NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
(unaudited)
1. General Information
The Company
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) offers games, entertainment products and technology through its ecommerce properties and stores.
We operate our business in four geographic segments: United States, Canada, Australia and Europe. The information contained in these consolidated financial statements refers to continuing operations unless otherwise noted.
Basis of Presentation and Consolidation
The 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 consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in our opinion, necessary for a fair presentation of the information for the periods presented. These 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 the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they exclude certain disclosures required under GAAP for complete consolidated financial statements.
The accompanying consolidated financial statements and notes are unaudited. The consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the 52 weeks ended January 29, 2022, as filed with the Securities and Exchange Commission ("SEC") on March 17, 2022 (the “2021 Annual Report on Form 10-K”). Due to the seasonal nature of our business, our results of operations for the three months ended April 30, 2022 are not indicative of our future results for the 52 weeks ending January 28, 2023. Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. Each of our fiscal years ending January 28, 2023 and January 29, 2022 consist of 52 weeks. All three month periods presented herein contain 13 weeks. All references to years, quarters and months relate to fiscal periods rather than calendar periods. Our business, like that of many retailers, is seasonal, with the major portion of the net sales realized during the fourth quarter, which includes the holiday selling season.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying footnotes. We regularly evaluate the estimates related to our assets and liabilities, contingent assets and liabilities, and the reported amounts of revenues and expenses. In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts recognized in the consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions that we have used could have a significant impact on our financial results. Actual results could differ from those estimates.
2. Summary of Significant Accounting Policies
There have been no material changes to our significant accounting policies included in Note 2, "Summary of Significant Accounting Policies," in the 2021 Annual Report on Form 10-K. Included below are certain updates related to those policies. Digital Assets
We account for digital assets in accordance with ASC 350, Intangibles-Goodwill and Other (Topic 350). Our digital assets are indefinite-lived intangible assets which are initially recorded at cost. Accordingly, if the fair market value at any point during the reporting period is lower than the carrying value, an impairment loss equal to the difference will be recognized in selling, general and administrative ("SG&A") expenses in our Consolidated Statement of Operations. Impairment losses cannot be recovered for any subsequent increase in fair value until the sale or disposal of the asset. Gains on the sale of digital assets, if any, will be recognized based on the fair value upon sale or disposal of the assets in SG&A expenses in our Consolidated Statement of Operations.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
(unaudited)
In January 2022, we entered into a partnership with Immutable X Pty Limited (“IMX”) and Digital Worlds NFTs Ltd. ("Digital Worlds") pursuant to which the Company was entitled to receive digital assets in the form of IMX tokens once certain milestones have been achieved. Upon entering the agreement, we recognized the fair value of noncurrent receivables and deferred income of $79.0 million. In February 2022, upon announcement of the agreement, we recognized the fair value of noncurrent receivables and deferred income of $31.7 million. Noncurrent receivables and deferred income are recognized in other noncurrent assets and other long-term liabilities, respectively, on our Consolidated Balance Sheets. Once the IMX tokens were received, we recorded the digital asset as an indefinite-lived intangible asset and derecognized the noncurrent receivable. The deferred income is recognized over the term of the agreement. During the first quarter of 2022, we recognized $13.9 million of income in SG&A expenses in our Consolidated Statement of Operations. In February 2022, we sold the digital assets related to this transaction and recognized a gain on sale of $6.9 million in SG&A expenses in our Consolidated Statement of Operations.
At-the-Market Equity Offering
During the three months ended May 1, 2021, we sold an aggregate of 3,500,000 shares of our common stock under our at-the market equity offering program (the "ATM Transaction"). We generated $556.7 million in aggregate gross proceeds from sales under the ATM Transaction and paid an aggregate of $5.0 million in commissions to the sales agent, among other legal and administrative fees. These commissions and fees are recognized in additional paid-in capital on our Consolidated Balance Sheets and SG&A expenses in our Consolidated Statements of Operations.
3. Recently Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides practical expedients for contract modifications with the transition from reference rates, such as LIBOR, that are expected to be discontinued. This guidance is applicable for our revolving line of credit, which uses LIBOR as a reference rate. The provisions of ASU 2020-04 are effective as of March 12, 2020 and may be adopted prospectively through December 31, 2022. As of January 30, 2022, we adopted this ASU with no material impact to our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is intended to simplify the accounting and disclosure requirements for income taxes by eliminating various exceptions in accounting for income taxes as well as clarifying and amending existing guidance to improve consistency in application of ASC 740. The provisions of ASU 2019-12 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. As of January 30, 2022, we adopted this ASU with no material impact to our consolidated financial statements.
4. Revenue
The following table presents net sales by significant product category: | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | April 30, 2022 | | May 1, 2021 | | | | |
Hardware and accessories (1) | | $ | 673.8 | | | $ | 703.5 | | | | | |
Software (2) | | 483.7 | | | 397.9 | | | | | |
Collectibles | | 220.9 | | | 175.4 | | | | | |
Total | | $ | 1,378.4 | | | $ | 1,276.8 | | | | | |
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__________________________________________________
(1) Includes sales of new and pre-owned hardware, accessories, hardware bundles in which hardware and digital or physical software are sold together in a single SKU, interactive game figures, strategy guides, mobile and consumer electronics.
(2) Includes sales of new and pre-owned gaming software, digital software, and PC entertainment software.
See Note 9, "Segment Information," for net sales by geographic location. Performance Obligations
We have arrangements with customers where our performance obligations are satisfied over time, which primarily relate to extended warranties and our Game Informer® magazine. We expect to recognize revenue in future periods for remaining performance obligations we have associated with 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 customers redeem gift cards, trade-in credits, customer deposits or loyalty program points for products that we offer. Unredeemed customer liabilities are generally redeemed within one year of issuance.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
(unaudited)
We offer extended warranties on certain new and pre-owned 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.
Performance obligations associated with subscriptions to Game Informer® magazine are satisfied when periodic magazines are delivered in print form or made available in digital format.
The following table presents our performance obligations:
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | April 30, 2022 | | May 1, 2021 |
Unredeemed customer liabilities | | $ | 201.3 | | | $ | 200.3 | |
Extended warranties | | 84.7 | | | 81.0 |
Subscription | | 44.0 | | | 41.3 |
Significant Judgments and Estimates
We accrue PowerUp Rewards loyalty points at the estimated retail price per point, net of estimated breakage, which can be redeemed by loyalty program members for products we offer. The estimated retail price per point is based on the actual historical retail prices of products purchased through the redemption of loyalty points. We estimate breakage of loyalty points and unredeemed gift cards based on historical redemption rates.
Contract Balances
Our contract liabilities primarily consist of unredeemed customer liabilities and deferred revenues associated with gift cards, extended warranties and subscriptions to Game Informer® magazine.
The following table presents a rollforward of our contract liabilities: | | | | | | | | | | | | | | | | |
| | | | | | |
| | April 30, 2022 | | May 1, 2021 | | |
Contract liability beginning balance | | $ | 378.3 | | | $ | 348.2 | | | |
| | | | | | |
Increase to contract liabilities (1) | | 207.0 | | | 208.7 | | | |
Decrease to contract liabilities (2) | | (253.5) | | | (234.5) | | | |
Other adjustments (3) | | (1.8) | | | 0.2 | | | |
Contract liability ending balance | | $ | 330.0 | | | $ | 322.6 | | | |
__________________________________________________ (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 customer deposits and revenues recognized for Game Informer® and extended warranties. During the three months ended April 30, 2022, there were $27.3 million of gift cards redeemed that were outstanding as of January 29, 2022. During the three months ended May 1, 2021, there were $23.5 million of gift cards redeemed that were outstanding as of January 30, 2021.
(3) Primarily includes foreign currency translation adjustments.
5. 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 in 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.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
(unaudited)
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Assets and liabilities that are measured at fair value on a recurring basis include our foreign currency contracts, Company-owned life insurance policies with a cash surrender value, and certain nonqualified deferred compensation liabilities.
We value our foreign currency contracts, 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, and 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 presents our assets and liabilities measured at fair value on a recurring basis, which utilize Level 2 inputs: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 30, 2022 | | | | May 1, 2021 | | | | January 29, 2022 | | |
Assets | | | | | | | | | | | | |
Foreign currency contracts(1) | | $ | 4.7 | | | | | $ | 2.7 | | | | | $ | 3.8 | | | |
Company-owned life insurance(2) | | 0.5 | | | | | 2.8 | | | | | 0.6 | | | |
Total assets | | $ | 5.2 | | | | | $ | 5.5 | | | | | $ | 4.4 | | | |
Liabilities | | | | | | | | | | | | |
Foreign currency contracts(3) | | $ | — | | | | | $ | 0.8 | | | | | $ | 0.4 | | | |
Nonqualified deferred compensation(3) | | 0.5 | | | | | 0.6 | | | | | 0.6 | | | |
Total liabilities | | $ | 0.5 | | | | | $ | 1.4 | | | | | $ | 1.0 | | | |
_________________________________________________ (1) Recognized in prepaid expenses and other current assets on our Consolidated Balance Sheets.
(2) Recognized in other noncurrent assets on our Consolidated Balance Sheets.
(3) Recognized in accrued liabilities and other current liabilities on our Consolidated Balance Sheets.
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, operating lease right-of-use ("ROU") assets and other intangible assets, including digital assets, which are remeasured when the estimated fair value is below its carrying value. When we determine that impairment has occurred, the carrying value of the asset is reduced to its fair value. Fair value of digital assets held are based on Level 2 inputs, as described above, and impairment losses for digital assets cannot be recovered for any subsequent increase in fair value until the sale or disposal of the asset.
During the three months ended April 30, 2022, we recognized impairment charges of $33.7 million associated with digital assets in SG&A expenses in our Consolidated Statements of Operations. These charges were recognized in the United States segment.
During the three months ended May 1, 2021, we recognized impairment charges totaling $0.6 million associated with store-level ROU assets to reflect their fair values in asset impairments in our Consolidated Statements of Operations. These charges were recognized in our United States segment.
The carrying values of our cash and cash equivalents, restricted cash, net receivables, accounts payable and current portion of debt approximate their fair values due to their short-term maturities.
As of April 30, 2022, our government-guaranteed low interest French term loans due October 2022 through October 2026 ("French Term Loans") had a carrying value of $42.2 million and a fair value of $39.0 million. The fair values of our French Term Loans were estimated based on a model that discounted future principal and interest payments at interest rates available to us at the end of the period for similar debt of the same maturity, which is a Level 2 input as defined by the fair value hierarchy.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
(unaudited)
6. Debt
During 2020, our French subsidiary, Micromania SAS, entered into six separate unsecured term loans for a total of €40.0 million, or $42.2 million, as of April 30, 2022. In the second quarter of 2021, at the request of Micromania SAS, these term loans were extended for five years, with an amortization plan for the principal starting in October 2022. The interest rate is 0.7% for three of the term loans totaling €20.0 million, and 1% for the remaining three term loans totaling €20.0 million. The French government has guaranteed 90% of the term loans pursuant to a state guaranteed loan program instituted in connection with the COVID-19 pandemic.
As of April 30, 2022, May 1, 2021 and January 29, 2022 there was $42.2 million, $48.1 million and $44.6 million of outstanding debt, including $6.5 million, $48.1 million and $4.1 million of short-term and current debt, respectively, which represents the current portion of the French Term Loans.
7. Commitments and Contingencies
Letter of Credit Facilities
We maintain uncommitted letter of credit facilities with certain lenders that provide for the issuance of letters of credit and bank guarantees, at times supported by cash collateral. As of April 30, 2022, we had approximately $14.4 million of outstanding letters of credit and bank guarantees under these facilities.
During the three months ended April 30, 2022, there were no material changes to our commitments as disclosed in our 2021 Annual Report on Form 10-K except as discussed in Note 6, "Debt." 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.
8. 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, unvested restricted stock and unvested restricted stock units 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 anti-dilutive. A net loss from continuing operations causes all potentially dilutive securities to be anti-dilutive. We have certain undistributed stock awards that participate in dividends on a non-forfeitable basis, however, their impact on earnings per share under the two-class method is negligible.
The following table presents a reconciliation of shares used in calculating basic and diluted net loss per common share:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | April 30, 2022 | | May 1, 2021 | | | | |
Weighted-average common shares outstanding | | 75.9 | | | 66.0 | | | | | |
Dilutive effect of restricted stock awards | | — | | | — | | | | | |
Weighted-average diluted common shares | | 75.9 | | | 66.0 | | | | | |
| | | | | | | | |
Anti-dilutive shares: | | | | | | | | |
Restricted stock units | | 1.2 | | | — | | | | | |
Restricted stock | | 0.2 | | | 2.6 | | | | | |
As of April 30, 2022 and May 1, 2021 there were 1.4 million and 2.6 million, respectively, of unvested restricted stock and restricted stock units. As of April 30, 2022 and May 1, 2021 there were 77.3 million and 71.9 million, respectively, of shares of Class A common stock that are legally issued and outstanding or are unvested restricted share units that represent a right to one share of Class A Common Stock.
As of April 30, 2022, 12.7 million shares of our Class A common stock were directly registered with our transfer agent.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
(unaudited)
9. Segment Information
We operate our business in four geographic segments: United States, Canada, Australia and Europe.
We identified segments based on a combination of geographic areas and management responsibility. Segment results for the United States include retail operations in 50 states; our ecommerce operations; and Game Informer® magazine. The United States segment also includes general and administrative expenses related to our corporate offices in the United States. Segment results for Canada include retail and ecommerce operations in Canada and segment results for Australia include retail and ecommerce operations in Australia and New Zealand. Segment results for Europe include retail and ecommerce operations in six countries. We measure segment profit using operating earnings, which is defined as income (loss) from 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 three months ended April 30, 2022 and May 1, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United States | | Canada | | Australia | | Europe | | Consolidated |
Three months ended April 30, 2022 | | | | | | | | | | |
Net sales | | $ | 995.3 | | | $ | 76.9 | | | $ | 126.7 | | | $ | 179.5 | | | $ | 1,378.4 | |
Operating loss | | (144.2) | | | (1.1) | | | 1.6 | | | (10.0) | | | (153.7) | |
Three months ended May 1, 2021 | | | | | | | | | | |
Net sales | | $ | 966.3 | | | $ | 61.9 | | | $ | 114.8 | | | $ | 133.8 | | | $ | 1,276.8 | |
Operating loss | | (3.6) | | | (2.9) | | | (0.4) | | | (33.9) | | | (40.8) | |
10. Income Taxes
The Coronavirus Aid, Relief, and Economic Securities Act (the "CARES Act"), which was enacted on March 27, 2020 in the United States, included measures to assist companies, including temporary changes to income and non-income-based tax laws. As of April 30, 2022, we have a $168.6 million U.S. federal income tax receivable resulting from the carryback of net operating losses allowed pursuant to the CARES Act. Income tax receivable is recognized in prepaid expenses and other current assets on our Consolidated Balance Sheets.
Our interim tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events and/or adjustments that may occur during the first quarter.
We recognized an income tax expense of $3.5 million, or (2.3)%, for the three months ended April 30, 2022 compared to an income tax expense of $1.3 million, or (2.0)%, for the three months ended May 1, 2021. Our effective income tax rate for both periods is primarily due to not recognizing tax benefits on certain current period losses as well as forecasted income taxes due in certain foreign and state jurisdictions in which we operate.