UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-24603
ELECTRONICS BOUTIQUE HOLDINGS CORP.
(Exact Name of Registrant as Specified in its Charter)
|
Delaware |
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51-0379406 |
|
(State of Incorporation) |
|
(IRS Employer Identification Number) |
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|
|
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931 South Matlack Street |
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19382 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: 610/430-8100
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 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 ý NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ý NO o
At May 28, 2004, there were 23,770,509 shares of common stock outstanding.
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
2
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
(Amounts in thousands, except per share amounts)
|
|
|
May 1, |
|
January 31, |
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|
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(unaudited) |
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Assets |
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|
|
|
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||
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|
|
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Current assets: |
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|
|
|
|
||
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Cash and cash equivalents |
|
$ |
82,290 |
|
$ |
157,968 |
|
|
Accounts receivable: |
|
|
|
|
|
||
|
Trade and vendors |
|
10,269 |
|
22,407 |
|
||
|
Other |
|
2,410 |
|
17,405 |
|
||
|
Merchandise inventories |
|
265,529 |
|
253,577 |
|
||
|
Deferred tax asset |
|
9,811 |
|
9,895 |
|
||
|
Prepaid expenses and other current assets |
|
15,637 |
|
16,435 |
|
||
|
Total current assets |
|
385,946 |
|
477,687 |
|
||
|
|
|
|
|
|
|
||
|
Property and equipment: |
|
|
|
|
|
||
|
Building & leasehold improvements |
|
114,588 |
|
113,109 |
|
||
|
Furniture, fixtures and equipment |
|
124,887 |
|
121,486 |
|
||
|
Land |
|
5,734 |
|
5,827 |
|
||
|
Construction in progress |
|
2,705 |
|
2,826 |
|
||
|
|
|
247,914 |
|
243,248 |
|
||
|
Less accumulated depreciation and amortization |
|
117,762 |
|
112,801 |
|
||
|
Net property and equipment |
|
130,152 |
|
130,447 |
|
||
|
|
|
|
|
|
|
||
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Goodwill and other intangible assets, net of accumulated amortization of $661 and $666 |
|
13,502 |
|
13,662 |
|
||
|
Deferred tax asset |
|
10,237 |
|
10,476 |
|
||
|
Other non-current assets |
|
4,997 |
|
4,103 |
|
||
|
Total assets |
|
$ |
544,834 |
|
$ |
636,375 |
|
|
|
|
|
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|
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||
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Liabilities and Stockholders’ Equity |
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|
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Current liabilities: |
|
|
|
|
|
||
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Accounts payable |
|
$ |
165,231 |
|
$ |
220,481 |
|
|
Accrued expenses |
|
65,911 |
|
73,336 |
|
||
|
Income taxes payable |
|
5,520 |
|
17,862 |
|
||
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Total current liabilities |
|
236,662 |
|
311,679 |
|
||
|
|
|
|
|
|
|
||
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Deferred rent and other long-term liabilities |
|
18,497 |
|
20,716 |
|
||
|
Total liabilities |
|
255,159 |
|
332,395 |
|
||
|
|
|
|
|
|
|
||
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Stockholders’ equity: |
|
|
|
|
|
||
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Preferred stock – authorized 25,000 shares;
$.01 par value; |
|
— |
|
— |
|
||
|
Common stock – authorized 100,000 shares; $.01 par value; 26,544 shares issued and 24,290 shares outstanding at May 1, 2004; 26,449 shares issued and 24,834 shares outstanding at January 31, 2004 |
|
265 |
|
264 |
|
||
|
Treasury stock – 2,254 and 1,615 shares at May 1, 2004 and January 31, 2004, respectively, at cost |
|
(51,675 |
) |
(34,455 |
) |
||
|
Additional paid-in capital |
|
184,014 |
|
181,204 |
|
||
|
Accumulated other comprehensive income |
|
2,469 |
|
5,411 |
|
||
|
Retained earnings |
|
154,602 |
|
151,556 |
|
||
|
|
|
|
|
|
|
||
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Total stockholders’ equity |
|
289,675 |
|
303,980 |
|
||
|
|
|
|
|
|
|
||
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Total liabilities and stockholders’ equity |
|
$ |
544,834 |
|
$ |
636,375 |
|
See accompanying notes to consolidated financial statements.
3
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Amounts in thousands, except per share amounts)
|
|
|
Thirteen weeks ended |
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||||
|
|
|
May 1, |
|
May 3, |
|
||
|
|
|
|
|
|
|
||
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Net sales |
|
$ |
370,964 |
|
$ |
301,821 |
|
|
Management fees |
|
1,453 |
|
1,643 |
|
||
|
Total revenues |
|
372,417 |
|
303,464 |
|
||
|
|
|
|
|
|
|
||
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Cost of goods sold |
|
271,154 |
|
223,269 |
|
||
|
|
|
|
|
|
|
||
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Gross profit |
|
101,263 |
|
80,195 |
|
||
|
|
|
|
|
|
|
||
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Costs and expenses: |
|
|
|
|
|
||
|
Selling, general and administrative expense |
|
88,922 |
|
69,302 |
|
||
|
Depreciation and amortization |
|
7,956 |
|
6,287 |
|
||
|
|
|
|
|
|
|
||
|
Operating income |
|
4,385 |
|
4,606 |
|
||
|
Interest income, net |
|
452 |
|
463 |
|
||
|
|
|
|
|
|
|
||
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Income before income tax expense |
|
4,837 |
|
5,069 |
|
||
|
Income tax expense |
|
1,791 |
|
1,897 |
|
||
|
|
|
|
|
|
|
||
|
Net income |
|
$ |
3,046 |
|
$ |
3,172 |
|
|
|
|
|
|
|
|
||
|
Net income per share: |
|
|
|
|
|
||
|
Basic |
|
$ |
0.12 |
|
$ |
0.12 |
|
|
Diluted |
|
$ |
0.12 |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
||
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Weighted average shares outstanding: |
|
|
|
|
|
||
|
Basic |
|
24,526 |
|
25,884 |
|
||
|
Diluted |
|
24,913 |
|
25,937 |
|
||
See accompanying notes to consolidated financial statements.
4
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
|
|
|
Thirteen weeks ended |
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||||
|
|
|
May 1, |
|
May 3, |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
||
|
Net income |
|
$ |
3,046 |
|
$ |
3,172 |
|
|
Adjustments to reconcile net income to cash (used in) provided by operating activities: |
|
|
|
|
|
||
|
Depreciation of property and equipment |
|
7,865 |
|
6,220 |
|
||
|
Amortization of other assets |
|
91 |
|
67 |
|
||
|
Loss on disposal of property and equipment |
|
459 |
|
24 |
|
||
|
Deferred taxes |
|
64 |
|
464 |
|
||
|
Foreign currency transaction (gain) loss |
|
(121 |
) |
140 |
|
||
|
Changes in assets and liabilities: |
|
|
|
|
|
||
|
Accounts receivable |
|
26,853 |
|
2,811 |
|
||
|
Merchandise inventories |
|
(14,182 |
) |
34,585 |
|
||
|
Prepaid expenses |
|
685 |
|
(594 |
) |
||
|
Other non-current assets |
|
(1,316 |
) |
882 |
|
||
|
Accounts payable |
|
(53,404 |
) |
(32,167 |
) |
||
|
Accrued expenses |
|
(6,886 |
) |
(2,500 |
) |
||
|
Income taxes payable |
|
(10,930 |
) |
(12,464 |
) |
||
|
Deferred rent and other long-term liabilities |
|
(2,200 |
) |
1,243 |
|
||
|
Net cash (used in) provided by operating activities |
|
(49,976 |
) |
1,883 |
|
||
|
Cash flows from investing activities: |
|
|
|
|
|
||
|
Purchases of property and equipment |
|
(9,468 |
) |
(6,644 |
) |
||
|
Proceeds from disposition of assets |
|
44 |
|
81 |
|
||
|
Net cash used in investing activities |
|
(9,424 |
) |
(6,563 |
) |
||
|
Cash flows from financing activities: |
|
|
|
|
|
||
|
Proceeds from exercise of stock options |
|
1,332 |
|
— |
|
||
|
Repurchase of common stock |
|
(17,220 |
) |
— |
|
||
|
Proceeds from issuance of common stock |
|
164 |
|
136 |
|
||
|
Other financing activities |
|
164 |
|
— |
|
||
|
Net cash (used in) provided by financing activities |
|
(15,560 |
) |
136 |
|
||
|
|
|
|
|
|
|
||
|
Effects of exchange rates on cash |
|
(718 |
) |
976 |
|
||
|
|
|
|
|
|
|
||
|
Net decrease in cash and cash equivalents |
|
(75,678 |
) |
(3,568 |
) |
||
|
Cash and cash equivalents, beginning of period |
|
157,968 |
|
121,873 |
|
||
|
Cash and cash equivalents, end of period |
|
$ |
82,290 |
|
$ |
118,305 |
|
|
|
|
|
|
|
|
||
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
||
|
Cash paid during the period for: |
|
|
|
|
|
||
|
Interest |
|
$ |
5 |
|
$ |
3 |
|
|
Income taxes |
|
12,666 |
|
14,156 |
|
||
See accompanying notes to consolidated financial statements.
5
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements include the accounts of Electronics Boutique Holdings Corp. and its wholly owned subsidiaries (the “Company”). All significant intercompany transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the more complete disclosures contained in the consolidated financial statements and notes thereto for the fiscal year ended January 31, 2004 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. Operating results for the thirteen week period ended May 1, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending January 29, 2005.
(2) Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is calculated by adjusting the weighted average common shares outstanding during the period for the dilutive effect of common stock equivalents related to stock options.
The following is a reconciliation of the basic weighted average number of shares outstanding to the diluted weighted average number of shares outstanding (amounts in thousands):
|
|
|
Thirteen weeks ended |
|
||
|
|
|
May 1, 2004 |
|
May 3, 2003 |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding—basic |
|
24,526 |
|
25,884 |
|
|
Dilutive effect of stock options |
|
387 |
|
53 |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding—diluted |
|
24,913 |
|
25,937 |
|
(3) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(4) Debt
The Company has available a revolving credit facility with Fleet Capital Corporation for maximum borrowings of $50.0 million. As of May 1, 2004, there were no outstanding borrowings on this facility.
6
(5) Comprehensive Income
Comprehensive income is computed as follows (amounts in thousands):
|
|
|
Thirteen weeks ended |
|
||||
|
|
|
May 1, |
|
May 3, |
|
||
|
Net income |
|
$ |
3,046 |
|
$ |
3,172 |
|
|
Foreign currency translations |
|
(4,098 |
) |
3,899 |
|
||
|
Hedging activities |
|
1,156 |
|
(1,729 |
) |
||
|
Comprehensive income |
|
$ |
104 |
|
$ |
5,342 |
|
Gains (losses) on foreign currency translations are a result of the Company’s investment in its foreign subsidiaries in Australia, Canada, Denmark, Germany, Italy, Norway and Sweden. Gains (losses) on hedging activities are primarily the result of foreign exchange forward contracts and cross currency swap agreements the Company has entered into to protect its investments in its European subsidiaries from foreign currency fluctuations. The net impact of these activities is primarily the result of the Company’s investments in its international subsidiaries that have not been hedged.
(6) Goodwill and Other Intangible Assets
The following tables show the intangible assets and goodwill as of May 1, 2004 and January 31, 2004 (amounts in thousands):
Amortizable Intangible Assets
|
|
|
May 1, 2004 |
|
January 31, 2004 |
|
||||||||
|
|
|
Gross
Carrying |
|
Accumulated |
|
Gross
Carrying |
|
Accumulated |
|
||||
|
Key Money |
|
$ |
2,087 |
|
$ |
651 |
|
$ |
1,791 |
|
$ |
581 |
|
|
Other |
|
10 |
|
10 |
|
85 |
|
85 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Total Intangible Assets |
|
$ |
2,097 |
|
$ |
661 |
|
$ |
1,876 |
|
$ |
666 |
|
Key money represents payments made to landlords, outgoing tenants or other third parties to enter into certain store leases.
Aggregate Amortization Expense
|
Thirteen weeks ended May 1, 2004 |
|
$ |
91 |
|
|
|
|
|
|
|
|
Thirteen weeks ended May 3, 2003 |
|
$ |
67 |
|
Goodwill
The change in carrying amount of goodwill for the thirteen weeks ended May 1, 2004 is as follows (amounts in thousands):
|
Balance January 31, 2004 |
|
$ |
12,452 |
|
|
Foreign exchange fluctuations |
|
(386 |
) |
|
|
Balance as of May 1, 2004 |
|
$ |
12,066 |
|
(7) Deferred Revenue
In January 2004, the Company entered into an agreement to terminate its services agreement with Game Group Plc (formerly The Electronics Boutique Plc.), a specialty interactive entertainment retailer based in the United Kingdom. Under the termination agreement, Game Group agreed to pay the Company $15.0 million. The Company received this payment in February 2004. The termination agreement eliminated and modified certain restrictive covenants that impacted the Company’s ability to expand in Europe. Based on an independent analysis, the remaining covenants not to compete with Game Group in the United Kingdom, Ireland, France and Spain were determined to have a value equal to
7
$10.3 million, which was recorded as deferred revenue on the Company’s consolidated balance sheet at January 31, 2004. This deferred revenue will be recognized as income over the terms of each covenant. For the thirteen weeks ended May 1, 2004, the Company recorded amortization of deferred revenue related to these covenants of $1.5 million on its consolidated statement of income.
(8) Sale of BC Sports Collectibles Business
On November 2, 2002, the Company sold its BC Sports Collectibles business to Sports Collectibles Acquisition Corporation (“SCAC”) for $2.2 million in cash and the assumption of lease related liabilities in excess of $13 million. The purchaser, SCAC, is owned by the family of James Kim, the Company’s Chairman. As of May 1, 2004, each of the 22 store leases have been assigned to SCAC. As the Company remains contingently liable for these leases, Mr. Kim has agreed to indemnify the Company against any liabilities associated with these leases. The purchase agreement provides SCAC the right, exercisable at any time after November 2, 2004, to assign back to the Company two of the store leases. The Company has retained an accrual of $204,000 for the estimated lease termination costs related to this option.
(9) Stock-Based Employee Compensation
The Company accounts for its employee stock options and purchase plans under the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of Statement No. 123, “Accounting for Stock-based Compensation,” to stock-based employee compensation.
|
|
|
(Amounts in thousands, except per share amounts) |
|
||||
|
|
|
Thirteen weeks ended |
|
||||
|
|
|
May 1, 2004 |
|
May 3, 2003 |
|
||
|
Net income, as reported |
|
$ |
3,046 |
|
$ |
3,172 |
|
|
Less: total stock based employee compensation, net of income tax |
|
963 |
|
1,073 |
|
||
|
Pro forma net income |
|
$ |
2,083 |
|
$ |
2,099 |
|
|
|
|
|
|
|
|
||
|
Net income per share: |
|
|
|
|
|
||
|
Basic – as reported |
|
$ |
0.12 |
|
$ |
0.12 |
|
|
Diluted – as reported |
|
$ |
0.12 |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
||
|
Basic – pro forma |
|
$ |
0.08 |
|
$ |
0.08 |
|
|
Diluted – pro forma |
|
$ |
0.08 |
|
$ |
0.08 |
|
(10) Stock Buy-Back Program
In May 2003, the Company’s Board of Directors approved a program to repurchase up to 1.5 million shares of its outstanding common stock. During fiscal 2004, the Company completed the program and repurchased 1.5 million shares of common stock at a weighted average cost, including broker commissions, of $21.18 per share. Cash expenditures to complete the stock buy-back totaled $31.8 million.
In November 2003, the Company announced that its Board of Directors approved a program to repurchase up to 2.0 million additional shares of its outstanding common stock. As of January 31, 2004, the Company had repurchased 115,700 shares of common stock at a weighted average cost, including broker commissions, of $23.21 per share. Cash expenditures for these stock repurchases totaled $2.7 million. During the thirteen weeks ended May 1, 2004, the Company repurchased an additional 638,400 shares of common stock at a weighted average cost, including broker commissions, of $26.97 per share. Cash expenditures for these stock repurchases totaled $17.2 million.
8
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are the world’s largest specialty retailer of video game hardware and software, PC entertainment software, pre-played video games and related accessories and products. As of May 1, 2004, we operated a total of 1,623 stores in the United States, Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico and Sweden, primarily under the names EB Games and Electronics Boutique. In addition, we operated a commercial website under the URL address www.ebgames.com. We operate in the interactive entertainment industry and are headquartered in West Chester, Pennsylvania. We are a holding company and do not have any significant assets or liabilities, other than all of the outstanding capital stock of our subsidiaries.
Our success has been, and will continue to be, contingent upon our ability to understand trends in our industry and to manage our business in response to these trends. For example, the interactive entertainment industry is cyclical as new technology is generally introduced every four to five years. We have historically achieved strong market share in the first few years of these cycles and then experienced subsequent declines as product prices fell and mass market retailers attracted consumers at the latter part of the cycle. Our current strategy to retain market share has been to expand our business through the opening of strip-center stores, which we believe attract the value conscious consumers that previously shopped through the mass market retail channel. Additionally, to increase profitability in all of our locations, we are focused on expanding our pre-played business and new ways to drive sales of new titles. Our success is dependent upon our ability to continue to grow the business in a profitable manner.
Management reviews several key indicators to evaluate our performance in achieving profit and sales growth. Sales growth is evaluated by measuring contributions generated from new store expansion and changes in comparable store sales. In addition, we measure our sales performance by analyzing changes in our market share relative to the overall industry. Gross margin is monitored for the impact of product mix as well as inventory obsolescence and losses. Product mix shifts throughout each industry cycle with lower margin hardware sales declining as a percentage of total sales while higher margin software sales increase. A prime driver of this shift has been the continual growth of the installed hardware base, which has increased to approximately 61 million units in the United States as of the end of the first quarter. We also review the growth of pre-played sales in relation to our total sales mix, as these pre-played sales are one of our higher margin categories.
We have a positive outlook for the remainder of fiscal 2005. We plan to open approximately 300 additional stores prior to the end of the current fiscal year. Approximately 200 of these are expected to be strip-center stores based in North America and the remaining stores will be predominantly based outside the United States. We continue to anticipate funding our store expansion with cash on hand and cash generated from operations. We anticipate the release of several popular software titles in the third and fourth quarters of fiscal 2005. These titles include Grand Theft Auto San Andreas, Half Life 2, Doom 3, Grand Turismo 4, Halo 2 and Madden 2005. We believe the recent hardware price drop to $149 for both Microsoft’s Xbox and Sony’s PS2 will lead to new growth for hardware sales, as well as increased software sales over the balance of fiscal 2005. Additionally, we expect to continue to strengthen our pre-played business through our increased presence in strip-center locations.
Results of operations
The following table sets forth certain statement of income items as a percentage of total revenues for the periods indicated:
|
|
|
Thirteen weeks ended |
|
||
|
|
|
May 1, |
|
May 3, |
|
|
Net sales |
|
99.6 |
% |
99.5 |
% |
|
Management fees |
|
0.4 |
|
0.5 |
|
|
Total revenues |
|
100.0 |
|
100.0 |
|
|
Cost of goods sold |
|
72.8 |
|
73.6 |
|
|
Gross profit |
|
27.2 |
|
26.4 |
|
|
Selling, general and administrative expense |
|
23.9 |
|
22.8 |
|
|
Depreciation and amortization |
|
2.1 |
|
2.1 |
|
|
Operating income |
|
1.2 |
|
1.5 |
|
|
Interest income, net |
|
0.1 |
|
0.1 |
|
|
Income before income tax expense |
|
1.3 |
|
1.6 |
|
|
Income tax expense |
|
0.5 |
|
0.6 |
|
|
Net income |
|
0.8 |
% |
1.0 |
% |
9
Net sales increased by 22.9% from $301.8 million in the thirteen weeks ended May 3, 2003 to $371.0 million in the thirteen weeks ended May 1, 2004. The increase in net sales was primarily due to the sales volume of $56.5 million resulting from 428 new stores opened since May 3, 2003, a favorable foreign currency exchange impact of $10.6 million on comparable stores in the thirteen weeks ended May 1, 2004 and additional sales volume of approximately $7.9 million for stores opened during the first thirteen weeks ended May 3, 2003. The increase in net sales was offset, in part, by a 2.5%, or $7.7 million, decrease in comparable store sales. The decrease in comparable sales was due to a weak new release schedule of software titles in the thirteen weeks ended May 1, 2004, compared with the highly anticipated releases of the Legend of Zelda: The Wind Waker and the Game Boy Advance SP in the thirteen weeks ended May 3, 2003, which contributed to a comparable store sales increase of 10.1% in the prior year period. Despite the decrease in overall comparable store sales, our U.S. strip center and European stores both showed positive comparable sales during the current year period.
Management fees decreased from $1.6 million in the thirteen weeks ended May 3, 2003 to $1.5 million in the thirteen weeks ended May 1, 2004. The $1.6 million in the thirteen weeks ended May 3, 2003 consisted of fees earned as part of the Company’s services agreement with Game Group, coupled with $150,000 in fees earned from Sports Collectibles Acquisition Corporation in connection with the sale of the BC Sports Collectibles business in November 2002. The $1.5 million in the thirteen weeks ended May 1, 2004 consists of the recognition of management fee income previously deferred as part of the termination of the services agreement with Game Group (see Note 7 to the Consolidated Financial Statements).
Cost of goods sold increased by 21.4% from $223.3 million in the thirteen weeks ended May 3, 2003 to $271.2 million in the thirteen weeks ended May 1, 2004. As a percentage of net sales, cost of goods sold decreased from 74.0% in the thirteen weeks ended May 3, 2003 to 73.1% in the thirteen weeks ended May 1, 2004. This decrease, as a percentage of net sales, was primarily due to a shift in business from lower margin hardware to higher margin software products combined with an increase in our pre-played business, offset, in part, by a decrease in vendor allowances recognized in cost of goods sold. Cost of goods sold does not include purchasing and distribution center operating expenses of approximately $4.8 million in the thirteen weeks ended May 1, 2004 and $3.9 million in the thirteen weeks ended May 3, 2003, which are included in selling, general and administrative expense. Accordingly, our cost of goods sold may not be comparable to the cost of goods sold of other retailers.
Selling, general and administrative expense increased by 28.3% from $69.3 million in the thirteen weeks ended May 3, 2003 to $88.9 million in the thirteen weeks ended May 1, 2004. This increase was primarily due to expenses associated with a larger domestic and international store base and the associated increases in store expense of $16.4 million and headquarter expense of $2.4 million. As a percentage of total revenues, selling, general and administrative expense increased from 22.8% in the thirteen weeks ended May 3, 2003 to 23.9% in the thirteen weeks ended May 1, 2004. This increase is primarily due to the decrease in comparable store sales of 2.5%, coupled with expenses associated with the opening of 428 stores since May 3, 2003.
Depreciation and amortization expense increased by 26.5% from $6.3 million in the thirteen weeks ended May 3, 2003 to $8.0 million in the thirteen weeks ended May 1, 2004. This increase was primarily attributable to capitalized expenditures for leasehold improvements and furniture and fixtures for new store openings and the remodeling of existing stores.
Income tax expense decreased from $1.9 million in the thirteen weeks ended May 3, 2003 to $1.8 million in the thirteen weeks ended May 1, 2004. As a percentage of income before income tax expense, income tax expense decreased from 37.4% in the thirteen weeks ended May 3, 2003 to 37.0% in the thirteen weeks ended May 1, 2004. Our effective tax rate decreased from the prior year principally as a result of an increase in operations in foreign jurisdictions that have lower tax rates than the United States.
10
Seasonality and quarterly results
Our business, like that of most retailers, is highly seasonal. A significant portion of our net sales and profits are generated during our fourth fiscal 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 and new store openings, net sales contributed by new stores, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays or promotions and changes in our merchandise mix.
Liquidity and capital resources
We have historically financed operations primarily through cash generated from operations and funds available under our credit facility. We expect capital expenditures to be approximately $50.0 million during the remainder of fiscal 2005. Expenditures will include the opening of approximately 300 additional new stores, the acquisition of a distribution center in Pennsylvania to consolidate our two existing Pennsylvania distribution centers, and the acquisition of two distribution centers to accommodate our expanding European operations. We have entered into an agreement to sell one of the existing Pennsylvania distribution centers for approximately $5.5 million. We expect this sale to be completed in early 2005.
The $50.0 million of cash used in operations in the thirteen weeks ended May 1, 2004 was primarily the result of a decrease in accounts payable and income taxes payable of $53.4 million and $10.9 million, respectively, and an increase in merchandise inventories of $14.2 million, offset, in part, by a decrease in accounts receivable of $26.9 million. The decrease in accounts payable and income taxes payable was due to payments of obligations arising from fourth quarter seasonal activity. The increase in merchandise inventories was due to an increased store base. The decrease in accounts receivable was primarily due to the receipt of $15.0 million as part of the termination of the services agreement with Game Group and normal seasonal fluctuations. The $1.9 million of cash generated from operations in the thirteen weeks ended May 3, 2003 was primarily a result of $10.1 million of net income and non-cash charges to net income plus decreases in accounts receivable and merchandise inventories, partially offset by the payment of accounts payable, accrued expenses and income taxes that were outstanding at the end of the prior fiscal year. The decline in merchandise inventories of $34.6 million was due to a reduction in first quarter inventory purchases and the sell-through of excess inventory levels held at the end of the prior fiscal year. The decrease in accounts payable of $32.2 million, accrued expenses of $2.5 million and taxes payable of $12.5 million were due to payments of obligations arising from fourth quarter seasonal activity, which is the highest volume and most profitable period of our fiscal year.
We made capital expenditures of $9.5 million in the thirteen weeks ended May 1, 2004 and $6.6 million in the thirteen weeks ended May 3, 2003, primarily to open new stores, continue our re-branding of existing stores and to remodel existing stores, our corporate headquarters and distribution centers.
At May 1, 2004, we had no borrowings under our $50.0 million revolving credit facility.
We have exercised an option to purchase a 315,000 square foot distribution center in Coatesville, Pennsylvania for $12.2 million. We plan to close on this facility in the Fall of 2004, at which time payment will be due.
In May 2003, the Company’s Board of Directors approved a program to repurchase up to 1.5 million shares of its outstanding common stock. During fiscal 2004, the Company completed the program and repurchased 1.5 million shares of common stock at a weighted average cost, including broker commissions, of $21.18 per share. Cash expenditures to complete the stock buy-back totaled $31.8 million. None of these expenditures occurred during the thirteen weeks ended May 3, 2003.
In November 2003, the Company announced that its Board of Directors approved a program to repurchase up to 2.0 million additional shares of its outstanding common stock. As of May 1, 2004, the Company had repurchased 754,100 shares of common stock at a weighted average cost, including broker commissions, of $26.40 per share. Cash expenditures for these stock repurchases totaled $19.9 million. Expenditures totaling $17.2 million were incurred during the thirteen weeks ended May 1, 2004.
Impact of inflation
We do not believe that inflation has had a material effect on our net sales or results of operations.
11
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of May 1, 2004 (the “Evaluation Date”), and, based on this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures were effective as of the Evaluation Date. There were no significant changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) are our internal controls and other procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in our reports under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
This Quarterly Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements. When used in this report, the words “expect,” “estimate,” “anticipate,” “intend,” “predict,” “believe,” and similar expressions and variations thereof are intended to identify forward-looking statements within the meaning of and subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward-looking statements appear in a number of places in this report and include statements regarding our intent, belief or current expectations with respect to, among other things, trends affecting our financial condition or results of operations and our business and growth strategies. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results or outcomes may differ materially from those projected in the forward-looking statements as a result of various factors.
We urge you to carefully consider the following important factors that could cause actual results to differ materially from our expectations:
• the timing and continuation of the introduction of new products by manufacturers;
• the cyclical nature of our industry;
• our ability to obtain vendor marketing and merchandising support;
• our ability to keep pace with technological changes;
• our ability to open new stores and renew existing locations;
• our ability to compete in an intensely competitive industry;
• the impact of vendor changes in pricing strategies;
• our ability to complete and integrate future acquisitions;
• the impact of the termination agreement with Game Group Plc. on our ability to expand in Europe;
• our dependence on suppliers, including overseas sources;
• changes in tax laws and the application thereof;
• the impact and costs of litigation and regulatory compliance;
• our dependence on common carriers to ship product to our stores;
• our dependence on management information systems;
• the risks involved with our international operations; and
• our ability to recruit and retain skilled personnel.
For a more detailed discussion of these and other important factors that could impact our results, see the text under the heading “Risk Factors” in Item 1 of our most recent Annual Report on Form 10-K. The forward-looking statements made in this report are made only as of the date of publication (June 2004) and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.
12
Part II. Other Information
Subsequent to the end of the first fiscal quarter, a subsidiary of the Company reached agreement on a tentative settlement of a proposed class action suit entitled “Chalmers v. Electronics Boutique of America Inc.” The suit, filed in the California Superior Court in Los Angeles County, California alleged that the Company’s subsidiary improperly classified store management employees as exempt from the overtime provisions of California wage-and-hour laws and sought recovery of wages for overtime hours worked and related relief. The Company denied liability but agreed to participate in non-binding mediation to attempt to resolve the matter. The settlement, in the amount of $950,000 which includes payments to be made to proposed class members, as well as the attorneys’ fees and litigation costs of the plaintiff, is still subject to preliminary and final court approval. The Company has previously reserved adequate amounts and, accordingly, the settlement will not have an adverse effect on its results of operations.
In addition, the Company is involved from time to time in legal proceedings and regulatory matters arising in the ordinary course of its business. In the opinion of management and except as described above, no pending proceedings could have a material adverse effect on the Company’s results of operations or financial condition.
The following table represents the periodic repurchases of equity securities made by the Company during the thirteen- week period ending May 1, 2004:
|
Fiscal Period |
|
Total |
|
Average |
|
Total
Number of |
|
Maximum |
|
||
|
|
|
|
|
|
|
|
|
|
|
||
|
2/1/04 – 2/28/04 |
|
|
268,200 |
|
$ |
26.67 |
|
268,200 |
|
1,616,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/29/04 – 4/3/04 |
|
|
249,500 |
|
$ |
26.79 |
|
249,500 |
|
1,366,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/4/04 – 5/1/04 |
|
|
120,700 |
|
$ |
27.87 |
|
120,700 |
|
1,245,900 |
|
In November 2003, the Company announced that its Board of Directors had approved its current program to repurchase up to 2.0 million shares of its outstanding common stock. Under the buy-back program, the Company may repurchase shares of its common stock from time to time in compliance with SEC regulations and subject to market conditions. There is no expiration date with regards to this program.
a. Exhibits:
|
31.1 |
|
Certification dated June 4, 2004 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Jeffrey W. Griffiths, President and Chief Executive Officer. |
|
|
|
|
|
31.2 |
|
Certification dated June 4, 2004 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by James A. Smith, Senior Vice President and Chief Financial Officer. |
|
|
|
|
|
32.1 |
|
Certification dated June 4, 2004 of CEO and CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Jeffrey W. |
13
|
|
|
Griffiths, President and Chief Executive Officer and James A. Smith, Senior Vice President and Chief Financial Officer. |
b. Reports on Form 8-K:
On February 2, 2004, the Company filed a Current Report on Form 8-K, reporting under Item 5 and announcing that two of its affiliates and Game Group Plc had mutually agreed to terminate the Services Agreement among the parties. Exhibits containing the termination agreement and the press release were attached.
On March 12, 2004, the Company filed a Current Report on Form 8-K, reporting under Item 12 and announcing financial results for the Company’s fourth quarter and year ended January 31, 2004.
14
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
Electronics Boutique Holdings Corp. |
|
||
|
|
|
|
(Registrant) |
|||
|
|
|
|
|
|||
|
Date: |
June 4, 2004 |
By: |
/s/ Jeffrey W. Griffiths |
|
||
|
|
|
|
Jeffrey W. Griffiths |
|||
|
|
|
|
President and Chief |
|||
|
|
|
|
Executive Officer |
|||
|
|
|
|
(Principal Executive Officer) |
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
Date: |
June 4, 2004 |
By: |
/s/ James A. Smith |
|
||
|
|
|
|
James A. Smith |
|||
|
|
|
|
Senior Vice President and |
|||
|
|
|
|
Chief Financial Officer |
|||
|
|
|
|
(Principal Financial and Accounting Officer) |
|||
15
EXHIBIT INDEX
|
Exhibit |
|
Description |
|
|
|
|
|
31.1 |
|
Certification dated June 4, 2004 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the Principal Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Jeffrey W. Griffiths, President and Chief Executive Officer. |
|
|
|
|
|
31.2 |
|
Certification dated June 4, 2004 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the Principal Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by James A. Smith, Senior Vice President and Chief Financial Officer. |
|
|
|
|
|
32.1 |
|
Certification dated June 4, 2004 of CEO and CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Jeffrey W. Griffiths, President and Chief Executive Officer and James A. Smith, Senior Vice President and Chief Financial Officer. |
16