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EX-32.2 - EXHIBIT 32.2 - GameStop Corp.ex322-fy16q2.htm
EX-32.1 - EXHIBIT 32.1 - GameStop Corp.ex321-fy16q2.htm
EX-31.2 - EXHIBIT 31.2 - GameStop Corp.ex312-fy16q2.htm
EX-31.1 - EXHIBIT 31.1 - GameStop Corp.ex311-fy16q2.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 JULY 30, 2016
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)
gslogocolor2a01a01a04.jpg
(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 31, 2016: 103,981,539



TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 




PART I — FINANCIAL INFORMATION
Item 1.    Financial Statements
GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
July 30,
2016
 
August 1,
2015
 
January 30,
2016
 
 
(In millions, except par value per share)
ASSETS
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
289.5

 
$
136.2

 
$
450.4

Receivables, net
 
126.6

 
118.3

 
176.5

Merchandise inventories, net
 
1,093.0

 
988.3

 
1,163.0

Deferred income taxes — current
 

 
65.9

 

Prepaid expenses and other current assets
 
175.3

 
191.6

 
147.6

Total current assets
 
1,684.4

 
1,500.3

 
1,937.5

Property and equipment:
 
 
 
 
 
 
Land
 
18.1

 
17.7

 
17.3

Buildings and leasehold improvements
 
698.8

 
627.9

 
668.2

Fixtures and equipment
 
899.9

 
926.3

 
874.6

Total property and equipment
 
1,616.8

 
1,571.9

 
1,560.1

Less accumulated depreciation
 
1,135.9

 
1,108.6

 
1,075.6

Net property and equipment
 
480.9

 
463.3

 
484.5

Deferred income taxes — noncurrent
 
39.0

 
26.8

 
39.0

Goodwill
 
1,490.0

 
1,472.0

 
1,476.7

Other intangible assets, net
 
369.7

 
301.6

 
330.4

Other noncurrent assets
 
69.6

 
69.5

 
62.2

Total noncurrent assets
 
2,449.2

 
2,333.2

 
2,392.8

Total assets
 
$
4,133.6

 
$
3,833.5

 
$
4,330.3

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
370.7

 
$
481.1

 
$
631.9

Accrued liabilities
 
682.4

 
847.4

 
1,041.0

Income taxes payable
 
3.4

 
3.5

 
121.1

Current portion of debt
 

 
12.5

 
0.4

Total current liabilities
 
1,056.5

 
1,344.5

 
1,794.4

Deferred income taxes
 
30.1

 
96.0

 
29.6

Long-term debt, net
 
813.5

 
344.7

 
345.4

Other long-term liabilities
 
82.5

 
81.0

 
79.9

Total long-term liabilities
 
926.1

 
521.7

 
454.9

Total liabilities
 
1,982.6

 
1,866.2

 
2,249.3

Commitments and contingencies (Note 7)
 

 

 

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

 

 

Class A common stock — $.001 par value; 300.0 shares authorized; 104.0, 105.9 and 103.3 shares issued and outstanding
 
0.1

 
0.1

 
0.1

Additional paid-in capital
 
5.2

 

 

Accumulated other comprehensive loss
 
(38.8
)
 
(55.4
)
 
(88.8
)
Retained earnings
 
2,184.5

 
2,022.6

 
2,169.7

Total stockholders’ equity
 
2,151.0

 
1,967.3

 
2,081.0

Total liabilities and stockholders’ equity
 
$
4,133.6

 
$
3,833.5

 
$
4,330.3

See accompanying notes to unaudited condensed consolidated financial statements.

1


GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
July 30,
2016
 
August 1,
2015
 
July 30,
2016
 
August 1,
2015
 
 
(In millions, except per share data)
Net sales
 
$
1,631.8

 
$
1,761.9

 
$
3,603.3

 
$
3,822.5

Cost of sales
 
1,014.1

 
1,181.4

 
2,310.1

 
2,603.0

Gross profit
 
617.7

 
580.5

 
1,293.2

 
1,219.5

Selling, general and administrative expenses
 
518.4

 
490.8

 
1,039.2

 
970.1

Depreciation and amortization
 
41.0

 
38.0

 
81.7

 
73.8

Operating earnings
 
58.3

 
51.7

 
172.3

 
175.6

Interest income
 
(0.3
)
 
(0.1
)
 
(0.5
)
 
(0.3
)
Interest expense
 
13.9

 
5.7

 
24.9

 
11.3

Earnings before income tax expense
 
44.7

 
46.1

 
147.9

 
164.6

Income tax expense
 
16.8

 
20.8

 
54.2

 
65.5

Net income
 
$
27.9

 
$
25.3

 
$
93.7

 
$
99.1

Basic net income per common share
 
$
0.27

 
$
0.24

 
$
0.90

 
$
0.92

Diluted net income per common share
 
$
0.27

 
$
0.24

 
$
0.90

 
$
0.92

Dividends per common share
 
$
0.37

 
$
0.36

 
$
0.74

 
$
0.72

Weighted average shares of common stock outstanding — basic
 
104.0

 
106.5

 
103.9

 
107.2

Weighted average shares of common stock outstanding — diluted
 
104.3

 
107.2

 
104.2

 
107.8



























See accompanying notes to unaudited condensed consolidated financial statements.

2


GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
July 30,
2016
 
August 1,
2015
 
July 30,
2016
 
August 1,
2015
 
 
(In millions)
Net income
 
$
27.9

 
$
25.3

 
$
93.7

 
$
99.1

Other comprehensive income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
0.8

 
(40.4
)
 
50.0

 
(30.0
)
Total comprehensive income
 
$
28.7

 
$
(15.1
)
 
$
143.7

 
$
69.1













































See accompanying notes to unaudited condensed consolidated financial statements.

3


GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
 
Class A
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
 
 
(In millions)
Balance at January 31, 2016
 
103.3

 
$
0.1

 
$

 
$
(88.8
)
 
$
2,169.7

 
$
2,081.0

Net income for the 26 weeks ended July 30, 2016
 

 

 

 

 
93.7

 
93.7

Foreign currency translation
 

 

 

 
50.0

 

 
50.0

Dividends(1)
 

 

 

 

 
(78.0
)
 
(78.0
)
Stock-based compensation expense
 

 

 
12.4

 

 

 
12.4

Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax deficiency of $0.3)
 
0.7

 

 
(7.2
)
 

 
(0.9
)
 
(8.1
)
Balance at July 30, 2016
 
104.0

 
$
0.1

 
$
5.2

 
$
(38.8
)
 
$
2,184.5

 
$
2,151.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Dividends declared per common share were $0.74 in the 26 weeks ended July 30, 2016.
 
 
 
Class A
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Total
 
 
(In millions)
Balance at February 1, 2015
 
107.7

 
$
0.1

 
$

 
$
(25.4
)
 
$
2,093.0

 
$
2,067.7

Net income for the 26 weeks ended August 1, 2015
 

 

 

 

 
99.1

 
99.1

Foreign currency translation
 

 

 

 
(30.0
)
 

 
(30.0
)
Dividends(2)
 

 

 

 

 
(78.4
)
 
(78.4
)
Stock-based compensation expense
 

 

 
17.9

 

 

 
17.9

Repurchase of common shares
 
(2.6
)
 

 
(16.0
)
 

 
(91.1
)
 
(107.1
)
Exercise of stock options and issuance of shares upon vesting of restricted stock grants (including tax benefit of $6.6)
 
0.8

 

 
(1.9
)
 

 

 
(1.9
)
Balance at August 1, 2015
 
105.9

 
$
0.1

 
$

 
$
(55.4
)
 
$
2,022.6

 
$
1,967.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2) 
Dividends declared per common share were $0.72 in the 26 weeks ended August 1, 2015.





See accompanying notes to unaudited condensed consolidated financial statements.

4


GAMESTOP CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
26 Weeks Ended
 
 
July 30,
2016
 
August 1,
2015
 
 
(In millions)
Cash flows from operating activities:
 
 
 
 
Net income
 
$
93.7

 
$
99.1

Adjustments to reconcile net income to net cash flows used in operating activities:
 
 
 
 
Depreciation and amortization (including amounts in cost of sales)
 
82.4

 
74.6

Stock-based compensation expense
 
12.4

 
17.9

Excess tax deficiencies (benefits) related to stock-based awards
 
0.3

 
(6.6
)
Loss on disposal of property and equipment
 
3.9

 
3.3

Other
 
4.9

 
0.3

Changes in operating assets and liabilities:
 
 
 
 
Receivables, net
 
51.4

 
1.2

Merchandise inventories
 
68.5

 
158.9

Prepaid expenses and other current assets
 
(13.2
)
 
(19.8
)
Prepaid income taxes and income taxes payable
 
(147.8
)
 
(44.5
)
Accounts payable and accrued liabilities
 
(591.4
)
 
(302.2
)
Changes in other long-term liabilities
 
(1.3
)
 
(5.2
)
Net cash flows used in operating activities
 
(436.2
)
 
(23.0
)
Cash flows from investing activities:
 
 
 
 
Purchase of property and equipment
 
(66.1
)
 
(75.8
)
Acquisitions, net of cash acquired of $0.0 and $13.9 million, respectively
 
(47.8
)
 
(200.0
)
Other
 
4.9

 
2.3

Net cash flows used in investing activities
 
(109.0
)
 
(273.5
)
Cash flows from financing activities:
 
 
 
 
Repurchase of common shares
 
(10.0
)
 
(104.1
)
Dividends paid
 
(79.3
)
 
(77.2
)
Proceeds from senior notes
 
475.0

 

Repayments of acquisition-related debt
 
(0.2
)
 

Borrowings from the revolver
 
100.0

 
126.0

Repayments of revolver borrowings
 
(100.0
)
 
(115.0
)
Payments of financing costs
 
(8.1
)
 

Issuance of common stock, net of share repurchases for withholdings taxes
 
(7.8
)
 
(2.4
)
Excess tax (deficiencies) benefits related to stock-based awards
 
(0.3
)
 
6.6

Net cash flows provided by (used in) financing activities
 
369.3

 
(166.1
)
Exchange rate effect on cash and cash equivalents
 
15.0

 
(11.3
)
Net decrease in cash and cash equivalents
 
(160.9
)
 
(473.9
)
Cash and cash equivalents at beginning of period
 
450.4

 
610.1

Cash and cash equivalents at end of period
 
$
289.5

 
$
136.2


See accompanying notes to unaudited condensed consolidated financial statements.

5


GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
1.
General Information
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. Within our family of brands, we are the world’s largest omnichannel video game retailer, the largest AT&T® (“AT&T”) authorized retailer, the largest Apple© (“Apple”) certified products reseller, a Cricket Wireless TM retailer (“Cricket,” an AT&T brand) and the owner of www.thinkgeek.com, one of the world’s largest sellers of collectible pop-culture themed products. We also operate www.kongregate.com, a leading browser-based game site, and Game Informer magazine, the world's leading print and digital video game publication. We operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe; and a Technology Brands segment. As of July 30, 2016, we operated 7,141 stores, in the United States, Australia, Canada and Europe, which are primarily located in major shopping malls and strip centers.
Through our Video Game Brands segments, we are the world's largest omnichannel video game retailer. We sell new and pre-owned video game hardware, physical and digital video game software and 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 and our nine global e-commerce sites, www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, www.gamestop.ca, www.gamestop.it, www.gamestop.ie, www.gamestop.de, www.gamestop.co.uk and www.micromania.fr. In July 2015, we acquired Geeknet, Inc. ("Geeknet"), an online and wholesale retailer that sells collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers under the name ThinkGeek through the www.thinkgeek.com website. ThinkGeek also sells certain exclusive products to wholesale channel customers.
Our Technology Brands segment owns and operates Spring Mobile, the largest authorized retailer of AT&T branded wireless retail stores and pre-paid wireless stores under the name Cricket in the United States, as well as a certified reseller of Apple consumer electronic products in the United States under the name Simply Mac. Spring Mobile sells all of AT&T’s products and services, including DirecTV, through all of its AT&T branded stores and offers pre-paid wireless services, devices and related accessories through its 70 Cricket branded stores in select markets in the United States. Simply Mac operates 75 stores, selling the full line of Apple products, including laptops, tablets, and smartphones; and offering Apple certified warranty and repair services.
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. 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 as of and for the periods presented. These unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all disclosures required under GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with our annual report on Form 10-K, as amended, for the 52 weeks ended January 30, 2016 (the “2015 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 26 weeks ended July 30, 2016 are not indicative of the results to be expected for the 52 weeks ending January 28, 2017 (“fiscal 2016”).
Restricted Cash
Restricted cash of $10.3 million, $9.9 million and $9.7 million as of July 30, 2016August 1, 2015 and January 30, 2016, 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.

6

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dividend
On August 22, 2016, our Board of Directors approved a quarterly cash dividend to our stockholders of $0.37 per share of Class A Common Stock payable on September 22, 2016 to stockholders of record at the close of business on September 9, 2016. Future dividends will be subject to approval by our Board of Directors.
Recently Implemented Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Balance Sheet Classification of Deferred Taxes. The standard amends the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will now be required to classify all deferred tax assets and liabilities as noncurrent. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company early adopted this standard during the fourth quarter of fiscal 2015, utilizing prospective application as permitted. As such, certain prior period amounts have not been retrospectively adjusted to conform to the current period presentation.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 became effective for interim and annual reporting periods beginning after December 15, 2015. We adopted this guidance as of January 31, 2016, and as a result have recast the August 1, 2015 and January 30, 2016 condensed consolidated balance sheets to conform to the current period presentation. The adoption of this standard reduced previously presented prepaid expenses and other current assets by $1.3 million, other noncurrent assets by $4.0 million, and long-term debt by $5.3 million for the period ended August 1, 2015 based upon the balance of unamortized debt financing costs relating to our senior notes due in 2019. The adoption of this standard also reduced previously presented prepaid expenses and other current assets by $1.3 million, other noncurrent assets by $3.3 million, and long-term debt by $4.6 million, for the period ended January 30, 2016 based upon the balance of unamortized debt financing costs relating to our senior notes due in 2019.
Recently Issued Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues in regard to how cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted. The amendments in the ASU should be adopted on a retrospective basis unless it is impracticable to apply, in which case the amendments should be applied prospectively as of the earliest date practicable. We are currently evaluating the impact that this standard will have on our consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The update simplifies several aspects of accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those years, with early adoption permitted. We do not anticipate that adoption of this standard will have a material impact to our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers. The standard addresses the implementation guidance on principal versus agent considerations in the new revenue recognition standard. The ASU clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017, with early adoption permitted. We do not anticipate that adoption of this standard will have a material impact to our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. The standard specifies how prepaid stored-value product liabilities should be derecognized, thereby eliminating the current and potential future diversity in practice. Consistent with ASU 2014-09 related to revenue recognition, the standard requires derecognition in proportion with the rights expected to be exercised by the holder. Entities may adopt this standard using either a modified retrospective transition approach with a cumulative-effect adjustment to retained earnings or a full retrospective transition approach. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.

7

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In February 2016, the FASB issued ASU 2016-02, Leases. The standard requires a lessee to recognize a liability related to lease payments and an offsetting right-of-use asset representing a right to use the underlying asset for the lease term on the balance sheet. Entities are required to use a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period presented in the financial statements, with certain reliefs available. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
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 FASB issued 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. Entities may use either a full retrospective or modified retrospective transition approach. The ASU is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 one year making it effective for annual reporting periods beginning on or after December 15, 2017 while also providing for early adoption as of the original effective date. We anticipate that the standard will affect the way that we recognize liabilities for our customer incentives. We are currently continuing to evaluate the impact that this standard will have on our consolidated financial statements as well as the appropriate method of adoption.
 
2.
Acquisitions
On May 31, 2016, in connection with the continued expansion of our Technology Brands segment, Spring Mobile completed the acquisition of certain assets of an AT&T authorized retailer comprised of 71 stores for cash consideration of $47.0 million (net of cash acquired). The acquisition was funded with proceeds from our $475.0 million unsecured senior notes due in March 2021. We recorded $42.7 million of indefinite-lived intangible assets related to this acquisition. The pro forma effect of this acquisition is not material to our consolidated financial statements.
On August 2, 2016, in connection with the continued expansion of our Technology Brands segment, Spring Mobile completed the acquisition of certain assets of two authorized AT&T retailers comprised of 436 stores for $394.1 million in cash (net of cash acquired), subject to working capital adjustments, and future contingent consideration which we estimate will range from $40.0 million to $50.0 million. The cash portion of the purchase price was funded with remaining proceeds from our $475.0 million unsecured senior notes due in March 2021 combined with a draw on our revolving credit facility. The contingent consideration will be paid in two installments if certain performance measures are met. The first installment is due in August 2017 and the second installment is due in March 2018. The purchase price allocation is not yet available due to the limited time from the completion of the acquisition through the filing date of this Quarterly Report on Form 10-Q. Pro forma information cannot be presented due to the impracticability of obtaining accurate and reliable historical financial data for the assets acquired.

3.
Stock-Based Compensation
The following is a summary of the stock-based awards granted during the periods indicated:
 
 
 
26 Weeks Ended July 30, 2016
 
26 Weeks Ended August 1, 2015
 
 
Quantity
 
Weighted Average
Grant Date Fair
Value
 
Quantity
 
Weighted Average
Grant Date Fair
Value
 
 
(In thousands, except per share data)
Restricted stock awards – time-vested
 
594

 
$
30.20

 
457

 
$
40.42

Restricted stock awards – performance-based
 
213

 
30.50

 
189

 
40.16

Total stock-based awards
 
807

 
 
 
646

 
 

For restricted stock awards and stock options granted, we record stock-based compensation expense in earnings based on the grant-date fair value. The fair value of each restricted stock award grant is based on the closing price of our Class A Common Stock on the grant date. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. No stock options were granted during the 26 weeks ended July 30, 2016 or the 26 weeks ended August 1, 2015.

8

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Total stock-based compensation recognized in selling, general and administrative expenses during the 13 weeks ended July 30, 2016 and the 13 weeks ended August 1, 2015 was $5.7 million and $7.6 million, respectively. Total stock-based compensation recognized in selling, general and administrative expenses during the 26 weeks ended July 30, 2016 and the 26 weeks ended August 1, 2015 was $12.4 million and $17.9 million, respectively. Upon adoption of the Company's retirement policy during the first quarter of fiscal 2015, $3.8 million of compensation expense was recognized related to employees whose equity based long-term incentive awards are subject to certain accelerated vesting provisions, based on age and years of service.

As of July 30, 2016, the unrecognized compensation expense related to the unvested portion of our stock options was $0.5 million, which is expected to be recognized over a weighted average period of 0.6 years, and the unrecognized compensation expense related to unvested restricted shares was $32.7 million, which is expected to be recognized over a weighted average period of 1.9 years. The total intrinsic value of options exercised during the 13 weeks ended August 1, 2015 was $1.3 million. The total intrinsic value of options exercised during the 26 weeks ended July 30, 2016 and August 1, 2015 was $0.1 million and $4.9 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
 
 
July 30,
2016
 
August 1, 2015
 
July 30,
2016
 
August 1,
2015
 
 
(In millions, except per share data)
Net income
 
$
27.9

 
$
25.3

 
$
93.7

 
$
99.1

Basic weighted average common shares outstanding
 
104.0

 
106.5

 
103.9

 
107.2

Dilutive effect of stock options and restricted stock awards(1)
 
0.3

 
0.7

 
0.3

 
0.6

Diluted weighted average common shares outstanding
 
104.3

 
107.2

 
104.2

 
107.8

Net income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.27

 
$
0.24

 
$
0.90

 
$
0.92

Diluted
 
$
0.27

 
$
0.24

 
$
0.90

 
$
0.92

___________________
(1)
Excludes 1.4 million, 0.9 million, 1.3 million, and 0.9 million stock-based awards for the 13 weeks ended July 30, 2016, 13 weeks ended August 1, 2015, 26 weeks ended July 30, 2016, and the 26 weeks ended August 1, 2015, 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 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 quoted prices for similar instruments in active markets, quoted

9

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

prices for similar or identical instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
We classify our foreign currency contracts, Company-owned life insurance policies with cash surrender values and certain nonqualified deferred compensation liabilities within Level 2 of the fair value hierarchy, as their fair values are derived using quotes provided by major market news services, such as Bloomberg, and industry-standard models that consider various assumptions, including quoted forward prices, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures, all of which are observable in active markets. When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
The following table provides the fair value of our assets and liabilities measured at fair value on a recurring basis and recorded in our unaudited condensed consolidated balance sheets (in millions): 
 
 
July 30, 2016 Level 2
 
August 1, 2015 Level 2
 
January 30, 2016 Level 2
Assets
 
 
 
 
 
 
Foreign currency contracts
 
 
 
 
 
 
Other current assets
 
$
15.7

 
$
44.4

 
$
40.6

Other noncurrent assets
 

 
12.2

 
0.1

Company-owned life insurance(1)
 
10.4

 
8.9

 
10.1

Total assets
 
$
26.1

 
$
65.5

 
$
50.8

Liabilities
 
 
 
 
 
 
Foreign currency contracts
 
 
 
 
 
 
Accrued liabilities
 
$
6.1

 
$
37.2

 
$
32.3

Other long-term liabilities
 

 
6.0

 
0.5

Nonqualified deferred compensation(2)
 
1.0

 
1.2

 
1.1

Total liabilities
 
$
7.1

 
$
44.4

 
$
33.9

___________________
(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 forward exchange contracts, foreign currency options and cross-currency swaps (together, the “foreign currency contracts”) to manage currency risk primarily related to intercompany loans denominated in non-functional currencies and certain foreign currency assets and liabilities. The 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 $792.2 million, $1,192.5 million and $925.3 million as of July 30, 2016, August 1, 2015 and January 30, 2016, respectively.
Activity related to 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,
2016
 
August 1,
2015
 
July 30,
2016
 
August 1,
2015
Gains (losses) on the change in fair value of derivative instruments
 
$
3.5

 
$
(8.1
)
 
$
5.5

 
$
(1.1
)
Gains (losses) on the remeasurement of related intercompany loans and foreign currency assets and liabilities
 
(2.9
)
 
9.7

 
(3.4
)
 
2.7

Total
 
$
0.6

 
$
1.6

 
$
2.1

 
$
1.6


10

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 26 weeks ended July 30, 2016 or August 1, 2015.
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.
As of July 30, 2016, our senior notes due in 2019 had a net carrying value of $346.0 million and a fair value of $356.6 million, and our senior notes due in 2021 had a net carrying value of $467.5 million and a fair value of $483.3 million. The fair values of our senior notes were determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined these to be Level 2 measurements as all significant inputs into the quotes provided by our external pricing source are observable in active markets.

6.
Debt
2019 Senior Notes. In September 2014, we issued $350.0 million aggregate principal amount of unsecured 5.50% senior notes due October 1, 2019 (the "2019 Senior Notes"). The 2019 Senior Notes bear interest at the rate of 5.50% per annum with interest payable semi-annually in arrears on April 1 and October 1 of each year beginning on April 1, 2015. The 2019 Senior Notes were sold in a private placement and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"). The 2019 Senior Notes were offered in the U.S. to “qualified institutional buyers” pursuant to the exemption from registration under Rule 144A of the Securities Act and in exempted offshore transactions pursuant to Regulation S under the Securities Act. The outstanding principal balance of the 2019 Senior Notes at July 30, 2016 was $350.0 million.
    
2021 Senior Notes. In March 2016, we issued $475.0 million aggregate principal amount of unsecured 6.75% senior notes due March 15, 2021 (the "2021 Senior Notes"). The 2021 Senior Notes bear interest at the rate of 6.75% per annum with interest payable semi-annually in arrears on March 15 and September 15 of each year beginning on September 15, 2016. The net proceeds from the offering were used for general corporate purposes, including acquisitions and dividends. The 2021 Senior Notes were sold in a private placement and will not be registered under the Securities Act. The 2021 Senior Notes were offered in the U.S. to "qualified institutional buyers" pursuant to the exemption from registration under Rule 144A of the Securities Act and in exempted offshore transactions pursuant to Regulation S under the Securities Act. The outstanding principal balance of the 2021 Senior Notes at July 30, 2016 was $475.0 million.
    
The indentures governing the 2019 Senior Notes and the 2021 Senior Notes (together, the "Senior Notes") do not contain financial covenants but do contain covenants which place certain restrictions on us and our subsidiaries, including limitations on asset sales, additional liens, investments, stock repurchases, the incurrence of additional debt and the repurchase of debt that is junior to the Senior Notes. In addition, the indentures restrict payments of dividends to stockholders (other than dividends payable in shares of capital stock) if one of the following conditions exist: (i) an event of default has occurred, (ii) we could not incur additional debt under the general debt covenant of the indentures or (iii) the sum of the proposed dividend and all other dividends and other restricted payments made under the indentures from the date of the indentures governing the Senior Notes exceeds the sum of 50% of consolidated net income plus 100% of net proceeds from capital stock sales and other amounts set forth in and determined as provided in the indentures. These restrictions are subject to exceptions and qualifications, including that we can pay up to $175 million in dividends to stockholders in each fiscal year and we can pay dividends and make other restricted payments in an unlimited amount if our leverage ratio on a pro forma basis after giving effect to the dividend payment and other restricted payments would be less than or equal to 1.0:1.0.


11

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The indentures contain customary events of default, including payment defaults, breaches of covenants, failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is continuing, the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, may be declared immediately due and payable. These amounts automatically become due and payable if an event of default relating to certain events of bankruptcy, insolvency or reorganization occurs.

The carrying value of our long-term debt is comprised as follows (in millions):
 
July 30, 2016
 
August 1, 2015
 
January 30, 2016
2019 Senior Notes principal amount
$
350.0

 
$
350.0

 
$
350.0

2021 Senior Notes principal amount
475.0

 

 

Less: Unamortized debt financing costs(1)
(11.5
)
 
(5.3
)
 
(4.6
)
Long-term debt, net
$
813.5

 
$
344.7

 
$
345.4

(1) 
Includes the reclassification of debt financing costs from "Prepaids and other current assets" and “Other noncurrent assets” as a result of the Company adopting ASU 2015-03. See Note 1.

Revolving Credit Facility. In January 2011, we entered into a $400 million credit agreement, which we amended and restated on March 25, 2014 and further amended on September 15, 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. 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.
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 of 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) 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 July 30, 2016, 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 July 30, 2016, we cumulatively borrowed $100.0 million and repaid $100.0 million under the Revolver. Average borrowings under the Revolver for the 26 weeks ended July 30, 2016 were

12

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

$9.5 million and our average interest rate on those borrowings was 3.7%. As of July 30, 2016, total availability under the Revolver was $391.6 million, with no outstanding borrowings and outstanding standby letters of credit of $8.4 million.
In September 2007, our Luxembourg subsidiary entered into a discretionary $20 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 July 30, 2016, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $1.9 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, stockholder 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.
Certain of our French subsidiaries have been under audit by the French Tax Administration (the "FTA") for fiscal years 2008 through 2012.  We received tax reassessment notices on December 23, 2015 and April 4, 2016, pursuant to which the FTA asserted that the French subsidiaries were ineligible to claim certain tax deductions from November 4, 2008, through January 31, 2013, resulting in a potential additional tax charge of approximately €85.5 million.  We may receive additional tax reassessments in material amounts for subsequent fiscal years. We filed a response to each reassessment and intend to vigorously contest the reassessments through administrative procedures. If we are unable to resolve this matter through administrative remedies at the FTA, we plan to pursue judicial remedies. We believe our tax positions will be sustained and have not taken a reserve for any potential adjustment based on the reassessment.  If we were not to prevail, then the adjustment to our income tax provision could be material.

8.
Significant Products
The following tables set forth net sales (in millions), percentages of total net sales, gross profit (in millions) and gross profit percentages by significant product category for the periods indicated: 
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
 
 
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(1)
 
$
216.4

 
13.3
%
 
$
324.9

 
18.4
%
 
$
529.3

 
14.7
%
 
$
764.6

 
20.0
%
New video game software
 
382.2

 
23.4
%
 
467.2

 
26.5
%
 
949.4

 
26.3
%
 
1,080.8

 
28.3
%
Pre-owned and value video game products
 
542.6

 
33.3
%
 
560.8

 
31.8
%
 
1,103.5

 
30.6
%
 
1,143.2

 
29.9
%
Video game accessories
 
119.5

 
7.3
%
 
125.8

 
7.1
%
 
282.2

 
7.8
%
 
276.3

 
7.2
%
Digital
 
36.3

 
2.2
%
 
41.6

 
2.4
%
 
79.1

 
2.2
%
 
87.6

 
2.3
%
Mobile and consumer electronics
 
203.3

 
12.5
%
 
142.2

 
8.1
%
 
395.9

 
11.0
%
 
279.0

 
7.3
%
Collectibles
 
90.0

 
5.5
%
 
41.0

 
2.3
%
 
172.3

 
4.8
%
 
63.8

 
1.7
%
Other(2)
 
41.5

 
2.5
%
 
58.4

 
3.4
%
 
91.6

 
2.6
%
 
127.2

 
3.3
%
Total
 
$
1,631.8

 
100.0
%
 
$
1,761.9

 
100.0
%
 
$
3,603.3

 
100.0
%
 
$
3,822.5

 
100.0
%


13

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
 
 
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(1)
 
$
30.0

 
13.9
%
 
$
33.4

 
10.3
%
 
$
58.3

 
11.0
%
 
$
70.6

 
9.2
%
New video game software
 
98.1

 
25.7
%
 
110.8

 
23.7
%
 
226.0

 
23.8
%
 
249.5

 
23.1
%
Pre-owned and value video game products
 
244.0

 
45.0
%
 
257.8

 
46.0
%
 
507.2

 
46.0
%
 
543.8

 
47.6
%
Video game accessories
 
45.7

 
38.2
%
 
45.7

 
36.3
%
 
102.8

 
36.4
%
 
101.5

 
36.7
%
Digital
 
32.7

 
90.1
%
 
32.8

 
78.8
%
 
69.7

 
88.1
%
 
68.2

 
77.9
%
Mobile and consumer electronics
 
118.5

 
58.3
%
 
64.5

 
45.4
%
 
236.2

 
59.7
%
 
119.0

 
42.7
%
Collectibles
 
34.7

 
38.6
%
 
17.1

 
41.7
%
 
63.3

 
36.7
%
 
26.0

 
40.8
%
Other(2)
 
14.0

 
33.7
%
 
18.4

 
31.5
%
 
29.7

 
32.4
%
 
40.9

 
32.2
%
Total
 
$
617.7

 
37.9
%
 
$
580.5

 
32.9
%
 
$
1,293.2

 
35.9
%
 
$
1,219.5

 
31.9
%
___________________
(1)
Includes sales of hardware bundles, in which physical hardware and digital or physical software are sold together as a single SKU.
(2) Other products include revenues from sales of PC entertainment software, interactive game figures, strategy guides and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in physical form.

9.
Segment Information
 We report our business in four Video Game Brands segments: United States, Canada, Australia and Europe; and a Technology Brands segment, which includes the operations of our Spring Mobile managed AT&T and Cricket Wireless branded stores and our Simply Mac business. 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, software and related accessories and collectibles, and Technology Brands stores engaged in the sale of wireless products and services and other consumer electronics. Our Video Game Brands segments also include stand-alone collectibles stores. Segment results for the United States include retail operations in 50 states, the District of Columbia, Guam and Puerto Rico; our electronic commerce websites www.gamestop.com and www.thinkgeek.com; Game Informer magazine; and Kongregate, our leading web and mobile gaming platform. 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 10 European countries and e-commerce operations in five 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 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 material intersegment sales during the 13 weeks and 26 weeks ended July 30, 2016 and August 1, 2015.

14

GAMESTOP CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The reconciliation of segment profit to earnings before income taxes for the 13 weeks and 26 weeks ended July 30, 2016 and August 1, 2015 is as follows (in millions): 

13 weeks ended July 30, 2016
 
United
States
 
Canada
 
Australia
 
Europe
 
Technology Brands
 
Consolidated
Net sales
 
$
1,022.7

 
$
66.6

 
$
127.4

 
$
239.2

 
$
175.9

 
$
1,631.8

Operating earnings (loss)
 
51.2

 
1.2

 
3.0

 
(11.0
)
 
13.9

 
58.3

Interest income
 
 
 
 
 
 
 
 
 
 
 
0.3

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(13.9
)
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
44.7


13 weeks ended August 1, 2015
 
United
States
 
Canada
 
Australia
 
Europe
 
Technology Brands
 
Consolidated
Net sales
 
$
1,187.4

 
$
78.2

 
$
130.6

 
$
251.9

 
$
113.8

 
$
1,761.9

Operating earnings (loss)
 
51.9

 
1.8

 
4.6

 
(7.0
)
 
0.4

 
51.7

Interest income
 
 
 
 
 
 
 
 
 
 
 
0.1

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(5.7
)
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
46.1


26 weeks ended July 30, 2016
 
United
States
 
Canada
 
Australia
 
Europe
 
Technology Brands
 
Consolidated
Net sales
 
$
2,391.3

 
$
144.3

 
$
237.3

 
$
488.7

 
$
341.7

 
$
3,603.3

Operating earnings (loss)
 
145.6

 
5.0

 
3.5

 
(14.5
)
 
32.7

 
172.3

Interest income
 
 
 
 
 
 
 
 
 
 
 
0.5

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(24.9
)
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
147.9


26 weeks ended August 1, 2015
 
United
States
 
Canada
 
Australia
 
Europe
 
Technology Brands
 
Consolidated
Net sales
 
$
2,680.1

 
$
167.9

 
$
242.6

 
$
515.9

 
$
216.0

 
$
3,822.5

Operating earnings (loss)
 
172.4

 
5.5

 
6.3

 
(12.2
)
 
3.6

 
175.6

Interest income
 
 
 
 
 
 
 
 
 
 
 
0.3

Interest expense
 
 
 
 
 
 
 
 
 
 
 
(11.3
)
Earnings before income taxes
 
 
 
 
 
 
 
 
 
 
 
$
164.6



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, as amended, for the fiscal year ended January 30, 2016 filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2016 (the “2015 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. Within our family of brands, we are the world’s largest omnichannel video game retailer, the largest AT&T® (“AT&T”) authorized retailer, the largest Apple© (“Apple”) certified products reseller, a Cricket Wireless TM retailer (“Cricket,” an AT&T brand) and the owner of www.thinkgeek.com, one of the world’s largest sellers of collectible pop-culture themed products. We also operate www.kongregate.com, a leading browser-based game site, and Game Informer magazine, the world's leading print and digital video game publication. We operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe; and a Technology Brands segment. As of July 30, 2016, we operated 7,141 stores, in the United States, Australia, Canada and Europe, which are primarily located in major shopping malls and strip centers.
Through our Video Game Brands segments, we are the world's largest omnichannel video game retailer. We sell new and pre-owned video game hardware, physical and digital video game software and 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 and our nine global e-commerce sites, www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, www.gamestop.ca, www.gamestop.it, www.gamestop.ie, www.gamestop.de, www.gamestop.co.uk and www.micromania.fr. In July 2015, we acquired Geeknet, Inc. ("Geeknet"), an online and wholesale retailer that sells collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers under the name ThinkGeek through the www.thinkgeek.com website. ThinkGeek also sells certain exclusive products to wholesale channel customers.
Our Technology Brands segment owns and operates Spring Mobile, the largest authorized retailer of AT&T branded wireless retail stores and pre-paid wireless stores under the name Cricket in the United States, as well as a certified reseller of Apple consumer electronic products in the United States under the name Simply Mac. Spring Mobile sells all of AT&T’s products and services, including DirecTV, through all of its AT&T branded stores and offers pre-paid wireless services, devices and related accessories through its 70 Cricket branded stores in select markets in the United States. Simply Mac operates 75 stores, selling the full line of Apple products, including laptops, tablets, and smartphones, and offering Apple certified warranty and repair services.
Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. The fiscal year ending January 28, 2017 ("fiscal 2016") and the fiscal year ended January 30, 2016 ("fiscal 2015") each consists of 52 weeks.
Growth in the video 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. Over the next twelve to eighteen months, we expect form-factor changes to the current console models.
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 digitally downloadable content (“DLC”), full game downloads, Xbox LIVE, PlayStation Plus and Nintendo network points cards, as well as prepaid digital and prepaid subscription cards. We have made significant investments in e-commerce and in-store and website 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 video game industry and in the digital aggregation and distribution category.
We continue to diversify our business by seeking out opportunities to extend our core competencies to other businesses and retail categories, including mobile and consumer electronics and collectibles, to continue to grow and to help mitigate the financial impact from the cyclical nature of the video game console cycle and regularly evaluate potential acquisition opportunities. On

16


May 31, 2016, Spring Mobile completed the acquisition of the assets of an AT&T authorized retailer comprised of 71 stores. On August 2, 2016, Spring Mobile completed the acquisition of the assets of two additional AT&T authorized retailers comprised of 436 stores. We continue to seek to invest in other retail concepts and product lines with the intention of further diversifying our business.
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 II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies from those included in our 2015 Annual Report on Form 10-K.
Consolidated Results of Operations
The following table sets forth certain statement of operations items (in millions) and as a percentage of net sales, for the periods indicated: 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
 
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Dollars
 
Percent
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,631.8

 
100.0
%
 
$
1,761.9

 
100.0
%
 
$
3,603.3

 
100.0
%
 
$
3,822.5

 
100.0
%
Cost of sales
 
1,014.1

 
62.1

 
1,181.4

 
67.1

 
2,310.1

 
64.1

 
2,603.0

 
68.1

Gross profit
 
617.7

 
37.9

 
580.5

 
32.9

 
1,293.2

 
35.9

 
1,219.5

 
31.9

Selling, general and administrative expenses
 
518.4

 
31.8

 
490.8

 
27.8

 
1,039.2

 
28.8

 
970.1

 
25.4

Depreciation and amortization
 
41.0

 
2.5

 
38.0

 
2.2

 
81.7

 
2.3

 
73.8

 
1.9

Operating earnings
 
58.3

 
3.6

 
51.7

 
2.9

 
172.3

 
4.8

 
175.6

 
4.6

Interest expense, net
 
13.6

 
0.9

 
5.6

 
0.3

 
24.4

 
0.7

 
11.0

 
0.3

Earnings before income tax expense
 
44.7

 
2.7

 
46.1

 
2.6

 
147.9

 
4.1

 
164.6

 
4.3

Income tax expense
 
16.8

 
1.0

 
20.8

 
1.2

 
54.2

 
1.5

 
65.5

 
1.7

Net income
 
$
27.9

 
1.7
%
 
$
25.3

 
1.4
%
 
$
93.7

 
2.6
%
 
$
99.1

 
2.6
%


17


The following tables set forth net sales (in millions), percentages of total net sales, gross profit (in millions) and gross profit percentages by significant product category for the periods indicated:
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
 
 
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(1)
 
$
216.4

 
13.3
%
 
$
324.9

 
18.4
%
 
$
529.3

 
14.7
%
 
$
764.6

 
20.0
%
New video game software
 
382.2

 
23.4
%
 
467.2

 
26.5
%
 
949.4

 
26.3
%
 
1,080.8

 
28.3
%
Pre-owned and value video game products
 
542.6

 
33.3
%
 
560.8

 
31.8
%
 
1,103.5

 
30.6
%
 
1,143.2

 
29.9
%
Video game accessories
 
119.5

 
7.3
%
 
125.8

 
7.1
%
 
282.2

 
7.8
%
 
276.3

 
7.2
%
Digital
 
36.3

 
2.2
%
 
41.6

 
2.4
%
 
79.1

 
2.2
%
 
87.6

 
2.3
%
Mobile and consumer electronics
 
203.3

 
12.5
%
 
142.2

 
8.1
%
 
395.9

 
11.0
%
 
279.0

 
7.3
%
Collectibles
 
90.0

 
5.5
%
 
41.0

 
2.3
%
 
172.3

 
4.8
%
 
63.8

 
1.7
%
Other(2)
 
41.5

 
2.5
%
 
58.4

 
3.4
%
 
91.6

 
2.6
%
 
127.2

 
3.3
%
Total
 
$
1,631.8

 
100.0
%
 
$
1,761.9

 
100.0
%
 
$
3,603.3

 
100.0
%
 
$
3,822.5

 
100.0
%
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
 
July 30, 2016
 
August 1, 2015
 
July 30, 2016
 
August 1, 2015
 
 
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(1)
 
$
30.0

 
13.9
%
 
$
33.4

 
10.3
%
 
$
58.3

 
11.0
%
 
$
70.6

 
9.2
%
New video game software
 
98.1

 
25.7
%
 
110.8

 
23.7
%
 
226.0

 
23.8
%
 
249.5

 
23.1
%
Pre-owned and value video game products
 
244.0

 
45.0
%
 
257.8

 
46.0
%
 
507.2

 
46.0
%