sales to other stores or online by marketing directly to the PowerUp Rewards members who have shopped in the stores as well as other customers who have recently visited the location 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 or online, 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 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 in a timely manner. Our revenues and earnings may decline if we fail to maintain existing store locations, enter into new leases, or locate alternative sites.
Beginning in March 2020 and continuing throughout fiscal 2020, we began negotiating with landlords under leases of stores impacted by the COVID-19 pandemic to defer or abate the applicable rent during the store closure period, to modify the terms (including rent) of our leases going forward after the stores reopen, or in certain instances to terminate the leases and permanently close some of the stores. However, there can be no assurance that we will be able to negotiate rent deferrals or rent abatements, or terminate the leases, on commercially reasonable terms or at all. If we are unable to renegotiate the leases and continue to suspend rent payments, we could be forced to either pay rent for periods in which our stores were closed or default under the leases, in which case landlords could attempt to terminate our leases and accelerate our future
rents due thereunder. Our negotiations with landlords may have a negative impact on our ability to renew leases on favorable terms in the future.
If we are unable to successfully maintain strong retail and e-commerce experiences for our customers, our sales and results of operations could adversely be impacted.
Our business has become increasingly dependent on multiple sales channels as we strive to deliver a seamless shopping experience to our customers through both online and in-store shopping experiences. Operating an e-commerce platform is a complex undertaking and exposes us to risks and difficulties frequently experienced by internet-based businesses, including risks related to our ability to attract and retain customers on a cost-effective basis and our ability to operate, support, expand, and develop our internet operations, website, mobile applications and software and other related operational systems. Continuing to improve our e-commerce platform involves substantial investment of capital and resources, increasing supply chain and distribution capabilities, attracting, developing and retaining qualified personnel with relevant subject matter expertise and effectively managing and improving the customer experience. In-store and e-commerce retail are competitive and evolving environments. Insufficient, untimely or inadequately prioritized or ineffectively implemented investments could significantly impact our profitability and growth and affect our ability to attract new customers, as well as maintain our existing ones.
Enhancing the customer experience through new and evolved programs, such as buy-online-pickup-in-store, new or expanded delivery options, the ability to shop through a mobile application or other similar programs, depends in part on the effectiveness of our inventory management processes and systems, the effectiveness of our merchandising strategy and mix, our supply chain and distribution capabilities, and the timing and effectiveness of our marketing activities, particularly our promotions. Costs associated with implementing store and/or e-commerce initiatives may be higher than expected, and the initiatives may not result in increased sales, including same store sales, customer traffic, customer loyalty or other anticipated results. Website downtime and other technology disruptions in our e-commerce platform, including due to cyber-related issues or natural disasters, and supply and distribution delays and other related issues may affect the successful operation of our e-commerce platform. If we are not able to successfully operate or improve our e-commerce platform and core business, we may not be able to provide a relevant shopping experience or improve customer traffic, sales or margins, and our reputation, operations, financial condition, results of operations and cash flows could be materially adversely affected.
Our strategic plans and transformation initiatives may initially result in a negative impact on our financial results and such plans and initiatives may not achieve the desired results within the anticipated time frame or at all.
Our ability to successfully implement and execute our strategic plans and transformation initiatives is dependent on many factors, some of which are out of our control. Our strategic plans and transformation initiatives may require significant capital investment and management attention at the expense of other business initiatives and may take longer than anticipated to achieve the desired return. Additionally, any new initiative is subject to certain risks, including customer acceptance, competition and the ability to attract and retain qualified personnel to support the initiative.
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. We expect competition in e-commerce generally to continue to increase. Some of our competitors have longer operating histories and may have greater financial resources than we do or other advantages. In addition, certain of these competitors may have more experience and infrastructure to support increased delivery orders, and may have improved their ability to deliver products as a result of, including in the case of mall merchants and regional chains, having been permitted to remain open during the COVID-19 pandemic. Additionally, competitors who were able to remain open during the COVID-19 pandemic may create increased competition for allocations from our suppliers. Furthermore, 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. The potential increase in consumers’ downloading of video game content in favor of purchasing games in stores as a result of COVID-19 related quarantine policies and social distancing measures could further accelerate consumer purchases of online video game content from other retailers. 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.
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.
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, restrictions on business operations (including as a result of the COVID-19 pandemic), 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.
Disruptions to our logistics capability or supply chain may have an adverse impact on our operations.
We depend on package carriers for the delivery of products to our customers and our stores. Any significant interruption or disruption in carrier service to our distribution centers or stores due to severe weather, natural disasters, information technology upgrades, operating issues, disruptions to our transportation network, public heath crises, pandemics, including the COVID-19 pandemic, or other unanticipated events, could impair our ability to obtain or deliver inventory in a timely manner, cause cancellations or delays in shipments to customers or otherwise disrupt our normal business operations.
Our logistics services are operated through our distribution centers. An interruption of operations at any of our distribution centers could have a material adverse effect on the operations of branches served by the affected distribution. Such disaster related risks and effects are not predictable with certainty and, although they typically can be mitigated, they cannot be eliminated. We seek to mitigate our exposures to disaster events in a number of ways. For example, where feasible, we design the configuration of our facilities to reduce the consequences of disasters. We also maintain insurance for our facilities against casualties, and we evaluate our risks and develop contingency plans for dealing with them. Although we have reviewed and analyzed a broad range of risks applicable to our business, the ones that actually affect us may not be those that we have concluded are most likely to occur. Furthermore, although our reviews have led to more systematic contingency planning, our plans are in varying stages of development and execution, such that they may not be adequate at the time of occurrence for the magnitude of any particular disaster event that we may encounter. See Item 1A. Risk Factors -- Risks Related to Our Ability to Grow Our Business – “We depend on third-party delivery services to deliver products to our retail locations, processing centers and customers on a timely and consistent basis, and deterioration in our relationship with these third-party providers or increases in the fees that they charge could reduce our margins, harm our reputation and adversely affect our business and financial condition.”
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. The interruption in the production of new music, movies and television shows, and the reduced access to our storefronts by consumers caused by the COVID-19 pandemic, has had and is likely to continue to have a negative impact on sales of collectibles. In addition, 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.
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.
Restrictions on our ability to purchase and sell pre-owned video game products 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 within our stores. Actions by manufacturers or publishers of video game products or governmental authorities to prohibit or limit our ability to purchase or sell pre-owned video game products, or to limit the ability of consumers to play pre-owned video games, could have a negative impact on our results of operations.
Risks Related to Laws and Regulations
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 previous 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.
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, workplace safety (including in response to the COVID-19 pandemic), 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.
Government regulation of the Internet, e-commerce and other aspects of our business is evolving, and we may experience unfavorable changes in or failure to comply with existing or future regulations and laws.
We are subject to a number of regulations and laws that apply generally to businesses, as well as regulations and laws specifically governing the Internet and e-commerce and the marketing, sale and delivery of goods and services over the Internet. Existing and future regulations and laws may impede the growth and availability of the Internet and online services and may limit our ability to operate our business. These laws and regulations, which continue to evolve, cover taxation, tariffs, privacy and data protection, data security, pricing, content, copyrights, distribution, mobile and other communications, advertising practices, electronic contracts, sales procedures, automatic subscription renewals, credit card processing procedures, consumer protections, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites, and the characteristics and quality of product offerings that are offered online. We cannot guarantee that we have been or will be fully compliant in every jurisdiction, as it is not entirely clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, consumer protection, libel and personal privacy apply or will be enforced with respect to the Internet and e-commerce, as many of these laws were adopted prior to the advent of the Internet and e-commerce and do not contemplate or address the unique issues they raise. Moreover, as e-commerce continues to evolve, increasing regulation and enforcement efforts by federal and state agencies and the prospects for private litigation claims related to our data collection, privacy policies or other e-commerce practices become more likely. In addition, the adoption of any laws or regulations, or the imposition of other legal requirements, that adversely affect our ability to market, sell, and deliver our products could decrease our ability to offer, or customer demand for, our offerings, resulting in lower net revenue, and existing or future laws or regulations could impair our ability to expand our product offerings, which could also result in lower net revenue and make us more vulnerable to increased competition. Future regulations, or changes in laws and regulations or their existing interpretations or applications, could also require us to change our business practices, raise compliance costs or other costs of doing business and materially adversely affect our business, financial condition and operating results.
Risks Related to Our Common Stock
The market price of our Class A Common Stock has been extremely volatile and may continue to be volatile due to numerous circumstances beyond our control.
The market price of our common stock has fluctuated, and may continue to fluctuate, widely, due to many factors, some of which may be beyond our control. These factors include, without limitation:
•comments by securities analysts or other third parties, including blogs, articles, message boards and social and other media;
•large stockholders exiting their position in our Class A Common Stock or an increase or decrease in the short interest in our Class A Common Stock;
•actual or anticipated fluctuations in our financial and operating results;
•risks and uncertainties associated with the ongoing COVID-19 pandemic;
•the timing and allocations of new product releases including new console launches;
•the timing of new store openings or closings;
•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;
•changes in foreign currency exchange rates;
•negative public perception of us, our competitors, or industry; and
•overall general market fluctuations.
Stock markets in general and our stock price in particular have recently experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies and our company. For example, on January 28, 2021, our Class A Common Stock experienced an intra-day trading high of $483.00 per share and a low of $112.25 per share. In addition, from January 11, 2021 to March 17, 2021, the closing price of our Class A Common Stock on the NYSE ranged from as low as $19.94 to as high as $347.51 and daily trading volume ranged from approximately 7,060,000 to 197,200,000 shares. During this time, we have not experienced any material changes in our financial condition or results of operations that would explain such price volatility or trading volume. These broad market fluctuations may adversely affect the trading price of our Class A Common Stock. In particular, a large proportion of our Class A Common Stock has been and may continue to be traded by short sellers which has put and may continue to put pressure on the supply and demand for our Class A Common Stock, further influencing volatility in its market price. Additionally, these and other external factors have caused and may continue to cause the market price and demand for our Class A Common Stock to fluctuate substantially, which may limit or prevent our stockholders from readily selling their shares of our common stock and may otherwise negatively affect the liquidity of our Class A Common Stock.
A “short squeeze” due to a sudden increase in demand for shares of our Class A Common Stock that largely exceeds supply has led to, and may continue to lead to, extreme price volatility in shares of our Class A Common Stock.
Investors may purchase shares of our Class A Common Stock to hedge existing exposure or to speculate on the price of our Class A Common Stock. Speculation on the price of our Class A Common Stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our Class A Common Stock available for purchase on the open market, investors with short exposure may have to pay a premium to repurchase shares of our Class A Common Stock for delivery to lenders of our Class A Common Stock. Those repurchases may in turn, dramatically increase the price of shares of our Class A Common Stock until additional shares of our Class A Common Stock are available for trading or borrowing. This is often referred to as a “short squeeze.”
A large proportion of our Class A Common Stock has been and may continue to be traded by short sellers which may increase the likelihood that our Class A Common Stock will be the target of a short squeeze. A short squeeze has led and could continue to lead to volatile price movements in shares of our Class A Common Stock that are unrelated or disproportionate to our operating performance or prospects and, once investors purchase the shares of our Class A Common Stock necessary to cover their short positions, the price of our Class A Common Stock may rapidly decline. Stockholders that purchase shares of our Class A Common Stock during a short squeeze may lose a significant portion of their investment.
Information available in public media that is published by third parties, including blogs, articles, message boards and social and other media may include statements not attributable to the Company and may not be reliable or accurate.
We have received, and may continue to receive, a high degree of media coverage that is published or otherwise disseminated by third parties, including blogs, articles, message boards and social and other media. This includes coverage that is not attributable to statements made by our officers or associates. Information provided by third parties may not be reliable or accurate and could materially impact the trading price of our Class A Common Stock which could cause stockholders to lose their investments.
A large number of shares of our Class A Common Stock available for future sale could adversely affect the market price of our Class A Common Stock and may be dilutive to current stockholders.
The sales of a substantial number of shares of our Class A Common Stock, or the perception that such sales could occur, could adversely affect the price for our Class A Common Stock. Our Board of Directors may authorize the issuance of additional authorized but unissued Class A Common Stock or other authorized but unissued securities at any time, including pursuant to equity incentive plans. In addition, we have filed a registration statement with the SEC, allowing us to offer, from time to time and at any time, equity securities (including common or preferred stock), subject to market conditions and other factors. Accordingly, we may, from time to time and at any time, seek to offer and sell our equity securities, including sales of our Class A common stock pursuant to our ATM program, based upon market conditions and other factors.
Future sales of a substantial amount of our Class A Common Stock in the public markets by our insiders, or the perception that these sales may occur, may cause the market price of our Class A Common Stock to decline.
Our employees, directors and officers, and their affiliates, hold substantial amounts of shares of our Class A Common Stock. Sales of a substantial number of such shares by these stockholders, or the perception that such sales will occur, may cause the market price of our Class A Common Stock to decline. Other than restrictions on trading that arise under securities laws [(or pursuant to our securities trading policy that is intended to facilitate compliance with securities laws)], including the prohibition on trading in securities by or on behalf of a person who is aware of nonpublic material information, we have no
restrictions on the right of our employees, directors and officers, and their affiliates, to sell their unrestricted shares of Class A Common Stock.
Risks Related to Financial Performance or General Economic Conditions
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 permanent or temporary closings, including those related to the COVID-19 pandemic;
•the amounts devoted to strategic investments, including in multi-channel capabilities and other business initiatives, and failure to achieve anticipated profitability increases and benefits from such initiatives within the expected time-frames or at all;
•timing and extent of the achievement of anticipated profit increases from investments, if at all
•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.
The indenture governing our 10.00% senior notes due March 15, 2023 (the "2023 Senior Notes") and our revolving credit facility restrict our current and future operations, particularly our ability to respond to changes or to take certain actions or take advantage of certain business opportunities.
The indenture governing our 2023 Senior Notes and our revolving credit facility contain a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
•incur, assume or permit to exist additional indebtedness or guaranty certain obligations;
•declare dividends, make payments or redeem or repurchase capital stock or make distributions in respect of capital stock;
•prepay, redeem or purchase certain indebtedness;
•issue certain preferred stock or similar equity securities;
•make loans and certain investments;
•engage in transactions with affiliates;
•enter into agreements restricting our subsidiaries’ ability to pay dividends; and
•engage in mergers, acquisitions and other business combinations.
In addition, the restrictive covenants applicable to our revolving credit facility require us to maintain a fixed charge coverage ratio covenant of 1.0:1.0 in the event that excess availability under the revolving credit facility is at any time less than the greater of (1) $12.5 million beginning on August 28, 2020 and (2) 10% of the lesser of the total commitment and the borrowing base. As of January 30, 2021, we would not have been in compliance with the fixed charge coverage ratio covenant if it were in effect and, therefore, our borrowing capacity was effectively reduced by 10% of the borrowing base. The impact of the COVID-19 pandemic on our financial performance may impair our ability to comply with the fixed charge coverage ratio covenant in the future, which would also impact our access to the availability under the revolving credit facility. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Liquidity.
A breach of the covenants or restrictions under the indenture governing our 2023 Senior Notes or our revolving credit facility could result in an event of default under the applicable indebtedness. Such an event of default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the revolving credit facility would permit the lenders under our revolving credit facility 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 revolving credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:
•limited in how we conduct our business;
•unable to raise additional debt or equity financing necessary in order to operate during general economic or business downturns; or
•unable to compete effectively or to take advantage of new business opportunities.
These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our substantial indebtedness and our credit ratings could adversely affect the availability and terms of our financing.
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 or refinance our debt on favorable terms.
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 revolving credit facility or to holders of our 2023 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 2023 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 inability to generate sufficient cash flow to satisfy our debt obligations, including the 2023 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.
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.
Although the indentures governing our 2023 Senior Notes and our revolving credit facility agreement 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. Additionally, these restrictions 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 2023 Senior Notes or our revolving credit facility agreement. The incurrence of additional indebtedness could impact our financial condition and results of operations.
General Risk Factors
Turnover in our senior management or our inability to attract and retain qualified personnel could have a material adverse impact on our business and results of operations.
Our success depends, in part, on the continuing services and contributions of our leadership team to execute on our strategic plan and to identify and pursue new opportunities. Through a committee of directors, our Board is currently evaluating our executive leadership team skill sets related to meeting changing business requirements and has engaged a third party firm to assist in its evaluation and exploration. This evaluation and exploration could result in a change in one or more of our senior executives. Turnover in key leadership positions within the Company could adversely affect our ability to manage the Company efficiently and effectively, could be disruptive and distracting to management and may lead to additional departures of current personnel, any of which could have a material adverse effect on our business and results of operations.
Our success also depends, in part, upon our ability to attract, motivate and retain a highly trained and engaged workforce, management for our stores and skilled merchandising, marketing, financial and administrative personnel. In addition, the turnover rate in the retail industry is relatively high, and there is an ongoing need to recruit and train new store associates. Factors that affect our ability to maintain sufficient numbers of qualified associates include associate morale, our reputation, unemployment rates, competition from other employers and our ability to offer appropriate compensation packages.
Any turnover in senior management in the future or inability to attract and retain qualified personnel could have a material adverse effect on our business and results of operations.
Recent turnover with our Board may disrupt our operations, our strategic focus or our ability to drive stockholder value.
There have been significant changes to our Board since June 2020 as previously reported in our periodic reports filed with the SEC, and we expect to experience additional changes to our Board at our 2021 Annual Meeting. As of the date of this Form 10-K, the Board has not determined the definitive slate of nominees for election at our 2021 Annual Meeting but currently expects that the following incumbent directors will retire from the Board at the 2021 Annual Meeting: Lizabeth Dunn, Paul Evans, Raul J. Fernandez, Reginald Fils-Aimé, William Simon, James K. Symancyk, Carrie W. Teffner and Kathy P. Vrabeck. See Item 9B. Other Information of this Form 10-K. Turnover among our Board may disrupt our operations, our strategic focus or our ability to drive stockholder value. If we fail to attract and retain new skilled personnel for our Board, our business and growth prospects could disrupt our operations and have a material adverse effect on our operations and business.
If we do not maintain the security of our customer, associate 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 and associates, 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 our computer systems or the computer system of our 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 associate awareness training around phishing, malware, and other cyber risks to protect our member, customer, associate, 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.
Damage to our reputation could adversely affect our business and our ability to attract and retain customers and employees.
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 and adversely impact our ability to attract and retain customers and employees. Failure to detect, prevent, or mitigate issues that might give rise to reputational risk or failure to adequately address negative publicity or perceptions could adversely impact our reputation, business, results of 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. Additionally, remote work arrangements and other operational changes instituted in response to the COVID-19 pandemic may impair our ability to maintain effective internal control over financial reporting.
If we are unable to 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 associate 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” in our Form 10-K.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
All of our retail stores are leased. Store leases typically provide for a lease term of one to five years, plus renewal options and longer for other operating countries. 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 or e-commerce properties to improve, if not at least maintain, profitability.
The terms of the store leases, including reasonably certain options, for the 4,816 leased stores open as of January 30, 2021 expire as follows:
Lease Terms to Expire During(1)
|Fiscal 2021||1,848 |
|Fiscal 2022||996 |
|Fiscal 2023||620 |
|Fiscal 2024||532 |
|Fiscal 2025 and later||820 |
(1) Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to January 31st.
In July of 2020, we sold and leased-back, in separate unrelated transactions, to unaffiliated third parties: i) our corporate headquarters and ancillary office space in Grapevine, Texas and ii) a nearby refurbishment center. In August of 2020, we sold and leased-back our Australian headquarters in Eagle Farm, Queensland to an unrelated party. Additionally, in September of 2020, we sold and leased-backed our Canadian headquarters in Brampton, Ontario.
As of January 30, 2021, we owned three and leased 11 office and distribution facilities, totaling approximately 1.9 million square feet. The lease expiration dates for the leased facilities range from 2021 to 2030, with an average remaining lease life, including reasonably certain options, of approximately seven years. Our principal facilities are as follows:
|Grapevine, Texas, USA||426,000 ||Leased||Distribution and administration|
|Grapevine, Texas, USA||182,000 ||Leased||Manufacturing and distribution|
|Shepherdsville, Kentucky, USA||631,000 ||Leased||Distribution|
|Brampton, Ontario, Canada||119,000 ||Leased||Distribution and administration|
|Eagle Farm, Queensland, Australia||185,000 ||Leased||Distribution and administration|
|Milan, Italy||123,000 ||Owned||Distribution and administration|
Additional information regarding our properties can be found in Item 1, “Business—Store Locations” in this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
The matters under the caption "Legal Proceedings" in Note 13 of the Notes to Consolidated Financial Statements included in this Form 10-K are incorporated by reference.
ITEM 4. MINE SAFETY DISCLOSURES
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 17, 2021, there were approximately 1,683 record holders of our Class A Common Stock.
On June 3, 2019, our Board of Directors elected to eliminate the Company’s quarterly dividend, effective immediately, in an effort to strengthen the Company's balance sheet and provide increased financial flexibility. We paid an aggregate of $40.5 million in cash dividends in the first quarter of fiscal 2019. We believe the decision to eliminate the dividend enabled us to further reduce debt and provided us flexibility under a capital allocation strategy focused on optimizing long-term value creation for our stakeholders.
Stock Comparative Performance Graph
The following graph compares the cumulative total stockholder return on our Class A Common Stock for the period commencing January 29, 2016 through January 29, 2021 (the last trading date of fiscal 2020) 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 $100 in our Class A Common Stock, the S&P 500 and the Dow Jones Specialty Retailers Index on January 29, 2016 and (ii) reinvestment of dividends.
The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor should such information be incorporated by reference into any future filings under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference in such filing.
|GME||$||100.00 ||$||97.78 ||$||70.13 ||$||53.72 ||$||18.99 ||$||1,607.19 ||*|
|S&P 500 Index||$||100.00 ||$||120.86 ||$||148.44 ||$||148.35 ||$||180.31 ||$||211.39 |
|Dow Jones Specialty Retailers Index||$||100.00 ||$||116.12 ||$||149.45 ||$||171.31 ||$||188.05 ||$||265.00 |
* As noted above under the heading "Risk Factors — Risk Related to Our Common Stock", the market price of our Class A Common Stock has been extremely volatile and was extremely volatile at the end of the fourth quarter of fiscal 2020 due to circumstances outside of our control, including a short squeeze that led to volatile price movements that were unrelated or disproportionate to our operating performance during that time.
Issuer Purchases of Equity Securities
Our purchases of our equity securities during the fourth quarter of fiscal 2020 were as follows:
Price Paid per
|Total Number of|
as Part of Publicly
Announced Plans or
Value of Shares that
May Yet Be Purchased
Under the Plans or
| || ||(In millions)|
|November 1 through November 28, 2020||— ||$||— ||— ||$||— |
|November 29 through January 2, 2021||— ||$||— ||— ||$||— |
|January 3, 2021 through January 30, 2021||— ||$||— ||— ||$||— |
|Total||— ||$||— ||— ||$||— |
(1) Under our 2011 and 2019 Incentive Plans, approved by our Board of Directors and our stockholders, we withheld no shares of Class A Common Stock from certain employees to satisfy minimum tax withholding obligations relating to the vesting of their restricted stock awards.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial and operating data for the five fiscal years ended January 30, 2021. The selected financial data set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in this Form 10-K.
| (In millions, except statistical and per share data)|
|Statement of Operations Data:|
|Net sales||$||5,089.8 ||$||6,466.0 ||$||8,285.3 ||$||8,547.1 ||$||7,965.0 |
Net (loss) income from continuing operations (1)
|$||(214.6)||$||(464.4)||$||(794.8)||$||230.4 ||$||304.5 |
|Diluted Per Share Data:|
|(Loss) earnings per share from continuing operations||$||(3.30)||$||(5.31)||$||(7.79)||$||2.27 ||$||2.93 |
|Dividends per common share||$||— ||$||0.38 ||$||1.52 ||$||1.52 ||$||1.48 |
|Weighted-average common shares outstanding:|
|Diluted||65.0 ||87.5 ||102.1 ||101.5 ||103.8 |
|Store Operating Data:|
|Comparable store sales (decrease) increase||(9.5)||%||(19.4)||%||(0.3)||%||5.8 ||%||(11.0)||%|
|Number of stores at fiscal year end||4,816 ||5,509 ||5,830 ||5,947 ||6,132 |
|Balance Sheet Data at Fiscal Year End:|
|Total assets||$||2,472.6 ||$||2,819.7 ||$||4,044.3 ||$||5,041.6 ||$||4,975.9 |
Total debt, net (2)
|$||362.7 ||$||419.8 ||$||820.8 ||$||817.9 ||$||815.0 |
|Total liabilities||$||2,035.9 ||$||2,208.2 ||$||2,708.1 ||$||2,827.1 ||$||2,721.8 |
(1)Fiscal 2019 and 2018 include goodwill impairment charges totaling $363.9 million and $970.7 million, respectively.
(2)In March 2016, we issued $475 million aggregate principal of 6.75% unsecured senior notes due in March 2021 (the "2021 Senior Notes"). During 2019, we used cash on hand to redeem all of our $350.0 million unsecured senior notes due October 2019. In addition, during fiscal 2019, we executed a series of open market purchases of our 2021 Senior Notes resulting in $53.6 million in aggregate principal amount being repurchased. In July 2020, we issued approximately $216.4 million aggregate principal amount of our 2023 Senior Notes in exchange for an equal aggregate principal amount of our 2021 Senior Notes. During the second and third quarters of 2020, we entered into six separate unsecured term loans for a total of $48.6 million by our French subsidiary, Micromania SAS. During 2020, we repaid $131.8 million of our 2021 Senior Notes, See Note 12, "Debt," to our consolidated financial statements for additional information.
(3) Fiscal 2017 contained 53 weeks.
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.”
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”), a Delaware corporation established in 1996, is a leading specialty retailer offering games and entertainment products through its e-commerce properties and thousands of stores.
We operate our business in four geographic segments: United States, Canada, Australia and Europe. Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. Fiscal year 2020 consisted of the 52 weeks ended on January 30, 2021 ("fiscal 2020"). Fiscal year 2019 consisted of the 52 weeks ended on February 1, 2020 ("fiscal 2019") and fiscal year 2018 consisted of the 52 weeks ended on February 2, 2019 ("fiscal 2018"). The discussion and analysis of our results of operations refers to continuing operations unless otherwise noted.
Impact from COVID-19
At various times throughout fiscal 2020, due to the COVID-19 pandemic, we temporarily closed store locations to customer access, across all of our operating regions, the U.S., Canada, Europe and Australia. These temporary store closures began in late March 2020 and by the end of June 2020, following the implementation of the highest level of health and safety protocols recommended by the federal and local health and governmental authorities, 98% of our stores globally were open to the public. During the third quarter of fiscal year 2020, the substantial majority of our stores were open, with approximately 15% of our stores in Australia temporarily closed for approximately four weeks due to an outbreak of COVID-19. Beginning in late October 2020 and continuing throughout the fiscal fourth quarter, as COVID-19 cases began to escalate in regions around the world, all of our stores in France and Ireland were temporarily closed as required by governmental authorities, while certain other stores in each of our operating segments began more long-term or fluctuating temporary closures as required by the various governmental authorities. Although certain stores remain closed, some of our stores in France, Ireland, and Canada were and are offering curbside pick-up. We remained vigilant in our compliance with COVID-19 regulations across our operating regions, and as such reverted a minor number of store operations in the United States in early November to curbside pick-up only, all of which reopened for customer access in late 2020. In late December 2020 and extending through the end of fiscal 2020, we experienced an increase in temporary store closures in all but the Australian segment, with certain jurisdictions in Canada, US, and Europe allowing for curbside pickup.
During the early stages of the global pandemic and subsequent period of temporary closures, we took steps to continue to serve our customers via our e-commerce platform including, but not limited to enhancing our online capabilities and offering curbside pick-up options while also lowering our purchase and expense levels to correspond with the lower demand.
We continue to prioritize the health and safety of our customers and team members. As a result, during fiscal 2020, we incurred approximately $25 million in costs 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 our stores, shared service centers and distribution centers across all geographies where we operate. We anticipate that we will continue to incur some or all of these costs well into the fiscal year 2021.
The COVID-19 pandemic remains a rapidly evolving situation and the impact on our business, operating results, cash flows and financial conditions will also depend on many factors that are not within our control, including the following:
•the geographies impacted by the virus;
•changes in consumer confidence and consumer spending habits, including spending for the merchandise that we sell;
•negative trends in consumer purchasing patterns due to changes in consumers' disposable income, credit availability and debt levels;
•the availability of additional economic stimulus programs introduced by the various governments where we operate;
•disruption to our supply chain including the manufacturing, supply, distribution, transportation and delivery of our products;
•delays in the release of key video game titles; and
•a slowdown in the U.S. and global economies, and the timing of the post-pandemic economic recovery.
We continue to take steps to improve cash flows and liquidity, which we believe will enhance our resiliency as we emerge from the COVID-19 pandemic, including:
•reducing inventory receipts to match demand, focusing our purchasing efforts on key hardware, software and accessories products, thereby minimizing late product cycle markdowns;
•concentrating capital spending on required maintenance or near-term high value strategic projects; and
•divesting non-strategic assets to free up cash for deployment to strategic investments and initiatives
In addition, during the first quarter of fiscal 2020 and the beginning of the second quarter of fiscal 2020, we took the following steps to preserve liquidity while most of our stores were temporarily closed:
•reduced the base salary for our executive leadership team by graduated amounts ranging from 30%-50% for 9 weeks;
•lowered the cash compensation for the members of the Board of Directors by 50% for 9 weeks;
•reduced pay for certain other associates by graduated amounts across most of the worldwide permanent workforce between 10% and 30% for 9 weeks; and
•forewent merit pay increases for the majority of our associates for fiscal 2020.
See Note 3, "COVID-19 Impacts" for further details.
Growth in the video game industry is generally driven by the introduction of new technology. Gaming consoles have historically launched in five to seven-year cycles as technological developments provide significant improvements in the gaming experience and add other entertainment capabilities. Consumer demand for gaming consoles is typically the highest in the early years of the cycle and the weakest in the latter years. The current generation of consoles includes the Sony PlayStation 5 (launched in November 2020), Microsoft Xbox Series X (launched in November 2020) and the Nintendo Switch (launched in March 2017). The Sony PlayStation 4 and Microsoft Xbox One are nearing the end of their cycle due to the launch of Sony and Microsoft next generation consoles.
The sale of video games delivered through digital channels and other forms of gaming continue to grow and represent 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 our e-commerce and store functionality to enable our customers to access digital content to facilitate the digital sales and delivery process. We plan to 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.
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 or decline in sales for certain stores for a particular period over the corresponding prior year's comparable period.
Our comparable store sales are comprised of sales from our video game 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 exchange rates.
Historically, stores with an active lease designation were included in our comparable stores sales even if there were temporary closures because such temporary closures were primarily due to remodeling and relocations and were typically resolved within fewer than 14 days. However beginning in the first quarter of our fiscal year 2020, as a result of COVID-19 related closures, we excluded stores from the comparable sales base that were closed for 14 consecutive days or more and where curbside delivery was not available to customers. Therefore, comparable sales results for fiscal 2020 exclude stores that were closed for periods of 14 consecutive days or more primarily due to the COVID-19 pandemic where curbside delivery was not available to customers. These criteria are consistent with the metrics used by management for internal reporting and analysis to measure performance of our stores.
The calculation of comparable store sales compares fiscal 2020 to the most closely comparable 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 a retailer that provides our consumers several ways to access our products.
In 2019, we announced our multi-year transformation initiative, which we refer to as GameStop Reboot to position GameStop on a strategic path to fully leverage our unique position and brand in gaming. Our strategic plan is anchored on the following tenets and designed to first stabilize and optimize our core business while at the same time, pursuing strategic initiatives to transform GameStop for the future by expanding our addressable market and product offerings to drive growth in the gaming and entertainment industries.
Stabilize and Optimize the core business. Improve the efficiency and effectiveness of operations across the organization, including cost restructuring, inventory management optimization, adding and growing high margin product categories, and rationalizing the global store base. Prioritizing efforts to optimize the store base and improve the fundamental operations of the business yielded the net closure of 321 stores in fiscal 2019, 693 stores in fiscal 2020, and included both the divestiture of the Simply Mac business and wind down of underperforming operations in Denmark, Finland, Norway and Sweden. Improved inventory management drove a significant increase in inventory turns and as a result, in working capital, while an intense focus on organization structure and expense reductions yielded a $408.5 million or 21.2% reduction in reported Selling, General and Administrative costs in fiscal 2020 as compared to fiscal 2019. We continue to explore strategic options for our European businesses, which may include further store closings, exiting unprofitable businesses, or investing in e-commerce capabilities.
Transform GameStop into a customer-obsessed technology company to delight gamers. The Company is taking the below steps in fiscal 2021:
•Investing in technology capabilities, including by in-sourcing talent and revamping systems, and evaluating next-generation assets.;
•Building a superior customer experience;
•Expanding product offerings to include PC gaming, computers, monitors, game tables, mobile gaming, and gaming TVs;
•Modernizing U.S. fulfillment operations to improve speed of delivery and service;
•Establishing a U.S.-based customer care operation, and;
•Leveraging the Company’s digital assets, including Game Informer and PowerUp Rewards, to increase market share within the growing online gaming community.
We believe these future transformation efforts are an important aspect of our continued business to enable long-term value creation for our shareholders.
Connected to our transformation efforts, we have incurred and may continue to incur severance, store closure costs and expenses for consultants and advisors. See "Consolidated Results from Operations—Selling, General and Administrative Expenses" for further information.
STORE COUNT INFORMATION
The following table presents the number of stores by segment as of the end of fiscal 2020 compared to the end of fiscal 2019.
|February 1, 2020||Net Disposals||January 30, 2021|
|United States||3,642 ||(450)||3,192 |
|Canada||299 ||(46)||253 |
|Australia||426 ||(9)||417 |
|Europe||1,142 ||(188)||954 |
|Total Stores||5,509 ||(693)||4,816 |
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, sales impacts of COVID-19 related temporary store closures, 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. During fiscal 2020 and 2019, we generated approximately 42% and 34%, respectively, of our sales during the fourth quarter.
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 2020||Fiscal Year 2019||Fiscal Year 2018|
|Amount||Percent of Net Sales||Amount||Percent of Net Sales||Amount||Percent of Net Sales|
|Net sales||$||5,089.8 ||100.0 ||%||$||6,466.0 ||100.0 ||%||$||8,285.3 ||100.0 ||%|
|Cost of sales||3,830.3 ||75.3 ||4,557.3 ||70.5 ||5,977.2 ||72.1 |
|Gross profit||1,259.5 ||24.7 ||1,908.7 ||29.5 ||2,308.1 ||27.9 |
Selling, general and administrative expenses
|1,514.2 ||29.7 ||1,922.7 ||29.8 ||1,994.2 ||24.2 |
|Goodwill and asset impairments||15.5 ||0.3 ||385.6 ||5.9 ||1,015.9 ||12.2 |
|Gain on sale of assets||(32.4)||(0.6)||— ||— ||— ||— |
|Interest expense, net||32.1 ||0.6 ||27.2 ||0.4 ||51.1 ||0.6 |
|Loss from continuing operations before income taxes||(269.9)||(5.3)||(426.8)||(6.6)||(753.1)||(9.1)|
|Income tax (benefit) expense ||(55.3)||(1.1)||37.6 ||0.6 ||41.7 ||0.5 |
|Net loss from continuing operations||(214.6)||(4.2)||(464.4)||(7.2)||(794.8)||(9.6)|
|(Loss) income from discontinued operations, net of tax||(0.7)||— ||(6.5)||(0.1)||121.8 ||1.5 |
The following table sets forth net sales by significant product category for the period indicated (dollars in millions):
| ||Fiscal Year 2020||Fiscal Year 2019||Fiscal Year 2018|
| ||Net Sales||Percent of Net Sales||Net Sales||Percent of Net Sales||Net Sales||Percent of Net Sales|
|Hardware and accessories||$||2,530.8 ||49.7 ||%||$||2,722.2 ||42.1 ||%||$||3,717.8 ||44.9 ||%|
|Software||1,979.1 ||38.9 ||3,006.3 ||46.5 ||3,856.5 ||46.5 |
|579.9 ||11.4 ||737.5 ||11.4 ||711.0 ||8.6 |
|Total||$||5,089.8 ||100.0 ||%||$||6,466.0 ||100.0 ||%||$||8,285.3 ||100.0 ||%|
Net sales by reportable segment in U.S. dollars were as follows (in millions):
| ||Fiscal Year 2020||Fiscal Year 2019||Fiscal Year 2018|
| ||Net Sales||Percent of Net Sales||Comparable Store Sales||Net Sales||Percent of Net Sales||Comparable Store Sales||Net Sales||Percent of Net Sales||Comparable Store Sales|
|United States||$||3,417.1 ||67.1 ||%||(13.9)%||4,497.7 ||69.6 ||%||(20.9)||%||5,800.2 ||70.0 ||%||1.8 ||%|
|Canada||258.4 ||5.1 ||(6.2)||344.2 ||5.3 ||(18.9)||434.5 ||5.2 ||3.1 |
|625.3 ||12.3 ||23.5||525.4 ||8.1 ||(12.0)||645.4 ||7.8 ||(3.4)|
|789.0 ||15.5 ||(10.0)||1,098.7 ||17.0 ||(16.8)||1,405.2 ||17.0 ||(7.7)|
|Total||$||5,089.8 ||100.0 ||%||(9.5)%||$||6,466.0 ||100.0 ||%||(19.4)||%||8,285.3 ||100.0 ||%||(0.3)||%|
Fiscal 2020 Compared to Fiscal 2019
Net sales decreased $1,376.2 million, or 21.3%, in fiscal 2020 compared to fiscal 2019. The decrease in net sales was primarily attributable to the impact of numerous COVID-19 related temporary store closures across every one of our operating regions, 693 net permanent global store closures and a decrease in comparable store sales of 9.5%. This decrease is consistent with the wind down of the last generation of video game consoles that occurred through three fiscal quarters of
2020 and prior to the launch of Microsoft and Sony new generation video game consoles in the fourth quarter of 2020. The decrease in net sales for the fourth fiscal quarter was primarily attributable to the combined impacts of temporary store closures and suppressed customer traffic due to the COVID-19 pandemic, primarily offset by positive 6.5% comparable store sales, which was led by sales volume attributable to the launch of the new video game consoles from Sony and Microsoft and continued strong sales of the Nintendo gaming product lines. For fiscal 2020, we experienced declines in the United States, Canada, Europe and New Zealand, which were partially offset by the performance in our Australia segment which increased in sales by 24.9% as stores in Australia remained open for the substantial majority of the fiscal year. These declines were partially offset by the increase in our e-commerce sales, which increased 174.5% and 190.8% in the current quarter and fiscal year periods, respectively, compared to the prior year periods. Although our sales have decreased compared to the prior year periods as described above, we believe the COVID-19 pandemic has increased demand for at home entertainment and connectivity products as consumers are spending more time in their homes and seek in-home entertainment options.
In total, net sales during fiscal 2020 in our United States, Canada and Europe segments declined by 24.0%, 24.9% and 28.2%, respectively, while net sales in our Australia segment increased 19.0%, when compared to fiscal 2019. Comparable store sales in the United States, Canada and Europe decreased by 13.9%, 6.2% and 10.0%, respectively, while comparable store sales increased in the Australia segment by 23.5%, primarily due to the same factors described above.
Gross profit decreased $649.2 million, or 34.0%, in fiscal 2020 compared to fiscal 2019, and gross profit as a percentage of net sales decreased to 24.7% in fiscal 2020 compared to 29.5% in fiscal 2019. The decrease in gross profit as a percentage of net sales was primarily due to the mix of sales into lower margin categories such as new console hardware given the launch of generation 9 consoles, increased freight and credit card fees associated with the shift to e-commerce sales, and a broader promotional stance.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased $408.5 million, or 21.2%, in fiscal 2020 compared to fiscal 2019. Fiscal 2020 and fiscal 2019 included $9.2 million and $76.3 million of costs with our transformation initiatives, business divestitures, severance and other charges, respectively. Excluding these charges, the decrease in SG&A in the period was primarily due to lower payroll and occupancy costs driven by the extensive cost reduction initiatives we have undertaken. These reductions include permanent store closures as we de-densify our store base. Additionally, and to a lesser extent, there were lower variable expenses as a result of lower sales volume related to the impacts of the COVID-19 pandemic. See Note 3, "COVID-19 Impacts" for further details.
Goodwill and Asset Impairments
Goodwill and asset impairments decreased $370.1 million, or 96.0% in fiscal 2020 compared to fiscal 2019 as the Company fully impaired its goodwill in fiscal 2019. In the second quarter of fiscal 2020, we sold our corporate aircraft resulting in an impairment charge of $3.2 million. We also incurred an impairment charge associated with store-level assets of $1.6 million in the 39 weeks ended October 31, 2020, respectively. In the fourth quarter of fiscal 2020, we incurred impairment charges of $9.6 million related to store-level, property and equipment and right-of-use asset impairment charges and $1.1 million associated with our Micromania and ThinkGeek trade names. See Note 8, “Goodwill and Intangible Assets,” to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information. We have no remaining goodwill balances as of January 30, 2021.
Gain on Sale of Assets
During the second quarter of fiscal 2020, we sold, in separate unrelated transactions, to unaffiliated third parties i) our 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. With respect to the leaseback of the corporate headquarters, we agreed to provide a letter of credit to the buyer-lessor within 18 months from the closing date to secure our lease obligation. Upon delivering such letter of credit, we will be entitled to a rent credit of $2.8 million. This variable consideration is included in the total gain on sale of assets recognized during fiscal 2020.
During the third quarter of fiscal 2020, we sold our Australian headquarters in Eagle Farm, Queensland to an unrelated party for approximately $27.0 million, net of costs to sell, and immediately leased back the facility for a term of ten years on market rate terms at an average annual base rent of $1.7 million, plus taxes, utilities, management fees and other operating and maintenance expenses. Additionally, in September 2020, we sold our Canadian headquarters in Brampton, Ontario for approximately $16.7 million, net of costs to sell, and leased back the facility for a term of five years on market rate terms at an average annual base rent of $0.9 million plus taxes, utilities, management fees and other operating and maintenance expenses.
The net proceeds from the sale of these assets are being used for general corporate purposes. As a result of the transactions that occurred during the second and third quarters of fiscal 2020, a gain on sale of assets of $32.4 million was recognized and is included in our consolidated statement of operations for fiscal 2020.
See Note 11, "Leases," for further information regarding the sale and leaseback of these facilities.
Interest Expense, Net
Interest expense, net increased by $4.9 million, or 18.0%, for fiscal 2020 compared to fiscal 2019, primarily due to higher interest expense associated with the July 2020 exchange of $216.4 million in aggregate principal amount of 2021 Senior Notes for 2023 Senior Notes. Furthermore, offsets of interest income in 2020 is lower as compared to 2019 primarily due to lower global interest rates earned on cash and cash equivalents.
Income tax benefit was $55.3 million, representing an effective tax rate of 20.5% in fiscal 2020, compared to $37.6 million expense in fiscal 2019, representing a negative effective tax rate of 8.8%. The effective tax rate of 20.5% is primarily driven by the establishment of a full valuation allowance on U.S. deferred tax assets, a change in the tax status of certain foreign entities, and the impact of the CARES Act, including tax benefits associated with the availability of a five-year carryback period for certain current year tax losses. The negative effective tax rate of 8.8% in fiscal 2019 was primarily the result of a permanent difference for non-deductible impairment charges and valuation allowances recognized in the year. See Note 9, "Income Taxes," to our consolidated financial statements.
(Loss) Income from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax, totaled $0.7 million in fiscal 2020 compared to loss from discontinued operations, net of tax, of $6.5 million in fiscal 2019. Refer to Note 2, "Discontinued Operations and Dispositions," to our consolidated financial statements for additional information.
For a comparison of our results of operations for 2019 and 2018, 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 ended February 1, 2020, filed with the SEC on March 27, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash from operations, cash on hand and our revolving credit facility. We may also fund our growth capital needs, as circumstances warrant, from sales of equity and debt securities. As of January 30, 2021, we had total unrestricted cash on hand of $508.5 million, $126.5 million of restricted cash and an additional $88.4 million of available borrowing capacity under our revolving credit facility. On March 15, 2021, we repaid our outstanding borrowings of $25.0 million under the Revolver (as defined below). See Note 19 “Subsequent Events”.
Availability under our revolving credit facilities, which was increased during the third quarter of fiscal 2020, as described in the Sources of Liquidity section below, provides us additional liquidity throughout the course of the year to fund our operations. Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and net availability under our revolving credit facility will provide sufficient liquidity to fund our operations for the next 12 months as well as the foreseeable future. While factors related to COVID-19 have negatively impacted our results during fiscal 2020, those negative impacts were generally offset by the positive results generated from our working capital initiatives, primarily inventory management and our expense reduction initiatives which supports an improved liquidity position.
We continually review and prioritize our capital needs and are committed to making investments in our infrastructure to drive our business plans and future transformation initiatives. Key areas of future investment include improving the presentation and content as well as the functionality, general search and navigation across our customer-facing digital channels; improving customer data integration and customer relations management capabilities; focusing on enhancing and optimizing the customer service proposition; continuing to strengthen and deepen our information technology, analytics, marketing and e-commerce teams and capabilities; and creating more flexible fulfillment options designed to improve our delivery capabilities and reduce our delivery times and shipping costs. These and other investments are expected to, among other things, provide a seamless and compelling customer experience across our retail platform.
On an ongoing basis, we evaluate and consider certain strategic operating alternatives, including divestitures, restructuring or dissolution of unprofitable business segments, as well as equity and debt financing alternatives that we believe may enhance stockholder value. On July 6, 2020 we issued $216.4 million aggregate principal amount of our 2023 Senior Notes in exchange for an equal aggregate principal amount of our 2021 Senior Notes. See Note 12, "Debt," for further details on this debt exchange. 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 arrangements; and overall market conditions.
As a result of the impact of the COVID-19 pandemic around the world, many of our vendors have been impacted by the volatility in the supply chain financing market. As we seek to optimize our inventories, including for next generation video game consoles and a number of new software releases, and related payment terms, we have increased the amount of credit support collateral we provide to select vendors for our inventory purchase obligations. Our continued provision of collateral, 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. See Note 1, "Nature of Operations and Summary of Significant Accounting Policies — Restricted Cash" for further details.
In fiscal 2020, cash flow from operating activities was an inflow of $123.7 million, an increase of $538.2 million compared to an outflow of $414.5 million during the same period last year. The increase was primarily due to improvements in working capital as a result of optimizing inventory and accounts payable levels through optimizing the cash conversion cycle and more efficient carrying levels of inventory.
In fiscal 2019, cash provided by operations was an outflow of $414.5 million, compared to an inflow of $325.1 million in fiscal 2018. The decrease in cash provided by operations of $739.6 million from fiscal 2018 to fiscal 2019 was primarily due to timing of vendor payments and lower earnings in fiscal 2019 compared to prior year.
In fiscal 2020, cash from investing activities was an inflow of $36.9 million compared to an outflow of $60.9 million in fiscal 2019 and a cash inflow of $635.5 million in fiscal 2018. The fiscal 2020 cash inflow from investing activities was primarily attributable to the proceeds from the sale and leaseback of five properties including our headquarter facilities in the United States, Australia and Canada as well as a refurbishment center and ancillary office space in Grapevine, Texas, lower capital expenditures in the current year period and $8.6 million net proceeds from the sale of our corporate aircraft. See Note 1, "Nature of Operations and Summary of Significant Accounting Policies," and Note 11, "Leases" for further information.
In fiscal 2018, cash provided by investing activities included $727.9 million in proceeds from divestitures, primarily from the sale of Spring Mobile. Capital expenditures totaled $60.0 million, $78.5 million and $93.7 million in fiscal 2020, 2019 and 2018, respectively.
In fiscal 2020, our financing activities were a net cash outflow of $55.4 million consisting primarily of the repayment of $130.3 million of our 2021 Senior Notes through a combination of open market transactions and an optional early redemption of $125.0 million of our 2021 Senior Notes, at par, in December 2020, partially offset by a net $25.0 million draw down on our Revolver and $47.1 million in proceeds from term loans entered into by our French subsidiary, Micromania SAS.
In 2019, our financing activities were a net cash outflow of $644.7 million consisting primarily of the redemption of our $350.0 million 2019 senior notes in April 2019, repurchases of our Class A Common Stock totaling $198.7 million, open market repurchases of our 2021 Senior Notes totaling $53.6 million and dividends paid on our Class A Common Stock of $40.5 million. 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.
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 also includes a $200 million expansion feature and $100 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 the London Interbank Offered ("LIBO") rate loans, range from 1.25% to 1.50%. The Revolver is secured by substantially all of the assets of GameStop Corp. and the assets of its domestic subsidiaries, such lien being junior to the lien in certain of such assets that secure the 2023 Senior Notes. We are required to pay a commitment fee of 0.25% for any unused portion of the total commitment under the Revolver. As of January 30, 2021, the applicable margin was 0.50% for prime rate loans and 1.50% for LIBO rate loans. As of January 30, 2021, total availability under the Revolver after giving effect to the Availability Reduction (as defined below) was $88.4 million, with outstanding borrowings of $25.0 million and outstanding standby letters of credit of $9.8 million. On March 15, 2021, we repaid our outstanding borrowings of $25.0 million under the Revolver. See Note 19 “Subsequent Events”.
In August 2020, we entered into the fourth amendment (“Fourth Amendment”) to the credit agreement governing our Revolver (“Credit Agreement”) giving effect to certain amendments, which are incorporated above and include, but are not limited to the following:
•Reduced the amount of the excess availability trigger that determines whether the Company is subject to a fixed charge coverage ratio covenant of 1.0:1.0 from the greater of $30 million and 10% of the borrowing base to the greater of $12.5 million and 10% of the borrowing base;
•Increased the sublimit for issuances of letters of credit under the Credit Agreement from $50 million to $100 million; and
•Increased the amount of letters of credit permitted to be issued separately from, and not pursuant to, the Credit Agreement from $25 million to (i) up to $150 million for letters of credit issued by borrowers/guarantors under the Credit Agreement and (ii) up to $75 million for letters of credit issued for the benefit of foreign subsidiaries, subject to the understanding that the outstanding amount of letters of credit issued under the Credit Agreement, combined with the outstanding amount of letters of credit otherwise permitted by the Credit Agreement cannot exceed $275 million in the aggregate.
The agreement governing our Revolver and the indentures governing our 2021 Senior Notes and 2023 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 agreement governing our Revolver and the indentures governing our 2021 Senior Notes and 2023 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 (the "Availability Reduction"). We are currently in compliance with all covenants under the indentures governing the 2021 Senior Notes and 2023 Senior Notes and the agreement governing our Revolver.
As of January 30, 2021, the aggregate principal amounts outstanding of our 2021 Senior Notes and 2023 Senior Notes were $73.2 million and $216.4 million, respectively. Additionally, as of January 30, 2021, the aggregate principal balance outstanding under term loans entered into by our French subsidiary, Micromania SAS, was €40.0 million ($48.6 million as of January 30, 2021).
On March 15, 2021, we redeemed the remaining $73.2 million principal amount of our 2021 Senior Notes. See Note 19 “Subsequent events”
Our French subsidiary, Micromania SAS, also maintained a credit facility of €20.0 million ($24.3 million as of January 30, 2021) that allows it to obtain short term loans of 10 to 93 days in duration to support its working capital needs. The credit facility commitments expired in January 2021. No amounts were drawn under this facility through January 30, 2021.
Separately from the asset-based Revolver, we maintain uncommitted letter of credit facilities with certain lenders that provide for the issuance of letters of credit and bank guarantees, at times supported by cash collateral. As of January 30, 2021, we had $133.3 million of outstanding letters of credit and other bank guarantees under facilities outside of the Revolver.
See Note 12, "Debt," for additional information.
We may also fund our growth capital needs, as circumstances warrant, from sales of equity and debt securities. The timing and amount of any equity sales would depend on, among other factors, our capital needs and alternative sources and costs of capital available to us, market perceptions about us, and the then current trading price of our common equity.
In December 2020, we entered into the ATM Program. Sales of our Class A Common Stock under the ATM Program may be made by means of transactions that are deemed to be an "at the market offering" as defined in Rule 415(a)(4) under the Securities Act, including block transactions, sales made directly on the NYSE or sales made into any other existing trading markets of our shares of Class A Common Stock. We are under no obligation to offer and sell shares of our Class A Common Stock under the ATM Program. As of January 30, 2021, and through the date of this Form 10-K, we have not sold any shares of our Class A Common Stock under the ATM Program. Since January 2021, we have been evaluating whether to increase the size of the ATM Program and whether to potentially sell shares of our Class A Common Stock under the increased ATM Program during the course of fiscal 2021, primarily to fund the acceleration of our future transformation initiatives. The timing and amount of sales under the ATM Program would depend on, among other factors, our capital needs and alternative sources and costs of capital available to us, market perceptions about us, and the then current trading price of our Class A Common Stock.
Net proceeds from sales of our shares of Class A Common Stock under the ATM Program are expected to be used for working capital and general corporate purposes, which may include funding our ongoing digital-first growth strategy and product category expansion efforts. For additional information, see Item 1. Business - Business and Growth Strategies.
On March 4, 2019, our Board of Directors approved a share repurchase authorization allowing us to repurchase up to $300.0 million of our Class A Common Stock. The authorization has no expiration date.
On June 11, 2019, we commenced a modified Dutch auction tender offer for up to 12.0 million shares of our Class A Common Stock with a price range between $5.20 and $6.00 per share. The tender offer expired on July 10, 2019. Through the tender offer, we accepted for payment 12.0 million shares at a purchase price of $5.20 per share for a total of $62.9 million, including fees and commissions. The shares purchased through the tender offer were immediately retired.
In addition to the equity tender offer described above, during the second half of fiscal 2019, we executed a series of open market repurchases for an aggregate of 26.1 million shares of our Class A Common Stock totaling $135.8 million, including fees and commissions. These repurchased shares were immediately retired.
In aggregate, during fiscal 2019, we repurchased a total of 38.1 million shares of our Class A Common Stock, totaling $198.7 million, for an average price of $5.19 per share. We did not repurchase shares during fiscal 2020 or fiscal 2018. As of January 30, 2021, we have $101.3 million remaining under the repurchase authorization.
As of January 30, 2021, our executive officers and other employees held an aggregate of 4.6 million unvested shares of restricted stock, including 0.3 million unvested shares of restricted stock that are scheduled to vest in the ordinary course in the first quarter of fiscal 2021. The vesting of shares of restricted stock may accelerate in connection with certain events (such as the cessation of the grantee’s employment due to death or disability, termination by us without cause or resignation by the grantee with good reason), whether under the terms of employment agreements, our severance plans or policies, or otherwise.
Tax withholding obligations arise upon the vesting of shares of restricted stock and these obligations must be satisfied at the time they arise through cash payments to the applicable taxing authorities. The amount of the tax withholding obligations due upon the vesting of shares of restricted stock is dependent on the price of our shares of Class A Common Stock on the New
York Stock Exchange on the applicable vesting date. The higher the price of the shares of our Class A Common Stock on the vesting date, the higher the tax withholding amount that will be due.
If we were to elect to satisfy tax withholding obligations by withholding and canceling a portion of the shares subject to vesting (sometimes referred to as “share withholding”) and remitting cash to the taxing authorities at the applicable statutory rates on behalf of the holder(s) of applicable awards then, depending on the price of our Class A Common Stock on the vesting date, the amount of these cash payments could be substantial and could have a negative impact on our liquidity and ability to use funds for operational purposes.
We may seek to implement “sell-to-cover” arrangements with one or more holders of shares of restricted stock to minimize our expenditure of cash to satisfy tax withholding obligations. Under such arrangements, a broker would assist the holder to sell, in the open market, all or a portion of the shares subject to vesting and would remit a portion of the sales proceeds to us. We would in turn remit such amounts to the taxing authorities. Such “sell-to-cover” arrangements would enable us to satisfy tax withholding obligations and remain in a net neutral cash position.
Our Class A Common Stock price has recently experienced extreme price fluctuations. Assuming, solely for illustration purposes, a stock price of $209.81 per share (the closing price of our shares of Class A Common Stock on the New York Stock Exchange on March 17, 2021) upon vesting of all of the shares of restricted stock scheduled to vest in the ordinary course during the first quarter of fiscal 2021 (0.3 million shares), we estimate that the aggregate amount of our tax withholdings obligations on account of these awards would be approximately $18.6 million. Accordingly, if we arranged for share withholding for all such awards, we would be required to expend such dollar amount in cash. Alternatively, if we arranged with the applicable employees for “sales-to-cover” for all such awards, then our net cash balances would not change materially and approximately 0.1 million shares of our Class A Common Stock would be sold on the open market (assuming each share were sold at $209.81). The foregoing amounts are illustrative and the actual amount of the tax obligations and the number of shares to be delivered or sold could be higher or lower, depending on the price of our Class A Common Stock upon vesting, the applicable tax withholding rates then in effect, the price at which any sales to cover were to occur and the number (if any) of restricted stock awards that are forfeited prior to vesting.
We paid cash dividends of $0.3 million, $40.5 million and $157.4 million in fiscal 2020, 2019 and 2018, respectively. On June 3, 2019, our Board of Directors elected to eliminate the Company’s quarterly dividend, effective immediately, in an effort to strengthen the Company's balance sheet and provide increased financial flexibility. Dividends paid in fiscal 2020 represents dividends previously declared on unvested restricted stock awards granted under the 2011 Plan as discussed in Note 14 "Common Stock and Share-Based Compensation". These dividends are paid upon vesting of the restricted stock awards. We believe the decision to eliminate the dividend will enable us to further reduce debt and provide us flexibility as we seek to drive value creation for stockholders.
The following table sets forth our contractual obligations as of January 30, 2021 (in millions):
| ||Payments Due by Fiscal Period|
|Total||FY 2021||FY 2022||FY 2023||FY 2024||FY 2025||Thereafter|
|Operating leases||$||755.3 ||$||258.2 ||$||168.0 ||$||112.1 ||$||78.8 ||$||51.0 ||$||87.2 |
|462.5 ||462.5 ||— ||— ||— ||— ||— |
|French term loans||48.6 ||48.6 ||— ||— ||— ||— ||— |
|2021 Senior Notes||73.2 ||73.2 ||— ||— ||— ||— ||— |
|2023 Senior Notes||216.4 ||— ||— ||216.4 ||— ||— ||— |
|Interest payments on senior notes||56.5 ||24.1 ||21.6 ||10.8 ||— ||— ||— |
|$||1,612.5 ||$||866.6 ||$||189.6 ||$||339.3 ||$||78.8 ||$||51.0 ||$||87.2 |
(1) Purchase obligations represent outstanding purchase orders for merchandise from vendors. These purchase orders are generally cancellable until shipment of the products.
(2) As of January 30, 2021, we had $9.1 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 9, "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.
As of January 30, 2021, we had standby letters of credit outstanding in the amount of $9.8 million and had other bank guarantees outstanding in the amount of $133.3 million, of which $57.6 million is cash collateralized.
OFF-BALANCE SHEET ARRANGEMENTS
We had no material off-balance sheet arrangements as of January 30, 2021 other than those disclosed Note 12, "Debt" to our audited consolidated financial statements.
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
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. 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 at January 30, 2021 would have affected net earnings by approximately $1.9 million in fiscal 2020.
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. 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.
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 January 30, 2021, in each case, would have affected net earnings by approximately $2.1 million in fiscal 2020. A 10% change in our gift card breakage rate at January 30, 2021 would have affected net earnings by approximately $11.0 million in fiscal 2020.
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 existing deferred tax assets are not more likely than not to be realized. We have therefore established valuation allowances in all jurisdictions. Our valuation allowance increased to $225.7 million as of January 30, 2021, due to cumulative losses in certain foreign jurisdictions. See Note 9, "Income Taxes" to our consolidated financial statements.
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 $9.1 million as of January 30, 2021. 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 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 to manage currency risk primarily related to intercompany loans denominated in non-functional currencies. The forward exchange 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. We recognized a loss of $6.1 million and a gain of $4.1 million in selling, general and administrative expenses related to derivative instruments for the fiscal years ended January 30, 2021 and February 1, 2020, respectively. The aggregate fair value of the forward exchange contracts as of January 30, 2021 and February 1, 2020 was a net asset of $0.1 million and $1.1 million, respectively, 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 January 30, 2021 would result in a gain of $11.2 million or a loss of $9.2 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
The per annum interest rate on our $420 million revolving credit facility is variable and is based on (i) the U.S. prime rate, (ii) LIBOR or (iii) the U.S. federal funds rate. We had $25.0 million and no outstanding balance on our revolving credit facility as of January 30, 2021 and February 1, 2020, respectively. On March 15, 2021, we repaid our outstanding borrowings of $25.0 million under the Revolver. See Note 19 “Subsequent Events”. In 2017, the Financial Conduct Authority, the regulatory body of LIBOR, announced its intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rate Committee, has proposed the replacement of U.S. dollar LIBOR rates with a new index calculated by short-term repurchase agreements backed by U.S. Treasury securities called the Secured Overnight Financing Rate (“SOFR”). Whether or not SOFR is generally accepted as the LIBOR replacement remains in question and the future of LIBOR at this time is uncertain. Our revolving credit facility matures in November 2022, therefore, we anticipate that we will amend our revolving credit facility prior to the LIBOR quotation termination date. There can be no assurances as to what alternative reference rates may be and whether such rates will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR.
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.
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
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 are effective at the reasonable assurance level. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports.
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 duly documented 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 January 30, 2021, 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 January 30, 2021, the Company’s internal control over financial reporting was effective at a reasonable assurance level.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of January 30, 2021. Deloitte & Touche LLP’s opinion, as stated in their report which appears on the following page, is consistent with management’s report on internal control over financial reporting as set forth above.
There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected or is reasonably likely to material affect our internal control over financial reporting.
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 January 30, 2021, 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, the Company maintained, in all material respects, effective internal control over financial reporting as of January 30, 2021, 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 January 30, 2021, of the Company and our report dated March 23, 2021, 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.
/s/ DELOITTE & TOUCHE LLP
March 23, 2021
ITEM 9B. OTHER INFORMATION
Reference is made to the Current Report on Form 8-K that we filed with the SEC on January 11, 2021 that disclosed that on January 10, 2021, we entered into an agreement (the “Agreement”) with RC Ventures LLC and Ryan Cohen. This Form 8-K also disclosed that, pursuant to the Agreement, we agreed that effective at our 2021 annual meeting of stockholders (the “2021 Annual Meeting”), the size of the Board would be reduced from the current 13 directors to nine directors and that the Board would nominate for election the individuals identified in the Form 8-K for election as directors at the 2021 Annual Meeting. As of the date of this Form 10-K, the Board has not determined the definitive slate of nominees but currently expects that the following incumbent directors will retire from the Board at the 2021 Annual Meeting: Lizabeth Dunn, Paul Evans, Raul J. Fernandez, Reginald Fils-Aimé, William Simon, James K. Symancyk, Carrie W. Teffner and Kathy P. Vrabeck. The contemplated retirements are not because of a disagreement with us on any matter relating to our operations, policies or practices.
Reference is made to the Current Report on Form 8-K that we filed with the SEC on the date of this Form 10-K that disclosed that on March 23, 2021, we announced the appointment of Jenna Owens, age 42, as the Company’s Executive Vice President and Chief Operating Officer, effective March 29, 2021. Prior to joining GameStop and since 2017, Ms. Owens served in a variety of senior roles at Amazon.com, Inc., including Director and General Manager of Distribution and Multi-Channel Fulfillment, Director of Associate Experience and Operations for COVID-19 Testing, Director of Global Product and Technology for Grocery Post-Order Customer Experience, and Director and General Manager of Amazon Fresh Pickup. Prior to joining Amazon.com, Inc., Ms. Owens held senior roles at Google, including General Manager of Operations of Google Express from 2012 to 2015 and Head of Operations Efficiency for Americas Ad Sales from 2015 to 2017. From 2011 to 2012, Ms. Owens worked at McKinsey & Co. in the Supply Chain practice where her work included customer-back supply chain transformations of Fortune 500 manufacturers. Ms. Owens has also worked in operations and supply chain at McMaster-Carr Industrial Supply Co. and Honeywell Inc. Ms. Owens holds an Interdisciplinary B.A. from Amherst College and an M.B.A. from New York University’s Leonard N. Stern School of Business.
Reference is made to the Current Report on Form 8-K that we filed with the SEC on February 23, 2021 that disclosed that James A. Bell, our Chief Financial Officer, would cease to be our Chief Financial Officer on or about March 26, 2021 and that if a permanent replacement is not in place at the time that Mr. Bell ceases to be our Chief Financial Officer, then, effective at such time, Diana Saadeh-Jajeh, who is currently serving our Senior Vice President and Chief Accounting Officer, will assume the additional role of interim Chief Financial Officer. Mr. Bell’s cessation as our Chief Financial Officer and Ms. Saadeh-Jajeh’s assumption of the role of interim Chief Financial Officer will occur on March 24, 2021.
Our Board of Directors has formed a committee of directors called the “Strategic Planning and Capital Allocation Committee” (the Strategic Committee). The Committee is responsible for assisting the Board in its oversight of our operational objectives and corporate strategy, capital allocation priorities and other opportunities for maximizing stockholder value. Our Board, through the Strategic Committee, is currently evaluating our executive leadership team skill sets related to meeting changing business requirements and has engaged a third party firm to assist it in its evaluation and exploration. This evaluation and exploration could result in a change in one or more of our senior executives.
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 Chief Executive Officer, Chief Financial Officer, Chief Merchandising Officer, Chief Customer Officer, Chief Accounting Officer, any Executive Vice President, any Senior Vice President or Vice President employed in a finance or accounting role and any managing director or finance director of all our foreign subsidiaries. We have also adopted a Code of Standards, Ethics and Conduct applicable to all of our associates. 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE*
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES*
* The information not otherwise provided herein that is required by Items 10, 11, 12, 13 and 14 will be set forth in the definitive proxy statement relating to our 2021 Annual Meeting of Stockholders to be held on or around June 10, 2021 which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. This definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by Items 10, 11, 12, 13 and 14 are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a)The following documents are filed as a part of this Form 10-K:
(i)Index and Consolidated Financial Statements
The list of consolidated financial statements set forth in the accompanying Index to Consolidated Financial Statements at page F-1 herein is incorporated herein by reference. Such consolidated financial statements are filed as part of this Form 10-K.
(2)Financial Statement Schedules required to be filed by Item 8 of this Form 10-K:
The following financial statement schedule for the 52 weeks ended January 30, 2021, 52 weeks ended February 1, 2020 and the 52 weeks ended February 2, 2019 is filed as part of this Form 10-K and should be read in conjunction with our Consolidated Financial Statements appearing elsewhere in this Form 10-K. All other schedules are omitted because they are not applicable.
The information required by this Section (b) of Item 15 is set forth on the Exhibit Index that follows the Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K.
Schedule II — Valuation and Qualifying Accounts
For fiscal years 2020, 2019 and 2018:
| ||Balance at|
| ||(In millions)|
|Fiscal year 2020||$||58.0 ||$||25.5 ||$||15.1 ||$||(53.4)||$||45.2 |
|Fiscal year 2019||$||69.4 ||$||35.4 ||$||20.5 ||$||(67.3)||$||58.0 |
|Fiscal year 2018||$||59.2 ||$||50.1 ||$||46.7 ||$||(86.6)||$||69.4 |
|Valuation Allowance for Deferred Tax Assets|
|Fiscal year 2020||$||112.7 ||$||113.0 ||$||— ||$||— ||$||225.7 |
|Fiscal year 2019||$||32.9 ||$||83.1 ||$||— ||$||(3.3)||$||112.7 |
|Fiscal year 2018||$||36.9 ||$||— ||$||— ||$||(4.0)||$||32.9 |
(1) Consists primarily of amounts received from vendors for defective allowances.
(2) The fiscal year 2019 includes the disposition of $0.3 million of Simply Mac inventory reserves as of the date of the sale. The fiscal year 2018 includes the disposition of $3.6 million of Spring Mobile inventory reserves as of the date of the sale.
(3) Includes inventory reserve activity related to Simply Mac and Spring Mobile. Simply Mac was sold in September 2019 and Spring Mobile was sold in January 2019.
ITEM 16. FORM 10-K SUMMARY
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
|By:||/s/ GEORGE E. SHERMAN|
|George E. Sherman|
|Chief Executive Officer|
Date: March 23, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|Name|| ||Capacity|| ||Date|
|/s/ GEORGE E. SHERMAN|| ||Chief Executive Officer and Director|| ||March 23, 2021|
|George E. Sherman||(Principal Executive Officer)|
|/s/ KATHY P. VRABECK|| ||Executive Chairman and Director|| ||March 23, 2021|
|Kathy P. Vrabeck|
|/s/ JAMES A. BELL|| ||Executive Vice President, Chief Financial Officer|| ||March 23, 2021|
|James A. Bell||(Principal Financial Officer)|
|/s/ DIANA SAADEH-JAJEH|| ||Senior Vice President, Chief Accounting Officer|| ||March 23, 2021|
|Diana Saadeh-Jajeh||(Principal Accounting Officer)|
|/s/ ALAN ATTAL|| ||Director|| ||March 23, 2021|
|/s/ RYAN COHEN|| ||Director|| ||March 23, 2021|
|/s/ LIZABETH DUNN|| ||Director|| ||March 23, 2021|
|/s/ PAUL J. EVANS||Director||March 23, 2021|
|Paul J. Evans|
|/s/ RAUL J. FERNANDEZ|| ||Director|| ||March 23, 2021|
|Raul J. Fernandez|
|/s/ REGINALD FILS-AIMÉ|| ||Director|| ||March 23, 2021|
|/s/ JIM GRUBE|| ||Director|| ||March 23, 2021|
|/s/ WILLIAM S. SIMON|| ||Director|| ||March 23, 2021|
|William S. Simon|
|/s/ JAMES K. SYMANCYK|| ||Director|| ||March 23, 2021|
|James K. Symancyk|
|/s/ CARRIE W. TEFFNER||Director||March 23, 2021|
|Carrie W. Teffner|
|/s/ KURTIS J. WOLF||Director||March 23, 2021|
|Kurtis J. Wolf|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of GameStop Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of GameStop Corp. and subsidiaries (the "Company") as of January 30, 2021, and February 1, 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for the 52 week periods ended January 30, 2021, February 1, 2020 and February 2, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 30, 2021, and February 1, 2020, and the results of its operations and its cash flows for the 52 week periods ended January 30, 2021, February 1, 2020, and February 2, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 23, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective February 3, 2019, the Company adopted FASB ASC Topic 842, Leases, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Merchandise Inventories - Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company carries merchandise inventories at the lower of cost or market generally using the average cost method. In valuing merchandise inventories, the Company is required to make adjustments to inventory to reflect potential obsolescence or over-valuation as a result of cost exceeding the market. In valuing inventory, management makes significant judgements and estimates, including consideration of quantities on hand, recent sales, potential price protections, returns to vendors, and other factors. Such judgements and estimates are more significant for certain inventory product types.
We identified the inventory reserve for certain inventory products as a critical audit matter because of the significant estimates and the assumptions management makes to estimate the excess, slow-moving, and obsolete inventory adjustments, including consideration of quantities on hand, recent sales, potential price protections, returns to vendors and other factors to estimate future customer demand. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of related assumptions, as well as the inputs and
related calculations, to evaluate whether merchandise inventory reserves for certain inventory products were appropriately recorded as of January 30, 2021.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the excess, slow-moving, and obsolete inventory reserve for certain inventory products included the following, among others:
•We tested the effectiveness of controls over the valuation of inventories.
•We evaluated the appropriateness and consistency of management’s methods and assumptions used in developing their estimate of the excess, slow-moving, and obsolete inventory reserve, which included consideration of reserve trends.
•We performed analysis over key product metrics, inventory turnover, and margins, to identify and evaluate slow-moving inventory categories, negative margins, or other unusual trends.
•We tested a sample of inventory items to assess the reasonableness of the excess, slow-moving, and obsolete inventory reserve through evaluation of historical margin, turnover, discounts, and markdowns.
/s/ DELOITTE & TOUCHE LLP
March 23, 2021
We have served as the Company's auditor since 2013.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value per share)
|Cash and cash equivalents||$||508.5 ||$||499.4 |
|Restricted cash||110.0 ||0.3 |
|Receivables, net||105.3 ||141.9 |
|Merchandise inventories||602.5 ||859.7 |
|Prepaid expenses and other current assets||224.9 ||120.6 |
|Assets held-for-sale ||— ||11.8 |
|Total current assets||1,551.2 ||1,633.7 |
|Property and equipment, net||201.2 ||275.9 |
|Operating lease right-of-use assets||662.1 ||767.0 |
|Deferred income taxes||— ||83.0 |
|Long-term restricted cash||16.5 ||13.8 |
|Other noncurrent assets||41.6 ||46.3 |
|Total assets||$||2,472.6 ||$||2,819.7 |
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Accounts payable||$||341.8 ||$||380.8 |
|Accrued liabilities and other current liabilities||626.8 ||617.5 |
|Current portion of operating lease liabilities||227.4 ||239.4 |
|Short-term debt, including current portion of long-term debt, net||121.7 ||— |
Borrowings under revolving line of credit (See Note 19 “Subsequent Events”)
|25.0 ||— |
|Total current liabilities||1,342.7 ||1,237.7 |
|Long-term debt, net||216.0 ||419.8 |
|Operating lease liabilities||456.7 ||529.3 |
|Other long-term liabilities||20.5 ||21.4 |
|Total liabilities||2,035.9 ||2,208.2 |
|Commitments and contingencies (Note 13)|
Class A common stock — $.001 par value; authorized 300.0 shares; 65.3 and 64.3 shares issued and outstanding, respectively
|0.1 ||0.1 |
|Additional paid-in capital||11.0 ||— |
|Accumulated other comprehensive loss||(49.3)||(78.8)|
|Retained earnings||474.9 ||690.2 |
|Total stockholders' equity||436.7 ||611.5 |
|Total liabilities and stockholders’ equity||$||2,472.6 ||$||2,819.7 |
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
|Net sales||$||5,089.8 ||$||6,466.0 ||$||8,285.3 |
|Cost of sales||3,830.3 ||4,557.3 ||5,977.2 |
|Gross profit||1,259.5 ||1,908.7 ||2,308.1 |
|Selling, general and administrative expenses||1,514.2 ||1,922.7 ||1,994.2 |
|Goodwill and asset impairments||15.5 ||385.6 ||1,015.9 |
|Gain on sale of assets||(32.4)||— ||— |
|Interest expense||34.0 ||38.5 ||56.8 |
|Loss from continuing operations before income taxes||(269.9)||(426.8)||(753.1)|
|Income tax (benefit) expense||(55.3)||37.6 ||41.7 |
|Net loss from continuing operations||(214.6)||(464.4)||(794.8)|
|(Loss) income from discontinued operations, net of tax||(0.7)||(6.5)||121.8|