CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General Information
The Company
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global, multichannel video game, consumer electronics and collectibles retailer. GameStop operates over 5,600 stores across 14 countries. Our consumer product network also includes www.gamestop.com and Game Informer® magazine, the world's leading print and digital video game publication.
We operate our business in four geographic segments: United States, Canada, Australia and Europe. Our former Technology Brands segment primarily consisted of Spring Mobile and Simply Mac. We sold Spring Mobile in January 2019. In September 2019, we closed on the sale of Simply Mac. See Note 2, "Discontinued Operations and Dispositions," for further information.
Simply Mac is included in the United States segment in these consolidated financial statements and accompanying condensed notes. The historical results of Spring Mobile are reported as discontinued operations in our consolidated statements of operations for all periods presented. The assets and liabilities held for sale as of November 3, 2018, relate to Spring Mobile. The consolidated statement of cash flows is presented on a combined basis for all periods presented and, therefore, does not segregate cash flows from continuing and discontinued operations. The information contained in these condensed notes to our consolidated financial statements refers to continuing operations unless otherwise noted.
Basis of Presentation and Consolidation
The unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned 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 for the 52 weeks ended February 2, 2019, as filed with the Securities and Exchange Commission on April 2, 2019, (the “2018 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, and 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 39 weeks ended November 2, 2019 are not indicative of the results to be expected for the 52 weeks ending February 1, 2020 ("fiscal 2019").
Reclassifications
In our unaudited consolidated statements of cash flows, we reclassified the prior period provision for inventory reserves of $42.4 million from other operating activities to changes in merchandise inventories in order to conform to the current year presentation.
Significant Accounting Policies
Except for the accounting policy for leases, which is discussed below within "—Adoption of New Accounting Pronouncements" and within Note 6, "Leases," there have been no material changes to our significant accounting policies included in Note 1, "Nature of Operations and Summary of Significant Accounting Policies," within our 2018 Annual Report on Form 10-K.
Restricted Cash
Restricted cash of $14.1 million, $15.0 million and $16.1 million as of November 2, 2019, November 3, 2018 and February 2, 2019, 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.
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of cash and cash equivalents in the condensed consolidated balance sheets to total cash and cash equivalents and restricted cash in the condensed consolidated statements of cash flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2,
2019
|
|
November 3,
2018
|
|
February 2,
2019
|
|
Cash and cash equivalents
|
|
$
|
290.3
|
|
|
$
|
448.6
|
|
|
$
|
1,624.4
|
|
|
Restricted cash (included in prepaid expenses and other current assets)
|
|
0.3
|
|
|
2.7
|
|
|
2.7
|
|
|
Restricted cash (included in other noncurrent assets)
|
|
13.8
|
|
|
12.3
|
|
|
13.4
|
|
|
Total cash and cash equivalents and restricted cash in the statements of cash flows
|
|
$
|
304.4
|
|
|
$
|
463.6
|
|
|
$
|
1,640.5
|
|
Property and Equipment, Net
Accumulated depreciation related to our property and equipment totaled $1,230.4 million, $1,237.9 million and $1,235.8 million as of November 2, 2019, November 3, 2018 and February 2, 2019, respectively.
We periodically review our property and equipment when events or changes in circumstances indicate that its carrying amounts may not be recoverable or its depreciation or amortization periods should be accelerated. We assess recoverability based on several factors, including our intention with respect to our stores and those stores’ projected undiscounted cash flows. An impairment loss is recognized for the amount by which the carrying amount of the assets exceeds its fair value, determined based on an estimate of discounted future cash flows. We recorded impairment losses totaling $3.6 million during the third quarter of fiscal 2019.
Share Repurchases
On June 11, 2019, we commenced a modified Dutch auction tender offer for up to 12.0 million shares of our Class A common stock with a price range between $5.20 and $6.00 per share. The tender offer expired on July 10, 2019. Through the tender offer, we accepted for payment 12.0 million shares at a purchase price of $5.20 per share for a total of $62.9 million, including fees and commissions. The shares purchased through the tender offer were immediately retired. The excess purchase price over par value was recorded as a reduction to additional paid-in capital and retained earnings in our unaudited consolidated balance sheet.
In addition to the equity tender offer describe above, during the third quarter of fiscal 2019, we executed a series of open market repurchases for an aggregate of 22.6 million shares of our Class A common stock totaling $115.7 million, including fees and commissions. Included in these amounts are repurchases of 0.3 million shares for $1.7 million that were initiated prior to November 2, 2019, but not settled until the fourth quarter of fiscal 2019. As of November 2, 2019, we have $121.4 million remaining under our share repurchase program.
Income Tax Expense (Benefit)
We have historically calculated the provision or benefit for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate ("AETR") for the full fiscal year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. For the 13 weeks ended November 2, 2019, we determined we could no longer reliably estimate income taxes utilizing an AETR. The AETR estimate is highly sensitive to estimates of ordinary income (loss) and permanent differences such that minor fluctuations in these estimates could result in significant fluctuations of the Company’s AETR. Accordingly, we used our actual year-to-date effective tax rate to calculate income taxes for the 13 and 39 weeks ended November 2, 2019.
We recognized income tax expense of $31.6 million, representing an effective tax rate of (61.2)%, for the 13 weeks ended November 2, 2019, and an income tax benefit of $6.2 million, representing an effective tax rate of 1.3%, for the 39 weeks ended November 2, 2019. The difference between our effective tax rates and the U.S. Federal statutory tax rate of 21% primarily relate to discrete items recognized in the 13 and 39 weeks ended November 2, 2019, and the relative mix of earnings across the jurisdictions within which we operate, including increases in valuation allowances and losses not benefited in certain foreign jurisdictions during the 13 and 39 weeks ended November 2, 2019.
Adoption of New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standard Update ("ASU") 2016-02, Leases, which requires a lessee to recognize a liability related to lease payments and a corresponding right-of-use asset representing a right to use the underlying asset for the lease term. 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides clarifications and improvements to ASU 2016-02 including allowing entities to elect an additional transition method with which to adopt ASU 2016-02.
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The approved transition method enables entities to apply the transition requirements in this ASU at the effective date of ASU 2016-02 (rather than at the beginning of the earliest comparative period presented) with the effect of initially applying ASU 2016-02 recognized as a cumulative-effect adjustment to retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the year of adoption would continue to be in accordance with ASC 840, Leases (Topic 840) (“ASC 840”), including the disclosure requirements of ASC 840. In March 2019, the FASB issued ASU 2019-01, Leases which clarifies the disclosure requirements for interim periods.
We adopted the new lease standard, Accounting Standards Codification Topic 842, Leases ("ASC 842"), effective February 3, 2019, using the modified-retrospective transition approach as outlined in ASU 2018-11, with no restatement of comparative periods. As permitted by the standard, we elected certain practical expedients, including the "package of practical expedients," under which we did not reassess our prior conclusions regarding lease identification, lease classification, or capitalization of initial lease direct costs for existing or expired contracts. For our real estate leases, we elected the practical expedient to not separate lease and non-lease components. For our non-real estate leases, we elected to separate lease and non-lease components. We did not elect to exclude short-term leases from our right-of-use asset and liability balances, nor did we elect the hindsight practical expedient.
Under the modified-retrospective transition approach, we have recorded adjustments to our fiscal 2019 opening balance sheet (as of February 3, 2019) to recognize an initial operating lease right-of-use asset and corresponding initial lease liability of approximately $850 million. See Note 6, "Leases" for further details.
2. Discontinued Operations and Dispositions
Discontinued Operations
On January 16, 2019, we completed the sale of all of the equity interest in our former wholly-owned subsidiary Spring Communications Holding, Inc. ("Spring Mobile") to Prime Acquisition Company, LLC, a wholly-owned subsidiary of Prime Communications, L.P., pursuant to an Equity Purchase Agreement dated as of November 21, 2018. The net cash proceeds received from the sale totaled $727.9 million, which is subject to customary post-closing adjustments. The net proceeds received consisted of the purchase price of $700.0 million less $10.5 million of transaction costs, plus preliminary adjustments totaling $38.4 million for working capital and indebtedness. We recognized a gain on sale of $100.8 million ($65.4 million, net of tax) during the fourth quarter of fiscal 2018. Except for customary post-closing adjustments and transition services, we have no contingencies or continuing involvement with Spring Mobile subsequent to the completion of the sale.
The historical results of Spring Mobile are reported as discontinued operations in our consolidated statements of operations for all periods presented. The results of our discontinued operations for the 13 and 39 weeks ended November 2, 2019 and November 3, 2018 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
|
November 2, 2019
|
|
November 3, 2018
|
|
November 2, 2019
|
|
November 3, 2018
|
|
Net sales
|
$
|
—
|
|
|
$
|
149.0
|
|
|
$
|
—
|
|
|
$
|
442.8
|
|
|
Cost of sales
|
—
|
|
|
16.4
|
|
|
—
|
|
|
57.9
|
|
|
Gross profit
|
—
|
|
|
132.6
|
|
|
—
|
|
|
384.9
|
|
|
Selling, general and administrative expenses
|
0.2
|
|
|
103.0
|
|
|
3.2
|
|
|
313.8
|
|
|
Depreciation and amortization
|
—
|
|
|
5.2
|
|
|
—
|
|
|
16.0
|
|
|
(Loss) income from discontinued operations before income taxes
|
(0.2
|
)
|
|
24.4
|
|
|
(3.2
|
)
|
|
55.1
|
|
|
Income tax (benefit) expense
|
—
|
|
|
6.1
|
|
|
(0.6
|
)
|
|
14.1
|
|
|
Net (loss) income from discontinued operations
|
$
|
(0.2
|
)
|
|
$
|
18.3
|
|
|
$
|
(2.6
|
)
|
|
$
|
41.0
|
|
There were no significant operating noncash items for our discontinued operations for the 39 weeks ended November 2, 2019. The following table presents capital expenditures, depreciation and amortization and other significant operating noncash items of our discontinued operations for the 39 weeks ended November 3, 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
Capital expenditures
|
|
$
|
6.1
|
|
|
Depreciation and amortization
|
|
16.0
|
|
|
Provision for inventory reserves
|
|
9.5
|
|
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Disposition of Simply Mac
On May 9, 2019, we entered into a definitive agreement to sell our Simply Mac business to Cool Holdings, Inc., which closed on September 25, 2019, for total consideration of $12.9 million. The consideration received is subject to customary post-closing adjustments and consisted of $5.2 million in cash and a note receivable of $7.7 million. We recognized a loss on sale of $1.3 million, net of tax, during the third quarter of fiscal 2019.
Assets and Liabilities Held for Sale
As of November 2, 2019, we classified our corporate aircraft, with an estimated fair value, less costs to sell, of $12.8 million as assets held for sale. The assets and liabilities classified as held for sale as of November 3, 2018 relate to our former Spring Mobile business, which we sold in the fourth quarter of fiscal 2018. The major classes of assets and liabilities held for sale as of November 3, 2018 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
November 3, 2018
|
|
Assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
5.9
|
|
|
Receivables, net
|
|
5.2
|
|
|
Merchandise inventories, net
|
|
145.9
|
|
|
Prepaid expenses and other current assets
|
|
8.7
|
|
|
Property and equipment, net
|
|
69.6
|
|
|
Goodwill
|
|
316.9
|
|
|
Other intangible assets, net
|
|
77.0
|
|
|
Other assets
|
|
2.4
|
|
|
Total assets held for sale
|
|
$
|
631.6
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
Accounts payable
|
|
$
|
16.1
|
|
|
Accrued liabilities
|
|
23.3
|
|
|
Other liabilities
|
|
14.9
|
|
|
Total liabilities held for sale
|
|
$
|
54.3
|
|
3. Revenue
Net sales by significant product category for the periods indicated is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
|
|
November 2, 2019
|
|
November 3, 2018
|
|
November 2, 2019
|
|
November 3, 2018
|
|
New video game hardware (1)
|
|
$
|
189.0
|
|
|
$
|
349.0
|
|
|
$
|
598.1
|
|
|
$
|
1,006.5
|
|
|
New video game software
|
|
485.9
|
|
|
720.7
|
|
|
1,217.3
|
|
|
1,488.3
|
|
|
Pre-owned and value video game products
|
|
344.2
|
|
|
396.9
|
|
|
1,112.6
|
|
|
1,344.7
|
|
|
Video game accessories
|
|
156.5
|
|
|
180.8
|
|
|
526.3
|
|
|
567.2
|
|
|
Digital
|
|
37.0
|
|
|
45.4
|
|
|
111.4
|
|
|
128.6
|
|
|
Collectibles
|
|
161.2
|
|
|
154.6
|
|
|
490.3
|
|
|
438.7
|
|
|
Other (2)
|
|
64.7
|
|
|
88.0
|
|
|
215.9
|
|
|
248.3
|
|
|
Total
|
|
$
|
1,438.5
|
|
|
$
|
1,935.4
|
|
|
$
|
4,271.9
|
|
|
$
|
5,222.3
|
|
__________________________________________________
|
|
|
|
(1)
|
Includes sales of hardware bundles, in which physical hardware and digital or physical software are sold together as a single SKU.
|
|
|
|
|
(2)
|
Includes mobile and consumer electronics sold through our Simply Mac branded stores, which were sold in September 2019. Also includes sales of PC entertainment software, interactive game figures, strategy guides, mobile and consumer electronics, and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in print form.
|
See Note 10, "Segment Information," for net sales by geographic location.
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Performance Obligations
We expect to recognize revenue in future periods for remaining performance obligations related to unredeemed gift cards, trade-in credits, reservation deposits and our PowerUp Rewards loyalty program (collectively, “unredeemed customer liabilities”), extended warranties and subscriptions to our Game Informer magazine.
Performance obligations associated with unredeemed customer liabilities are primarily satisfied at the time our customers redeem gift cards, trade-in credits, reservation deposits or loyalty program points for products that we offer. Unredeemed customer liabilities are generally redeemed within one year of issuance. As of November 2, 2019, our unredeemed customer liabilities totaled $250.5 million.
We offer extended warranties on certain new and pre-owned video game products with terms generally ranging from 12 to 24 months, depending on the product. Revenues for extended warranties sold are recognized on a straight-line basis over the life of the contract. As of November 2, 2019, our deferred revenue liability related to extended warranties totaled $58.9 million.
Performance obligations associated with subscriptions to our Game Informer magazine are satisfied when monthly magazines are delivered in print form or made available in digital format. The significant majority of our customers’ subscriptions is for 12 monthly issues. As of November 2, 2019, we had deferred revenue of $39.2 million associated with our Game Informer magazine.
Contract Balances
Our contract liabilities primarily consist of unredeemed customer liabilities and deferred revenues associated with extended warranties and subscriptions to our Game Informer magazine. The opening balance, current period changes and ending balance of our contract liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Contract Liabilities
|
|
Balance at February 2, 2019
|
|
$
|
376.9
|
|
|
Increase to contract liabilities (1)
|
|
677.1
|
|
|
Decrease to contract liabilities (2)
|
|
(705.0
|
)
|
|
Other adjustments (3)
|
|
(0.4
|
)
|
|
Balance at November 2, 2019
|
|
$
|
348.6
|
|
__________________________________________________
|
|
|
|
(1)
|
Includes issuances of gift cards, trade-in credits and loyalty points, new reservation deposits, new subscriptions to Game Informer and extended warranties sold.
|
|
|
|
|
(2)
|
Includes redemptions of gift cards, trade-in credits, loyalty points and reservation deposits as well as revenues recognized for Game Informer and extended warranties. During the 39 weeks ended November 2, 2019, there were $47.3 million of gift cards redeemed that were outstanding as of February 2, 2019.
|
|
|
|
|
(3)
|
Primarily includes foreign currency translation adjustments.
|
4. Fair Value Measurements and 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. Applicable accounting standards require 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.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis include our foreign currency contracts, life insurance policies we own that have a cash surrender value, and certain nonqualified deferred compensation liabilities.
We value our foreign currency contracts, our 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, all of which are observable in active markets. When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Our assets and liabilities measured at fair value on a recurring basis as of November 2, 2019, November 3, 2018 and February 2, 2019, utilize Level 2 inputs and include the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2, 2019
|
|
November 3, 2018
|
|
February 2, 2019
|
|
Assets
|
|
|
|
|
|
|
|
Foreign currency contracts(1)
|
|
$
|
1.2
|
|
|
$
|
4.6
|
|
|
$
|
1.0
|
|
|
Company-owned life insurance(2)
|
|
16.2
|
|
|
14.4
|
|
|
14.6
|
|
|
Total assets
|
|
$
|
17.4
|
|
|
$
|
19.0
|
|
|
$
|
15.6
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency contracts(3)
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
1.2
|
|
|
Nonqualified deferred compensation(3)
|
|
0.8
|
|
|
1.1
|
|
|
1.1
|
|
|
Total liabilities
|
|
$
|
1.3
|
|
|
$
|
1.6
|
|
|
$
|
2.3
|
|
__________________________________________________
|
|
|
|
(1)
|
Recognized in prepaid expenses and other current assets in our unaudited condensed consolidated balance sheets.
|
|
|
|
|
(2)
|
Recognized in other non-current assets in our unaudited condensed consolidated balance sheets.
|
|
|
|
|
(3)
|
Recognized in accrued liabilities in our unaudited condensed consolidated balance sheets.
|
We use forward exchange contracts to manage currency risk primarily related to intercompany loans denominated in foreign currencies. 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 denominated in foreign currencies. The total gross notional value of derivatives related to our foreign currency contracts was $147.1 million, $319.5 million and $240.0 million as of November 2, 2019, November 3, 2018 and February 2, 2019, respectively.
Activity related to the trading of derivative instruments and the offsetting impact of intercompany loans denominated in foreign currencies recognized in selling, general and administrative expense is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
|
|
November 2,
2019
|
|
November 3,
2018
|
|
November 2,
2019
|
|
November 3,
2018
|
|
Gains on the change in fair value of derivative instruments
|
|
$
|
0.4
|
|
|
$
|
0.6
|
|
|
$
|
3.2
|
|
|
$
|
10.0
|
|
|
Gains (losses) on the re-measurement of related intercompany loans denominated in foreign currencies
|
|
0.1
|
|
|
(0.2
|
)
|
|
(2.7
|
)
|
|
(7.7
|
)
|
|
Net gains
|
|
$
|
0.5
|
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
2.3
|
|
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.
Assets that are Measured at Fair Value on a Nonrecurring Basis
Assets that are measured at fair value on a nonrecurring basis relate primarily to property and equipment, right-of-use assets and intangible assets, which are remeasured when the estimated fair value is below its carrying value. For these assets, we do not periodically adjust carrying value to fair value; rather, when we determine that impairment has occurred, the carrying value of the asset is reduced to its fair value.
During the 39 weeks ended November 2, 2019, we recognized impairment charges totaling $3.6 million related to store-level property and equipment, to reflect their estimated fair value of zero. We also recognized an impairment charge of $7.7 million related to our corporate aircraft, to reflect the fair value of $12.8 million. The corporate aircraft is classified as assets held-for-sale in our consolidated balance sheet as of November 2, 2019.
During the 39 weeks ended November 3, 2018, we recognized impairment charges totaling $30.2 million related to intangible assets. We recognized impairment charges of $19.0 million and $5.3 million associated with our Micromania and ThinkGeek trade names, respectively, to reflect their fair values of $19.0 million and $2.8 million, respectively. We also recognized an impairment charge of $5.9 million associated with other ThinkGeek intangible assets, to reflect their fair values of zero.
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The fair value estimates of the store-level property and equipment, trade names and other intangible assets are based on significant unobservable inputs (Level 3) developed from company-specific information. These assets were valued using variations of the discounted cash flow method, which require assumptions associated with, among others, projected sales and cost estimates, capital expenditures, royalty rates, discount rates, terminal values and remaining useful lives. The fair value of the corporate aircraft was estimated by evaluating significant unobservable inputs (Level 3), including recent sales of similar assets, market statistics and fleet information.
Other Fair Value Disclosures
The carrying values of our cash equivalents, receivables, net, accounts payable and notes payable approximate the fair value due to their short-term maturities.
As of November 2, 2019 our unsecured 6.75% senior notes due in 2021 had a net carrying value of $419.4 million and a fair value of $422.9 million. The fair value of our 6.75% 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 this to be a Level 2 measurement as all significant inputs into the quote provided by our pricing source are observable in active markets.
5. Goodwill
Goodwill represents the excess purchase price over tangible net assets and identifiable intangible assets acquired. Intangible assets are recorded apart from goodwill if they arise from a contractual right and are capable of being separated from the entity and sold, transferred, licensed, rented or exchanged individually. We are required to evaluate goodwill and other intangible assets not subject to amortization for impairment at least annually. This annual test is completed at the beginning of the fourth quarter of each fiscal year or when circumstances indicate the carrying value of the goodwill or other intangible assets might be impaired. Goodwill has been assigned to reporting units for the purpose of impairment testing. We have four operating segments, including the United States, Canada, Australia and Europe, which also define our reporting units based upon the similar economic characteristics of operations within each segment, including the nature of products, product distribution and the type of customer and separate management within these businesses. In order to test goodwill for impairment, we compare a reporting unit's carrying amount to its estimated fair value. If the reporting unit’s carrying value exceeds its estimated fair value, then an impairment charge is recorded in the amount of the excess.
The changes in the carrying amounts of goodwill, by reportable segment, for fiscal 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Australia
|
|
Europe
|
|
Total
|
|
Balance at February 2, 2019
|
|
$
|
363.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
363.9
|
|
|
Impairment charge
|
|
(363.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(363.9
|
)
|
|
Balance at November 2, 2019
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative goodwill impairment charges
|
|
$
|
1,173.0
|
|
|
$
|
129.1
|
|
|
$
|
173.5
|
|
|
$
|
499.5
|
|
|
$
|
1,975.1
|
|
During the second quarter of fiscal 2019, we determined that a triggering event occurred as a result of a decline in our market capitalization; therefore, we performed an interim impairment test for our goodwill and indefinite-lived intangible assets. As a result of the interim impairment test, we recognized a goodwill impairment charge totaling $363.9 million related to our United States segment. We have no remaining goodwill as a result of the impairment charge. We estimated the fair value of our United States segment by using a combination of the income approach and market approach. The income approach is based on the present value of future cash flows, which are derived from our long-term financial forecasts, and requires significant assumptions including, among others, a discount rate and a terminal value. The market approach is based on the observed ratios of enterprise value to earnings of the Company and other comparable, publicly-traded companies.
During the third quarter of fiscal 2018, we determined that a triggering event occurred as a result of a decline in our market capitalization; therefore, we performed an interim impairment test for our goodwill and indefinite-lived intangible assets. As a result of the interim impairment testing, we recognized goodwill impairment charges totaling $557.3 million and intangible asset impairment charges totaling $30.2 million.
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Leases
We conduct the substantial majority of our business with leased real estate properties, including retail stores, warehouse facilities and office space. We also lease certain equipment and vehicles. These are generally leased under noncancelable agreements and include various renewal options for additional periods. These agreements generally provide for minimum, and in some cases, percentage rentals, and require us to pay insurance, taxes and other maintenance costs. Percentage rentals are based on sales performance in excess of specified minimums at various stores and are accounted for in the period in which the amount of percentage rentals can be accurately estimated. All of our lease agreements are classified as operating leases.
Effective February 3, 2019, we adopted ASC 842, Leases (see Note 1, "General Information"). Under ASC 842, fixed payments associated with our operating leases are included in operating lease right-of-use ("ROU") assets and both current and noncurrent operating lease liabilities on the balance sheet. We determine if an arrangement is considered a lease at inception. We recognize ROU assets, on the commencement date based on the present value of future minimum lease payments over the lease term, including reasonably certain renewal options. As the rate implicit in the lease is not readily determinable for most leases, we utilize our incremental borrowing rate ("IBR") to determine the present value of future payments. The incremental borrowing rate represents a significant judgment that is based on an analysis of our credit rating, country risk, corporate bond yields, the effect of collateralization, as well as comparison to our borrowing rates. For our real estate leases, we do not separate the components of a contract, thus our future payments include minimum rent payments and fixed executory costs. For our non-real estate leases, future payments include only fixed minimum rent payments. We record the amortization of our ROU assets and the accretion of our lease liabilities as a single lease cost on a straight-line basis over the lease term, which includes option terms we are reasonably certain to exercise. We recognize our cash or lease incentives as a reduction to the ROU asset. We assess ROU assets for impairment in accordance with our long-lived asset impairment policy, which is performed periodically or when events or changes in circumstances indicate that the carrying amount may not be recoverable.
Prior to our adoption of ASC 842, liabilities for future rental payments for operating leases were not recognized on the balance sheet. Leases with step rent provisions, escalation clauses or other lease concessions were accounted for on a straight-line basis over the lease term, which included renewal option periods when we were reasonably assured of exercising the renewal options and included “rent holidays” (periods in which we were not obligated to pay rent). Cash or lease incentives received upon entering into certain store leases (“tenant improvement allowances”) were also recognized on a straight-line basis as a reduction to rent expense over the lease term. We recorded the unamortized portion of tenant improvement allowances as a part of deferred rent.
Rent expense under operating leases was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 weeks ended
|
|
|
|
November 2, 2019
|
|
November 2, 2019
|
|
Operating lease cost
|
|
$
|
86.6
|
|
|
$
|
257.8
|
|
|
Variable lease cost (1)
|
|
23.1
|
|
|
72.2
|
|
|
Total rent expense
|
|
$
|
109.7
|
|
|
$
|
330.0
|
|
_____________________________________________
|
|
|
|
(1)
|
Variable lease cost includes percentage rentals and variable executory costs.
|
During the 39 weeks ended November 2, 2019, we had cash outflows of $223.0 million associated with operating leases included in the measurement of our lease liabilities and we recognized $147.3 million of ROU assets that were obtained in exchange for operating lease obligations.
The weighted-average remaining lease term, which includes reasonably certain renewal options, and the weighted-average discount rate for operating leases included in the measurement of our lease liabilities, as of November 2, 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
November 2, 2019
|
|
|
Weighted-average remaining lease term (years)
|
|
4.5
|
|
(1)
|
|
Weighted-average discount rate
|
|
4.4
|
%
|
|
_____________________________________________
|
|
|
|
(1)
|
The weighted-average remaining lease term is weighted based on the lease liability balance for each lease as of November 2, 2019. This weighted average calculation differs from our simple average remaining lease term due to the inclusion of reasonably certain renewal options and the effect of the lease liability value of longer term leases.
|
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Expected lease payments associated with our operating lease liabilities, excluding percentage rentals, as of November 2, 2019, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Operating Leases (1)
|
|
Remainder of Fiscal Year 2019, as of November 2, 2019
|
|
$
|
76.7
|
|
|
Fiscal Year 2020
|
|
247.5
|
|
|
Fiscal Year 2021
|
|
172.1
|
|
|
Fiscal Year 2022
|
|
124.6
|
|
|
Fiscal Year 2023
|
|
78.0
|
|
|
Thereafter
|
|
137.5
|
|
|
Total remaining lease payments
|
|
836.4
|
|
|
Less: Interest
|
|
(81.4
|
)
|
|
Present value of lease liabilities (2)
|
|
$
|
755.0
|
|
_______________________________________________________________
|
|
|
|
(1)
|
Operating lease payments exclude legally binding lease payments for leases signed but not yet commenced.
|
|
|
|
|
(2)
|
The present value of lease liabilities consist of $238.5 million classified as current portion of operating lease liabilities and $516.5 million classified as long-term operating lease liabilities.
|
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, ASC 840, future minimum annual rentals, including reasonably assured options, as of February 2, 2019, were as follows (in millions):
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
Fiscal Year 2019
|
$
|
296.2
|
|
|
Fiscal Year 2020
|
208.7
|
|
|
Fiscal Year 2021
|
149.1
|
|
|
Fiscal Year 2022
|
105.4
|
|
|
Fiscal Year 2023
|
71.4
|
|
|
Thereafter
|
116.2
|
|
|
|
|
$
|
947.0
|
|
7. Debt
Senior Notes
The carrying values of our long-term debt, net consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2, 2019
|
|
November 3, 2018
|
|
February 2, 2019
|
|
2019 Senior Notes principal amount
|
$
|
—
|
|
|
$
|
350.0
|
|
|
$
|
350.0
|
|
|
2021 Senior Notes principal amount
|
421.4
|
|
|
475.0
|
|
|
475.0
|
|
|
Less: Unamortized debt financing costs
|
(2.0
|
)
|
|
(5.0
|
)
|
|
(4.2
|
)
|
|
|
$
|
419.4
|
|
|
$
|
820.0
|
|
|
$
|
820.8
|
|
|
Less: Current portion
|
—
|
|
|
(348.8
|
)
|
|
(349.2
|
)
|
|
Long-term debt, net
|
$
|
419.4
|
|
|
$
|
471.2
|
|
|
$
|
471.6
|
|
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"). On April 4, 2019, we used cash on hand to redeem all of our $350.0 million unsecured senior notes due October 2019, plus accrued but unpaid interest, at the redemption price equal to 100% of par value.
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. We incurred fees and expenses related to the 2021 Senior Notes offering of $8.1 million, which were capitalized during the first quarter of fiscal 2016 and are being amortized as interest expense over the term of the notes. The 2021 Senior Notes were sold in a private placement and are not registered under the Securities Act of 1933 (the "Securities Act"). The 2021 Senior Notes were offered in the United States 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.
During the 39 weeks ended November 2, 2019, we repurchased $53.6 million of our 2021 Senior Notes in open market transactions at prices ranging from 99.6% to 101.5% of par value.
The indenture governing the 2021 Senior Notes does not contain financial covenants but does 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 2021 Senior Notes. In addition, the indenture restricts 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 indenture from the date of the indenture governing the 2021 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 indenture. 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.
The indenture contains 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 2021 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.
Revolving Credit Facility
We maintain an asset-based revolving credit facility (the “Revolver”) with a borrowing base capacity of $420 million and a maturity date of November 2022. The Revolver also includes a $200 million expansion feature and $50 million letter of credit sublimit, and allows for an incremental $50 million first-in, last-out facility. The applicable margins for prime rate loans range from 0.25% to 0.50% and, for the London Interbank Offered (“LIBO”) rate loans, range from 1.25% to 1.50%. The Revolver is secured by substantially all of the assets of GameStop Corp. and the assets of its domestic subsidiaries.
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, 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 period between July 15 and October 15 of each year. 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 20%, or is projected to be within six months after such payment or (2) excess availability under the Revolver is less than 15%, or is projected to be within six months after such payment, and the fixed charge coverage ratio, as calculated on a pro-forma basis for the prior 12 months, is 1.0:1.0 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.
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 0.50% above the highest of (a) the prime rate of the administrative agent, (b) the federal funds effective rate plus 0.50% and (c) the LIBO rate for a one month interest period as determined on such day plus 1.00%, and (2) for LIBO rate loans of 1.25% to 1.50% 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 November 2, 2019, 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 39 weeks ended November 2, 2019, we had no borrowings or repayments under our revolving credit facility. As of November 2, 2019, total availability under the Revolver was $412.7 million, with no outstanding borrowings and outstanding standby letters of credit of $7.3 million. We are currently in compliance with the financial requirements of the Revolver.
Luxembourg Line of Credit
In September 2007, our Luxembourg subsidiary entered into a $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 November 2, 2019, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $1.8 million.
8. Commitments and Contingencies
Commitments
During the 39 weeks ended November 2, 2019, there were no material changes to our commitments as disclosed in our 2018 Annual Report on Form 10-K.
Contingencies
Legal Proceedings
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.
9. Earnings Per Share
Basic net income (loss) per common share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding and potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options and unvested restricted stock outstanding during the period, using the treasury stock method. Potentially dilutive securities are excluded from the computations of diluted earnings per share if their effect would be antidilutive. A net loss from continuing operations causes all potentially dilutive securities to be antidilutive.
A reconciliation of shares used in calculating basic and diluted net income (loss) per common share is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
39 Weeks Ended
|
|
|
November 2,
2019
|
|
November 3,
2018
|
|
November 2,
2019
|
|
November 3,
2018
|
|
Weighted-average common shares outstanding
|
82.1
|
|
|
102.2
|
|
|
94.8
|
|
|
102.0
|
|
|
Dilutive effect of stock options and restricted stock awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted-average diluted common shares outstanding
|
82.1
|
|
|
102.2
|
|
|
94.8
|
|
|
102.0
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options and restricted stock awards
|
2.3
|
|
|
1.7
|
|
|
2.3
|
|
|
1.7
|
|
GAMESTOP CORP.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information
We operate our business in four geographic segments: United States, Canada, Australia and Europe. Our former Technology Brands segment primarily consisted of Spring Mobile and Simply Mac. We sold Spring Mobile in January 2019. In September 2019, we closed on the sale of Simply Mac, which is reported in the United States segment in these consolidated financial statements and accompanying notes. The historical results of Spring Mobile are reported as discontinued operations and are excluded from our segment results for all periods presented.
We identify segments based on a combination of geographic areas and management responsibility. Segment results for the United States include retail operations in 50 states, the District of Columbia and Guam; our e-commerce website www.gamestop.com; Game Informer magazine; and Simply Mac, which was sold in September 2019. The United States segment also includes general and administrative expenses related to our corporate headquarters in Grapevine, Texas. 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 and e-commerce operations in 10 European countries. 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 and 39 weeks ended November 2, 2019 and November 3, 2018.
Segment information for the 13 and 39 weeks ended November 2, 2019 and November 3, 2018 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
Canada
|
|
Australia
|
|
Europe
|
|
Consolidated
|
|
13 weeks ended November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
987.5
|
|
|
$
|
79.8
|
|
|
$
|
117.0
|
|
|
$
|
254.2
|
|
|
$
|
1,438.5
|
|
|
Operating loss
|
|
(24.2
|
)
|
|
(3.9
|
)
|
|
(0.2
|
)
|
|
(17.3
|
)
|
|
(45.6
|
)
|
|
13 weeks ended November 3, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,326.4
|
|
|
$
|
107.0
|
|
|
$
|
147.4
|
|
|
$
|
354.6
|
|
|
$
|
1,935.4
|
|
|
Operating loss
|
|
(427.2
|
)
|
|
(7.1
|
)
|
|
(30.4
|
)
|
|
(53.2
|
)
|
|
(517.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
Canada
|
|
Australia
|
|
Europe
|
|
Consolidated
|
|
39 weeks ended November 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,010.7
|
|
|
$
|
215.4
|
|
|
$
|
339.8
|
|
|
$
|
706.0
|
|
|
$
|
4,271.9
|
|
|
Operating loss
|
|
(386.1
|
)
|
|
(16.3
|
)
|
|
(10.6
|
)
|
|
(61.8
|
)
|
|
(474.8
|
)
|
|
39 weeks ended November 3, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,661.1
|
|
|
$
|
263.4
|
|
|
$
|
405.9
|
|
|
$
|
891.9
|
|
|
$
|
5,222.3
|
|
|
Operating loss
|
|
(336.4
|
)
|
|
(10.7
|
)
|
|
(37.5
|
)
|
|
(85.3
|
)
|
|
(469.9
|
)
|