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EXCEL - IDEA: XBRL DOCUMENT - GameStop Corp.Financial_Report.xls
EX-31.2 - CERTIFICATION OF CFO - SECTION 302 - GameStop Corp.ex312-fy14q2.htm
EX-32.1 - CERTIFICATION OF CEO - SECTION 906 - GameStop Corp.ex321-fy14q2.htm
EX-32.2 - CERTIFICATION OF CFO - SECTION 906 - GameStop Corp.ex322-fy14q2.htm
EX-31.1 - CERTIFICATION OF CEO - SECTION 302 - GameStop Corp.ex311-fy14q2.htm

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 AUGUST 2, 2014
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 29, 2014: 112,667,338



TABLE OF CONTENTS
 
 
Page No.
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 




PART I — FINANCIAL INFORMATION
Item 1.    Financial Statements
GAMESTOP CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
August 2,
2014
 
August 3,
2013
 
February 1,
2014
 
 
(In millions, except per share data)
(Unaudited)
ASSETS
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
193.0

 
$
127.4

 
$
536.2

Receivables, net
 
91.2

 
55.7

 
84.4

Merchandise inventories, net
 
1,061.0

 
1,004.4

 
1,198.9

Deferred income taxes
 
59.2

 
55.2

 
51.7

Income taxes receivable
 
83.0

 
50.9

 

Prepaid expenses and other current assets
 
98.9

 
98.8

 
78.4

Total current assets
 
1,586.3

 
1,392.4

 
1,949.6

Property and equipment:
 
 
 
 
 
 
Land
 
21.0

 
20.7

 
20.4

Buildings and leasehold improvements
 
621.9

 
594.3

 
609.6

Fixtures and equipment
 
864.0

 
939.2

 
841.8

Total property and equipment
 
1,506.9

 
1,554.2

 
1,471.8

Less accumulated depreciation and amortization
 
1,057.2

 
1,074.8

 
995.6

Net property and equipment
 
449.7

 
479.4

 
476.2

Goodwill
 
1,420.6

 
1,365.1

 
1,414.7

Other intangible assets, net
 
222.0

 
144.4

 
194.3

Other noncurrent assets
 
84.9

 
57.0

 
56.6

Total noncurrent assets
 
2,177.2

 
2,045.9

 
2,141.8

Total assets
 
$
3,763.5

 
$
3,438.3

 
$
4,091.4

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
460.8

 
$
315.8

 
$
783.9

Accrued liabilities
 
743.1

 
812.0

 
861.7

Income taxes payable
 
29.7

 

 
78.0

Current portion of debt
 
214.1

 
50.0

 
2.4

Total current liabilities
 
1,447.7

 
1,177.8

 
1,726.0

Deferred income taxes
 
58.9

 
27.3

 
37.4

Other long-term liabilities
 
75.2

 
76.5

 
75.0

Notes payable - long-term
 
0.3

 

 
1.6

Total long-term liabilities
 
134.4

 
103.8

 
114.0

Total liabilities
 
1,582.1

 
1,281.6

 
1,840.0

Commitments and contingencies (Note 7)
 

 

 

Stockholders’ equity:
 
 
 
 
 
 
Preferred stock — authorized 5.0 shares; no shares issued or outstanding
 

 

 

Class A common stock — $.001 par value; authorized 300.0 shares; 112.8, 127.1 and 115.3 shares issued, 112.8, 117.1 and 115.3 shares outstanding, respectively
 
0.1

 
0.1

 
0.1

Additional paid-in-capital
 
65.8

 
286.3

 
172.9

Accumulated other comprehensive income
 
104.1

 
98.3

 
82.5

Retained earnings
 
2,011.4

 
1,772.0

 
1,995.9

Total stockholders’ equity
 
2,181.4

 
2,156.7

 
2,251.4

Total liabilities and stockholders’ equity
 
$
3,763.5

 
$
3,438.3

 
$
4,091.4

See accompanying notes to unaudited condensed consolidated financial statements.

1


GAMESTOP CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
 
 
(In millions, except per share data)
(Unaudited)
Net sales
 
$
1,731.4

 
$
1,383.7

 
$
3,727.7

 
$
3,249.0

Cost of sales
 
1,180.5

 
902.3

 
2,550.4

 
2,189.3

Gross profit
 
550.9

 
481.4

 
1,177.3

 
1,059.7

Selling, general and administrative expenses
 
475.4

 
421.6

 
956.4

 
870.8

Depreciation and amortization
 
38.8

 
41.0

 
78.3

 
82.9

Operating earnings
 
36.7

 
18.8

 
142.6

 
106.0

Interest income
 
(0.1
)
 
(0.1
)
 
(0.3
)
 
(0.2
)
Interest expense
 
1.2

 
1.4

 
2.0

 
2.4

Earnings before income tax expense
 
35.6

 
17.5

 
140.9

 
103.8

Income tax expense
 
11.0

 
7.0

 
48.3

 
38.7

Net income
 
$
24.6

 
$
10.5

 
$
92.6

 
$
65.1

Basic net income per common share
 
$
0.22

 
$
0.09

 
$
0.81

 
$
0.55

Diluted net income per common share
 
$
0.22

 
$
0.09

 
$
0.80

 
$
0.55

Dividends per common share
 
$
0.33

 
$
0.275

 
$
0.66

 
$
0.55

Weighted average shares of common stock outstanding — basic
 
113.6

 
117.9

 
114.3

 
118.1

Weighted average shares of common stock outstanding — diluted
 
114.3

 
119.2

 
115.1

 
119.3


See accompanying notes to unaudited condensed consolidated financial statements.


2


GAMESTOP CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
 
 
(In millions)
(Unaudited)
Net income
 
$
24.6

 
$
10.5

 
$
92.6

 
$
65.1

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(7.6
)
 
(48.0
)
 
21.6

 
(66.1
)
Total comprehensive income (loss)
 
$
17.0

 
$
(37.5
)
 
$
114.2

 
$
(1.0
)

See accompanying notes to unaudited condensed consolidated financial statements.


3


GAMESTOP CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
 
 
Class A
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
 
 
(In millions)
(Unaudited)
Balance at February 2, 2014
 
115.3

 
$
0.1

 
$
172.9

 
$
82.5

 
$
1,995.9

 
$
2,251.4

Net income for the 26 weeks ended August 2, 2014
 

 

 

 

 
92.6

 
92.6

Foreign currency translation
 

 

 

 
21.6

 

 
21.6

Dividends(1)
 

 

 

 

 
(77.1
)
 
(77.1
)
Stock-based compensation
 

 

 
12.6

 

 

 
12.6

Repurchase of common shares
 
(3.2
)
 

 
(127.7
)
 

 

 
(127.7
)
Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax benefit of $4.4)
 
0.7

 

 
8.0

 

 

 
8.0

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 2, 2014
 
112.8

 
$
0.1

 
$
65.8

 
$
104.1

 
$
2,011.4

 
$
2,181.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Dividends declared per common share were $0.66 in the 26 weeks ended August 2, 2014.
 
 
 
Class A
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
 
 
(In millions)
(Unaudited)
Balance at February 3, 2013
 
118.2

 
$
0.1

 
$
348.3

 
$
164.4

 
$
1,773.5

 
$
2,286.3

Net income for the 26 weeks ended August 3, 2013
 

 

 

 

 
65.1

 
65.1

Foreign currency translation
 

 

 

 
(66.1
)
 

 
(66.1
)
Dividends(2)
 

 

 

 

 
(66.6
)
 
(66.6
)
Stock-based compensation
 

 

 
11.5

 

 

 
11.5

Repurchase of common shares
 
(3.4
)
 

 
(114.4
)
 

 

 
(114.4
)
Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax benefit of $1.6)
 
2.3

 

 
40.9

 

 

 
40.9

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 3, 2013
 
117.1

 
$
0.1

 
$
286.3

 
$
98.3

 
$
1,772.0

 
$
2,156.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2) 
Dividends declared per common share were $0.55 in the 26 weeks ended August 3, 2013.
See accompanying notes to unaudited condensed consolidated financial statements.

4


GAMESTOP CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
26 Weeks Ended
 
 
August 2,
2014
 
August 3,
2013
 
 
(In millions)
(Unaudited)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
92.6

 
$
65.1

Adjustments to reconcile net income to net cash flows used in operating activities:
 
 
 
 
Depreciation and amortization (including amounts in cost of sales)
 
79.4

 
84.2

Stock-based compensation expense
 
12.6

 
11.5

Deferred income taxes
 
(13.2
)
 
1.0

Excess tax benefits related to stock-based awards
 
(4.4
)
 
(1.6
)
Loss on disposal of property and equipment
 
2.1

 
3.4

Other
 
20.1

 
(0.9
)
Changes in operating assets and liabilities:
 
 
 
 
Receivables, net
 
(4.8
)
 
16.9

Merchandise inventories
 
125.8

 
142.2

Prepaid expenses and other current assets
 
(19.9
)
 
(31.8
)
Income tax payable/receivable
 
(115.7
)
 
(152.9
)
Accounts payable and accrued liabilities
 
(450.1
)
 
(200.0
)
Changes in other long-term liabilities
 
0.2

 
(22.4
)
Net cash flows used in operating activities
 
(275.3
)
 
(85.3
)
Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(51.5
)
 
(47.3
)
Acquisitions, net of cash acquired of $2.5
 
(43.1
)
 

Other
 
(0.9
)
 
1.4

Net cash flows used in investing activities
 
(95.5
)
 
(45.9
)
Cash flows from financing activities:
 
 
 
 
Repurchase of common shares
 
(123.8
)
 
(114.4
)
Dividends paid
 
(75.7
)
 
(66.2
)
Proceeds from the revolver
 
476.0

 
130.0

Repayments of revolver borrowings
 
(266.0
)
 
(80.0
)
Payments of financing costs
 
(1.3
)
 

Issuance of common stock, net of share repurchases for withholdings taxes
 
(2.0
)
 
39.3

Excess tax benefits related to stock-based awards
 
4.4

 
3.1

Net cash flows provided by (used in) financing activities
 
11.6

 
(88.2
)
Exchange rate effect on cash and cash equivalents
 
16.0

 
(27.6
)
Net decrease in cash and cash equivalents
 
(343.2
)
 
(247.0
)
Cash and cash equivalents at beginning of period
 
536.2

 
374.4

Cash and cash equivalents at end of period
 
$
193.0

 
$
127.4

See accompanying notes to unaudited condensed consolidated financial statements.

5


GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
1.
Nature of Operations and Summary of Significant Accounting Policies
Background
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global family of specialty retail brands that makes the most popular technologies affordable and simple. As the world's largest multichannel video game retailer, we sell new and pre-owned video game hardware, physical and digital video game software, video game accessories, as well as new and pre-owned mobile and consumer electronics products and other merchandise primarily through our GameStop, EB Games and Micromania stores. We sell consumer electronics, mobile products and wireless services primarily through our Simply Mac, Spring Mobile and Cricket Wireless stores. As of August 2, 2014, we operated 6,698 stores, in the United States, Australia, Canada and Europe, which are primarily located in major shopping malls and strip centers. We also operate electronic commerce Web sites www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, 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 world's leading print and digital video game publication; a digital PC game distribution platform available at www.gamestop.com/pcgames; iOS and Android mobile applications; and an online consumer electronics marketplace available at www.buymytronics.com. We also own and operate a certified Apple reseller selling Apple products in the United States under the name Simply Mac; Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores in the United States; and pre-paid wireless stores under the name Cricket Wireless (an AT&T brand) as part of our expanding relationship with AT&T. We operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe, and a Technology Brands segment, which was added in the fourth quarter of the fiscal year comprised of the 52 weeks ended February 1, 2014 ("fiscal 2013") and includes the operations of our Simply Mac, Spring Mobile and Cricket Wireless businesses.
Basis of Presentation and Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Additionally, certain reclassifications have been made to prior period amounts reflected in the condensed consolidated statements of cash flows to conform to the current period presentation. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in our opinion, 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 consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with our annual report on Form 10-K for the 52 weeks ended February 1, 2014 (the “2013 Annual Report on Form 10-K”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results. Actual results could differ from those estimates. Due to the seasonal nature of our business, the results of operations for the 13 and 26 weeks ended August 2, 2014 are not indicative of the results to be expected for the 52 weeks ending January 31, 2015 (“fiscal 2014”).
We have revised the presentation of outstanding checks in our prior period financial statements as indicated in the tables below. Previously, we reduced cash and liabilities when the checks were presented for payment and cleared our bank accounts. We now reduce cash and liabilities when the checks are released for payment. The impacts of revising our financial statements for the specified prior periods are as follows:

6

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Consolidated Balance Sheets as of August 3, 2013:
 
As Previously Reported
 
Revision
 
As Revised
 
 
(In millions)
Cash and cash equivalents
 
$
199.5

 
$
(72.1
)
 
$
127.4

Total current assets
 
1,464.5

 
(72.1
)
 
1,392.4

Total assets
 
3,510.4

 
(72.1
)
 
3,438.3

Accounts payable
 
356.8

 
(41.0
)
 
315.8

Accrued liabilities
 
843.1

 
(31.1
)
 
812.0

Total current liabilities
 
1,249.9

 
(72.1
)
 
1,177.8

Total liabilities
 
1,353.7

 
(72.1
)
 
1,281.6

Consolidated Statements of Cash Flows for the 26 weeks ended August 3, 2013:
 
As Previously Reported
 
Revision
 
As Revised
 
 
(In millions)
Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
(389.3
)
 
$
189.3

 
$
(200.0
)
Net cash flows provided by operating activities
 
(274.6
)
 
189.3

 
(85.3
)
Cash and cash equivalents at beginning of period
 
635.8

 
(261.4
)
 
374.4

Cash and cash equivalents at end of period
 
199.5

 
(72.1
)
 
127.4

Restricted Cash
Restricted cash of $13.6 million, $10.4 million and $16.4 million as of August 2, 2014August 3, 2013 and February 1, 2014, respectively, consists primarily of bank deposits serving as collateral for bank guarantees issued on behalf of our foreign subsidiaries and is included in other noncurrent assets in our unaudited condensed consolidated balance sheets.
 
Revenue Recognition
Revenue from the sales of our products is recognized at the time of sale, net of sales discounts and net of an estimated sales return reserve, based on historical return rates, with a corresponding reduction in cost of sales. Our sales return policy is generally limited to less than 30 days and as such our sales returns are, and have historically been, immaterial.
Recently Issued Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 related to revenue recognition. The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The ASU provides alternative methods of initial adoption and is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is not permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements as well as the appropriate method of adoption.

7

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In April 2014, the FASB issued ASU 2014-08 related to reporting discontinued operations and disclosures of disposals of components of an entity. Specifically, the ASU amends the definition of a discontinued operation, expands disclosure requirements for transactions that meet the definition of a discontinued operation and requires entities to disclose additional information about individually significant components that are disposed of or held for sale and do not qualify as discontinued operations. Additionally, entities will be required to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position and to separately present certain information related to the operating and investing cash flows of the discontinued operation, for all comparative periods, in the statement of cash flows. The ASU is effective for us beginning in the first quarter of our fiscal year ending January 30, 2016 and will be adopted on a prospective basis for all disposals (except disposals classified as held for sale prior to the adoption date) or components initially classified as held for sale in periods beginning on or after the adoption date, with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

2.
Acquisitions
Technology Brands
During the first half of fiscal 2014, in connection with the continued expansion of our Technology Brands business, Spring Mobile completed acquisitions of certain AT&T resellers and Simply Mac completed an acquisition of an authorized Apple retailer for total consideration of $45.6 million ($43.1 million net of cash acquired). We recorded an immaterial amount of goodwill related to these acquisitions. We continue to believe that our Spring Mobile and Simply Mac businesses represent important strategic growth opportunities for us within the specialty retail marketplace and also provide avenues for diversification relative to our core operations in the video game retail marketplace.
    
3.
Accounting for Stock-Based Compensation
The following is a summary of the stock-based awards granted during the periods indicated:
 
 
 
26 Weeks Ended August 2, 2014
 
26 Weeks Ended August 3, 2013
 
 
Shares
 
Weighted Average
Grant Date Fair
Value
 
Shares
 
Weighted Average
Grant Date Fair
Value
 
 
(In thousands, except per share data)
Stock options – time-vested
 
283

 
$
12.37

 
457

 
$
7.10

Restricted stock awards – time-vested
 
437

 
38.64

 
916

 
24.82

Restricted stock awards – performance-based
 
182

 
38.52

 
262

 
24.82

Total stock-based awards
 
902

 
 
 
1,635

 
 
For stock options granted, we record stock-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, expected dividend yield and expected employee forfeiture rate. We use historical data to estimate the option life, dividend yield and the employee forfeiture rate, and use historical volatility when estimating the stock price volatility. The following assumptions were used with respect to the stock options granted:
 
 
26 Weeks Ended
 
August 2,
2014
 
August 3,
2013
Volatility
46.5
%
 
46.4
%
Risk-free interest rate
1.7
%
 
1.0
%
Expected life (years)
5.5

 
5.6

Expected dividend yield
3.4
%
 
4.3
%

8

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Total stock-based compensation recognized in selling, general and administrative expenses was as follows for the periods indicated:
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
 
 
(In millions)
Stock-based compensation expense
 
$
6.8

 
$
6.0

 
$
12.6

 
$
11.5

As of August 2, 2014, the unrecognized compensation expense related to the unvested portion of our stock-based awards was $43.3 million, which is expected to be recognized over a weighted average period of 2 years. The total intrinsic value of options exercised during the 13 weeks ended August 2, 2014 and the 13 weeks ended August 3, 2013 was $5.1 million and $10.5 million, respectively. The total intrinsic value of options exercised during the 26 weeks ended August 2, 2014 and the 26 weeks ended August 3, 2013 was $6.3 million and $21.1 million, respectively.

4.
Computation of Net Income per Common Share
Basic net income per common share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period. Under the treasury stock method, potentially dilutive securities include stock options and unvested restricted stock outstanding during the period. Potentially dilutive securities are excluded from the computations of diluted earnings per share if their effect would be antidilutive.
A reconciliation of shares used in the computation of basic and diluted net income per common share is as follows:
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
 
 
(In millions, except per share data)
Net income
 
$
24.6

 
$
10.5

 
$
92.6

 
$
65.1

Weighted average common shares outstanding
 
113.6

 
117.9

 
114.3

 
118.1

Dilutive effect of options and restricted shares on common stock(1)
 
0.7

 
1.3

 
0.8

 
1.2

Common shares and dilutive potential common shares
 
114.3

 
119.2

 
115.1

 
119.3

Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.22

 
$
0.09

 
$
0.81

 
$
0.55

Diluted
 
$
0.22

 
$
0.09

 
$
0.80

 
$
0.55

 
(1) 
Excludes 1.5 million, 1.6 million, 1.6 million, and 1.8 million share-based awards for the 13 weeks ended August 2, 2014, the 13 weeks ended August 3, 2013, the 26 weeks ended August 2, 2014 and the 26 weeks ended August 3, 2013, respectively, because their effects were antidilutive.


5.
Fair Value Measurements and Financial Instruments
Recurring Fair Value Measurements and Derivative Financial Instruments
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value accounting guidance applies to our foreign currency contracts, which include forward exchange contracts, foreign currency options and cross-currency swaps, our Company-owned

9

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 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 at fair value on a recurring basis and recorded on our unaudited condensed consolidated balance sheets (in millions): 
 
 
August 2,
2014
 
August 3,
2013
 
February 1,
2014
Assets
 
 
 
 
 
 
Foreign currency contracts
 
 
 
 
 
 
Other current assets
 
$
2.0

 
$
2.6

 
$
0.9

Other noncurrent assets
 
3.2

 
0.3

 
0.5

Company-owned life insurance(1)
 
7.2

 
5.4

 
7.1

Total assets
 
12.4

 
8.3

 
8.5

Liabilities
 
 
 
 
 
 
Foreign currency contracts
 
 
 
 
 
 
Accrued liabilities
 
7.6

 
12.8

 
21.3

Other long-term liabilities
 
1.6

 
8.0

 
2.2

Nonqualified deferred compensation(2)
 
1.1

 
1.0

 
1.1

Total liabilities
 
$
10.3

 
$
21.8

 
$
24.6

 
(1) 
Recognized in other non-current assets in our unaudited condensed consolidated balance sheets.
(2) 
Recognized in accrued liabilities in our unaudited condensed consolidated balance sheets.
We use 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. The total gross notional value of derivatives related to our foreign currency contracts was $713.4 million, $692.3 million and $640.6 million as of August 2, 2014, August 3, 2013 and February 1, 2014, respectively.
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
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
Gains (losses) on the change in fair value of derivative instruments
 
$
9.1

 
$
(19.7
)
 
$
10.4

 
$
(10.3
)
Gains (losses) on the re-measurement of related intercompany loans and foreign currency assets and liabilities
 
(8.4
)
 
22.2

 
(9.1
)
 
13.4

Total
 
$
0.7

 
$
2.5

 
$
1.3

 
$
3.1


10

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We do not use derivative financial instruments for trading or speculative purposes. We are exposed to counterparty credit risk on all of our derivative financial instruments and cash equivalent investments. We manage counterparty risk according to the guidelines and controls established under our 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.
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record certain assets and liabilities at fair value on a nonrecurring basis as required by GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. We did not record any significant impairment charges related to assets measured at fair value on a nonrecurring basis during the 13 and 26 weeks ended August 2, 2014 or August 3, 2013, respectively.
Other Fair Value Disclosures
The carrying values of our cash equivalents, receivables, net and accounts payable approximate the fair value due to their short-term maturities.
6.
Debt
On January 4, 2011, we entered into a $400 million credit agreement, which we amended and restated on March 25, 2014 (the “Revolver”). The Revolver is a five-year, asset-based facility that is secured by substantially all of our assets and the assets of our domestic subsidiaries. Availability under the Revolver is subject to a monthly borrowing base calculation. The Revolver includes a $50 million letter of credit sublimit. Prior to the March 2014 amendments, the Revolver was scheduled to mature in January 2016. The amendments extended the maturity date to March 25, 2019; increased the expansion feature under the Revolver from $150 million to $200 million, subject to certain conditions; and revised certain other terms, including a reduction of the fee we are required to pay on the unused portion of the total commitment amount. We believe the extension of the maturity date of the Revolver to March 2019 helps to limit our exposure to potential tightening or other adverse changes in the credit markets.

Borrowing availability under the Revolver is limited to a borrowing base which allows us 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. The borrowing base provides for borrowing up to 92.5% of the appraisal value during the fiscal months of August through October. Letters of credit reduce the amount available to borrow under the Revolver by an amount equal to the face value of the letters of credit. Our ability to pay cash dividends, redeem options and repurchase shares is generally permitted, except under certain circumstances, including if either 1) excess availability under the Revolver is less than 30%, or is projected to be within 12 months after such payment or 2) if excess availability under the Revolver is less than 15%, or is projected to be within 12 months after such payment, and the fixed charge coverage ratio, as calculated on a pro-forma basis for the prior 12 months is 1.1:1.0 or less. In the event that excess availability under the Revolver is at any time less than the greater of (1) $30 million or (2) 10% of the lesser of the total commitment or the borrowing base, we will be subject to a fixed charge coverage ratio covenant of 1.0:1.0.
The Revolver places certain restrictions on us and our subsidiaries, including limitations on asset sales, additional liens, investments, loans, guarantees, acquisitions and the incurrence of additional indebtedness. Absent consent from our lenders, we may not incur more than $1 billion of senior secured debt and $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 0.25% to 0.75% above the highest of (a) the prime rate of the administrative agent, (b) the federal funds effective rate plus 0.50% or (c) the London Interbank Offered (“LIBO”) rate for a 30-day interest period as determined on such day plus 1.00%, and (2) for LIBO rate loans of 1.25% to 1.75% above the LIBO rate. The applicable margin is determined quarterly as a function of our average daily excess availability under the facility. In addition, we are required to pay a commitment fee of 0.25% for any unused portion of the total commitment under the Revolver. As of August 2, 2014, the applicable margin was 0.25% for prime rate loans and 1.25% for LIBO rate loans.
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 us or the borrowers proving to be false in any material respect, certain bankruptcy, insolvency or receivership events affecting us or our subsidiaries, defaults relating to certain other indebtedness, imposition of certain judgments and mergers or the liquidation of the Company or certain of its subsidiaries. During the 26 weeks ended August 2, 2014, we borrowed $476 million and subsequently

11

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

repaid $266 million under the Revolver. During the 26 weeks ended August 3, 2013, we had borrowings of $130 million and repayments of $80 million under the Revolver. Average borrowings under the Revolver for the 26 weeks ended August 2, 2014 were $91.1 million. Our average interest rate on those outstanding borrowings for the 26 weeks ended August 2, 2014 was 1.7%. As of August 2, 2014, total availability under the Revolver was $181.4 million, with outstanding borrowings of $210 million and outstanding standby letters of credit of $8.3 million. We are currently in compliance with the requirements of the Revolver.
In September 2007, our 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 is available to our 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 August 2, 2014, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $4.1 million.

7.
Commitments and Contingencies
In the ordinary course of business, we are, from time to time, subject to various legal proceedings, including matters involving wage and hour employee class actions and consumer class actions. We may enter into discussions regarding settlement of these and other types of lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interest of our stockholders. We do not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material effect on our financial condition, results of operations or liquidity.
 
8.
Significant Products

Beginning with our 2013 Annual Report on Form 10-K, we expanded the categories included in our disclosures on sales and gross profit by category to reflect recent changes in our business, the expansion of categories previously included in Other and our management emphasis as we operate in the future. Our previous categories of New Video Game Hardware and New Video Game Software remain unchanged.

We have expanded our previous category of Pre-owned Video Game Products to include value-priced, or closeout, products and this category is now referred to as the Pre-owned and Value Video Game Products category. We believe there is an opportunity to purchase closeout and overstocked inventory from publishers, distributors and other retailers which is older new product but can be acquired for less than typical new release product costs. This product can then be resold in our Video Game Brands stores and on our websites as value-priced product. Our sales of this product in the past have yielded significantly higher margins than new video game products, yet lower margins than pre-owned video game products.

In the past, all other products we sold were categorized into “Other,” which included video game accessories, digital products, new and pre-owned mobile products, consumer electronics, revenues from our PowerUp Rewards program and Game Informer subscription sales, strategy guides, toys and PC entertainment software. We are separating our historical Other category into the following new categories:

Video Game Accessories, which includes new accessories for use with video game consoles and hand-held devices and software, such as controllers, gaming headsets and memory cards;
Digital, which includes revenues from the sale of DLC, full game downloads, Xbox Live, PlayStation Plus and Nintendo network points and subscription cards, other prepaid digital currencies and time cards, Kongregate, Game Informer digital subscriptions and PC digital downloads;
Mobile and Consumer Electronics, which includes revenues from selling new and pre-owned mobile devices and consumer electronics in Video Game Brands stores and all revenues from our Technology Brands stores;
Other, which includes revenues from the sales of PC entertainment software, toys, strategy guides and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in physical form.

12

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables set forth net sales and gross profit (in millions) and gross profit percentages by significant product category for the periods indicated: 
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
 
 
Net
Sales
 
Percent
of Total
 
Net
Sales
 
Percent
of Total
 
Net
Sales
 
Percent
of Total
 
Net
Sales
 
Percent
of Total
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New video game hardware
 
$
332.3

 
19.2
%
 
$
147.8

 
10.7
%
 
$
770.3

 
20.7
%
 
$
389.6

 
12.0
%
New video game software
 
497.0

 
28.7
%
 
429.8

 
31.1
%
 
1,056.9

 
28.4
%
 
1,133.0

 
34.9
%
Pre-owned and value video game products
 
558.0

 
32.2
%
 
528.7

 
38.2
%
 
1,160.9

 
31.1
%
 
1,101.3

 
33.9
%
Video game accessories
 
107.5

 
6.2
%
 
92.0

 
6.6
%
 
252.6

 
6.8
%
 
218.4

 
6.7
%
Digital
 
52.3

 
3.0
%
 
49.4

 
3.6
%
 
108.4

 
2.9
%
 
105.6

 
3.3
%
Mobile and consumer electronics
 
112.1

 
6.5
%
 
60.6

 
4.4
%
 
214.3

 
5.7
%
 
111.6

 
3.4
%
Other
 
72.2

 
4.2
%
 
75.4

 
5.4
%
 
164.3

 
4.4
%
 
189.5

 
5.8
%
Total
 
$
1,731.4

 
100.0
%
 
$
1,383.7

 
100.0
%
 
$
3,727.7

 
100.0
%
 
$
3,249.0

 
100.0
%

 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
 
 
Gross
Profit
 
Gross
Profit
Percent
 
Gross
Profit
 
Gross
Profit
Percent
 
Gross
Profit
 
Gross
Profit
Percent
 
Gross
Profit
 
Gross
Profit
Percent
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New video game hardware
 
$
31.6

 
9.5
%
 
$
15.5

 
10.5
%
 
$
76.2

 
9.9
%
 
$
35.7

 
9.2
%
New video game software
 
115.7

 
23.3
%
 
98.9

 
23.0
%
 
242.9

 
23.0
%
 
247.1

 
21.8
%
Pre-owned and value video game products
 
262.1

 
47.0
%
 
250.6

 
47.4
%
 
560.5

 
48.3
%
 
521.4

 
47.3
%
Video game accessories
 
41.9

 
39.0
%
 
38.4

 
41.7
%
 
96.9

 
38.4
%
 
88.3

 
40.4
%
Digital
 
34.0

 
65.0
%
 
35.1

 
71.1
%
 
69.8

 
64.4
%
 
72.4

 
68.6
%
Mobile and consumer electronics
 
40.5

 
36.1
%
 
16.3

 
26.9
%
 
77.6

 
36.2
%
 
28.9

 
25.9
%
Other
 
25.1

 
34.8
%
 
26.6

 
35.3
%
 
53.4

 
32.5
%
 
65.9

 
34.8
%
Total
 
$
550.9

 
31.8
%
 
$
481.4

 
34.8
%
 
$
1,177.3

 
31.6
%
 
$
1,059.7

 
32.6
%

9.
Segment Information
 
We operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe, and a Technology Brands segment, which was added in the fourth quarter of fiscal 2013 and includes the operations of our Simply Mac, Spring Mobile and Cricket Wireless businesses. We identify segments based on a combination of geographic areas and management responsibility. Each of the segments includes significant retail operations with all Video Game Brands stores engaged in the sale of new and pre-owned video game systems and software and related accessories and Technology Brand stores engaged in the sale of consumer electronics and wireless products and services. Segment results for the United States include retail operations in 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; a digital PC game distribution platform available at www.gamestop.com/pcgames; and an online consumer electronics marketplace available at www.buymytronics.com. 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 11 European countries and e-commerce operations in six countries. The Technology Brands segment includes retail operations in the United States. We measure segment profit using operating earnings, which is defined as income from continuing operations before intercompany

13

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

royalty fees, net interest expense and income taxes. Transactions between reportable segments consist primarily of royalties, management fees, intersegment loans and related interest. There were no intersegment sales during the 13 weeks ended August 2, 2014 and August 3, 2013 or the 26 weeks ended August 2, 2014 and August 3, 2013.
The reconciliation of segment profit to earnings before income taxes for the 13 weeks ended August 2, 2014 and August 3, 2013, respectively, is as follows (in millions): 
13 weeks ended August 2, 2014
 
United
States
 
Canada
 
Australia
 
Europe
 
Technology Brands
 
Consolidated
Net sales
 
$
1,101.0

 
$
82.9

 
$
142.1

 
$
335.3

 
$
70.1

 
$
1,731.4

Segment operating earnings (loss)
 
35.6

 
1.2

 
4.8

 
(12.0
)
 
7.1

 
36.7

Interest income
 
 
 
 
 
 
 
 
 
 
 
0.1

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(1.2
)
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
35.6

 
13 weeks ended August 3, 2013
 
United
States
 
Canada
 
Australia
 
Europe
 
Technology Brands
 
Consolidated
Net sales
 
$
942.4

 
$
67.7

 
$
112.4

 
$
261.2

 
$

 
$
1,383.7

Segment operating earnings (loss)
 
43.4

 
(0.7
)
 
1.1

 
(25.0
)
 

 
18.8

Interest income
 
 
 
 
 
 
 
 
 
 
 
0.1

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(1.4
)
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
17.5


The reconciliation of segment profit to earnings before income taxes for the 26 weeks ended August 2, 2014 and August 3, 2013, respectively, is as follows (in millions): 
26 weeks ended August 2, 2014
 
United
States
 
Canada
 
Australia
 
Europe
 
Technology Brands
 
Consolidated
Net sales
 
$
2,498.7

 
$
173.2

 
$
258.6

 
$
667.0

 
$
130.2

 
$
3,727.7

Segment operating earnings (loss)
 
142.2

 
3.6

 
6.5

 
(22.8
)
 
13.1

 
142.6

Interest income
 
 
 
 
 
 
 
 
 
 
 
0.3

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(2.0
)
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
140.9


26 weeks ended August 3, 2013
 
United
States
 
Canada
 
Australia
 
Europe
 
Technology Brands
 
Consolidated
Net sales
 
$
2,295.3

 
$
155.7

 
$
226.5

 
$
571.5

 
$

 
$
3,249.0

Segment operating earnings (loss)
 
136.2

 
1.8

 
2.6

 
(34.6
)
 

 
106.0

Interest income
 
 
 
 
 
 
 
 
 
 
 
0.2

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(2.4
)
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
103.8


14

GAMESTOP CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


10.
Subsequent Events
Dividend
On August 19, 2014, our Board of Directors approved a quarterly cash dividend to our stockholders of $0.33 per share of Class A Common Stock payable on September 16, 2014 to stockholders of record at the close of business on September 3, 2014. Future dividends will be subject to approval by our Board of Directors.
Share Repurchases
As of August 29, 2014, we have purchased an additional 0.1 million shares of our Class A Common Stock for an average price per share of $41.48 since August 2, 2014.



15


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 unaudited condensed 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. See our Annual Report on Form 10-K for the fiscal year ended February 1, 2014 filed with the Securities and Exchange Commission (the “SEC”) on April 2, 2014 (the “2013 Annual Report on Form 10-K”), including the factors disclosed under “Item 1A. Risk Factors,” as well as “Disclosure Regarding Forward-looking Statements” and “Item 1A. Risk Factors” below, for certain factors which may cause actual results to vary materially from these forward-looking statements.
General
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global family of specialty retail brands that makes the most popular technologies affordable and simple. As the world's largest multichannel video game retailer, we sell new and pre-owned video game hardware, physical and digital video game software, video game accessories, as well as new and pre-owned mobile and consumer electronics products and other merchandise primarily through our GameStop, EB Games and Micromania stores. We sell consumer electronics, mobile products and wireless services primarily through our Simply Mac, Spring Mobile and Cricket Wireless stores. As of August 2, 2014, we operated 6,698 stores in the United States, Australia, Canada and Europe, which are primarily located in major shopping malls and strip centers. We also operate electronic commerce Web sites www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, 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 world's leading print and digital video game publication; a digital PC game distribution platform available at www.gamestop.com/pcgames; iOS and Android mobile applications; and an online consumer electronics marketplace available at www.buymytronics.com. We also operate a certified Apple reseller selling Apple products in the United States under the name Simply Mac; Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores in the United States; and pre-paid wireless stores under the name Cricket Wireless (an AT&T brand) as part of our expanding relationship with AT&T. Our Simply Mac, Spring Mobile and Cricket Wireless business comprise our Technology Brands segment.
Our fiscal year is composed of 52 or 53 weeks ending on the Saturday closest to January 31. The fiscal year ending January 31, 2015 (“fiscal 2014”) and the fiscal year ended February 1, 2014 (“fiscal 2013”) each consists of 52 weeks.
Growth in the electronic game industry is generally driven by the introduction of new technology. Gaming consoles are typically launched in cycles as technological developments provide significant improvements in graphics, audio quality, game play, Internet connectivity and other entertainment capabilities beyond video gaming. The current generation of consoles (the Sony PlayStation 4, the Microsoft Xbox One and the Nintendo Wii U) was introduced between November 2012 and November 2013. The previous generation of consoles (the Sony PlayStation 3, the Microsoft Xbox 360 and the Nintendo Wii) were introduced between 2005 and 2007. The Nintendo 3DS was introduced in March 2011, the Sony PlayStation Vita was introduced in February 2012 and the Nintendo 2DS was introduced in October 2013. 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 margin percent in the first full year following new platform releases and an increase in gross margin percent in the years subsequent to the first full year following the launch period; therefore, the launch of the current-generation Sony PlayStation 4 and the Microsoft Xbox One could negatively impact our overall gross margin percentage in fiscal 2014. Unit sales of maturing video game platforms, like the Sony PlayStation 3 and the Microsoft Xbox 360, are typically also driven by manufacturer-funded retail price reductions, further driving sales of related software and accessories. With the introduction of the new consoles in the fourth quarter of fiscal 2013, sales of new hardware have increased.
We expect that future growth in the electronic 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 digitally downloadable content (“DLC”), full game downloads, Xbox LIVE, PlayStation Plus and Nintendo network points cards, as well as prepaid digital and online timecards. We have made significant investments in e-commerce and in-store and Web site functionality to enable our customers to access digital content easily and facilitate the digital sales and delivery process. We plan to continue to invest in these types of processes and channels to grow our digital sales base and enhance our market leadership position in the electronic game industry and in the digital aggregation and distribution category. We currently sell tablets and accessories in most of our video game stores. We also sell and accept trades of pre-owned mobile devices in our stores. In addition, we intend to continue to invest in customer loyalty programs designed to attract and retain customers.

16


Over the last year, we have acquired two authorized Apple resellers selling Apple products and services in 33 stores. Additionally, we acquired Spring Mobile, an authorized AT&T reseller currently operating 238 stores selling wireless services and products. We also operate 48 stores under the Cricket Wireless brand (formerly operated under the Aio Wireless name prior to AT&T's acquisition of Leap Wireless). Cricket Wireless is an AT&T brand selling pre-paid wireless services and products. Collectively these businesses comprise our Technology Brands segment. We expect to expand the number of Technology Brands stores which we operate in future years.
Recent Developments
Acquisition activity. During the first half of fiscal 2014, in connection with the continued expansion of our Technology Brands business, Spring Mobile and Simply Mac completed acquisitions of certain AT&T resellers and authorized Apple retailers for total consideration of $45.6 million ($43.1 million net of cash acquired). We continue to seek out opportunities to extend our core competencies to other products and retail categories in order to continue to grow and to help mitigate the financial impact from the cyclical nature of the video game console cycle. As a result of our acquisition activity in the Technology Brands segment over the past two fiscal quarters, we are currently experiencing higher gross margins in that segment in comparison to the margins in our Video Game Brands segments, which has had the impact of offsetting potential margin erosion associated with the recent launch of the current generation video game consoles. We continue to seek avenues for growth in our Technology Brands business, and we expect to pursue similar acquisitions moving forward.
Additionally, as part of our efforts to drive long-term shareholder value, we have accomplished the following return of capital activities in the first half of fiscal 2014:
Quarterly cash dividend. On March 4, 2014, our Board of Directors authorized an increase in our annual cash dividend from $1.10 to $1.32 per share of Class A Common Stock, which represents an increase of 20%. On March 25, 2014 and June 17, 2014, we made quarterly dividend payments of $0.33 per share of Class A Common Stock to stockholders of record on March 17, 2014 and June 4, 2014, respectively. Additionally, on August 19, 2014, our Board of Directors declared a quarterly cash dividend of $0.33 per common share payable on September 16, 2014, to shareholders of record as of the close of business on September 3, 2014.
Share repurchase activity. During the first two quarters of fiscal 2014, we repurchased 3.2 million shares of our Class A Common Stock at an average price per share of $39.51 for a total of $127.7 million. Between August 3, 2014 and August 29, 2014, we repurchased an additional 0.1 million shares of our Class A Common Stock for an average price per share of $41.48.
Critical Accounting Policies
Our unaudited condensed 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 us 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 “Part 2 - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2013 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies from those included in our 2013 Annual Report on Form 10-K.

17


Consolidated Results of Operations
The following table sets forth certain statement of operations items as a percentage of net sales for the periods indicated:
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2,
2014
 
August 3,
2013
 
August 2,
2014
 
August 3,
2013
Statement of Operations Data:
 
 
 
 
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
 
68.2

 
65.2

 
68.4

 
67.4

Gross profit
 
31.8

 
34.8

 
31.6

 
32.6

Selling, general and administrative expenses
 
27.5

 
30.5

 
25.7

 
26.8

Depreciation and amortization
 
2.2

 
2.9

 
2.1

 
2.5

Operating earnings
 
2.1

 
1.4

 
3.8

 
3.3

Interest expense, net
 
0.1

 
0.1

 

 
0.1

Earnings before income tax expense
 
2.0

 
1.3

 
3.8

 
3.2

Income tax expense
 
0.6

 
0.5

 
1.3

 
1.2

Net income
 
1.4
%
 
0.8
%
 
2.5
%
 
2.0
%

We include purchasing, receiving and distribution costs in selling, general and administrative expenses, rather than in cost of sales, in the statement of operations. We include processing fees associated with purchases made by 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 credit cards in selling, general and administrative expenses. The net effect of these classifications as a percentage of net sales has not historically been material.

Beginning with our 2013 Annual Report on Form 10-K, we expanded the categories included in our disclosures on sales and gross profit by category to reflect recent changes in our business, the expansion of categories previously included in Other and our management emphasis as we operate in the future. Our previous categories of New Video Game Hardware and New Video Game Software remain unchanged.

We have expanded our previous category of Pre-owned Video Game Products to include value-priced, or closeout, products and this category is now referred to as the Pre-owned and Value Video Game Products category. We believe there is an opportunity to purchase closeout and overstocked inventory from publishers, distributors and other retailers which is older new product but can be acquired for less than typical new release product costs. This product can then be resold in our Video Game Brands stores and on our Web sites as value-priced product. Our limited sales of this product in the past have yielded significantly higher margins than new video game products, yet slightly lower margins than pre-owned video game products.

In the past, all other products we sold were categorized into “Other,” which included video game accessories, digital products, new and pre-owned mobile products, consumer electronics, revenues from our PowerUp Rewards program and Game Informer subscription sales, strategy guides, toys and PC entertainment software. We are separating our historical Other category into the following new categories:

Video Game Accessories, which includes new accessories for use with video game consoles and hand-held devices and software, such as controllers, gaming headsets and memory cards;
Digital, which includes revenues from the sale of DLC, full game downloads, Xbox Live, PlayStation Plus and Nintendo network points and subscription cards, other prepaid digital currencies and time cards, Kongregate, Game Informer digital subscriptions and PC digital downloads;
Mobile and Consumer Electronics, which includes revenues from selling new and pre-owned mobile devices and consumer electronics in Video Game Brands stores and all revenues from our Technology Brands stores;
Other, which includes revenues from the sales of PC entertainment software, toys, strategy guides and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in physical form.

18


The following tables set forth net sales and gross profit (in millions) and gross profit percentages by significant product category for the periods indicated:
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
 
 
Net
Sales
 
Percent
of Total
 
Net
Sales
 
Percent
of Total
 
Net
Sales
 
Percent
of Total
 
Net
Sales
 
Percent
of Total
Net Sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New video game hardware
 
$
332.3

 
19.2
%
 
$
147.8

 
10.7
%
 
$
770.3

 
20.7
%
 
$
389.6

 
12.0
%
New video game software
 
497.0

 
28.7
%
 
429.8

 
31.1
%
 
1,056.9

 
28.4
%
 
1,133.0

 
34.9
%
Pre-owned and value video game products
 
558.0

 
32.2
%
 
528.7

 
38.2
%
 
1,160.9

 
31.1
%
 
1,101.3

 
33.9
%
Video game accessories
 
107.5

 
6.2
%
 
92.0

 
6.6
%
 
252.6

 
6.8
%
 
218.4

 
6.7
%
Digital
 
52.3

 
3.0
%
 
49.4

 
3.6
%
 
108.4

 
2.9
%
 
105.6

 
3.3
%
Mobile and consumer electronics
 
112.1

 
6.5
%
 
60.6

 
4.4
%
 
214.3

 
5.7
%
 
111.6

 
3.4
%
Other
 
72.2

 
4.2
%
 
75.4

 
5.4
%
 
164.3

 
4.4
%
 
189.5

 
5.8
%
Total
 
$
1,731.4

 
100.0
%
 
$
1,383.7

 
100.0
%
 
$
3,727.7

 
100.0
%
 
$
3,249.0

 
100.0
%
  
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
August 2, 2014
 
August 3, 2013
 
August 2, 2014
 
August 3, 2013
 
 
Gross
Profit
 
Gross
Profit
Percent
 
Gross
Profit
 
Gross
Profit
Percent
 
Gross
Profit
 
Gross
Profit
Percent
 
Gross
Profit
 
Gross
Profit
Percent
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New video game hardware
 
$
31.6

 
9.5
%
 
$
15.5

 
10.5
%
 
$
76.2

 
9.9
%
 
$
35.7

 
9.2
%
New video game software
 
115.7

 
23.3
%
 
98.9

 
23.0
%
 
242.9

 
23.0
%
 
247.1

 
21.8
%
Pre-owned and value video game products
 
262.1

 
47.0
%
 
250.6

 
47.4
%
 
560.5

 
48.3
%
 
521.4

 
47.3
%
Video game accessories
 
41.9

 
39.0
%
 
38.4

 
41.7
%
 
96.9

 
38.4
%
 
88.3

 
40.4
%
Digital
 
34.0

 
65.0
%
 
35.1

 
71.1
%
 
69.8

 
64.4
%
 
72.4

 
68.6
%
Mobile and consumer electronics
 
40.5

 
36.1
%
 
16.3

 
26.9
%
 
77.6

 
36.2
%
 
28.9

 
25.9
%
Other
 
25.1

 
34.8
%
 
26.6

 
35.3
%
 
53.4

 
32.5
%
 
65.9

 
34.8
%
Total
 
$
550.9

 
31.8
%
 
$
481.4

 
34.8
%
 
$
1,177.3

 
31.6
%
 
$
1,059.7

 
32.6
%
13 weeks ended August 2, 2014 compared with the 13 weeks ended August 3, 2013
Net Sales
Net sales increased by $347.7 million, or 25.1%, from $1,383.7 million in the 13 weeks ended August 3, 2013 to $1,731.4 million in the 13 weeks ended August 2, 2014. The increase in net sales was primarily attributable to increases in comparable store sales of 21.9% for the 13 weeks ended August 2, 2014 when compared to the 13 weeks ended August 3, 2013. The increase in comparable store sales was primarily due to strong sales performance during the 13 weeks ended August 2, 2014 associated with the new video game console launches and related video game accessories, as well as strong new video game software sales. In addition, our Technology Brands segment added $70.1 million in net sales in the 13 weeks ended August 2, 2014. The increase in sales also included a favorable impact of $9.8 million from foreign exchange rate fluctuations for the 13 weeks ended August 2, 2014 when compared to the 13 weeks ended August 3, 2013.