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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - GameStop Corp.d222403dex322.htm
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EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - GameStop Corp.d222403dex312.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - GameStop Corp.d222403dex321.htm
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

       FOR THE QUARTERLY PERIOD ENDED JULY 30, 2011

OR

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

       FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NO. 1-32637

GameStop Corp.

(Exact name of registrant as specified in its Charter)

 

Delaware   20-2733559

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

625 Westport Parkway,  

76051

(Zip Code)

Grapevine, Texas  
(Address of principal executive offices)  

Registrant’s telephone number, including area code:

(817) 424-2000

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  þ      No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post such files).    Yes  þ      No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  þ    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
  

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨      No  þ

Number of shares of $.001 par value Class A Common Stock outstanding as of August 25, 2011: 139,078,768

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page No.  
PART I — FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

     2   
  

Condensed Consolidated Balance Sheets — July 30, 2011 (unaudited), July 31, 2010 (unaudited) and January 29, 2011

     2   
  

Condensed Consolidated Statements of Operations (unaudited) — For the 13 weeks and 26 weeks ended July  30, 2011 and July 31, 2010

     3   
  

Condensed Consolidated Statement of Changes in Equity (unaudited) — July 30, 2011

     4   
  

Condensed Consolidated Statements of Cash Flows (unaudited) — For the 26 weeks ended July 30, 2011 and July 31, 2010

     5   
  

Notes to Condensed Consolidated Financial Statements

     6   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     34   

Item 4.

  

Controls and Procedures

     35   
PART II — OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     35   

Item 1A.

  

Risk Factors

     35   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     36   

Item 6.

  

Exhibits

     36   

SIGNATURES

     40   

EXHIBIT INDEX

     41   

 

1


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1.    Financial Statements

GAMESTOP CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     July 30,
2011
    July 31,
2010
    January 29,
2011
 
     (Unaudited)     (Unaudited)        
     (In millions, except per share data)  
ASSETS:   

Current assets:

      

Cash and cash equivalents

   $ 224.8      $ 289.3      $ 710.8   

Receivables, net

     44.2        44.3        65.5   

Merchandise inventories, net

     1,059.9        1,129.5        1,257.5   

Deferred income taxes — current

     24.6        19.3        28.8   

Prepaid taxes

     49.3        9.5          

Prepaid expenses

     87.4        74.1        75.7   

Other current assets

     19.7        19.8        16.5   
  

 

 

   

 

 

   

 

 

 

Total current assets

     1,509.9        1,585.8        2,154.8   
  

 

 

   

 

 

   

 

 

 

Property and equipment:

      

Land

     25.6        13.5        24.0   

Buildings and leasehold improvements

     592.8        535.8        577.2   

Fixtures and equipment

     867.8        747.1        817.8   
  

 

 

   

 

 

   

 

 

 

Total property and equipment

     1,486.2        1,296.4        1,419.0   

Less accumulated depreciation and amortization

     871.3        721.1        805.2   
  

 

 

   

 

 

   

 

 

 

Net property and equipment

     614.9        575.3        613.8   

Goodwill, net

     2,073.2        1,924.2        1,996.3   

Other intangible assets

     278.1        239.6        254.6   

Other noncurrent assets

     63.3        38.1        44.3   
  

 

 

   

 

 

   

 

 

 

Total noncurrent assets

     3,029.5        2,777.2        2,909.0   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 4,539.4      $ 4,363.0      $ 5,063.8   
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY:   

Current liabilities:

    

Accounts payable

   $ 469.7      $ 625.0      $ 1,028.1   

Accrued liabilities

     662.0        529.4        657.0   

Taxes payable

                   62.7   

Revolver debt outstanding

     10.0                 
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,141.7        1,154.4        1,747.8   
  

 

 

   

 

 

   

 

 

 

Senior notes payable, long-term portion, net

     249.3        447.8        249.0   

Deferred taxes

     69.3        16.8        74.9   

Other long-term liabilities

     99.0        102.0        96.2   
  

 

 

   

 

 

   

 

 

 

Total long-term liabilities

     417.6        566.6        420.1   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,559.3        1,721.0        2,167.9   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies (Note 8)

      

Stockholders’ equity:

      

Preferred stock — authorized 5.0 shares; no shares issued or outstanding

                     

Class A common stock — $.001 par value; authorized 300.0 shares; 140.2, 150.4 and 146.0 shares outstanding, respectively

     0.1        0.1        0.1   

Additional paid-in-capital

     799.4        1,046.8        928.9   

Accumulated other comprehensive income

     265.9        82.8        162.5   

Retained earnings

     1,917.1        1,513.3        1,805.8   
  

 

 

   

 

 

   

 

 

 

Equity attributable to GameStop Corp. stockholders

     2,982.5        2,643.0        2,897.3   

Equity (deficit) attributable to noncontrolling interest

     (2.4     (1.0     (1.4
  

 

 

   

 

 

   

 

 

 

Total equity

     2,980.1        2,642.0        2,895.9   
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,539.4      $ 4,363.0      $ 5,063.8   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

GAMESTOP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     13 Weeks Ended     26 Weeks Ended  
     July 30,
2011
    July 31,
2010
    July 30,
2011
    July 31,
2010
 
     (In millions, except per share data)  
           (Unaudited)        

Sales

   $ 1,743.7      $ 1,799.1      $ 4,025.1      $ 3,881.8   

Cost of sales

     1,200.5        1,282.3        2,861.7        2,794.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     543.2        516.8        1,163.4        1,087.6   

Selling, general and administrative expenses

     442.5        405.0        885.2        808.8   

Depreciation and amortization

     47.1        42.2        93.4        84.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     53.6        69.6        184.8        194.1   

Interest income

     (0.4     (0.3     (0.5     (1.1

Interest expense

     6.7        10.3        13.0        20.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income tax expense

     47.3        59.6        172.3        174.5   

Income tax expense

     16.7        19.8        61.8        59.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     30.6        39.8        110.5        114.7   

Net loss attributable to noncontrolling interests

     0.3        0.5        0.8        0.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income attributable to GameStop

   $ 30.9      $ 40.3      $ 111.3      $ 115.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share1

   $ 0.22      $ 0.27      $ 0.78      $ 0.76   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share1

   $ 0.22      $ 0.26      $ 0.78      $ 0.74   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock-basic

     141.0        151.3        141.9        152.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock-diluted

     142.2        154.2        142.9        155.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1

Basic net income per share and diluted net income per share are calculated based on consolidated net income attributable to GameStop.

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

GAMESTOP CORP.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

    GameStop Corp. Stockholders              
    Class A
Common Stock
    Additional
Paid-in
Capital
    Accumulated
Other

Comprehensive
Income
                   
    Shares     Common
Stock
        Retained
Earnings
    Noncontrolling
Interest
    Total  
                      (In millions)                    
                      (Unaudited)                    

Balance at January 29, 2011

    146.0      $ 0.1      $ 928.9      $ 162.5      $ 1,805.8      $ (1.4   $ 2,895.9   

Comprehensive income:

             

Net income (loss) for the 26 weeks ended July 30, 2011

                                111.3        (0.8     110.5   

Foreign currency translation

                         103.4               (0.2     103.2   
             

 

 

 

Total comprehensive income

                213.7   

Stock-based compensation

                  9.8                             9.8   

Purchase of treasury stock

    (7.3            (152.4                          (152.4

Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax expense of $0.1)

    1.5               13.1                             13.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at July 30, 2011

    140.2      $ 0.1      $ 799.4      $ 265.9      $ 1,917.1      $ (2.4   $ 2,980.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

GAMESTOP CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     26 Weeks Ended  
     July 30,
2011
    July 31,
2010
 
     (In millions)  
     (Unaudited)  

Cash flows from operating activities:

    

Consolidated net income

   $ 110.5      $ 114.7   

Adjustments to reconcile net income to net cash flows used in operating activities:

    

Depreciation and amortization (including amounts in cost of sales)

     94.5        85.7   

Amortization and retirement of deferred financing fees and issue discounts

     1.2        1.7   

Stock-based compensation expense

     9.8        14.7   

Deferred income taxes

     (2.5     (3.3

Excess tax expense realized from exercise of stock-based awards

     0.4        2.7   

Loss on disposal of property and equipment

     6.9        3.2   

Changes in other long-term liabilities

     1.2        (1.0

Changes in operating assets and liabilities, net:

    

Receivables, net

     22.6        19.2   

Merchandise inventories

     217.5        (89.2

Prepaid expenses and other current assets

     (12.7     (13.5

Prepaid income taxes and accrued income taxes payable

     (112.0     (74.4

Accounts payable and accrued liabilities

     (563.1     (351.7
  

 

 

   

 

 

 

Net cash flows used in operating activities

     (225.7     (291.2
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchase of property and equipment

     (87.9     (80.3

Acquisitions, net of cash acquired

     (27.4       

Other

     (5.7     (9.2
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (121.0     (89.5
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchase of treasury shares

     (174.4     (241.6

Borrowings from the revolver

     35.0          

Repayments of revolver borrowings

     (25.0       

Issuance of shares relating to stock options

     13.2        1.2   

Excess tax expense realized from exercise of stock-based awards

     (0.4     (2.7
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (151.6     (243.1
  

 

 

   

 

 

 

Exchange rate effect on cash and cash equivalents

     12.3        7.7   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (486.0     (616.1

Cash and cash equivalents at beginning of period

     710.8        905.4   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 224.8      $ 289.3   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Basis of Presentation

GameStop Corp. (together with its predecessor companies, “GameStop,” “we,” “us,” “our,” or the “Company”), a Delaware corporation, is the world’s largest multichannel retailer of physical and digital video game products and PC entertainment software. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair presentation of the information for the periods presented. These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required under GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the 52 weeks ended January 29, 2011 (“fiscal 2010”). The preparation of financial statements in conformity with GAAP requires management 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, management has made its 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 management could have significant impact on the Company’s financial results. Actual results could differ from those estimates.

Due to the seasonal nature of the business, the results of operations for the 26 weeks ended July 30, 2011 are not indicative of the results to be expected for the 52 weeks ending January 28, 2012 (“fiscal 2011”).

Certain reclassifications have been made to conform the prior period data to the current interim period presentation.

 

2.

Accounting for Stock-Based Compensation

For options granted, the Company records share-based compensation expense in earnings based on the grant-date fair value. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This valuation model requires the use of subjective assumptions, including expected option life, expected volatility and the expected employee forfeiture rate. The Company uses historical data to estimate the option life and the employee forfeiture rate, and uses historical volatility when estimating the stock price volatility. There were no stock options granted during the 26 weeks ended July 30, 2011 and the 13 weeks ended July 31, 2010. There were 1,177,000 options to purchase common stock granted during the 26 weeks ended July 31, 2010, with a weighted-average fair value estimated at $7.88 per share, using the following assumptions:

 

     26 Weeks Ended  
     July 31,
2010
 

Volatility

     51.6

Risk-free interest rate

     1.6

Expected life (years)

     3.5   

Expected dividend yield

     0

 

6


Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In the 13 weeks ended July 30, 2011 and July 31, 2010, the Company included compensation expense relating to stock option grants of $1.6 million and $3.0 million, respectively, in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. In the 26 weeks ended July 30, 2011 and July 31, 2010, the Company included compensation expense relating to stock option grants of $3.2 million and $6.0 million, respectively, in selling, general and administrative expenses. As of July 30, 2011, the unrecognized compensation expense related to the unvested portion of our stock options was $6.0 million which is expected to be recognized over a weighted average period of 1.3 years. The total intrinsic value of options exercised during the 13 weeks ended July 30, 2011 and July 31, 2010 was $2.4 million and $0.2 million, respectively. The total intrinsic value of options exercised during the 26 weeks ended July 30, 2011 and July 31, 2010 was $10.0 million and $1.2 million, respectively.

During the 13 weeks ended July 30, 2011, the Company granted 4,620 shares of restricted stock at a weighted average grant date fair value of $25.95 which vest in equal annual installments over three years. During the 13 weeks ended July 31, 2010, the Company granted 60,000 shares of restricted stock at a weighted average grant date fair value of $21.73 which vest in equal annual installments over three years. During the 26 weeks ended July 30, 2011, the Company granted 452,270 shares of restricted stock with a fair market value of $20.90 per share. Of these shares, 372,270 vest in equal annual installments over three years and 80,000 vest over three years subject to performance targets based on fiscal 2011 operating results. The restricted stock granted during the 26 weeks ended July 31, 2010 was 742,680 shares with a fair market value of $20.43 per share, which vest in equal annual installments over three years. During the 13 weeks ended July 30, 2011 and July 31, 2010, the Company included compensation expense relating to the restricted stock grants in the amount of $3.3 million and $4.4 million, respectively, in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. During the 26 weeks ended July 30, 2011 and July 31, 2010, the Company included compensation expense relating to the restricted stock grants in the amount of $6.6 million and $8.7 million, respectively, in selling, general and administrative expenses. As of July 30, 2011, there was $17.7 million of unrecognized compensation expense related to nonvested restricted stock awards that is expected to be recognized over a weighted average period of 1.9 years.

 

3.

Computation of Net Earnings per Common Share

A reconciliation of shares used in calculating basic and diluted net earnings per common share is as follows:

 

     13 Weeks Ended      26 Weeks Ended  
     July 30,
2011
     July 31,
2010
     July 30,
2011
     July 31,
2010
 
     (In millions, except per share data)  

Net income attributable to GameStop

   $ 30.9       $ 40.3       $ 111.3       $ 115.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     141.0         151.3         141.9         152.4   

Dilutive effect of options and restricted shares on common stock

     1.2         2.9         1.0         2.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common shares and dilutive potential common shares

     142.2         154.2         142.9         155.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share:

           

Basic

   $ 0.22       $ 0.27       $ 0.78       $ 0.76   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.22       $ 0.26       $ 0.78       $ 0.74   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table contains information on restricted shares and options to purchase shares of Class A common stock which were excluded from the computation of diluted earnings per share because they were anti-dilutive:

 

     Anti-
Dilutive
Shares
     Range of
Exercise
Prices
     Expiration
Dates
 
     (In millions, except per share data)  

13 Weeks Ended July 30, 2011

     2.6       $ 26.02 - 49.95         2017 - 2019   

13 Weeks Ended July 31, 2010

     4.4       $ 20.32 - 49.95         2011 - 2020   

 

4.

Fair Value Measurements and Financial Instruments

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value accounting guidance applies to our forward exchange contracts, foreign currency options and cross-currency swaps (together, the “Foreign Currency Contracts”), Company-owned life insurance policies with a cash surrender value and certain nonqualified deferred compensation liabilities that are measured at fair value on a recurring basis in periods subsequent to initial recognition.

Fair value accounting guidance requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.

We value our Foreign Currency Contracts, Company-owned life insurance policies with cash surrender values and certain nonqualified deferred compensation liabilities based on Level 2 inputs using quotations provided by major market news services, such as Bloomberg and The Wall Street Journal, 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. When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.

The following table provides the fair value of our assets and liabilities measured on a recurring basis and recorded on our condensed consolidated balance sheets (in millions):

 

     July 30, 2011      July 31, 2010      January 29, 2011  
     Level 2      Level 2      Level 2  

Assets

  

Foreign Currency Contracts

   $ 18.2       $ 18.0       $ 14.0   

Company-owned life insurance

     3.1         2.7         3.1   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 21.3       $ 20.7       $ 17.1   
  

 

 

    

 

 

    

 

 

 

Liabilities

        

Foreign Currency Contracts

   $ 15.8       $ 6.9       $ 12.8   

Nonqualified deferred compensation

     1.0         0.8         0.9   
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 16.8       $ 7.7       $ 13.7   
  

 

 

    

 

 

    

 

 

 

 

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GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company uses Foreign Currency Contracts to manage currency risk primarily related to intercompany loans denominated in non-functional currencies and certain foreign currency assets and liabilities. These Foreign Currency Contracts are not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign currency assets and liabilities.

Activity related to the trading of derivative instruments and the offsetting impact of related intercompany loans and foreign currency assets and liabilities recognized in selling, general and administrative expense is as follows (in millions):

 

     13 Weeks Ended     26 Weeks Ended  
     July 30,
2011
    July 31,
2010
    July 30,
2011
    July 31,
2010
 

Gains (losses) on the changes in fair value of derivative instruments

   $ 11.3      $ (7.8   $ 2.0      $ 4.1   

Gains (losses) on the re-measurement of related intercompany loans and foreign currency assets and liabilities

     (12.0     7.6        (0.2     (5.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (0.7   $ (0.2   $ 1.8      $ (1.4
  

 

 

   

 

 

   

 

 

   

 

 

 

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. The Company manages 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.

The fair values of derivative instruments not receiving hedge accounting treatment in the condensed consolidated balance sheets presented herein were as follows (in millions):

 

     July 30, 2011     July 31, 2010     January 29, 2011  

Assets

      

Foreign Currency Contracts

      

Other current assets

   $ 16.0      $ 16.3      $ 13.0   

Other noncurrent assets

     2.2        1.7        1.0   

Liabilities

      

Foreign Currency Contracts

      

Accrued liabilities

     (14.3     (6.5     (11.2

Other long-term liabilities

     (1.5     (0.4     (1.6
  

 

 

   

 

 

   

 

 

 

Total derivatives

   $ 2.4      $ 11.1      $ 1.2   
  

 

 

   

 

 

   

 

 

 

As of July 30, 2011, the Company had a series of Foreign Currency Contracts outstanding, with a gross notional value of $488.5 million and a net notional value of $192.8 million. As of July 31, 2010, the Company had a series of Foreign Currency Contracts outstanding, with a gross notional value of $423.8 million and a net notional value of $261.5 million.

The Company’s carrying value of financial instruments approximates their fair value, except for differences with respect to the senior notes. The fair value of the Company’s senior notes payable in the accompanying consolidated balance sheets is estimated based on recent quotes from brokers. As of July 30, 2011, the senior

 

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GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

notes payable had a carrying value of $249.3 million and a fair value of $252.8 million. As of July 31, 2010, the senior notes payable had a carrying value of $447.8 million and a fair value of $462.9 million.

 

5.

Debt

On January 4, 2011, the Company entered into a $400 million credit agreement (the “Revolver”), which amended and restated, in its entirety, the Company’s prior credit agreement entered into on October 11, 2005 (the “Credit Agreement”). The Revolver provides for a five-year, $400 million asset-based facility, including a $50 million letter of credit sublimit, secured by substantially all of the Company’s and its domestic subsidiaries’ assets. The Company has the ability to increase the facility, which matures in January 2016, by $150 million under certain circumstances. The extension of the Revolver to 2016 reduces our exposure to potential tightening in the credit markets.

The availability under the Revolver is limited to a borrowing base which allows the Company to borrow up to 90% of the appraisal value of the inventory, in each case plus 90% of eligible credit card receivables, net of certain reserves. Letters of credit reduce the amount available to borrow by their face value. The Company’s ability to pay cash dividends, redeem options and repurchase shares is generally permitted, except under certain circumstances, including if Revolver excess availability is less than 20%, or is projected to be within 12 months after such payment. In addition, if Revolver usage is projected to be equal to or greater than 25% of the borrowing base during the prospective 12-month period, the Company is subject to meeting a fixed charge coverage ratio of 1.1:1.0 prior to making such payments. In the event that excess availability under the Revolver is at any time less than the greater of (1) $40.0 million or (2) 12.5% of the lesser of the total commitment or the borrowing base, the Company will be subject to a fixed charge coverage ratio covenant of 1.1:1.0.

The Revolver places certain restrictions on the Company and its subsidiaries, including limitations on asset sales, additional liens, investments, loans, guarantees, acquisitions and the incurrence of additional indebtedness. Absent consent from its lenders, the Company may not incur more than $750 million of additional unsecured indebtedness to be limited to $250 million in general unsecured obligations and $500 million in unsecured obligations to finance acquisitions valued at $500 million or more. The per annum interest rate under the Revolver is variable and is calculated by applying a margin (1) for prime rate loans of 1.25% to 1.50% above the highest of (a) the prime rate of the administrative agent, (b) the federal funds effective rate plus 0.50% or (c) the LIBO rate for a 30-day interest period as determined on such day plus 1.00%, and (2) for LIBO rate loans of 2.25% to 2.50% above the LIBO rate. The applicable margin is determined quarterly as a function of the Company’s average daily excess availability under the facility. In addition, the Company is required to pay a commitment fee of 0.375% or 0.50%, depending on facility usage, for any unused portion of the total commitment under the Revolver. As of July 30, 2011, the applicable margin was 1.25% for prime rate loans and 2.25% for LIBO rate loans, while the required commitment fee was 0.50% for the unused portion of the Revolver.

The Revolver provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with covenants, any material representation or warranty made by the Company or the borrowers proving to be false in any material respect, certain bankruptcy, insolvency or receivership events affecting the Company or its subsidiaries, defaults relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of the Company or certain of its subsidiaries. As of July 30, 2011, there was $10.0 million outstanding under the Revolver at an average per annum interest rate of 3.25% and letters of credit outstanding totaled $8.5 million.

In September 2007, the Company’s Luxembourg subsidiary entered into a discretionary $20.0 million Uncommitted Line of Credit (the “Line of Credit”) with Bank of America. There is no term associated with the Line of Credit and Bank of America may withdraw the facility at any time without notice. The Line of Credit will

 

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GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

be made available to the Company’s foreign subsidiaries for use primarily as a bank overdraft facility for short-term liquidity needs and for the issuance of bank guarantees and letters of credit to support operations. As of July 30, 2011, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $5.9 million.

In September 2005, the Company, along with GameStop, Inc. as co-issuer (together with the Company, the “Issuers”), completed the offering of $300 million aggregate principal amount of Senior Floating Rate Notes due 2011 (the “Senior Floating Rate Notes”) and $650 million aggregate principal amount of Senior Notes due 2012 (the “Senior Notes” and, together with the Senior Floating Rate Notes, the “Notes”). The Notes were issued under an Indenture, dated September 28, 2005 (the “Indenture”), by and among the Issuers, the subsidiary guarantors party thereto, and Citibank, N.A., as trustee (the “Trustee”). In November 2006, Wilmington Trust Company was appointed as the new Trustee for the Notes.

The Senior Notes bear interest at 8.0% per annum, mature on October 1, 2012 and were priced at 98.688%, resulting in a discount at the time of issue of $8.5 million. The discount is being amortized using the effective interest method. As of July 30, 2011, the unamortized original issue discount was $0.7 million. The Issuers pay interest on the Senior Notes semi-annually, in arrears, every April 1 and October 1, to holders of record on the immediately preceding March 15 and September 15, and at maturity.

The Indenture contains affirmative and negative covenants customary for such financings, including, among other things, limitations on (1) the incurrence of additional debt, (2) restricted payments, (3) liens, (4) sale and leaseback transactions and (5) asset sales. The debt limitation under the Indenture does not provide an effective restriction on the amount the Company may borrow under current or foreseeable circumstances. Events of default provided for in the Indenture include, among other things, failure to pay interest or principal on the Notes, other breaches of covenants in the Indenture, and certain events of bankruptcy and insolvency. As of July 30, 2011, the Company was in compliance with all covenants associated with the Revolver and the Indenture.

Under certain conditions, the Issuers may on any one or more occasions prior to maturity redeem up to 100% of the aggregate principal amount of Senior Notes issued under the Indenture at redemption prices at or in excess of 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the redemption date. The circumstances which would limit the percentage of the Notes which may be redeemed or which would require the Company to pay a premium in excess of 100% of the principal amount are defined in the Indenture. Upon a Change of Control (as defined in the Indenture), the Issuers are required to offer to purchase all of the Notes then outstanding at 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. The Issuers may acquire Senior Notes by means other than redemption, whether by tender offer, open market purchases, negotiated transactions or otherwise, in accordance with applicable securities laws, so long as such acquisitions do not otherwise violate the terms of the Indenture.

Between May 2006 and October 2010, the Company repurchased and redeemed the $300 million of Senior Floating Rate Notes and $400 million of Senior Notes under previously announced buybacks authorized by the Company’s Board of Directors. The repurchased Notes were delivered to the Trustee for cancellation. None of the debt was retired or redeemed during the 26-week periods ended July 31, 2010 or July 30, 2011.

In February 2011, the Board of Directors authorized the Company to use $500 million to repurchase shares of the Company’s common stock and/or retire the Company’s Senior Notes. Under the repurchase program, the Company may purchase the Company’s Senior Notes and/or shares of issued and outstanding Class A Common Stock through open market purchases, debt calls or privately negotiated transactions. The timing and actual amount of debt or share repurchases will be determined by the Company’s management based on their evaluation of market conditions and other factors. In addition, repurchases may be suspended or discontinued at any time. As of July 30, 2011, the Company has repurchased $152.4 million of common stock, representing 7.3 million shares at an average purchase price of $20.91, under the current repurchase program and none of the Senior

 

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GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Notes, leaving $347.6 million remaining under the existing authorization. As of August 29, 2011, the Company notified the Trustee of its intent to purchase $125 million of the Company’s Senior Notes on or about October 1, 2011.

As of July 30, 2011 and July 31, 2010, the only long-term debt outstanding was the Senior Notes. The $250 million in Senior Notes outstanding as of July 30, 2011, gross of the unamortized original issue discount of $0.7 million, matures in the fiscal year ending January 2013.

 

6.

Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examination by the Internal Revenue Service for years before and including the fiscal year ended January 28, 2006.

We accrue for the effects of uncertain tax positions and the related potential penalties and interest. There were no net material adjustments to our recorded liability for unrecognized tax benefits during the 13 and 26 weeks ended July 30, 2011. It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions could significantly increase or decrease during the next 12 months. At this time, an estimate of the range of the reasonably possible outcomes cannot be made.

The tax provisions for the 13 weeks and 26 weeks ended July 30, 2011 and July 31, 2010 are based upon management’s estimate of the Company’s annualized effective tax rate.

 

7.

Certain Relationships and Related Transactions

The Company has various relationships with Barnes & Noble, Inc. (“Barnes & Noble”), a related party through a common stockholder who is the Chairman of the Board of Directors of Barnes & Noble. The Company operates departments within eight bookstores operated by Barnes & Noble, whereby the Company pays a license fee to Barnes & Noble on the gross sales of such departments. Additionally, until April 30, 2011, www.gamestop.com was the exclusive specialty video game retailer listed on www.bn.com, Barnes & Noble’s e-commerce site, whereby the Company paid a fee to Barnes & Noble for sales of video game or PC entertainment products sold through www.bn.com. The Company also continues to incur costs related to its participation in Barnes & Noble’s workers’ compensation, property and general liability insurance programs prior to June 2005. During the 13 weeks ended July 30, 2011 and July 31, 2010, these charges amounted to $0.2 million and $0.3 million, respectively. During the 26 weeks ended July 30, 2011 and July 31, 2010, these charges amounted to $0.5 million and $0.6 million, respectively.

 

8.

Commitments and Contingencies

In the ordinary course of the Company’s business, the Company is, from time to time, subject to various legal proceedings, including matters involving wage and hour employee class actions. The Company may enter into discussions regarding settlement of these and other types of lawsuits, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company’s stockholders. Management does not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

 

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GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

9.

Significant Products

The following table sets forth sales by significant product category for the periods indicated:

 

     13 Weeks Ended     26 Weeks Ended  
     July 30,
2011
    July 31,
2010
    July 30,
2011
    July 31,
2010
 
     Sales      Percent
of Total
    Sales      Percent
of Total
    Sales      Percent
of Total
    Sales      Percent
of Total
 
     (In millions)  
     (Unaudited)  

Sales:

                    

New video game hardware

   $ 275.6         15.8   $ 314.3         17.5   $ 708.0         17.6   $ 662.6         17.1

New video game software

     599.8         34.4     663.2         36.9     1,514.5         37.6     1,536.2         39.6

Used video game products

     633.1         36.3     565.5         31.4     1,258.1         31.3     1,136.3         29.2

Other

     235.2         13.5     256.1         14.2     544.5         13.5     546.7         14.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,743.7         100.0   $ 1,799.1         100.0   $ 4,025.1         100.0   $ 3,881.8         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table sets forth gross profit and gross profit percentages by significant product category for the periods indicated:

 

     13 Weeks Ended     26 Weeks Ended  
     July 30,
2011
    July 31,
2010
    July 30,
2011
    July 31,
2010
 
     Gross
Profit
     Gross
Profit
Percent
    Gross
Profit
     Gross
Profit
Percent
    Gross
Profit
     Gross
Profit
Percent
    Gross
Profit
     Gross
Profit
Percent
 
                         (In millions)                      
                         (Unaudited)                      

Gross Profit:

                    

New video game hardware

   $ 20.8         7.5   $ 25.9         8.2   $ 51.0         7.2   $ 47.0         7.1

New video game software

     132.0         22.0     141.7         21.4     306.8         20.3     316.2         20.6

Used video game products

     292.4         46.2     260.0         46.0     592.4         47.1     534.5         47.0

Other

     98.0         41.7     89.2         34.8     213.2         39.2     189.9         34.7
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 543.2         31.2   $ 516.8         28.7   $ 1,163.4         28.9   $ 1,087.6         28.0
  

 

 

      

 

 

      

 

 

      

 

 

    

10.    Segment Information

The Company operates its business in the following segments: United States, Canada, Australia and Europe. Segment results for the United States include retail operations in all 50 states, the District of Columbia, Guam and Puerto Rico, the electronic commerce Web site www.gamestop.com, Game Informer magazine, the online video gaming Web site www.kongregate.com, the digital distribution platform Impulse and the streaming technology company Spawn Labs. Segment results for Canada include retail and e-commerce operations in Canada and segment results for Australia include retail and e-commerce operations in Australia and New Zealand. Segment results for Europe include retail operations in 13 European countries and e-commerce operations in six countries. The Company measures segment profit using operating earnings, which is defined as income from continuing operations before intercompany royalty fees, net interest expense and income taxes. There has been no material change in total assets by segment since January 29, 2011. Transactions between

 

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Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

reportable segments consist primarily of royalties, management fees, intersegment loans and related interest. Information on segments appears in the following tables:

 

     13 Weeks Ended     26 Weeks Ended  
     July 30,
2011
    July 31,
2010
    July 30,
2011
    July 31,
2010
 
          

(In millions)

(Unaudited)

       

Sales by operating segment were as follows:

        

United States

   $ 1,156.9      $ 1,280.4      $ 2,857.7      $ 2,811.7   

Canada

     87.8        93.6        195.9        197.9   

Australia

     138.1        119.3        256.9        226.4   

Europe

     360.9        305.8        714.6        645.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,743.7      $ 1,799.1      $ 4,025.1      $ 3,881.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating earnings (loss) were as follows:

        

United States

   $ 58.1      $ 71.8      $ 189.3      $ 190.4   

Canada

     (1.8     0.0        (1.5     3.8   

Australia

     3.5        4.9        7.2        7.5   

Europe

     (6.2     (7.1     (10.2     (7.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 53.6      $ 69.6      $ 184.8      $ 194.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

11.    Supplemental Cash Flow Information

 

     26 Weeks Ended  
     July 30,
2011
     July 31,
2010
 
    

(In millions)

(Unaudited)

 

Cash paid during the period for:

     

Interest

   $ 10.9       $ 18.7   
  

 

 

    

 

 

 

Income taxes

   $ 170.0       $ 138.0   
  

 

 

    

 

 

 

12.    Consolidating Financial Statements

As described in Note 5, in September 2005, the Company, along with GameStop, Inc., as co-issuer, completed the offering of the Notes. The direct and indirect U.S. wholly-owned subsidiaries of the Company, excluding GameStop, Inc., as co-issuer, have guaranteed the Senior Notes on a senior unsecured basis with unconditional guarantees.

The following condensed consolidating financial statements present the financial position as of July 30, 2011, July 31, 2010 and January 29, 2011 and results of operations for the 13 and 26 weeks ended July 30, 2011 and July 31, 2010 and cash flows for the 26 weeks ended July 30, 2011 and July 31, 2010 of the Company’s guarantor and non-guarantor subsidiaries.

 

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Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

GameStop Corp.

Condensed Consolidating Balance Sheet

 

     Issuers and
Guarantor
Subsidiaries
July  30,
2011
     Non-Guarantor
Subsidiaries
July 30,
2011
    Eliminations     Consolidated
July  30,
2011
 
    

(Amounts in millions, except per share amounts)

(Unaudited)

 
ASSETS:   

Current assets:

         

Cash and cash equivalents

   $ 99.1       $ 125.7      $      $ 224.8   

Receivables, net

     153.2         633.2        (742.2     44.2   

Merchandise inventories, net

     609.6         450.3               1,059.9   

Deferred income taxes — current

     20.0         4.6               24.6   

Prepaid taxes

     26.9         22.4               49.3   

Prepaid expenses

     39.8         47.6               87.4   

Other current assets

     15.5         4.2               19.7   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     964.1         1,288.0        (742.2     1,509.9   
  

 

 

    

 

 

   

 

 

   

 

 

 

Property and equipment:

         

Land

     4.7         20.9               25.6   

Buildings and leasehold improvements

     318.0         274.8               592.8   

Fixtures and equipment

     687.3         180.5               867.8   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total property and equipment

     1,010.0         476.2               1,486.2   

Less accumulated depreciation and amortization

     627.1         244.2               871.3   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net property and equipment

     382.9         232.0               614.9   

Investment

     2,246.1         596.5        (2,842.6       

Goodwill, net

     1,143.1         930.1               2,073.2   

Other intangible assets

     25.0         253.1               278.1   

Other noncurrent assets

     24.9         38.4               63.3   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noncurrent assets

     3,822.0         2,050.1        (2,842.6     3,029.5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 4,786.1       $ 3,338.1      $ (3,584.8   $ 4,539.4   
  

 

 

    

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY:   

Current liabilities:

         

Accounts payable

   $ 353.0       $ 116.7      $      $ 469.7   

Accrued liabilities

     1,073.7         330.5        (742.2     662.0   

Revolver debt outstanding

     10.0                       10.0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,436.7         447.2        (742.2     1,141.7   
  

 

 

    

 

 

   

 

 

   

 

 

 

Senior notes payable, long-term portion, net

     249.3                       249.3   

Deferred taxes

     40.3         29.0               69.3   

Other long-term liabilities

     79.7         19.3               99.0   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total long-term liabilities

     369.3         48.3               417.6   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     1,806.0         495.5        (742.2     1,559.3   
  

 

 

    

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

         

Preferred stock — authorized 5.0 shares; no shares issued or outstanding

                             

Class A common stock — $.001 par value; authorized 300.0 shares; 140.2 shares outstanding

     0.1                       0.1   

Additional paid-in-capital

     797.0         2,459.3        (2,456.9     799.4   

Accumulated other comprehensive income (loss)

     265.9         110.9        (110.9     265.9   

Retained earnings

     1,917.1         274.8        (274.8     1,917.1   
  

 

 

    

 

 

   

 

 

   

 

 

 

Equity attributable to GameStop Corp. stockholders

     2,980.1         2,845.0        (2,842.6     2,982.5   

Equity (deficit) attributable to noncontrolling interest

             (2.4            (2.4
  

 

 

    

 

 

   

 

 

   

 

 

 

Total equity

     2,980.1         2,842.6        (2,842.6     2,980.1   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,786.1       $ 3,338.1      $ (3,584.8   $ 4,539.4   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

GameStop Corp.

Condensed Consolidating Balance Sheet

 

     Issuers and
Guarantor
Subsidiaries
July  31,
2010
    Non-Guarantor
Subsidiaries
July 31,
2010
    Eliminations     Consolidated
July  31,
2010
 
    

(Amounts in millions, except per share amounts)

(Unaudited)

 
ASSETS:   

Current assets:

        

Cash and cash equivalents

   $ 153.2      $ 136.1      $      $ 289.3   

Receivables, net

     128.8        613.4        (697.9     44.3   

Merchandise inventories, net

     712.0        417.5               1,129.5   

Deferred income taxes — current

     15.9        3.4               19.3   

Prepaid taxes

     (5.8     15.3               9.5   

Prepaid expenses

     47.9        26.2               74.1   

Other current assets

     7.0        12.8               19.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     1,059.0        1,224.7        (697.9     1,585.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

        

Land

     4.7        8.8               13.5   

Buildings and leasehold improvements

     307.7        228.1               535.8   

Fixtures and equipment

     601.2        145.9               747.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property and equipment

     913.6        382.8               1,296.4   

Less accumulated depreciation and amortization

     537.3        183.8               721.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net property and equipment

     376.3        199.0               575.3   

Investment

     2,028.8        595.4        (2,624.2       

Goodwill, net

     1,096.6        827.6               1,924.2   

Other intangible assets

     2.0        237.6               239.6   

Other noncurrent assets

     8.6        29.5               38.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent assets

     3,512.3        1,889.1        (2,624.2     2,777.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 4,571.3      $ 3,113.8      $ (3,322.1   $ 4,363.0   
  

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY:   

Current liabilities:

        

Accounts payable

   $ 442.0      $ 183.0      $      $ 625.0   

Accrued liabilities

     966.6        260.7        (697.9     529.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,408.6        443.7        (697.9     1,154.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Senior notes payable, long-term portion, net

     447.8                      447.8   

Deferred taxes

     (15.5     32.3               16.8   

Other long-term liabilities

     87.4        14.6               102.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term liabilities

     519.7        46.9               566.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     1,928.3        490.6        (697.9     1,721.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

        

Preferred stock — authorized 5.0 shares; no shares issued or outstanding

                            

Class A common stock — $.001 par value; authorized 300.0 shares; 150.4 shares outstanding

     0.1                      0.1   

Additional paid-in-capital

     1,046.8        2,404.5        (2,404.5     1,046.8   

Accumulated other comprehensive income (loss)

     82.8        (18.8     18.8        82.8   

Retained earnings

     1,513.3        238.5        (238.5     1,513.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to GameStop Corp. stockholders

     2,643.0        2,624.2        (2,624.2     2,643.0   

Equity (deficit) attributable to noncontrolling interest

            (1.0            (1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     2,643.0        2,623.2        (2,624.2     2,642.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,571.3      $ 3,113.8      $ (3,322.1   $ 4,363.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

GameStop Corp.

Condensed Consolidating Balance Sheet

 

    Issuers and
Guarantor
Subsidiaries
January  29,
2011
    Non-Guarantor
Subsidiaries
January 29,
2011
    Eliminations     Consolidated
January  29,
2011
 
    (Amounts in millions, except per share amounts)  
ASSETS:   

Current assets:

       

Cash and cash equivalents

  $ 378.7      $ 332.1      $      $ 710.8   

Receivables, net

    161.3        629.8        (725.6     65.5   

Merchandise inventories, net

    783.4        474.1               1,257.5   

Deferred income taxes – current

    24.4        4.4               28.8   

Prepaid expenses

    40.5        35.2               75.7   

Other current assets

    10.1        6.4               16.5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,398.4        1,482.0        (725.6     2,154.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment:

       

Land

    4.7        19.3               24.0   

Buildings and leasehold improvements

    323.3        253.9               577.2   

Fixtures and equipment

    663.9        153.9               817.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total property and equipment

    991.9        427.1               1,419.0   

Less accumulated depreciation and amortization

    595.2        210.0               805.2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net property and equipment

    396.7        217.1               613.8   

Investment

    2,161.4        595.1        (2,756.5       

Goodwill, net

    1,125.1        871.2               1,996.3   

Other intangible assets

    11.4        243.2               254.6   

Other noncurrent assets

    10.8        33.5               44.3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total noncurrent assets

    3,705.4        1,960.1        (2,756.5     2,909.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 5,103.8      $ 3,442.1      $ (3,482.1   $ 5,063.8   
 

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY:   

Current liabilities:

       

Accounts payable

  $ 725.7      $ 302.4      $      $ 1,028.1   

Accrued liabilities

    1,047.7        334.9        (725.6     657.0   

Taxes payable

    63.3        (0.6            62.7   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    1,836.7        636.7        (725.6     1,747.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Senior notes payable, long-term portion, net

    249.0                      249.0   

Deferred taxes

    40.5        34.4               74.9   

Other long-term liabilities

    80.3        15.9               96.2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term liabilities

    369.8        50.3               420.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    2,206.5        687.0        (725.6     2,167.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

       

Preferred stock — authorized 5.0 shares; no shares issued or outstanding

                           

Class A common stock — $.001 par value; authorized 300.0 shares; 146.0 shares outstanding

    0.1                      0.1   

Additional paid-in-capital

    928.9        2,430.7        (2,430.7     928.9   

Accumulated other comprehensive income (loss)

    162.5        34.4        (34.4     162.5   

Retained earnings

    1,805.8        291.4        (291.4     1,805.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to GameStop Corp. stockholders

    2,897.3        2,756.5        (2,756.5     2,897.3   

Equity (deficit) attributable to noncontrolling interest

           (1.4            (1.4
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    2,897.3        2,755.1        (2,756.5     2,895.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 5,103.8      $ 3,442.1      $ (3,482.1   $ 5,063.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

GameStop Corp.

Condensed Consolidating Statement of Operations

 

For the 13 Weeks Ended July 30, 2011

   Issuers and
Guarantor
Subsidiaries
July  30,
2011
    Non-Guarantor
Subsidiaries
July 30,
2011
    Eliminations     Consolidated
July  30,
2011
 
    

(Amounts in millions)

(Unaudited)

 

Sales

   $ 1,156.9      $ 586.8      $      $ 1,743.7   

Cost of sales

     778.4        422.1               1,200.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     378.5        164.7               543.2   

Selling, general and administrative expenses

     288.2        154.3               442.5   

Depreciation and amortization

     31.6        15.5               47.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     58.7        (5.1            53.6   

Interest income

     (9.6     (5.1     14.3        (0.4

Interest expense

     6.3        14.7        (14.3     6.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income tax expense

     62.0        (14.7            47.3   

Income tax expense (benefit)

     21.0        (4.3            16.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     41.0        (10.4            30.6   

Net loss attributable to noncontrolling interests

            0.3               0.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss) attributable to GameStop

   $ 41.0      $ (10.1   $      $ 30.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

GameStop Corp.

Condensed Consolidating Statement of Operations

 

For the 13 Weeks Ended July 31, 2010

   Issuers and
Guarantor
Subsidiaries
July  31,
2010
    Non-Guarantor
Subsidiaries
July 31,
2010
    Eliminations     Consolidated
July  31,
2010
 
    

(Amounts in millions)

(Unaudited)

 

Sales

   $ 1,280.3      $ 518.8      $      $ 1,799.1   

Cost of sales

     902.7        379.6               1,282.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     377.6        139.2               516.8   

Selling, general and administrative expenses

     276.5        128.5               405.0   

Depreciation and amortization

     27.9        14.3               42.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     73.2        (3.6            69.6   

Interest income

     (8.2     (3.8     11.7        (0.3

Interest expense

     10.0        12.0        (11.7     10.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income tax expense

     71.4        (11.8            59.6   

Income tax expense (benefit)

     23.5        (3.7            19.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     47.9        (8.1            39.8   

Net loss attributable to noncontrolling interests

            0.5               0.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss) attributable to GameStop

   $ 47.9      $ (7.6   $      $ 40.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

GameStop Corp.

Condensed Consolidating Statement of Operations

 

For the 26 Weeks Ended July 30, 2011

   Issuers and
Guarantor
Subsidiaries
July  30,
2011
    Non-Guarantor
Subsidiaries
July 30,
2011
    Eliminations     Consolidated
July  30,
2011
 
    

(Amounts in millions)

(Unaudited)

 

Sales

   $ 2,857.7      $ 1,167.4      $      $ 4,025.1   

Cost of sales

     2,022.8        838.9               2,861.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     834.9        328.5               1,163.4   

Selling, general and administrative expenses

     582.0        303.2               885.2   

Depreciation and amortization

     62.8        30.6               93.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     190.1        (5.3            184.8   

Interest income

     (18.6     (9.8     27.9        (0.5

Interest expense

     12.3        28.6        (27.9     13.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income tax expense

     196.4        (24.1            172.3   

Income tax expense (benefit)

     68.6        (6.8            61.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     127.8        (17.3            110.5   

Net loss attributable to noncontrolling interests

            0.8               0.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss) attributable to GameStop

   $ 127.8      $ (16.5   $      $ 111.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

GameStop Corp.

Condensed Consolidating Statement of Operations

 

For the 26 Weeks Ended July 31, 2010

   Issuers and
Guarantor
Subsidiaries
July  31,
2010
    Non-Guarantor
Subsidiaries
July 31,
2010
    Eliminations     Consolidated
July  31,
2010
 
    

(Amounts in millions)

(Unaudited)

 

Sales

   $ 2,811.4      $ 1,070.4      $      $ 3,881.8   

Cost of sales

     2,014.9        779.3               2,794.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     796.5        291.1               1,087.6   

Selling, general and administrative expenses

     548.4        260.4               808.8   

Depreciation and amortization

     54.9        29.8               84.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     193.2        0.9               194.1   

Interest income

     (17.8     (7.8     24.5        (1.1

Interest expense

     20.1        25.1        (24.5     20.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income tax expense

     190.9        (16.4            174.5   

Income tax expense (benefit)

     72.1        (12.3            59.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     118.8        (4.1            114.7   

Net loss attributable to noncontrolling interests

            0.8               0.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss) attributable to GameStop

   $ 118.8      $ (3.3   $      $ 115.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

GameStop Corp.

Condensed Consolidating Statement of Cash Flows

 

For the 26 Weeks Ended July 30, 2011

   Issuers and
Guarantor
Subsidiaries
July  30,
2011
    Non-Guarantor
Subsidiaries
July 30,
2011
    Eliminations      Consolidated
July  30,
2011
 
    

(Amounts in millions)

(Unaudited)

 

Cash flows from operating activities:

         

Consolidated net income (loss)

   $ 127.8      $ (17.3   $       $ 110.5   

Adjustments to reconcile net income (loss) to net cash flows used in operating activities:

         

Depreciation and amortization (including amounts in cost of sales)

     63.8        30.7                94.5   

Amortization and retirement of deferred financing fees and issue discounts

     1.2                       1.2   

Stock-based compensation expense

     9.8                       9.8   

Deferred income taxes

     4.1        (6.6             (2.5

Excess tax expense realized from exercise of stock-based awards

     0.4                       0.4   

Loss on disposal of property and equipment

     3.3        3.6                6.9   

Changes in other long-term liabilities

     (2.1     3.3                1.2   

Changes in operating assets and liabilities, net:

         

Receivables, net

     17.2        5.4                22.6   

Merchandise inventories

     161.0        56.5                217.5   

Prepaid expenses and other current assets

     (4.3     (8.4             (12.7

Prepaid income taxes and accrued income taxes payable

     (90.3     (21.7             (112.0

Accounts payable and accrued liabilities

     (332.8     (230.3             (563.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in operating activities

     (40.9     (184.8             (225.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities:

         

Purchase of property and equipment

     (58.1     (29.8             (87.9

Acquisitions, net of cash acquired

     (27.4                    (27.4

Other

     (1.5     (4.2             (5.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in investing activities

     (87.0     (34.0             (121.0
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities:

         

Purchase of treasury shares

     (174.4                    (174.4

Borrowings from the revolver

     35.0                       35.0   

Repayments of revolver borrowings

     (25.0                    (25.0

Issuance of shares relating to stock options

     13.2                       13.2   

Excess tax expense realized from exercise of stock-based awards

     (0.4                    (0.4
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in financing activities

     (151.6                    (151.6
  

 

 

   

 

 

   

 

 

    

 

 

 

Exchange rate effect on cash and cash equivalents

            12.3                12.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (279.5     (206.5             (486.0

Cash and cash equivalents at beginning of period

     378.7        332.1                710.8   
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 99.2      $ 125.6      $       $ 224.8   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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GAMESTOP CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

GameStop Corp.

Condensed Consolidating Statement of Cash Flows

 

For the 26 Weeks Ended July 31, 2010

   Issuers and
Guarantor
Subsidiaries
July  31,
2010
    Non-Guarantor
Subsidiaries
July 31,
2010
    Eliminations      Consolidated
July  31,
2010
 
    

(Amounts in millions)

(Unaudited)

 

Cash flows from operating activities:

         

Consolidated net income (loss)

   $ 118.8      $ (4.1   $       $ 114.7   

Adjustments to reconcile net income (loss) to net cash flows used in operating activities:

         

Depreciation and amortization (including amounts in cost of sales)

     55.8        29.9                85.7   

Amortization and retirement of deferred financing fees and issue discounts

     1.7                       1.7   

Stock-based compensation expense

     14.7                       14.7   

Deferred income taxes

     2.2        (5.5             (3.3

Excess tax expense realized from exercise of stock-based awards

     2.7                       2.7   

Loss on disposal of property and equipment

     1.5        1.7                3.2   

Changes in other long-term liabilities

     7.2        (8.2             (1.0

Changes in operating assets and liabilities, net:

         

Receivables, net

     9.3        9.9                19.2   

Merchandise inventories

     (141.8     52.6                (89.2

Prepaid expenses and other current assets

     (11.2     (2.3             (13.5

Prepaid income taxes and accrued income taxes payable

     (69.1     (5.3             (74.4

Accounts payable and accrued liabilities

     (185.8     (165.9             (351.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in operating activities

     (194.0     (97.2             (291.2
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from investing activities:

         

Purchase of property and equipment

     (62.3     (18.0             (80.3

Other

     (0.4     (8.8             (9.2
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in investing activities

     (62.7     (26.8             (89.5
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash flows from financing activities:

         

Purchase of treasury shares

     (241.6                    (241.6

Issuance of shares relating to stock options

     1.2                       1.2   

Excess tax expense realized from exercise of stock-based awards

     (2.7                    (2.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash flows used in financing activities

     (243.1                    (243.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Exchange rate effect on cash and cash equivalents

            7.7                7.7   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (499.8     (116.3             (616.1

Cash and cash equivalents at beginning of period

     653.0        252.4                905.4   
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 153.2      $ 136.1      $       $ 289.3   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
ITEM 2. 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 in GameStop’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2011 (the “Form 10-K”), including the factors disclosed under “Item 1A. Risk Factors.”

General

GameStop Corp. (together with its predecessor companies, “GameStop,” “we,” “us,” “our,” or the “Company”) is the world’s largest multichannel video game retailer. We sell new and used video game hardware, physical and digital video game software, accessories, as well as PC entertainment software and other merchandise. As of July 30, 2011, GameStop’s retail network and family of brands include 6,582 Company-operated stores in the United States, Australia, Canada and Europe, primarily under the names GameStop, EB Games and Micromania. We also operate electronic commerce Web sites www.gamestop.com, www.ebgames.com.au, www.gamestop.ca, www.gamestop.it, www.gamestop.es, www.gamestop.ie, www.gamestop.de, www.gamestop.co.uk and www.micromania.fr. The network also includes: www.Kongregate.com, a leading browser-based game site; Game Informer magazine, the leading multi-platform video game publication; Spawn Labs, a streaming technology company; and Impulse, Inc., a digital distribution platform available at www.GameStop.com/impulse.

Our fiscal year is composed of 52 or 53 weeks ending on the Saturday closest to January 31. The fiscal years ending January 28, 2012 (“fiscal 2011”) and ended January 29, 2011 (“fiscal 2010”) consist of 52 weeks.

Growth in the video game industry is driven by the introduction of new technology. The current generation of hardware consoles (the Sony PlayStation 3, the Microsoft Xbox 360 and the Nintendo Wii) were introduced between 2005 and 2007. The Sony PlayStation Portable was introduced in 2005. The Nintendo DSi XL was introduced in early 2010 and the Nintendo 3DS was introduced in March 2011. Typically, following the introduction of new video game platforms, sales of new video game hardware increase as a percentage of total sales in the first full year following introduction. As video game platforms mature, the sales mix attributable to complementary video game software and accessories, which generate higher gross margins, generally increases in the subsequent years. The net effect is generally a decline in gross margins in the first full year following new platform releases and an increase in gross margins in the years subsequent to the first full year following the launch period. Unit sales of maturing video game platforms are typically also driven by manufacturer-funded retail price reductions, further driving sales of related software and accessories. We expect that the installed base of the hardware platforms listed above and sales of related software and accessories will increase in the future.

We expect that future growth in the video game industry will also be driven by the sale of video games delivered in digital form and the expansion of other forms of gaming. We currently sell various types of products that relate to the digital category, including Xbox Live, PlayStation and Nintendo network point cards, as well as prepaid digital and online timecards and digitally downloaded software. We continue to make significant investments in e-commerce, online game development, digital kiosks and in-store and Web site functionality to enable our customers to access digital content and eliminate friction in 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 and in the digital aggregation and distribution category. We also intend to continue to invest in customer loyalty programs designed to attract and retain customers.

 

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Table of Contents

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and do not include all disclosures required under GAAP for complete financial statements. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. For a summary of significant accounting policies and the means by which we develop estimates thereon, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K.

Consolidated Results of Operations

The following table sets forth certain statement of operations items as a percentage of sales for the periods indicated:

 

     13 Weeks Ended     26 Weeks Ended  
     July 30,
2011
    July 31,
2010
    July 30,
2011
    July 31,
2010
 

Statement of Operations Data:

        

Sales

     100.0     100.0     100.0     100.0

Cost of sales

     68.8        71.3        71.1        72.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     31.2        28.7        28.9        28.0   

Selling, general and administrative expenses

     25.4        22.5        22.0        20.8   

Depreciation and amortization

     2.7        2.3        2.3        2.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     3.1        3.9        4.6        5.0   

Interest expense, net

     0.4        0.6        0.3        0.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income tax expense

     2.7        3.3        4.3        4.5   

Income tax expense

     0.9        1.1        1.5        1.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     1.8        2.2        2.8        3.0   

Net loss attributable to noncontrolling interests

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income attributable to GameStop

     1.8     2.2     2.8     3.0
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company includes purchasing, receiving and distribution costs in selling, general and administrative expenses, rather than cost of sales, in the statement of operations. The Company includes processing fees associated with purchases made by check and credit cards in cost of sales, rather than selling, general and administrative expenses, in the statement of operations. As a result of these classifications, our gross margins are not comparable to those retailers that include purchasing, receiving and distribution costs in cost of sales and include processing fees associated with purchases made by check and credit cards in selling, general and administrative expenses. The net effect of these classifications as a percentage of sales has not historically been material.

 

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The following table sets forth sales by significant product category for the periods indicated:

 

    13 Weeks Ended     26 Weeks Ended  
    July 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
    Sales     Percent
of  Total
    Sales     Percent
of Total
    Sales     Percent
of Total
    Sales     Percent
of Total
 
    (In millions)  
    (Unaudited)  

Sales:

               

New video game hardware

  $ 275.6        15.8   $ 314.3        17.5   $ 708.0        17.6   $ 662.6        17.1

New video game software

    599.8        34.4     663.2        36.9     1,514.5        37.6     1,536.2        39.6

Used video game products

    633.1        36.3     565.5        31.4     1,258.1        31.3     1,136.3        29.2

Other

    235.2        13.5     256.1        14.2     544.5        13.5     546.7        14.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,743.7        100.0   $ 1,799.1        100.0   $ 4,025.1        100.0   $ 3,881.8        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other products include PC entertainment and other software, digital products and currency, accessories and magazines.

The following table sets forth gross profit and gross profit percentages by significant product category for the periods indicated:

 

     13 Weeks Ended     26 Weeks Ended  
     July 30, 2011     July 31, 2010     July 30, 2011     July 31, 2010  
     Gross
Profit
     Gross
Profit
Percent
    Gross
Profit
     Gross
Profit
Percent
    Gross
Profit
     Gross
Profit
Percent
    Gross
Profit
     Gross
Profit
Percent
 
                         (In millions)                      
                         (Unaudited)                      

Gross Profit:

                    

New video game hardware

   $ 20.8         7.5   $ 25.9         8.2   $ 51.0         7.2   $ 47.0         7.1

New video game software

     132.0         22.0     141.7         21.4     306.8         20.3     316.2         20.6

Used video game products

     292.4         46.2     260.0         46.0     592.4         47.1     534.5         47.0

Other

     98.0         41.7     89.2         34.8     213.2         39.2     189.9         34.7
  

 

 

      

 

 

      

 

 

      

 

 

    

Total

   $ 543.2         31.2   $ 516.8         28.7   $ 1,163.4         28.9   $ 1,087.6         28.0
  

 

 

      

 

 

      

 

 

      

 

 

    

13 weeks ended July 30, 2011 compared with the 13 weeks ended July 31, 2010

Sales decreased by $55.4 million, or 3.1%, from $1,799.1 million in the 13 weeks ended July 31, 2010 to $1,743.7 million in the 13 weeks ended July 30, 2011. The decrease in sales was primarily attributable to a decrease in comparable store sales of 9.1% for the second quarter of fiscal 2011, offset by changes related to foreign exchange rates, which had the effect of increasing sales by $79.6 million when compared to the second quarter of fiscal 2010. Stores are included in our comparable store sales base beginning in the thirteenth month of operation and exclude the effect of changes in foreign exchange rates. The decrease in comparable store sales was primarily attributable to a decrease in new video game software sales due to a lack of new release video game titles in the second quarter of fiscal 2011 when compared to the second quarter of fiscal 2010, and a decrease in new video game hardware sales.

New video game hardware sales decreased $38.7 million, or 12.3%, from $314.3 million in the 13 weeks ended July 31, 2010 to $275.6 million in the 13 weeks ended July 30, 2011, primarily due to weak consumer demand, product shortages and the year-on-year comparison to the introduction of the Microsoft Xbox 360 Slim which increased hardware sales in the second quarter of fiscal 2010. New video game software sales decreased $63.4 million, or 9.6%, from $663.2 million in the 13 weeks ended July 31, 2010 to $599.8 million in the

 

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13 weeks ended July 30, 2011, primarily due to a lack of new release video game titles in the second quarter of fiscal 2011. Used video game product sales grew by $67.6 million, or 12.0%, from $565.5 million in the 13 weeks ended July 31, 2010 to $633.1 million in the 13 weeks ended July 30, 2011. Used video game product sales grew due to an increase in the hardware install base, marketing efforts and changes in merchandising, the shift in sales from new video game software due to the lack of new release video game titles during the second quarter of fiscal 2011 and the growth of used video game product sales internationally. Sales of other product categories decreased 8.2%, or $20.9 million, from the 13 weeks ended July 31, 2010 to the 13 weeks ended July 30, 2011. The decrease in other product sales was primarily due to the decrease in sales of new release PC entertainment software titles when compared to the prior year quarter.

As a percentage of sales, new video game hardware, new video game software and other video game products decreased and used video game products increased in the 13 weeks ended July 30, 2011 compared to the 13 weeks ended July 31, 2010. The change in the mix of sales was primarily due to the increase in used video game product sales as discussed above and the decrease in sales of new video game software and other product sales due to a lack of new release video game and PC entertainment software titles in the second quarter of fiscal 2011.

Cost of sales decreased by $81.8 million, or 6.4%, from $1,282.3 million in the 13 weeks ended July 31, 2010 to $1,200.5 million in the 13 weeks ended July 30, 2011 as a result of a decrease in sales and the changes in gross profit discussed below.

Gross profit increased by $26.4 million, or 5.1%, from $516.8 million in the 13 weeks ended July 31, 2010 to $543.2 million in the 13 weeks ended July 30, 2011. Gross profit as a percentage of sales increased from 28.7% in the 13 weeks ended July 31, 2010 to 31.2% in the 13 weeks ended July 30, 2011. The gross profit percentage increase was primarily due to the increase in sales of used video game products as a percentage of total sales and the increase in gross profit as a percentage of sales on other video game products, including the increase in sales of digital product sales, in the 13 weeks ended July 30, 2011 when compared to the 13 weeks ended July 31, 2010. Gross profit as a percentage of sales on new video game hardware decreased from 8.2% in the 13 weeks ended July 31, 2010 to 7.5% in the 13 weeks ended July 30, 2011, primarily due to promotional activities and a decrease in product replacement plan sales on new hardware units when compared to the prior year. Gross profit as a percentage of sales on new video game software increased from 21.4% in the 13 weeks ended July 31, 2010 to 22.0% in the 13 weeks ended July 30, 2011, primarily due to the increase in the mix of international new video game software sales to total new video game sales during the second quarter of fiscal 2011 when compared to the second quarter of the prior year. International new video game software sales have a higher gross margin than U.S. new video game software sales. Gross profit as a percentage of sales on used video game products increased slightly from 46.0% in the 13 weeks ended July 31, 2010 to 46.2% in the 13 weeks ended July 30, 2011. Gross profit as a percentage of sales on other product sales increased from 34.8% in the 13 weeks ended July 31, 2010 to 41.7% in the 13 weeks ended July 30, 2011, primarily due to a shift in sales to higher margin digital product sales, some of which are recorded on a commission basis at 100% margin, and growth in sales of PowerUp Rewards Pro memberships and related Game Informer subscriptions that also have higher margins than software and accessories.

Selling, general and administrative expenses increased by $37.5 million, or 9.3%, from $405.0 million in the 13 weeks ended July 31, 2010 to $442.5 million in the 13 weeks ended July 30, 2011. This increase was primarily attributable to changes in foreign exchange rates which had the effect of increasing expenses by $19.3 million when compared to the second quarter of fiscal 2010, as well as additional expenses incurred in support of our digital and loyalty initiatives. Selling, general and administrative expenses as a percentage of sales increased from 22.5% in the 13 weeks ended July 31, 2010 to 25.4% in the 13 weeks ended July 30, 2011. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to deleveraging of fixed costs as a result of the decrease in comparable store sales and the additional expenses incurred in support of our digital and loyalty initiatives in the second quarter of fiscal 2011. Included in selling, general and administrative expenses are $4.9 million and $7.5 million in stock-based compensation expense for the 13 weeks ended July 30, 2011 and July 31, 2010, respectively.

Depreciation and amortization expense increased $4.9 million from $42.2 million in the 13 weeks ended July 31, 2010 to $47.1 million in the 13 weeks ended July 30, 2011. This increase was primarily due to

 

25


Table of Contents

investments in management information systems and the capital expenditures associated with the opening of 55 new stores during the second quarter of fiscal 2011.

Interest income increased $0.1 million from $0.3 million in the 13 weeks ended July 31, 2010 to $0.4 million in the 13 weeks ended July 30, 2011. Interest expense decreased $3.6 million from $10.3 million in the 13 weeks ended July 31, 2010 to $6.7 million in the 13 weeks ended July 30, 2011 primarily due to the retirement of $200.0 million of the Company’s senior notes since January 30, 2010.

Income tax expense for the 13 weeks ended July 30, 2011 and the 13 weeks ended July 31, 2010 was based upon management’s estimate of the Company’s annualized effective tax rate. Income tax expense was $16.7 million, or 35.3% of earnings before income tax expense for the 13 weeks ended July 30, 2011 compared to $19.8 million, or 33.2% of earnings before income tax expense for the 13 weeks ended July 31, 2010. The increase in the income tax rate was due primarily to the variability in the accounting for the Company’s uncertain tax positions.

The factors described above led to a decrease in operating earnings of $16.0 million from $69.6 million in the 13 weeks ended July 31, 2010 to $53.6 million in the 13 weeks ended July 30, 2011, and a decrease in consolidated net income of $9.2 million from $39.8 million in the 13 weeks ended July 31, 2010 to $30.6 million in the 13 weeks ended July 30, 2011.

The $0.3 million and $0.5 million net loss attributable to noncontrolling interests for the 13 weeks ended July 30, 2011 and July 31, 2010, respectively, represents the portion of the minority interest stockholders’ net loss of the Company’s non-wholly owned subsidiaries included in the Company’s consolidated net income.

26 weeks ended July 30, 2011 compared with the 26 weeks ended July 31, 2010

Sales increased by $143.3 million, or 3.7%, from $3,881.8 million in the 26 weeks ended July 31, 2010 to $4,025.1 million in the 26 weeks ended July 30, 2011. The increase in sales was primarily attributable to changes related to foreign exchange rates, which had the effect of increasing sales by $112.5 million, and the addition of non-comparable store sales from the 132 stores opened since January 30, 2010, offset partially by a decrease in comparable store sales of 1.4% for the 26 weeks ended July 30, 2011 when compared to the 26 weeks ended July 31, 2010. The decrease in comparable store sales was primarily attributable to a decrease in new video game software sales due to a lack of new release video game titles in the second quarter of fiscal 2011.

New video game hardware sales increased $45.4 million, or 6.9%, from $662.6 million in the 26 weeks ended July 31, 2010 to $708.0 million in the 26 weeks ended July 30, 2011, primarily due to the launch of Nintendo 3DS in the first quarter of fiscal 2011. New video game software sales decreased $21.7 million, or 1.4%, from $1,536.2 million in the 26 weeks ended July 31, 2010 to $1,514.5 million in the 26 weeks ended July 30, 2011, primarily due to a lack of new release video game titles in the second quarter of fiscal 2011 when compared to the same period in fiscal 2010. Used video game product sales increased $121.8 million, or 10.7%, from $1,136.3 million in the 26 weeks ended July 31, 2010 to $1,258.1 million in the 26 weeks ended July 30, 2011. Used video game product sales increased due to an increase in the hardware install base, marketing efforts and changes in merchandising, the shift in sales from new video game software due to the lack of new release video game titles during fiscal 2011 and the growth of used product sales internationally. Sales of other product categories decreased by $2.2 million, or 0.4%, from $546.7 million in the 26 weeks ended July 31, 2010 to $544.5 million in the 26 weeks ended July 30, 2011. The decrease in other product sales was primarily due to the decrease in sales of new release PC entertainment software when compared to the prior year period, offset by the effect of changes in foreign exchange rates.

As a percentage of sales, new video game hardware sales and used video game product sales increased and new video game software sales and other product sales decreased in the 26 weeks ended July 30, 2011 compared to the 26 weeks ended July 31, 2010. The change in the mix of sales was primarily due to the increase in used video game product sales as discussed above and the increase in new video game hardware sales due to the launch of Nintendo 3DS in the first quarter of fiscal 2011.

 

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Table of Contents

Cost of sales increased by $67.5 million, or 2.4%, from $2,794.2 million in the 26 weeks ended July 31, 2010 to $2,861.7 million in the 26 weeks ended July 30, 2011, primarily as a result of the increase in sales and the changes in gross profit discussed below.

Gross profit increased by $75.8 million, or 7.0%, from $1,087.6 million in the 26 weeks ended July 31, 2010 to $1,163.4 million in the 26 weeks ended July 30, 2011. Gross profit as a percentage of sales increased from 28.0% in the 26 weeks ended July 31, 2010 to 28.9% in the 26 weeks ended July 30, 2011. The gross profit percentage increase was primarily due to the increase in sales of used video game products as a percentage of total sales and the increase in gross profit as a percentage of sales on other video game products in fiscal 2011. Gross profit as a percentage of sales on new video game hardware increased slightly from 7.1% in the 26 weeks ended July 31, 2010 to 7.2% in the 26 weeks ended July 30, 2011. Gross profit as a percentage of sales on new video game software decreased slightly from 20.6% in the 26 weeks ended July 31, 2010 to 20.3% in the 26 weeks ended July 30, 2011. Gross profit as a percentage of sales on used video game products increased slightly from 47.0% in the 26 weeks ended July 31, 2010 to 47.1% in the 26 weeks ended July 30, 2011. Gross profit as a percentage of sales on the other product sales category increased from 34.7% in the 26 weeks ended July 31, 2010 to 39.2% in the 26 weeks ended July 30, 2011 primarily due to a shift in sales to higher margin digital product sales, some of which are recorded on a commission basis at 100% margin, and growth in sales of PowerUp Rewards Pro memberships and related Game Informer subscriptions that also have higher margins than software or accessories.

Selling, general and administrative expenses increased by $76.4 million, or 9.4%, from $808.8 million in the 26 weeks ended July 31, 2010 to $885.2 million in the 26 weeks ended July 30, 2011. This increase was primarily attributable to the increase in the number of stores in operation during fiscal 2011 and the related increases in store, distribution and corporate office operating expenses, changes in foreign exchange rates which had the effect of increasing expenses by $26.6 million, as well as expenses incurred in support of our digital and loyalty initiatives. Selling, general and administrative expenses as a percentage of sales increased from 20.8% in the 26 weeks ended July 31, 2010 to 22.0% in the 26 weeks ended July 30, 2011. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to deleveraging of fixed costs as a result of the decrease in comparable store sales and the additional expenses incurred in support of our digital and loyalty initiatives in fiscal 2011. Selling, general and administrative expenses include $9.8 million and $14.7 million in stock-based compensation expense for the 26 weeks ended July 30, 2011 and July 31, 2010, respectively.

Depreciation and amortization expense increased $8.7 million from $84.7 million for the 26 weeks ended July 31, 2010 to $93.4 million in the 26 weeks ended July 30, 2011. This increase was primarily due to investments in management information systems and the capital expenditures associated with the opening of 117 new stores during the 26 weeks ended July 30, 2011.

Interest income decreased from $1.1 million in the 26 weeks ended July 31, 2010 to $0.5 million in the 26 weeks ended July 30, 2011, due primarily to lower invested cash balances. Interest expense decreased from $20.7 million in the 26 weeks ended July 31, 2010 to $13.0 million in the 26 weeks ended July 30, 2011, primarily due to the retirement of $200.0 million of the Company’s senior notes since January 30, 2010.

Income tax expense for the 26 weeks ended July 30, 2011 and the 26 weeks ended July 31, 2010 was based upon management’s estimate of the Company’s annualized effective tax rate. Income tax expense was $61.8 million, or 35.9% of earnings before income tax expense, for the 26 weeks ended July 30, 2011 compared to $59.8 million, or 34.3% of earnings before income tax expense, for the 26 weeks ended July 31, 2010. The increase in the income tax rate was due primarily to the variability in the accounting for the Company’s uncertain tax positions.

The factors described above led to a decrease in operating earnings of $9.3 million from $194.1 million in the 26 weeks ended July 31, 2010 to $184.8 million in the 26 weeks ended July 30, 2011, and a decrease in consolidated net income of $4.2 million from $114.7 million in the 26 weeks ended July 31, 2010 to $110.5 million in the 26 weeks ended July 30, 2011.

 

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The $0.8 million net loss attributable to noncontrolling interests for each of the 26 weeks ended July 30, 2011 and July 31, 2010 represents the portion of the minority interest stockholders’ net loss of the Company’s non-wholly owned subsidiaries included in the Company’s consolidated net income.

Segment Performance

The Company operates its business in the following segments: United States, Australia, Canada and Europe. The following tables provide a summary of our sales and operating earnings (loss) by reportable segment:

 

     13 Weeks Ended     26 Weeks Ended  
     July 30,
2011
    July 31,
2010
    July 30,
2011
    July 31,
2010
 
     (In millions)  
     (Unaudited)  

Sales by operating segment are as follows:

        

United States

   $ 1,156.9      $ 1,280.4      $ 2,857.7      $ 2,811.7   

Canada

     87.8        93.6        195.9        197.9   

Australia

     138.1        119.3        256.9        226.4   

Europe

     360.9        305.8        714.6        645.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,743.7      $ 1,799.1      $ 4,025.1      $ 3,881.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss) by operating segment are as follows:

        

United States

   $ 58.1      $ 71.8      $ 189.3      $ 190.4   

Canada

     (1.8     0.0        (1.5     3.8   

Australia

     3.5        4.9        7.2        7.5   

Europe

     (6.2     (7.1     (10.2     (7.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 53.6      $ 69.6      $ 184.8      $ 194.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

United States

Segment results for the United States include retail operations in all 50 states, the District of Columbia, Guam and Puerto Rico, the electronic commerce Web site www.gamestop.com, Game Informer magazine, www.Kongregate.com, Spawn Labs, and Impulse, Inc. As of July 30, 2011, the United States segment included 4,440 GameStop stores, compared to 4,477 on July 31, 2010. Sales for the 13 weeks ended July 30, 2011 decreased 9.6% compared to the 13 weeks ended July 31, 2010 as a result of the decrease in comparable store sales. The decrease in comparable store sales in the second quarter of fiscal 2011 was primarily attributable to a decrease in new video game software sales due to a lack of new release video game titles and a decrease in new video game hardware sales due to a slow-down in sales of new hardware systems when compared to the second quarter of fiscal 2010. Sales for the 26 weeks ended July 30, 2011 increased 1.6% compared to the 26 weeks ended July 31, 2010 primarily as a result of the opening of 302 new stores since January 31, 2010, including 75 stores in the 26 weeks ended July 30, 2011. Sales at existing stores for the 26 weeks ended July 30, 2011 were flat compared to sales for the 26 weeks ended July 31, 2010. Segment operating income for the 13 and 26 weeks ended July 30, 2011 decreased by 19.1% and 0.6%, respectively, compared to the 13 and 26 weeks ended July 31, 2010, due primarily to the impact from the changes in comparable store sales and the additional expenses incurred in support of our digital and loyalty initiatives in fiscal 2011.

Canada

Sales in the Canadian segment in the 13 and 26 weeks ended July 30, 2011 decreased 6.2% and 1.0%, respectively, compared to the 13 and 26 weeks ended July 31, 2010. The decrease in sales was primarily due to a

 

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decrease in sales at existing stores partially offset by the impact of changes in exchange rates, which had the effect of increasing sales by $6.2 million and $11.7 million, respectively, in the 13 and 26 weeks ended July 30, 2011 when compared to the same periods in fiscal 2010. As of July 30, 2011, the Canadian segment had 344 stores compared to 343 stores at July 31, 2010. Sales decreased at existing stores primarily due to a weaker line up of new software releases for the 13 and 26 weeks ended July 30, 2011 when compared to the same periods in fiscal 2010. Segment operating income for the 13 and 26 weeks ended July 30, 2011 decreased by $1.8 million and $5.3 million, respectively, compared to the 13 and 26 weeks ended July 31, 2010, driven by the decrease in sales at existing stores discussed above and the impact of changes in exchange rates, which had the effect of decreasing operating earnings by $0.2 million and $0.2 million, respectively, for the 13 and 26 weeks ended July 30, 2011 when compared to the prior year periods.

Australia

Segment results for Australia include retail operations in Australia and New Zealand and e-commerce operations in Australia. As of July 30, 2011, the Australian segment included 411 stores, compared to 398 stores at July 31, 2010. Sales for the 13 and 26 weeks ended July 30, 2011 increased 15.8% and 13.5%, respectively, compared to the 13 and 26 weeks ended July 31, 2010. The increase in sales was primarily due to the impact of changes in exchange rates in the second quarter of fiscal 2011, which had the effect of increasing sales by $25.9 million and $39.1 million when compared to the same periods in fiscal 2010. Sales also increased due to the addition of 28 new stores since January 30, 2010. Excluding the impact of changes in exchange rates, sales in the Australian segment decreased 6.0% and 3.8% in the 13 and 26 weeks ended July 30, 2011, respectively. This decrease in sales was primarily due to a decrease in sales at existing stores due to fewer new software title releases when compared to the same periods in fiscal 2010. Segment operating income in the 13 and 26 weeks ended July 30, 2011 decreased by $1.4 million and $0.3 million, respectively, when compared to the 13 and 26 weeks ended July 31, 2010. The decrease in segment operating income was due to the decrease in sales at existing stores and the increase in selling, general and administrative expenses associated with the increase in the number of stores in operation. Selling, general and administrative expenses rise as a percentage of sales during periods of store count growth due to the fixed nature of many store expenses compared to the ramp in sales at new stores. This decrease in operating earnings was partially offset by the impact of changes in exchange rates, which had the effect of increasing operating earnings by $0.7 million and $1.1 million, respectively, for the 13 and 26 weeks ended July 30, 2011 when compared to the 13 and 26 weeks ended July 31, 2010.

Europe

Segment results for Europe include retail operations in 13 European countries and e-commerce operations in six countries. As of July 30, 2011, the European segment operated 1,387 stores compared to 1,331 stores as of July 31, 2010. For the 13 and 26 weeks ended July 30, 2011, European sales increased 18.0% and 10.7%, respectively, compared to the 13 and 26 weeks ended July 31, 2010. The increase in sales was primarily due to the impact of the changes in exchange rates, which had the effect of increasing sales by $47.5 million and $61.7 million, respectively, in the 13 and 26 weeks ended July 30, 2011 when compared to the prior year periods. Excluding the impact of changes in exchange rates, sales in the European segment increased 2.5% and 1.1%, respectively, in the 13 and 26 weeks ended July 30, 2011 when compared to the prior year periods. This increase in sales was primarily due to the increase in sales at the 134 stores opened since January 30, 2010 and the growth of used video game product sales as this category continues to mature internationally. These increases were partially offset by the decrease in sales at existing stores due to fewer new software title releases in the relevant periods of fiscal 2011 when compared to the relevant periods in fiscal 2010.

The segment operating loss in Europe was $6.2 million in the 13 weeks ended July 30, 2011 compared to the operating loss in the 13 weeks ended July 31, 2010 of $7.1 million. The decrease in the operating loss for the 13 weeks ended July 30, 2011 compared to the 13 weeks ended July 31, 2010 was primarily due to the increase in gross margin due to the higher mix of used video game product sales as a percentage of total sales during fiscal 2011 which carry higher gross margins than other category sales. This increase was partially offset by the increase in selling, general and administrative expenses associated with the increase in the number of stores in

 

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operation. The decrease in the operating loss was partially offset by the impact of changes in exchange rates, which had the effect of increasing the operating loss by $0.6 million when compared to the prior year period. The segment operating loss in Europe for the 26 weeks ended July 30, 2011 was $10.2 million compared to the operating loss in the 26 weeks ended July 31, 2010 of $7.6 million. The increase in the operating loss for the 26 weeks ended July 30, 2011 compared to the 26 weeks ended July 31, 2010 was primarily due to the decrease in sales at existing stores and the increase in selling, general and administrative expenses associated with the increase in the number of stores in operation. The increase in the operating loss was also impacted by changes in exchange rates, which had the effect of increasing the operating loss by $1.2 million when compared to the prior year period.

Seasonality

The Company’s business, like that of many retailers, is seasonal, with the major portion of the sales and operating profit realized during the fourth fiscal quarter which includes the holiday selling season.

Liquidity and Capital Resources

Cash Flows

During the 26 weeks ended July 30, 2011, cash used in operations was $225.7 million, compared to cash used in operations of $291.2 million during the 26 weeks ended July 31, 2010. The decrease in cash used in operations of $65.5 million was primarily due to a decrease in cash used for working capital purposes of $61.9 million, primarily driven by lower inventory purchases in the 26 weeks ended July 30, 2011 and the related effects on accounts payable payments. The lower inventory purchases were due to better in-stock positions coming out of the fiscal 2010 holiday selling season, particularly hardware inventory which was in short supply at the end of the 52 weeks ended January 30, 2010 (“fiscal 2009”), inventory management, and a lack of new video game title releases in the second quarter of fiscal 2011.

Cash used in investing activities was $121.0 million and $89.5 million during the 26 weeks ended July 30, 2011 and July 31, 2010, respectively. During the 26 weeks ended July 30, 2011, $87.9 million of cash was used primarily to invest in information systems and e-commerce, digital and loyalty program initiatives and to open new stores in the U.S. and internationally. In addition, during the 26 weeks ended July 30, 2011, the Company used $27.4 million for acquisitions in support of the Company’s digital initiatives. During the 26 weeks ended July 31, 2010, $80.3 million of cash was used primarily to open new stores in the U.S. and internationally and to invest in information systems, e-commerce and digital and loyalty program initiatives.

Cash used in financing activities was $151.6 million and $243.1 million for the 26 weeks ended July 30, 2011 and July 31, 2010, respectively. The cash used in financing activities for the 26 weeks ended July 30, 2011 was primarily due to the purchase of $174.4 million of treasury shares pursuant to the Board of Directors’ $500 million authorization in February 2011. Of this amount, $22.0 million of cash was used to settle treasury share purchases that were initiated prior to January 29, 2011. In addition, $13.2 million of cash was received due to the issuance of shares relating to stock option exercises and the Company borrowed $35.0 million against its Revolver (as defined below) during the 26 weeks ended July 30, 2011 and subsequently repaid $25.0 million of the borrowings before July 30, 2011. The cash used in financing activities for the 26 weeks ended July 31, 2010 was primarily due to the purchase of $241.6 million of treasury shares pursuant to the Board of Directors’ $300 million authorization in January 2010.

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 growth initiatives. Our cash and cash equivalents are carried at cost, which approximates market value, and consist primarily of time deposits with highly rated commercial banks and money market investment funds holding direct U.S. Treasury obligations.

 

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