GameStop Corp.
Item 1.
Business
General
GameStop Corp. (together with its predecessor companies, “GameStop,” “we,” “us,” “our,” or the “Company”) is a global, multichannel video game, consumer electronics and wireless services retailer. As the world’s largest multichannel video game retailer, we sell new and pre-owned video game hardware, physical and digital video game software, video game accessories, as well as new and pre-owned mobile and consumer electronics products and other merchandise. As of February 1, 2014, GameStop's retail network and family of brands include 6,675 company-operated stores in the United States, Australia, Canada and Europe, primarily under the names GameStopTM (“GameStop”), EB GamesTM (“EB Games”), and Micromania. We also operate electronic commerce Web sites under the names www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, www.gamestop.ca, www.gamestop.it, www.gamestop.es, www.gamestop.ie, www.gamestop.de, www.gamestop.co.uk and www.micromania.fr. The network also includes: www.kongregate.comTM, a leading browser-based game site; Game InformerTM (“Game Informer”) magazine, the world's leading physical and digital video game publication; a digital personal computer (“PC”) distribution platform available at www.gamestop.com/pcgames; iOS and Android mobile applications; and an online consumer electronics marketplace available at www.buymytronics.comTM. We also operate Simply Mac©, a U.S. based, certified Apple© (“Apple”) products reseller; Spring Mobile©, an authorized AT&T® (“AT&T”) reseller operating AT&T branded wireless retail stores in the United States; and pre-paid wireless stores under the name Aio WirelessTM (“Aio Wireless,” an AT&T brand) as part of our expanding relationship with AT&T.
We are a Delaware corporation which, through a predecessor, began operations in November 1996. Our corporate office and one of our distribution facilities are housed in a 519,000 square foot facility in Grapevine, Texas.
Recent Developments
Strategic Activities
Following on the success of extending our buy-sell-trade model into our mobile business, we are seeking other opportunities to extend our core competencies to other products and retail categories in order to continue to grow our company. Doing so will allow us to help mitigate the cyclical nature of the video game console cycle. Aligned with this strategy we have executed the following initiatives in the 52 weeks ended February 1, 2014 (“fiscal 2013”).
Acquisition of Simply Mac. In October 2012, we acquired a minority equity ownership interest in Simply Mac, Inc. (“Simply Mac”), which operated Apple specialty retail stores in Utah and Wyoming. The investment was structured with an option whereby we could acquire the remaining ownership interest in Simply Mac's equity for a pre-negotiated price at a future point in time. Pursuant to this arrangement, in November 2013, we acquired the remaining 50.1% interest in Simply Mac for a total purchase price of $9.5 million.
Acquisition of Spring Mobile. In November 2013, we purchased Spring Communications, Inc. (“Spring Mobile”), a wireless retailer, for a purchase price of $62.6 million and the assumption of $34.5 million in term loans and a line of credit, of which $31.9 million was repaid shortly after the acquisition date.
Opening of Aio Wireless stores. In the fourth quarter of fiscal 2013, we began to open and operate pre-paid wireless stores under the name Aio Wireless.
As a result of the Spring Mobile and Simply Mac acquisitions and the opening of our new Aio Wireless stores, we have added a new reportable segment, Technology Brands, during the fourth quarter of fiscal 2013.
Decision to abandon investment in Spawn Labs. Spawn Labs, Inc. (“Spawn Labs”) is a streaming technology company with a patented technology to provide a unique game streaming and virtualization experience. Our decision to abandon this investment is a result of a lack of consumer demand for video game streaming services. As a result of this decision, we recorded an impairment charge of $19.7 million during the fourth quarter of fiscal 2013, of which $10.2 million was related goodwill and is recorded in the goodwill impairments line in our consolidated statements of operations and $9.5 million was related to certain technology assets and other intangible assets and is reflected in the asset impairments and restructuring charges line item in our consolidated statements of operations.
Return of Capital Strategies
In an effort to continue our commitment to drive long-term shareholder value we have accomplished the following initiatives in fiscal 2013 and so far in the 52 weeks ending January 31, 2015 (“fiscal 2014”).
Increase of cash dividend. In fiscal 2013 we paid dividends of $1.10 per share of Class A Common Stock, totaling approximately $131 million for the year. On March 4, 2014, our Board of Directors authorized an increase in our annual cash dividend from $1.10 to $1.32 per share of Class A Common Stock, which represents an increase of 20%. Additionally, on March 4, 2014, we declared our first quarterly dividend of fiscal 2014 of $0.33 per share of Class A Common Stock, payable on March 25, 2014 to stockholders of record on March 17, 2014.
Share repurchase activity. In fiscal 2013, we repurchased 6.3 million shares of our Class A Common Stock at an average price per share of $41.12 for a total of $258.3 million. On November 19, 2013, our Board of Directors authorized us to use up to $500 million to repurchase shares of our Class A Common Stock, replacing the $209.9 million remaining under our previous authorization. Between February 2, 2014 and March 20, 2014, we repurchased an additional 0.6 million shares of our Class A Common Stock for an average price per share of $37.17.
Our Reportable Segments
As of February 1, 2014, we operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe; and a Technology Brands segment. The Video Game Brands segments include 6,457 stores, 4,249 of which are included in the United States segment. There are 335, 418, and 1,455 stores in the Canadian, Australian and European segments, respectively. Each of the Video Game Brands segments consists primarily of retail operations, with all stores engaged in the sale of new and pre-owned video game systems, software and accessories, which we refer to as video game products. Our Video Game Brands stores sell various types of digital products, including downloadable content, network points cards, prepaid digital, online timecards and digitally downloadable software. They also carry mobile and consumer electronics products, which consist primarily of pre-owned mobile devices, tablets and related accessories. Our buy-sell-trade program creates a unique value proposition to our customers by providing our customers with an opportunity to trade in their pre-owned video game and consumer electronics products for store credits and apply those credits towards other merchandise, which in turn, increases sales. The products in our Video Games Brands segments are substantially the same regardless of geographic location, with the primary differences in merchandise carried being the timing of release of new products in the various geographies, language translations and the timing of roll-outs of newly developed technology enabling the sale of new digital products. Stores in all Video Games Brands segments are similar in size at an average of approximately 1,400 square feet.
Results for the Video Games Brands United States segment include retail operations in the 50 states, the District of Columbia, Guam and Puerto Rico; the electronic commerce Web site www.gamestop.com; Game Informer magazine; www.kongregate.com, a digital PC game distribution platform available at www.gamestop.com/pcgames; and an online consumer electronics marketplace available at www.buymytronics.com. Segment results for Canada include retail and e-commerce operations in stores throughout 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 11 European countries.
Our Technology Brands segment includes all of our Simply Mac, Spring Mobile and Aio Wireless stores. Simply Mac operates 23 stores primarily in the western half of the United States, which sell Apple products, including desktop computers, laptops, tablets and smart phones and related accessories and other consumer electronics products. As an authorized Apple reseller, Simply Mac also offers certified training, warranty and repair services to its customers. Spring Mobile sells post-paid AT&T services and wireless products through its 164 AT&T branded stores, as well as related accessories and other consumer electronics products. Aio Wireless is a new AT&T brand offering pre-paid wireless services, devices and related accessories. We have opened 31 Aio Wireless stores in recent months in a few key markets throughout the United States. AT&T recently acquired Leap Wireless, the operator of Cricket® (“Cricket”) branded pre-paid wireless stores. We expect that our Aio stores will be re-branded under the Cricket name in the coming months.
Additional information, including financial information, regarding our reportable segments can be found in “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K (the "Form 10-K") and in Note 17 to our consolidated financial statements.
Disclosure Regarding Forward-looking Statements
This Form 10-K and other oral and written statements made by us to the public contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to:
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the introduction of next-generation consoles and other product releases which impact sales of new products and old products, the current or future features of such consoles, manufacturer-imposed or regulatory restrictions, changes or conditions that may adversely affect our pre-owned business;
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our ability to respond quickly to technological changes and evolving consumer preferences;
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our reliance on a limited number of suppliers and vendors for timely delivery of sufficient quantities of their products;
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our dependence on the production of new, innovative and popular product releases and enhanced video game platforms and accessories by developers and manufacturers;
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general economic conditions in the U.S. and internationally, specifically Europe, which impact consumer confidence and consumer spending;
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seasonality of sales;
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the proliferation of alternate sources of distribution of video game hardware, software and content, including through digital downloads;
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the growth of alternate means to play video games, including mobile, social networking sites and browser gaming;
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the intense competition in the video game industry;
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our ability to open and operate new stores and to efficiently close underperforming stores;
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our ability to attract and retain qualified personnel;
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the failure to achieve the anticipated benefits from new ventures and transactions and our ability to effectively integrate and operate acquired companies, including digital gaming, technology-based, mobile, wireless or consumer electronics companies that are outside of our historical operating expertise;
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the impact and costs of litigation and regulatory compliance;
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the amounts, timing and prices of any share repurchases made by us under our share repurchase programs;
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the risks involved with our international operations, including depressed local economic conditions, political risks, currency exchange risks, tax rates and regulatory risks;
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the efficiency of our management information systems and back-office functions;
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data breaches involving customers or employee data and failure of our cyber security infrastructure which could expose us to litigation;
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restrictions under our credit agreement which may impose operating and financial restrictions on us; and
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other factors described in this Form 10-K, including those set forth under the caption “
Item 1A.
Risk Factors
An investment in our company involves a high degree of risk. You should carefully consider the risks below, together with the other information contained in this report, before you make an investment decision with respect to our company. The risks described below are not the only ones facing us. Additional risks not presently known to us, or that we consider immaterial, may also impair our business operations. Any of the following risks could materially adversely affect our business, operating results or financial condition, and could cause a decline in the trading price of our common stock and the value of your investment.
Risks Related to Our Business
If economic conditions do not improve, demand for the products we sell may decline.
Sales of our products involve discretionary spending by consumers. Consumers are typically more likely to make discretionary purchases, including purchasing video game products, when there are favorable economic conditions. In recent years, poor worldwide economic conditions have led consumers to delay or reduce discretionary spending, including purchases of the products we sell. If conditions do not improve, these delays or reductions may continue, which could negatively impact our business, results of operations and financial condition.
The electronic game industry is cyclical and affected by the introduction of next-generation consoles, which could negatively impact the demand for existing products or our pre-owned business.
The electronic game industry has been cyclical in nature in response to the introduction and maturation of new technology. Following the introduction of new video game platforms, sales of these platforms and related software and accessories generally increase due to initial demand, while sales of older platforms and related products generally decrease as customers migrate toward the new platforms. A new console cycle began when Nintendo launched the Wii U in November 2012 and Sony and Microsoft launched their next generation of consoles, the PlayStation 4 and Xbox One, in November 2013. If the new video game platforms are not successful, our sales of video game products could decline. The introduction of these next-generation consoles could negatively impact the demand for existing products or our pre-owned business, which could have a negative impact on our sales and earnings.
The introduction of next-generation consoles could negatively impact the demand for existing products or our pre-owned business.
The introduction of next-generation consoles, the features of such consoles, including any future restrictions or conditions that may adversely affect our pre-owned business or the ability to play prior generation video games on such consoles, and the impact on demand for existing products could have a negative impact on our sales and earnings.
We depend upon the timely delivery of products.
We depend on major hardware manufacturers, primarily Microsoft, Sony and Nintendo, to deliver new and existing video game platforms and new innovations on a timely basis and in anticipated quantities. In addition, we depend on software publishers to introduce new and updated software titles. We have experienced sales declines in the past due to a reduction in the number of new software titles available for sale. Any material delay in the introduction or delivery, or limited allocations, of hardware platforms or software titles could result in reduced sales.
We depend upon third parties to develop products and software.
Our business depends upon the continued development of new and enhanced video game platforms and accessories and video game and PC entertainment software. Our business could suffer and has declined due to the failure of manufacturers to develop new or enhanced video game platforms, a decline in the continued technological development and use of multimedia PCs, or the failure of software publishers to develop popular game and entertainment titles for current or future generation video game systems or PC hardware.
If we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The interactive entertainment industry is characterized by swiftly changing technology, evolving industry standards, frequent new and enhanced product introductions, rapidly changing consumer preferences and product obsolescence. Video games are now played on a wide variety of products, including mobile phones, tablets, social networking Web sites and other devices. In order to continue to compete effectively in the electronic game industry, we need to respond quickly to technological changes and to understand their impact on our customers’ preferences. It may take significant time and resources to respond to these technological changes. If we fail to keep pace with these changes, our business may suffer.
Technological advances in the delivery and types of video games and PC entertainment software, as well as changes in consumer behavior related to these new technologies, could lower our sales.
While it is currently possible to download video game content to the current generation video game systems, downloading is somewhat constrained by bandwidth capacity. However, broadband speeds are increasing and downloading technology is becoming more prevalent and continues to evolve rapidly. The new consoles from Sony and Microsoft have improved download technology. If these consoles and other advances in technology continue to expand our customers’ ability to access and download the current format of video games and incremental content for their games through these and other sources, our customers may no longer choose to purchase video games in our stores or reduce their purchases in favor of other forms of game delivery. As a result, our sales and earnings could decline.
We may not compete effectively as browser, mobile and social gaming becomes more popular.
Gaming continues to evolve rapidly. The popularity of browser, mobile and social gaming has increased greatly and this popularity is expected to continue to grow. Browser, mobile and social gaming is accessed through hardware other than the consoles and traditional hand-held video game devices we currently sell. If we are unable to respond to this growth in popularity of browser, mobile and social games and transition our business to take advantage of these new forms of gaming, our financial position and results of operations could suffer. We have been and are currently pursuing various strategies to integrate these new forms of gaming into our business model, but we can provide no assurances that these strategies will be successful or profitable.
Our ability to obtain favorable terms from our suppliers may impact our financial results.
Our financial results depend significantly upon the business terms we can obtain from our suppliers, including competitive prices, unsold product return policies, advertising and market development allowances, freight charges and payment terms. We purchase substantially all of our products directly from manufacturers, software publishers and, in some cases, distributors. Our largest vendors worldwide are Sony, Microsoft, Nintendo, Take-Two Interactive, Electronic Arts and Activision, which accounted for 20%, 15%, 12%, 11%, 10% and 10%, respectively, of our new product purchases in fiscal 2013. If our suppliers do not provide us with favorable business terms, we may not be able to offer products to our customers at competitive prices.
If our vendors fail to provide marketing and merchandising support at historical levels, our sales and earnings could be negatively impacted.
The manufacturers of video game hardware and software have typically provided retailers with significant marketing and merchandising support for their products. Additionally, AT&T and Apple provide our Technology Brands stores with similar support. As part of this support, we receive cooperative advertising and market development payments from these vendors. These cooperative advertising and market development payments enable us to actively promote and merchandise the products we sell and drive sales at our stores and on our Web sites. We cannot assure you that vendors will continue to provide this support at historical levels. If they fail to do so, our sales and earnings could be negatively impacted.
We have made and may make investments and acquisitions which could negatively impact our business if we fail to successfully complete and integrate them, or if they fail to perform in accordance with our expectations.
To enhance our efforts to grow and compete, we have made and continue to make investments and acquisitions. These activities include investments in and acquisitions of digital, browser, social and mobile gaming and technology-based companies as the delivery methods for video games continue to evolve, and investments in new retail categories like wireless and consumer electronics. Our plans to pursue future transactions are subject to our ability to identify potential candidates and negotiate favorable terms for these transactions. Accordingly, we cannot assure you that future investments or acquisitions will be completed. In addition, to facilitate future transactions, we may take actions that could dilute the equity interests of our stockholders, increase our debt or cause us to assume contingent liabilities, all of which may have a detrimental effect on the price of our common stock. Also, companies that we have acquired, and that we may acquire in the future, could have products that are in development, and there is no assurance that these products will be successfully developed. Finally, if any acquisitions are not successfully integrated with our business, or fail to perform in accordance with our expectations, our ongoing operations could be adversely affected. Integration of digital, browser, social and mobile gaming and mobile phone and technology-based companies or other retailers may be particularly challenging to us as these companies are outside of our historical operating expertise.
Pressure from our competitors may force us to reduce our prices or increase spending, which could decrease our profitability.
The electronic game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. We compete with mass merchants and regional chains, including Wal-Mart and Target; computer product and consumer electronics stores, including Best Buy; internet-based retailers such as Amazon.com; other U.S. and
international video game and PC software specialty stores located in malls and other locations, such as Carrefour and Media Markt; toy retail chains; direct sales by software publishers; and online retailers and game rental companies. Some of our competitors have longer operating histories and may have greater financial resources than we do or other advantages, including non-taxability of sold merchandise. In addition, video game products and content are increasingly being digitally distributed and new competitors built to take advantage of these new capabilities are entering the marketplace, and other methods may emerge in the future. We also compete with other sellers of pre-owned video game products and other PC software distribution companies, including Steam. Certain of our mass-merchants competitors are expanding in the market for pre-owned video games through aggressive pricing which may negatively affect our margins, sales and earnings for these products. Additionally, we compete with other forms of entertainment activities, including browser, social and mobile games, movies, television, theater, sporting events and family entertainment centers. Our Technology Brands stores compete with a wide variety of other wireless carriers and retailers and consumer electronics retailers. If we lose customers to our competitors, or if we reduce our prices or increase our spending to maintain our customers, we may be less profitable.
We depend upon our key personnel and they would be difficult to replace.
Our success depends upon our ability to attract, motivate and retain a highly trained and engaged workforce, including key management for our stores and skilled merchandising, marketing, financial and administrative personnel. The turnover rate in the retail industry is relatively high, and there is an ongoing need to recruit and train new store employees. Factors that affect our ability to maintain sufficient numbers of qualified employees include employee morale, our reputation, unemployment rates, competition from other employers and our ability to offer appropriate compensation packages. Additionally, we depend upon the continued services of our key executive officers: Daniel A. DeMatteo, our Executive Chairman; J. Paul Raines, our Chief Executive Officer; Tony D. Bartel, our President; Robert A. Lloyd, our Executive Vice President and Chief Financial Officer; Michael Mauler, our Executive Vice President-International; and Michael P. Hogan, our Executive Vice President-Strategic Business and Brand Development. Our inability to recruit a sufficient number of qualified individuals or our failure to retain key employees in the future may have a negative impact on our business.
International events could delay or prevent the delivery of products to our suppliers.
Our suppliers rely on foreign sources, primarily in Asia, to manufacture a portion of the products we purchase from them. As a result, any event causing a disruption of imports, including natural disasters or the imposition of import restrictions or trade restrictions in the form of tariffs or quotas, could increase the cost and reduce the supply of products available to us, which could lower our sales and profitability.
Our international operations expose us to numerous risks.
We have international retail operations in Australia, Canada and Europe. Because release schedules for hardware and software introduction in these markets often differ from release schedules in the United States, the timing of increases and decreases in foreign sales may differ from the timing of increases and decreases in domestic sales. We are also subject to a number of other factors that may affect our current or future international operations. These include:
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economic downturns, specifically in the regions in which we operate;
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currency exchange rate fluctuations;
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international incidents;
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natural disasters;
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government instability; and
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competitors entering our current and potential markets.
Our operations in Europe are also subject to risks associated with the current economic conditions and uncertainties in the European Union (“EU”). European and global economic conditions have already been negatively impacted by the ability of certain EU member states to service their sovereign debt obligations. Additionally, there continues to be uncertainty over the possibility that other EU member states may experience similar financial troubles, the ultimate outcome of the EU governments’ financial support programs, the possible breakup or restructuring of the EU and the possible elimination or restructuring of the EU monetary system. These continued uncertainties could further disrupt European and global economic conditions. Unfavorable economic conditions could negatively impact consumer demand for our products. These factors could have an adverse effect on our business, results of operations and financial condition.
We are also subject to risks that our operations outside the United States could be conducted by our employees, contractors, representatives or agents in ways that violate the Foreign Corrupt Practices Act or other similar anti-bribery laws. While we have
policies and procedures intended to ensure compliance with these laws, our employees, contractors, representatives and agents may take actions that violate our policies. Moreover, it may be more difficult to oversee the conduct of any such persons who are not our employees, potentially exposing us to greater risk from their actions. Any violations of those laws by any of those persons could have a negative impact on our business.
Unfavorable changes in our global tax rate could have a negative impact on our business, results of operations and cash flows.
As a result of our operations in many foreign countries, our global tax rate is derived from a combination of applicable tax rates in the various jurisdictions in which we operate. Depending upon the sources of our income, any agreements we may have with taxing authorities in various jurisdictions and the tax filing positions we take in various jurisdictions, our overall tax rate may be higher than other companies or higher than our tax rates have been in the past. We base our estimate of an annual effective tax rate at any given point in time on a calculated mix of the tax rates applicable to our business and to estimates of the amount of income to be derived in any given jurisdiction. A change in the mix of our business from year to year and from country to country, changes in rules related to accounting for income taxes, changes in tax laws in any of the multiple jurisdictions in which we operate or adverse outcomes from the tax audits that regularly are in process in any jurisdiction in which we operate could result in an unfavorable change in our overall tax rate, which could have a material adverse effect on our business and results of our operations.
If we are unable to renew or enter into new leases on favorable terms, our revenue growth may decline.
All of our retail stores are located in leased premises. If the cost of leasing existing stores increases, we cannot assure you that we will be able to maintain our existing store locations as leases expire. In addition, we may not be able to enter into new leases on favorable terms or at all, or we may not be able to locate suitable alternative sites or additional sites for new store expansion in a timely manner. Our revenues and earnings may decline if we fail to maintain existing store locations, enter into new leases, locate alternative sites or find additional sites for new store expansion.
Restrictions on our ability to take trade-ins of and sell pre-owned video game products or pre-owned mobile devices could negatively affect our financial condition and results of operations.
Our financial results depend on our ability to take trade-ins of, and sell, pre-owned video game products and pre-owned mobile devices within our stores. Actions by manufacturers or publishers of video game products or mobile devices, wireless carriers or governmental authorities to prohibit or limit our ability to take trade-ins or sell pre-owned video game products or mobile devices, or to limit the ability of consumers to play pre-owned video games or use pre-owned mobile devices, could have a negative impact on our sales and earnings.
Sales of video games containing graphic violence may decrease as a result of actual violent events or other reasons, and our financial results may be adversely affected as a result.
Many popular video games contain material with graphic violence. These games receive an “M” or “T” rating from the Entertainment Software Ratings Board. As actual violent events occur and are publicized, or for other reasons, public acceptance of graphic violence in video games may decline. Consumer advocacy groups may increase their efforts to oppose sales of graphically-violent video games and may seek legislation prohibiting their sales. As a result, our sales of those games may decrease, which could adversely affect our financial results.
An adverse trend in sales during the holiday selling season could impact our financial results.
Our business, like that of many retailers, is seasonal, with the major portion of our sales and operating profit realized during the fourth fiscal quarter, which includes the holiday selling season. During fiscal 2013, we generated approximately 41% of our sales during the fourth quarter. Any adverse trend in sales during the holiday selling season could lower our results of operations for the fourth quarter and the entire fiscal year.
Our results of operations may fluctuate from quarter to quarter.
Our results of operations may fluctuate from quarter to quarter depending upon several factors, some of which are beyond our control. These factors include, but are not limited to:
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the timing and allocations of new product releases including new console launches;
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the timing of new store openings or closings;
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shifts in the timing or content of certain promotions or service offerings;
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the effect of changes in tax rates in the jurisdictions in which we operate;
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acquisition costs and the integration of companies we acquire or invest in;
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the mix of earnings in the countries in which we operate;
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the costs associated with the exit of unprofitable markets or stores; and
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changes in foreign currency exchange rates.
These and other factors could affect our business, financial condition and results of operations, and this makes the prediction of our financial results on a quarterly basis difficult. Also, it is possible that our quarterly financial results may be below the expectations of public market analysts.
Failure to effectively manage our new store openings could lower our sales and profitability.
Our growth strategy depends in part upon opening new stores and operating them profitably. We opened 109 Video Game Brands stores and opened or acquired 218 Technology Brands stores in fiscal 2013, which is inclusive of the stores we acquired as a result of the Simply Mac and Spring Mobile acquisitions. We expect to open or acquire approximately 350 - 450 new stores in fiscal 2014, including 40 - 50 Video Game Brands stores and 300 - 400 Technology Brands stores. Our ability to open new stores and operate them profitably depends upon a number of factors, some of which may be beyond our control. These factors include:
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the ability to identify new store locations, negotiate suitable leases and build out the stores in a timely and cost efficient manner;
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the ability to hire and train skilled associates;
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the ability to integrate new stores into our existing operations; and
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the ability to increase sales at new store locations.
Our growth will also depend on our ability to process increased merchandise volume resulting from new store openings through our inventory management systems and distribution facilities in a timely manner. If we fail to manage new store openings in a timely and cost efficient manner, our growth or profits may decrease.
Failure to successfully execute our strategy to close stores and transfer customers and sales to nearby stores could adversely impact our financial results.
Our strategy includes closing stores which are not meeting our performance standards or stores at the end of their lease terms and transferring sales to other nearby GameStop locations. We plan to close approximately 170 - 180 Video Game Brands stores worldwide in fiscal 2014. We believe that we can ultimately increase profitability by successfully transferring customers and sales to other stores by marketing directly to the PowerUp Rewards members who have shopped in the stores that we plan to close. If we are unsuccessful in marketing to customers of the stores that we plan to close or in transferring sales to nearby stores, our sales and profitability could be adversely affected.
We rely on centralized facilities for refurbishment of our pre-owned products. Any disruption to these facilities could adversely affect our profitability.
We rely on centralized facilities for the refurbishment of all pre-owned products that we sell. If any disruption occurred at these facilities, whether due to natural disaster or severe weather, or events such as fire, accidents, power outages, systems failures, or other unforeseen causes, sales of our pre-owned products could decrease. Since we generally obtain higher margins on our pre-owned products, any adverse effect on their sales could adversely affect our profitability.
If our management information systems fail to perform or are inadequate, our ability to manage our business could be disrupted.
We rely on computerized inventory and management systems to coordinate and manage the activities in our distribution centers, as well as to communicate distribution information to the off-site, third-party operated distribution centers with which we work. The third-party distribution centers pick up products from our suppliers, repackage the products for each of our stores and ship those products to our stores by package carriers. We use inventory replenishment systems to track sales and inventory. Our ability to rapidly process incoming shipments of new release titles and deliver them to all of our stores, either that day or by the next morning, enables us to meet peak demand and replenish stores at least twice a week, to keep our stores in stock at optimum levels and to move inventory efficiently. If our inventory or management information systems fail to adequately perform these functions, our business could be adversely affected. In addition, if operations in any of our distribution centers were to shut down
or be disrupted for a prolonged period of time or if these centers were unable to accommodate the continued store growth in a particular region, our business could suffer.
Data breaches involving customer or employee data stored by us could adversely affect our reputation and revenues.
We store confidential information with respect to our customers and employees. A compromise of our data security systems or those of businesses we interact with could result in information related to our customers or employees being obtained by unauthorized persons. Any such breach of our systems could lead to fraudulent activity resulting in claims and lawsuits against us or other operational problems or interruptions in connection with such breaches. Consequently, despite our efforts, our security measures have been breached in the past and may be breached in the future due to cyber attack, team member error, malfeasance, fraudulent inducement or other acts; and unauthorized parties have in the past obtained, and may in the future obtain, access to our data or our customers’ data. While costs associated with past security breaches have not been significant, any breach or unauthorized access in the future could result in significant legal and financial exposure and damage to our reputation that could potentially have an adverse effect on our business. While we also seek to obtain assurances that others we interact with will protect confidential information, there is a risk the confidentiality of data held or accessed by others may be compromised. If a compromise of our data security or function of our computer systems or website were to occur, it could have a material adverse effect on our operating results and financial condition and, possibly, subject us to additional legal, regulatory and operating costs and damage our reputation in the marketplace.
Also, the interpretation and enforcement of data protection laws in the United States, Europe and elsewhere are uncertain and, in certain circumstances, contradictory. These laws may be interpreted and enforced in a manner that is inconsistent with our policies and practices. If we are subject to data security breaches or government-imposed fines, we may have a loss in sales or be forced to pay damages or other amounts, which could adversely affect profitability, or be subject to substantial costs related to compliance.
Litigation and the outcomes of such litigation could negatively impact our future financial condition and results of operations.
In the ordinary course of our business, we are, from time to time, subject to various litigation and legal proceedings. In the future, the costs or results of such legal proceedings, individually or in the aggregate, could have a negative impact on our financial condition, results of operations and cash flows.
Legislative actions and changes in accounting rules may cause our general and administrative and compliance costs to increase and impact our future financial condition and results of operations.
In order to comply with laws adopted by the U.S. government or other U.S. or foreign regulatory bodies, we may be required to increase our expenditures and hire additional personnel and additional outside legal, accounting and advisory services, all of which may cause our general and administrative and compliance costs to increase. Significant workforce-related legislative changes could increase our expenses and adversely affect our operations. Examples of possible workforce-related legislative changes include changes to an employer's obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements, and health care mandates. In addition, changes in the regulatory environment affecting Medicare reimbursements, product safety, supply chain transparency, and increased compliance costs related to enforcement of federal and state wage and hour statutes and common law related to overtime, among others, could cause our expenses to increase without an ability to pass through any increased expenses through higher prices. Environmental legislation or other regulatory changes could impose unexpected costs or impact us more directly than other companies due to our operations as a global retailer. Specifically, environmental legislation or international agreements affecting energy, carbon emissions, and water or product materials are continually being explored by governing bodies. Increasing energy and fuel costs, supply chain disruptions and other potential risks to our business, as well as any significant rule making or passage of any such legislation, could materially increase the cost to transport our goods and materially adversely affect our results of operations. Additionally, regulatory and enforcement activity focused on the retail industry has increased in recent years, increasing the risk of fines and additional operational costs associated with compliance.
Our Board of Directors could change our dividend policy at any time.
We initiated our first cash dividend on our common stock during fiscal 2012. Notwithstanding the foregoing, there is no assurance that we will continue to pay cash dividends on our common stock in the future. Certain provisions in our credit facility triggered by certain borrowing levels restrict our ability to pay dividends in the future. Subject to any financial covenants in current or future financing agreements that directly or indirectly restrict our ability to pay dividends, the payment of dividends is within the discretion of our Board of Directors and will depend upon our future earnings and cash flow from operations, our capital requirements, our financial condition and any other factors that the Board of Directors may consider. Unless we continue to pay
cash dividends on our common stock in the future, the success of an investment in our common stock will depend entirely upon its future appreciation. Our common stock may not appreciate in value or even maintain the price at which it was purchased.
We may record future goodwill impairment charges or other asset impairment charges which could negatively impact our future results of operations and financial condition.
In recent periods we have recorded significant non-cash charges relating to the impairment of goodwill and other tangible and intangible assets that had a material adverse effect on our consolidated statements of operations and consolidated balance sheets. Because we have grown in part through acquisitions, goodwill and other acquired intangible assets represent a substantial portion of our assets. We also have long-lived assets consisting of property and equipment and other identifiable intangible assets which we review both on an annual basis as well as when events or circumstances indicate that the carrying amount of an asset may not be recoverable. If a determination is made that a significant impairment in value of goodwill, other intangible assets or long-lived assets has occurred, such determination could require us to impair a substantial portion of our assets. Asset impairments could have a material adverse effect on our financial condition and results of operations.
Risks Relating to Indebtedness
Because of our floating rate credit facility, we may be adversely affected by interest rate changes.
Our financial position may be affected by fluctuations in interest rates, as our senior credit facility is subject to floating interest rates.
Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. If we were to borrow against our senior credit facility, a significant increase in interest rates could have an adverse effect on our financial position and results of operations.
The terms of our senior credit facility may impose significant operating and financial restrictions on us.
The terms of our senior credit facility may impose significant operating and financial restrictions on us in certain circumstances. These restrictions, among other things, limit our ability to:
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incur, assume or permit to exist additional indebtedness or guaranty obligations;
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incur liens or agree to negative pledges in other agreements;
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engage in sale and leaseback transactions;
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make loans and investments;
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declare dividends, make payments or redeem or repurchase capital stock;
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engage in mergers, acquisitions and other business combinations;
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prepay, redeem or purchase certain indebtedness;
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amend or otherwise alter the terms of our organizational documents and indebtedness;
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sell assets; and
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engage in transactions with affiliates.
We cannot assure you that these covenants will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities.
We may incur additional indebtedness in the future, which may adversely impact our financial condition and results of operations.
We may incur additional indebtedness in the future, including additional secured indebtedness. Our senior credit facility restricts us from incurring additional indebtedness and is subject to important exceptions and qualifications. Such future indebtedness may have restrictions similar to or more restrictive than those contained in our senior credit facility. The incurrence of additional indebtedness could impact our financial condition and results of operations.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
All of our stores are leased. Store leases typically provide for an initial lease term of three to five years, plus renewal options. This arrangement gives us the flexibility to pursue extension or relocation opportunities that arise from changing market conditions. We believe that, as current leases expire, we will be able to obtain either renewals at present locations, leases for equivalent locations in the same area, or be able to close the stores with expiring leases and transfer enough of the sales to other nearby stores to improve, if not at least maintain, profitability. We expect to open or acquire approximately 350 - 450 new stores in fiscal 2014, including 40 - 50 Video Game Brands stores and 300 - 400 Technology Brands stores. We also plan to close approximately 170 - 180 Video Game Brands stores worldwide in fiscal 2014.
The terms of the store leases for the 6,675 leased stores open as of February 1, 2014 expire as follows:
At February 1, 2014, we owned or leased office and distribution facilities, with lease expiration dates ranging from 2014 to 2034 and an average remaining lease life of approximately four years, in the following locations:
Additional information regarding our properties can be found in “Item 1. Business - Store Operations” and “Item 1. Business - Site Selection and Locations” elsewhere in this Form 10-K.
Item 3.
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 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 adverse effect on our financial condition, results of operations or cash flows.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our Class A Common Stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “GME.”
The following table sets forth, for the periods indicated, the high and low sales prices of the Class A Common Stock on the NYSE Composite Tape:
Approximate Number of Holders of Common Equity
As of March 20, 2014, there were approximately 1,549 record holders of our Class A Common Stock.
Dividends
Prior to February 2012, we had never declared or paid any dividends on our common stock. During fiscal 2012, we paid quarterly dividends of $0.15 per share of Class A Common Stock during the first and second fiscal quarters and $0.25 per share of Class A Common Stock during the third and fourth fiscal quarters. During fiscal 2013, we paid quarterly dividends of $0.275 per share of Class A Common Stock during each of the four fiscal quarters. On March 4, 2014, our Board of Directors authorized an increase in our annual cash dividend from $1.10 to $1.32 per share of Class A Common Stock and on March 4, 2014, we declared our first quarterly dividend for fiscal 2014 of $0.33 per share of Class A Common Stock, payable on March 25, 2014 to stockholders of record on March 17, 2014. Our payment of dividends is and will continue to be restricted by or subject to, among other limitations, applicable provisions of federal and state laws, our earnings and various business considerations, including our financial condition, results of operations, cash flow, the level of our capital expenditures, our future business prospects, our status as a holding company and such other matters that our Board of Directors deems relevant. In addition, the terms of the senior credit facility restrict our ability to pay dividends under certain circumstances. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” herein for further information regarding restrictions on our dividend payments.
Issuer Purchases of Equity Securities
Our purchases of our equity securities during the fourth quarter of the fiscal year ended February 1, 2014 were as follows:
(1)
In November 2012, the Board of Directors authorized $500 million to be used for share repurchases. In November 2013, the Board of Directors authorized $500 million to be used for share repurchases, replacing the November 2012 authorization. The November 2013 $500 million authorization has no expiration date.
GameStop Stock Comparative Performance Graph
The following graph compares the cumulative total stockholder return on our Class A Common Stock for the period commencing January 30, 2009 through January 31, 2014 (the last trading date of fiscal 2013) with the cumulative total return on the Standard & Poor’s 500 Stock Index (the “S&P 500”) and the Dow Jones Retailers, Other Specialty Industry Group Index (the “Dow Jones Specialty Retailers Index”) over the same period. Total return values were calculated based on cumulative total return assuming (i) the investment of $100 in our Class A Common Stock, the S&P 500 and the Dow Jones Specialty Retailers Index on January 30, 2009 and (ii) reinvestment of dividends.
The following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor should such information be incorporated by reference into any future filings under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference in such filing.
1/30/2009
1/29/2010
1/28/2011
1/27/2012
2/1/2013
1/31/2014
GME
79.78
84.67
98.14
103.40
151.47
S&P 500 Index
130.03
154.54
159.39
183.22
215.84
Dow Jones Specialty Retailers Index
144.54
192.05
209.89
223.01
285.02
Securities Authorized for Issuance under Equity Compensation Plans
For information regarding securities authorized for issuance under equity compensation plans, refer to “Part III -Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
Item 6.
Selected Financial Data
The following table sets forth our selected consolidated financial and operating data for the periods ended and as of the dates indicated. Our fiscal year is composed of 52 or 53 weeks ending on the Saturday closest to January 31. The fiscal year ended February 2, 2013 consisted of 53 weeks. The fiscal years ended February 1, 2014, January 28, 2012, January 29, 2011 and January 30, 2010 consisted of 52 weeks. The “Statement of Operations Data” for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 and the “Balance Sheet Data” as of February 1, 2014 and February 2, 2013 are derived from, and are qualified by reference to, our audited consolidated financial statements which are included elsewhere in this Form 10-K. The “Statement of Operations Data” for fiscal years ended January 29, 2011 and January 30, 2010 and the “Balance Sheet Data” as of January 28, 2012, January 29, 2011 and January 30, 2010 are derived from our audited consolidated financial statements which are not included elsewhere in this Form 10-K.
The selected financial data set forth below should be read in conjunction with “
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the information contained in our consolidated financial statements, including the notes thereto. Statements regarding future economic performance, management’s plans and objectives, and any statements concerning assumptions related to the foregoing contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements. Certain factors, which may cause actual results to vary materially from these forward-looking statements, accompany such statements or appear elsewhere in this Form 10-K, including the factors disclosed under “Part I - Item 1A. Risk Factors.”
General
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global, multichannel video game, consumer electronics and wireless services retailer and is the world’s largest multichannel video game retailer. We sell new and pre-owned video game hardware, physical and digital video game software, video game accessories, as well as new and pre-owned mobile and consumer electronics products and other merchandise primarily through our GameStop, EB Games and Micromania stores. As of February 1, 2014, we operated 6,675 stores, in the United States, Australia, Canada and Europe, which are primarily located in major shopping malls and strip centers. We also operate electronic commerce Web sites www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, www.gamestop.ca, www.gamestop.it, www.gamestop.es, www.gamestop.ie, www.gamestop.de, www.gamestop.co.uk and www.micromania.fr. The network also includes: www.kongregate.com, a leading browser-based game site; Game Informer magazine, the leading multi-platform video game publication; a digital PC distribution platform available at www.gamestop.com/pcgames; iOS and Android mobile applications; and an online consumer electronics marketplace available at www.buymytronics.com. We also operate a certified Apple reseller with stores selling Apple products in the United States under the name Simply Mac; Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores in the United States; and pre-paid wireless stores under the name Aio Wireless (an AT&T brand) as part of our expanding relationship with AT&T.
Our fiscal year is composed of 52 or 53 weeks ending on the Saturday closest to January 31. The fiscal year ended February 1, 2014 (“fiscal 2013”) consisted of 52 weeks. The fiscal year ended February 2, 2013 (“fiscal 2012”) consisted of 53 weeks. The fiscal year ended January 28, 2012 (“fiscal 2011”) consisted of 52 weeks.
Growth in the electronic game industry is generally driven by the introduction of new technology. Gaming consoles are typically launched in cycles as technological developments provide significant improvements in graphics, audio quality, game play, Internet connectivity and other entertainment capabilities beyond video gaming. The current generation of consoles (the Sony PlayStation 4, the Microsoft Xbox One and the Nintendo Wii U) were introduced between November 2012 through November 2013. The previous generation of consoles (the Sony PlayStation 3, the Microsoft Xbox 360 and the Nintendo Wii) were introduced between 2005 and 2007. The Nintendo 3DS was introduced in March 2011, the Sony PlayStation Vita was introduced in February 2012 and the Nintendo 2DS was introduced in October 2013. Typically, following the introduction of new video game platforms, sales of new video game hardware increase as a percentage of total sales in the first full year following introduction. As video game platforms mature, the sales mix attributable to complementary video game software and accessories, which generate higher gross margins, generally increases in the subsequent years. The net effect is generally a decline in gross margin percent in the first full year following new platform releases and an increase in gross margin percent in the years subsequent to the first full year following the launch period. The launch of the next-generation Sony PlayStation 4 and the Microsoft Xbox One should negatively impact our overall gross margin percentage in future years. Unit sales of maturing video game platforms are typically also driven by manufacturer-funded retail price reductions, further driving sales of related software and accessories. Historically, new hardware consoles are typically introduced every four to five years. We experienced declines in new hardware and software sales throughout the first few months of fiscal 2013 due to the age of the older generation of consoles. With the introduction of the new consoles in the fourth quarter, sales of new hardware have increased.
We expect that future growth in the electronic game industry will also be driven by the sale of video games delivered in digital form and the expansion of other forms of gaming. We currently sell various types of products that relate to the digital category, including digitally downloadable content ("DLC"), Xbox LIVE, PlayStation Plus and Nintendo network points cards, as well as prepaid digital and online timecards. We expect our sales of digital products to increase in fiscal 2014. We have made significant investments in e-commerce and in-store and Web site functionality to enable our customers to access digital content easily and facilitate the digital sales and delivery process. We plan to continue to invest in these types of processes and channels to grow our digital sales base and enhance our market leadership position in the electronic game industry and in the digital aggregation and distribution category. In fiscal 2011, we also launched our mobile business and began selling an assortment of tablets and accessories. We currently sell tablets and accessories in all of our stores in the United States and in a majority of stores in our international markets. We also sell and accept trades of pre-owned mobile devices in our stores. In addition, we intend to continue to invest in customer loyalty programs designed to attract and retain customers.
In November 2013, we acquired Spring Mobile, an authorized AT&T reseller operating over 160 stores selling wireless services and products, and acquired Simply Mac, an authorized Apple reseller selling Apple products and services in 23 stores. We also opened 31 stores under the Aio Wireless brand. Aio Wireless is an AT&T brand selling pre-paid wireless services and products. We expect to expand the number of Spring Mobile and Simply Mac stores which we operate in future years. We also expect to expand our pre-paid stores with AT&T under either the Aio Wireless brand or the Cricket brand following AT&T’s acquisition of Leap Wireless.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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, and actual results could differ from those estimates. Our senior management has discussed the development and selection of these critical accounting policies, as well as the significant accounting policies disclosed in Note 1 to our consolidated financial statements, with the Audit Committee of our Board of Directors. We believe the following accounting policies are the most critical to aid in fully understanding and evaluating our reporting of transactions and events, and the estimates these policies involve require our most difficult, subjective or complex judgments.
Revenue Recognition. Revenue from the sales of our products is recognized at the time of sale, net of sales discounts and net of an estimated sales return reserve, based on historical return rates, with a corresponding reduction in cost of sales. Our sales return policy is generally limited to less than 30 days and as such our sales returns are, and have historically been, immaterial. The sales of pre-owned video game products are recorded at the retail price charged to the customer. Advertising revenues for Game Informer are recorded upon release of magazines for sale to consumers. Subscription revenues for our PowerUp Rewards loyalty program and magazines are recognized on a straight-line basis over the subscription period. Revenue from the sales of product replacement plans is recognized on a straight-line basis over the coverage period. Gift cards sold to customers are recognized
as a liability on the consolidated balance sheet until redeemed or until a reasonable point at which breakage related to non-redemption can be recognized.
We also sell a variety of digital products which generally allow consumers to download software or play games on the internet. Certain of these products do not require us to purchase inventory or take physical possession of, or take title to, inventory. When purchasing these products from us, consumers pay a retail price and we earn a commission based on a percentage of the retail sale as negotiated with the product publisher. We recognize these commissions as revenue on the sale of these digital products.
Merchandise Inventories. Our merchandise inventories are carried at the lower of cost or market generally using the average cost method. Under the average cost method, as new product is received from vendors, its current cost is added to the existing cost of product on-hand and this amount is re-averaged over the cumulative units. Pre-owned video game products traded in by customers are recorded as inventory at the amount of the store credit given to the customer. In valuing inventory, we are required to make assumptions regarding the necessity of reserves required to value potentially obsolete or over-valued items at the lower of cost or market. We consider quantities on hand, recent sales, potential price protections and returns to vendors, among other factors, when making these assumptions. Our ability to gauge these factors is dependent upon our ability to forecast customer demand and to provide a well-balanced merchandise assortment. Any inability to forecast customer demand properly could lead to increased costs associated with inventory markdowns. We also adjust inventory based on anticipated physical inventory losses or shrinkage. Physical inventory counts are taken on a regular basis to ensure the reported inventory is accurate. During interim periods, estimates of shrinkage are recorded based on historical losses in the context of current period circumstances. Our reserve for merchandise inventories was $76.5 million as of February 1, 2014.
Property and Equipment. We had net property and equipment of $476.2 million as of February 1, 2014. We review our property and equipment for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their depreciation or amortization periods should be accelerated. We assess recoverability based on several factors, including our intention with respect to our stores and the stores' projected undiscounted cash flows. If the results of the recoverability test indicate that an asset or asset group is not recoverable, an impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its fair value, as approximated by the present value of their projected discounted cash flows. We recorded impairment losses on our property and equipment of $18.5 million, $8.8 million and $11.2 million in fiscal 2013, fiscal 2012 and fiscal 2011, respectively, based on the results of our impairment tests.
Goodwill. We had goodwill totaling $1,414.7 million as of February 1, 2014. Our goodwill results from our acquisitions and represents the excess purchase price over the net identifiable assets acquired. We are required to evaluate our goodwill and other indefinite-lived intangible assets for impairment at least annually or whenever indicators of impairment are present. This annual test is completed as of the beginning of the fourth fiscal quarter, and interim tests are conducted when circumstances indicate the carrying value of the goodwill or other intangible assets may not be recoverable. Goodwill is evaluated for impairment at the reporting unit level. We have five operating segments, including Video Game Brands in the United States, Australia, Canada and Europe, and Technology Brands in the United States, which also define our reporting units. Our reporting units are 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 those regions.
We use a two-step process to measure any potential goodwill impairment. The first step of the goodwill impairment test involves estimating the fair value of each reporting unit based on its discounted projected future cash flows. If the fair value of the reporting unit exceeds its carrying value, then goodwill is not impaired; however, if the fair value of the reporting unit is less than its carrying value, then the second step of the goodwill impairment test is needed. The second step compares the implied fair value of the reporting unit’s goodwill with its carrying amount. The implied fair value of goodwill is determined in step two of the goodwill impairment test by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation used in a business combination. Any residual fair value after this allocation represents the implied fair value of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of its goodwill, then an impairment loss is recognized in the amount of the excess.
We utilize a discounted cash flow method to determine the fair value of reporting units. Management is required to make significant judgments based on our projected annual business plans, long-term business strategies, comparable store sales, store count, gross margins, operating expenses, working capital needs, capital expenditures and long-term growth rates, all considered in light of current and anticipated economic factors. Discount rates used in the analysis reflect a hypothetical market participant’s weighted average cost of capital, current market rates and the risks associated with the projected cash flows. Terminal growth rates were based on long-term growth rate potential and a long-term inflation forecast. The impairment testing process is subject to inherent uncertainties and subjectivity, particularly related to sales and gross margins which can be impacted by various factors including the items listed in "Item 1A. Risk Factors" within this Form 10-K. While the fair value is determined based on the best available information at the time of assessment, any changes in business or economic conditions could materially increase or decrease the fair value of the reporting unit’s net assets and, accordingly, could materially increase or decrease any related
impairment charge. While management does not anticipate any material changes to the projected undiscounted cash flows underlying its impairment test, many other factors impact the fair value calculation. Since we are required to determine fair value from a hypothetical market participant’s perspective, discount rates used in the analyses may change based on market conditions, regardless of whether our cost of capital has changed, which could negatively impact the fair value calculation. As we periodically reassess our fair value calculations using currently available market information and internal forecasts, changes in our judgments and other assumptions could result in recording material impairment charges of goodwill or other intangible assets in any of our reporting units in the future.
We completed the annual impairment test of goodwill for our United States, Canada, Australia and Europe Video Game Brands reporting units as of the first day of the fourth quarter of fiscal 2013. The results of our test indicated that none of our goodwill was impaired. The Technology Brands reporting unit was excluded from the fiscal 2013 annual impairment test as it commenced operations during the fourth quarter and therefore was not a reporting unit subject to assessment as of our annual testing date. For our United States, Canada and Australia reporting units, the calculated fair value of each of these reporting units exceeded their respective carrying values by more than 20% and the calculated fair value of our Europe reporting unit exceeded its carrying value by more than 10%. A reduction in the terminal growth rate assumption of 0.25% or an increase in the discount rate assumption of 0.25% utilized in the test for each respective reporting unit would not have resulted in an impairment.
For fiscal 2013, there was a $10.2 million goodwill write-off in the United States Video Game Brands reporting unit as a result of abandoning our investment in Spawn Labs, which is described more fully in Note 2 to our consolidated financial statements.
During the third quarter of fiscal 2012, we determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment test. As a result of the interim goodwill impairment test, we recorded non-cash, non-tax deductible goodwill impairments for the third quarter of fiscal 2012 of $107.1 million, $100.3 million and $419.6 million in our Australia, Canada and Europe reporting units, respectively, to reduce the carrying value of goodwill.
We completed our annual impairment test of goodwill as of the first day of the fourth quarter of fiscal 2011, fiscal 2012 and fiscal 2013 and concluded that none of our goodwill was impaired. For fiscal 2011, there was a $3.3 million goodwill write-off recorded in the United States segment as a result of the exiting of a non-core business. See Note 9 to our consolidated financial statements for additional information concerning goodwill.
Other Intangible Assets. Other intangible assets consist primarily of trade names, dealer agreements, leasehold rights, advertising relationships and amounts attributed to favorable leasehold interests recorded primarily as a result of the acquisitions of Spring Mobile in the fourth quarter of fiscal 2013, SFMI Micromania SAS (“Micromania”) in 2008 and the merger with Electronics Boutique Holdings Corp. in 2005 (the “EB merger”). We record intangible assets 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. The useful life and amortization methodology of intangible assets are determined based on the period in which they are expected to contribute directly to cash flows.
Trade names which were recorded as a result of acquisitions, primarily Micromania, are generally considered indefinite-lived intangible assets as they are expected to contribute to cash flows indefinitely and are not subject to amortization, but they are subject to annual impairment testing. Dealer agreements were recorded primarily from our acquisition of Spring Mobile. Dealer agreements represent a value associated with the rights and privileges afforded the operator under the associated agreement. Our dealer agreements are not subject to amortization. Leasehold rights which were recorded as a result of the Micromania acquisition represent the value of rights of tenancy under commercial property leases for properties located in France. Rights pertaining to individual leases can be sold by us to a new tenant or recovered by us from the landlord if the exercise of the automatic right of renewal is refused. Leasehold rights are amortized on a straight-line basis over the expected lease term not to exceed 20 years with no residual value. Advertising relationships, which were recorded as a result of digital acquisitions, are relationships with existing advertisers who pay to place ads on our digital Web sites and are amortized on a straight-line basis over 10 years. Favorable leasehold interests represent the value of the contractual monthly rental payments that are less than the current market rent at stores acquired as part of the Micromania acquisition or the EB merger. Favorable leasehold interests are amortized on a straight-line basis over their remaining lease term with no expected residual value.
Indefinite-lived intangible assets are assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. This test is completed as of the beginning of the fourth quarter each fiscal year or when circumstances indicate the carrying value of the intangible assets might be impaired. Similar to the test for goodwill impairment discussed above, the impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds the fair value of the asset. The fair value of our trade names is calculated using a relief-from-royalty approach, which assumes the value of the trade name is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the trade name and instead licensed the trade name from another company. The basis for
future cash flow projections is internal revenue forecasts, which our management believes represent reasonable market participant assumptions, to which the selected royalty rate is applied. These future cash flows are discounted using the applicable discount rate, as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset. The discount rate used in the analysis reflects a hypothetical market participant’s weighted average cost of capital, current market rates and the risks associated with the projected cash flows. The primary uncertainties in this calculation are the selection of an appropriate royalty rate and assumptions used in developing internal revenue growth forecasts, as well as the perceived risk associated with those forecasts in developing the discount rate.
During the third quarter of fiscal 2012, we determined that sufficient indicators of potential impairment existed to require an interim impairment test of our Micromania trade name. As a result of the interim impairment test of our Micromania trade name, we recorded a $44.9 million impairment charge during the third quarter of fiscal 2012. We completed our annual impairment tests of indefinite-lived intangible assets as of the first day of the fourth quarter of fiscal 2013 and fiscal 2012 and concluded that none of our intangible assets were impaired. We completed our annual impairment test of indefinite-lived intangible assets as of the first day of the fourth quarter of fiscal 2011 and concluded that our Micromania trade name was impaired due to revenue forecasts that had declined since the initial valuation. As a result, we recorded a $37.8 million impairment charge for fiscal 2011. For additional information related to our intangible assets, see Note 9 to our consolidated financial statements.
Cash Consideration Received from Vendors. We participate in cooperative advertising programs and other vendor marketing programs in which our vendors provide us with cash consideration in exchange for marketing and advertising the vendors’ products. Our accounting for cooperative advertising arrangements and other vendor marketing programs results in a significant portion of the consideration received from our vendors reducing the product costs in inventory rather than as an offset to our marketing and advertising costs. The consideration serving as a reduction in inventory is recognized in cost of sales as inventory is sold. The amount of vendor allowances to be recorded as a reduction of inventory was determined based on the nature of the consideration received and the merchandise inventory to which the consideration relates. We apply a sell through rate to determine the timing in which the consideration should be recognized in cost of sales. Consideration received that relates to video game products that have not yet been released to the public is deferred.
The cooperative advertising programs and other vendor marketing programs generally cover a period from a few days up to a few weeks and include items such as product catalog advertising, in-store display promotions, Internet advertising, co-op print advertising and other programs. The allowance for each event is negotiated with the vendor and requires specific performance by us to be earned.
Although we consider our advertising and marketing programs to be effective, we do not believe that we would be able to incur the same level of advertising expenditures if the vendors decreased or discontinued their allowances. In addition, we believe that our revenues would be adversely affected if our vendors decreased or discontinued their allowances; however, we are not able to reasonably estimate or quantify the impact of such actions by our vendors.
Loyalty Program. The PowerUp Rewards loyalty program allows enrolled members to earn points on purchases in our stores and on some of our Web sites that can be redeemed for rewards that include discounts or merchandise. Management estimates the net cost of the rewards that will be issued and redeemed and records this cost and the associated balance sheet reserve as points are accumulated by loyalty program members. The two primary estimates utilized to record the balance sheet reserve for loyalty points earned by members are the estimated redemption rate and the estimated weighted-average cost per point redeemed. Management uses historical redemption rates experienced under the loyalty program, prior experience with other customer incentives and data on other similar loyalty programs as a basis to estimate the ultimate redemption rate of points earned. A weighted-average cost per point redeemed is used to estimate future redemption costs. The weighted-average cost per point redeemed is based on our most recent actual costs incurred to fulfill points that have been redeemed by our loyalty program members and is adjusted as appropriate for recent changes in redemption costs, including the mix of rewards redeemed. We continually evaluate our reserve methodology and assumptions based on developments in redemption patterns, cost per point redeemed and other factors. Changes in the ultimate redemption rate and weighted-average cost per point redeemed have the effect of either increasing or decreasing the reserve through the current period provision by an amount estimated to cover the cost of all points previously earned but not yet redeemed by loyalty program members as of the end of the reporting period.
Lease Accounting. We lease retail stores, warehouse facilities, office space and equipment. These are generally leased under noncancelable agreements that expire at various dates through 2034 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for minimum and, in some cases, percentage rentals, and require us to pay all insurance, taxes and other maintenance costs. Leases with step rent provisions, escalation clauses or other lease concessions are accounted for on a straight-line basis over the lease term, which includes renewal option periods when we are reasonably assured of exercising the renewal options and includes “rent holidays” (periods in which we are not obligated to pay rent). Cash or lease incentives received upon entering into certain store leases (“tenant improvement allowances”) are recognized on a straight-line basis as a reduction to rent expense over the lease term, which includes renewal option periods when we are reasonably assured of exercising the renewal options. We record the unamortized portion of tenant improvement
allowances as a part of deferred rent. We do not have leases with capital improvement funding. 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.
Income Taxes. We account for income taxes utilizing an asset and liability approach, and deferred taxes are determined based on the estimated future tax effect of differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates. As a result of our operations in many foreign countries, our global tax rate is derived from a combination of applicable tax rates in the various jurisdictions in which we operate. We base our estimate of an annual effective tax rate at any given point in time on a calculated mix of the tax rates applicable to our operations and to estimates of the amount of income to be derived in any given jurisdiction.
We file our tax returns based on our understanding of the appropriate tax rules and regulations. However, complexities in the tax rules and our operations, as well as positions taken publicly by the taxing authorities, may lead us to conclude that accruals for uncertain tax positions are required. In accordance with GAAP, we maintain accruals for uncertain tax positions until examination of the tax year is completed by the taxing authority, available review periods expire or additional facts and circumstances cause us to change our assessment of the appropriate accrual amount. Our liability for uncertain tax positions was $20.6 million as of February 1, 2014.
Additionally, a valuation allowance is recorded against a deferred tax asset if it is not more likely than not that the asset will be realized. Several factors are considered in evaluating the realizability of our deferred tax assets, including the remaining years available for carry forward, the tax laws for the applicable jurisdictions, the future profitability of the specific business units, and tax planning strategies. Our valuation allowance was $13.3 million as of February 1, 2014. See Note 13 to our consolidated financial statements for further information regarding income taxes.
Consolidated Results of Operations
The following table sets forth certain statement of operations items as a percentage of net sales for the periods indicated:
We include purchasing, receiving and distribution costs in selling, general and administrative expenses, rather than in cost of sales, in the statement of operations. We include processing fees associated with purchases made by check and credit cards in cost of sales, rather than selling, general and administrative expenses, in the statement of operations. As a result of these classifications, our gross margins are not comparable to those retailers that include purchasing, receiving and distribution costs in cost of sales and include processing fees associated with purchases made by check and credit cards in selling, general and administrative expenses. The net effect of these classifications as a percentage of sales has not historically been material.
Beginning with this Form 10-K, we are expanding the categories included in our disclosures on sales and gross profit by category in order to reflect recent changes in our business, the expansion of categories previously included in "Other", and management emphasis as we operate in the future. Our previous categories of New Video Game Hardware and New Video Game Software remain unchanged.
We are expanding our previous category of Pre-owned Video Game Products to include value-priced, or closeout, product and will be calling the category Pre-owned and Value Video Game Products now and in the future. We believe there is significant opportunity to purchase closeout and overstocked inventory from publishers, distributors and other retailers which is older new product that can be acquired for less than typical new release product costs. This product can then be resold in our Video Game Brands stores and on our Web sites as value-priced product. Our limited purchases of this product in the past have yielded significantly higher margins than new video game products, yet slightly lower margins than pre-owned video game products. We have intentionally limited the amount of this product we have acquired in order to protect the typical margin range of 46% to 49% we earn from our pre-owned business. In the future, we intend to expand our selection of value product and expect that the margins for the Pre-owned and Value Video Game Product category will range from 42% to 48%.
In the past, all other products we sold were categorized into an Other category, which included video game accessories, digital products, new and pre-owned mobile products, consumer electronics, revenues from our PowerUp Rewards program and Game Informer subscription sales, strategy guides, toys and PC entertainment software. We are separating our historical Other category into the following new categories:
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Video Game Accessories, which includes new accessories for use with video game consoles and hand-held devices and software, such as controllers, gaming headsets and memory cards;
•
Digital, which includes revenues from the sale of DLC, Xbox Live, PlayStation Plus and Nintendo network points and subscription cards, other prepaid digital currencies and time cards, Kongregate, Game Informer digital subscriptions and PC digital downloads;
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Mobile and Consumer Electronics, which includes revenues from selling new and pre-owned mobile devices and consumer electronics in Video Game Brands stores and all revenues from our Technology Brands stores;
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Other, which includes revenues from the sales of PC entertainment software, toys, strategy guides and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in physical form.
The following table sets forth net sales (in millions) and percentage of total net sales by significant product category for the periods indicated:
The following table sets forth gross profit (in millions) and gross profit percentages by significant product category for the periods indicated:
Fiscal 2013 Compared to Fiscal 2012
Net sales increased $152.8 million, or 1.7%, to $9,039.5 million in the 52 weeks of fiscal 2013 from $8,886.7 million in the 53 weeks of fiscal 2012. Sales for the 53rd week included in fiscal 2012 were $112.2 million. The increase in net sales during fiscal 2013 was primarily attributable to an increase in comparable store sales of 3.8% compared to fiscal 2012. Additionally, sales included $62.8 million from the new Technology Brands segment. These increases were partially offset by a decline in domestic sales of $185.9 million due to a 4.1% decline in domestic store count, changes in foreign exchange rates, which had the effect of decreasing sales by $23.3 million when compared to the 53 weeks of fiscal 2012, and sales from the 53rd week in fiscal 2012. The increase in comparable store sales was primarily due to strong sales performance during the second half of fiscal 2013. Refer to the note to the Selected Financial Data table in "Item 6 - Selected Financial Data" for a discussion of the calculation of comparable store sales.
New video game hardware sales increased $396.6 million, or 29.7%, from fiscal 2012 to fiscal 2013, primarily attributable to an increase in hardware unit sell-through due to the launches of the Microsoft Xbox One and the Sony PlayStation 4 in November 2013. These increases were partially offset by declines in sales of previous generation hardware. New video game software sales decreased $101.5 million, or 2.8%, from fiscal 2012 to fiscal 2013, primarily due to fewer new titles that were released during fiscal 2013 when compared to fiscal 2012 and by the additional sales for the 53rd week in fiscal 2012. Pre-owned and value video game product sales decreased $100.7 million, or 4.1%, from fiscal 2012 to fiscal 2013, primarily due to less store traffic during the majority of fiscal 2013 because of lower video game demand due to the late stages of the previous console cycle, and also due to sales for the 53rd week in fiscal 2012. Sales of video game accessories declined $51.2 million, or 8.4% from fiscal 2012 to fiscal 2013 due to the decline in demand for video game products in the late stages of the last console cycle, offset slightly by sales of accessories for use with the recently launched consoles. Digital revenues increased $9.3 million, or 4.5%, from fiscal 2012 to fiscal 2013 with growth limited due to the conversion of certain types of digital currency cards from a full retail price revenue arrangement to a commission revenue model. Mobile and consumer electronics sales increased $103.4 million, or 51.6%, from fiscal 2012 to fiscal 2013, due to increased growth of the mobile business within the Video Game Brand stores and due to the Technology Brands stores acquired or started in the fourth quarter of fiscal 2013. Sales of other product categories decreased $103.1 million, or 19.8%, from fiscal 2012 to fiscal 2013, primarily due to a decrease in sales of PC entertainment software due to strong launches of PC titles during fiscal 2012.
As a percentage of net sales, new video game hardware sales increased and sales of new video game software, pre-owned and value video game products and video game accessories decreased in fiscal 2013 compared to fiscal 2012. The change in the mix of net sales was primarily due to the launch of the new hardware consoles in the fourth quarter of fiscal 2013.
Cost of sales increased by $143.2 million, or 2.3%, from $6,235.2 million in fiscal 2012 to $6,378.4 million in fiscal 2013 primarily as a result of the increase in net sales discussed above and the changes in gross profit discussed below, partially offset by the cost of sales associated with the 53rd week in fiscal 2012.
Gross profit increased by $9.6 million, or 0.4%, from $2,651.5 million in fiscal 2012 to $2,661.1 million in fiscal 2013. Gross profit as a percentage of net sales was 29.8% in fiscal 2012 and 29.4% in fiscal 2013. The gross profit percentage decreased primarily due to an increase in sales of new video game hardware as a percentage of total net sales and the decrease in gross profit as a percentage of sales on pre-owned and value video game products. This decrease was partially offset by a $33.6 million benefit
related to a change in management estimates on the redemption rate in our PowerUp Rewards and other customer liability programs. In addition, we recorded an increase in gross profit due to a reclassification from selling, general and administrative expenses of cash consideration received from our vendors to align those funds with the specific products we sell, net of the cost of free or discounted products for our loyalty programs, in the amount of $42.5 million. Gross profit as a percentage of sales on new video game hardware increased from 7.6% in fiscal 2012 to 10.2% in fiscal 2013 due to the mix of next generation consoles at a higher margin rate, the reclassification of cash consideration received from vendors and increased sales of extended warranties. Gross profit as a percentage of sales on new video game software increased from 21.9% for fiscal 2012 to 23.1% for fiscal 2013 due to the reclassification of cash consideration received from vendors. Gross profit as a percentage of sales on pre-owned and value video game products decreased from 48.1% in fiscal 2012 to 47.0% in fiscal 2013 due to aggressive trade offers made in the current year in order to provide consumers with trade currency to help make new consoles more affordable. Gross profit as a percentage of sales on video game accessories was comparable at 38.9% in fiscal 2012 and 39.3% in fiscal 2013. Gross profit as a percentage of sales on digital sales increased from 58.0% in fiscal 2012 to 68.5% in fiscal 2013 due to conversion of full retail price revenue digital currency cards into commission only currency cards. Gross profit as a percentage of sales on mobile and consumer electronics revenues increased from 20.6% in fiscal 2012 to 21.4% in fiscal 2013 due to maturation of the mobile business within the video game stores and due to the newly acquired Technology Brands stores. Gross profit as a percentage of sales on the other product sales category decreased from 37.2% in fiscal 2012 to 36.1% in fiscal 2013.
Selling, general and administrative expenses increased by $56.5 million, or 3.1%, from $1,835.9 million in fiscal 2012 to $1,892.4 million in fiscal 2013. This increase was primarily due to higher variable costs associated with the increase in comparable store sales during the second half of 2013 and the net increase in expenses associated with the change in classification of cash consideration received from vendors and the reclassification of the cost of free or discounted products for our loyalty programs discussed above. These increases were partially offset by expenses for the 53rd week in fiscal 2012 coupled with changes in foreign exchange rates, which had the effect of decreasing fiscal 2013 selling, general and administrative expenses by $2.1 million when compared to fiscal 2012. Additionally, cost control activities during the current year associated with the decline in sales at the end of the previous console cycle helped to reduce our selling, general and administrative expenses along with lower current year store counts. Selling, general and administrative expenses as a percentage of sales increased from 20.7% in fiscal 2012 to 21.0% in fiscal 2013, primarily due to the classification of cash consideration received from vendors and loyalty costs as discussed above. Included in selling, general and administrative expenses are $19.4 million and $19.6 million in stock-based compensation expense for fiscal 2013 and fiscal 2012, respectively.
Depreciation and amortization expense decreased $10.0 million from $176.5 million in fiscal 2012 to $166.5 million in fiscal 2013. This decrease was primarily due to a decrease in capital expenditures in recent years when compared to prior years, which included significant investments in our loyalty and digital initiatives, as well as a decrease in new store openings and investments in management information systems.
During fiscal 2013, we recorded a $28.7 million impairment charge, comprised of a $10.2 million goodwill impairment, a $7.4 million impairment of technology assets and an impairment of $2.1 million of intangible assets as a result of our decision to abandon Spawn Labs. Additionally, we recognized $9.0 million of property and equipment impairments during fiscal 2013. During fiscal 2012, we recorded a $680.7 million impairment charge, comprised of $627.0 million of goodwill impairments, $44.9 million of trade name impairment and $8.8 million of property and equipment impairments. Refer to Note 2 and Note 9 to the consolidated financial statements in this Form 10-K for further information associated with these impairments.
Interest income resulting from the investment of excess cash balances was $0.9 million for both fiscal 2012 and fiscal 2013. Interest expense increased from $4.2 million in fiscal 2012 to $5.6 million in fiscal 2013, primarily due to increased average borrowings under our revolving credit facility during the year and interest expense incurred on pre-acquisition indebtedness of one of the businesses acquired, prior to paying off the debt during fiscal 2013.
Income tax expense was $224.9 million on a $44.9 million loss before income tax expense in fiscal 2012, compared to $214.6 million, or an effective tax rate of 37.7% in fiscal 2013. The difference in the effective income tax rate between fiscal 2013 and fiscal 2012 was primarily due to the recognition of the goodwill impairment charge in fiscal 2012 which is not tax deductible and the recording of valuation allowances against certain deferred tax assets in the European segment in fiscal 2012. Without the effect of the goodwill impairments and the recording of the valuation allowances, the effective income tax rate in fiscal 2012 would have been 36.6%. Refer to Note 13 to our consolidated financial statements for additional information regarding income taxes.
The factors described above led to an increase in operating earnings of $615.1 million from an operating loss of $41.6 million during fiscal 2012 to operating income of $573.5 million in fiscal 2013 and an increase in consolidated net income of $624.0 million from a $269.8 million net loss in fiscal 2012 to $354.2 million of consolidated net income in fiscal 2013. The increase in operating earnings is primarily attributable to goodwill and asset impairments recognized in fiscal 2012. Excluding the impact of the goodwill and other impairment charges of $28.7 million, operating earnings would have been $602.2 million for fiscal 2013. Excluding the
impact of goodwill and other impairment charges of $680.7 million, operating earnings would have been $639.1 million for fiscal 2012.
Fiscal 2012 Compared to Fiscal 2011
Net sales decreased $663.8 million, or 7.0%, to $8,886.7 million in the 53 weeks of fiscal 2012 compared to $9,550.5 million in the 52 weeks of fiscal 2011. Sales for the 53rd week included in fiscal 2012 were $112.2 million. The decrease in net sales was primarily attributable to a decrease in comparable store sales of 8.0% and changes in foreign exchange rates, which had the effect of decreasing sales by $90.7 million when compared to the 52 weeks of fiscal 2011, offset partially by sales from the 53rd week in fiscal 2012. The decrease in comparable store sales was primarily due to decreases in new video game hardware sales, new video game software sales, pre-owned and value video game products sales and video game accessories sales offset partially by an increase in digital, mobile and consumer electronics sales.
New video game hardware sales decreased $278.2 million, or 17.3%, from fiscal 2011 to fiscal 2012, primarily due to a decrease in hardware unit sell-through related to being in the late stages of the previous console cycle and sales from the launch of the Nintendo 3DS in the first quarter of fiscal 2011, which exceeded the sales from the launch of the Sony PlayStation Vita in the first quarter of fiscal 2012. These sales declines were offset partially by the launch of the Nintendo Wii U in the fourth quarter of fiscal 2012 and sales for the 53rd week in fiscal 2012. New video game software sales decreased $465.8 million, or 11.5%, from fiscal 2011 to fiscal 2012, primarily due to a lack of new release video game titles in fiscal 2012 when compared to fiscal 2011 and declines in sales due to the late stages of the console cycle, offset partially by sales for the 53rd week in fiscal 2012. Pre-owned and value video game products sales decreased $189.7 million, or 7.2%, from fiscal 2011 to fiscal 2012, primarily due to a decrease in store traffic related to the lack of new release video game titles in fiscal 2012 when compared to fiscal 2011 and lower video game demand due to the late stages of the previous console cycle, offset partially by sales for the 53rd week in fiscal 2012. Video game accessories’ sales followed the same trends as other video game products given the late stages of the previous console cycle, with a decline of $49.3 million, or 7.5% from fiscal 2011 to fiscal 2012. Sales of digital products increased $65.4 million, or 45.7%, due to strong growth of DLC and digital currency sales. Our mobile and consumer electronics business grew $187.5 million from its inception in late fiscal 2011 to a full year of sales in fiscal 2012. Sales of other product categories increased $66.3 million, or 14.6%, from fiscal 2011 to fiscal 2012 due to an increase in sales of PC entertainment software and toys in fiscal 2012 when compared to fiscal 2011 and sales for the 53rd week in fiscal 2012.
As a percentage of net sales, new video game hardware sales and new video game software sales decreased and several other product sales increased in fiscal 2012 compared to fiscal 2011. The change in the mix of net sales was primarily due to the increase in digital and mobile and consumer electronics sales as a result of the expansion of both the digital and mobile sales categories and in PC entertainment software and toys in the other product sales. These categories showed significant growth in fiscal 2012 while sales of new video game hardware and new video game software decreased due to fewer new software title launches compared to the same period last year and lower sales due to the late stages of the console cycle. Cost of sales decreased by $635.8 million, or 9.3%, from $6,871.0 million in fiscal 2011 to $6,235.2 million in fiscal 2012 primarily as a result of the decrease in net sales, offset partially by cost of sales related to sales for the 53rd week in fiscal 2012 and the changes in gross profit discussed below.
Gross profit decreased by $28.0 million, or 1.0%, from $2,679.5 million in fiscal 2011 to $2,651.5 million in fiscal 2012. Gross profit as a percentage of net sales was 28.1% in fiscal 2011 and 29.8% in fiscal 2012. The gross profit percentage increase was primarily due to the increase in sales of digital, mobile and consumer electronics and other products as a percentage of total net sales and the increase in gross profit as a percentage of sales on new video game hardware and software sales and pre-owned and value video game products sales. Gross profit as a percentage of sales on new video game hardware increased slightly from 7.0% in fiscal 2011 to 7.6% in fiscal 2012. Gross profit as a percentage of sales on new video game software increased from 20.7% for fiscal 2011 to 21.9% for fiscal 2012. Gross profit as a percentage of sales on pre-owned and value video game products increased from 46.6% in fiscal 2011 to 48.1% in fiscal 2012 due to a decrease in promotional activities and improvements in margin rates throughout most of our international operations when compared to the prior year. Gross profit as a percentage of sales on video game accessories increased from 38.1% in fiscal 2011 to 38.9% in fiscal 2012. Gross profit as a percentage of sales on digital revenues increased from 46.5% in fiscal 2011 to 58.0% in fiscal 2012 due to growth in the sales of DLC as a percentage of total digital sales and conversion of full retail revenue digital currency cards into commission only currency cards. Gross profit as a percentage of sales on mobile and consumer electronics sales decreased from 27.3% in fiscal 2011 to 20.6% in fiscal 2012. Gross profit as a percentage of sales on the other product sales category decreased from 40.5% in fiscal 2011 to 37.2% in fiscal 2012.
Selling, general and administrative expenses decreased by $6.2 million, or 0.3%, from $1,842.1 million in fiscal 2011 to $1,835.9 million in fiscal 2012. This decrease was primarily due to changes in foreign exchange rates which had the effect of decreasing expenses by $26.7 million when compared to fiscal 2011 offset partially by expenses for the 53rd week in fiscal 2012. Selling, general and administrative expenses as a percentage of sales increased from 19.3% in the fiscal 2011 to 20.7% in fiscal 2012. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to deleveraging
of fixed costs as a result of the decrease in comparable store sales. Included in selling, general and administrative expenses are $19.6 million and $18.8 million in stock-based compensation expense for fiscal 2012 and fiscal 2011, respectively.
Depreciation and amortization expense decreased $9.8 million from $186.3 million in fiscal 2011 to $176.5 million in fiscal 2012. This decrease was primarily due to the capital expenditures in recent years when compared to prior years, which included significant investments in our loyalty and digital initiatives, as well as a decrease in new store openings and investments in management information systems.
During fiscal 2012, we recorded a $680.7 million impairment charge, comprised of $627.0 million of goodwill impairments, $44.9 million of trade name impairment and $8.8 million of property and equipment impairments. During fiscal 2011, we recorded asset impairments and restructuring charges of $81.2 million. These charges were primarily due to impairment of our Micromania trade name in France and impairment and disposal costs related to the exit of non-core businesses, including a small retail movie chain of stores we owned until fiscal 2011. Restructuring costs include disposal and exit costs related to the exit of underperforming regions in Europe and consolidation of home office and back office functions, as well as impairment and store closure costs primarily in the international segments. See Note 9 to our consolidated financial statements for further information associated with these impairments.
Interest income resulting from the investment of excess cash balances was $0.9 million in both fiscal 2011 and fiscal 2012. Interest expense decreased from $20.7 million in fiscal 2011 to $4.2 million in fiscal 2012, primarily due to the redemption of the remaining $250.0 million of our senior notes during fiscal 2011. Debt extinguishment expense of $1.0 million was recognized in fiscal 2011 as a result of the write-off of deferred financing fees and unamortized original issue discount associated with the redemption.
Income tax expense was $210.6 million, or 38.4% of earnings before income tax expense, in fiscal 2011 compared to $224.9 million in fiscal 2012. The difference in the effective income tax rate between fiscal 2012 and fiscal 2011 was primarily due to the recognition of the goodwill impairment charge in fiscal 2012 which was not tax deductible and the recording of valuation allowances against certain deferred tax assets in the European segment in fiscal 2012. Without the effect of the goodwill impairments and the recording of the valuation allowances, the effective income tax rate in fiscal 2012 would have been 36.6%. See Note 13 to our consolidated financial statements for additional information regarding income taxes.
The factors described above led to a decrease in operating earnings of $611.5 million from $569.9 million of operating earnings in fiscal 2011 to $41.6 million of operating loss in fiscal 2012 and a decrease in consolidated net income of $608.3 million from $338.5 million of consolidated net income in fiscal 2011 to $269.8 million of consolidated net loss in fiscal 2012. The decrease in operating earnings and consolidated net income is primarily attributable to goodwill impairments recognized in fiscal 2012 offset partially by the decrease in asset impairments and restructuring charges when compared to the prior year. Excluding the impact of the goodwill and other impairment charges of $680.7 million, operating earnings would have been $639.1 million and consolidated net income would have been $403.0 million for fiscal 2012. Excluding the impact of asset impairments and restructuring charges of $81.2 million, operating earnings would have been $651.1 million and consolidated net income would have been $405.1 million for fiscal 2011.
The $0.1 million net loss attributable to noncontrolling interests for fiscal 2012 represents the portion of the minority interest stockholders’ net loss of our non-wholly owned subsidiaries included in our consolidated net income. The remaining noncontrolling interests were purchased during the second quarter of fiscal 2012.
Segment Performance
We operate our business in the following operating segments, which are also our reportable segments: Video Game Brands, which consists of four segments in the United States, Canada, Australia and Europe, and Technology Brands. We identified these segments based on a combination of geographic areas, the methods with which we analyze performance, the way in which our sales and profits are derived and how we divide management responsibility. Our sales and profits are driven through our physical stores which are highly integrated with our e-commerce, digital and mobile businesses. Due to this integration, our physical stores are the basis for our segment reporting. Each of the Video Game Brands segments consists primarily of retail operations, with all stores engaged in the sale of new and pre-owned video game systems, software and accessories (which we refer to as video game products), new and pre-owned mobile devices and related accessories. These products are substantially the same regardless of geographic location, with the primary differences in merchandise carried being the timing of the release of new products or technologies in the various segments. Stores in all Video Game Brands segments are similar in size at an average of approximately 1,400 square feet. The Technology Brands segment offers wireless services, devices and related accessories and sells Apple products.
With our presence in international markets, we have operations in several foreign currencies, including the Euro, Australian dollar, New Zealand dollar, Canadian dollar, British pound, Swiss franc, Danish kroner, Swedish krona, and the Norwegian kroner.
Net sales by reportable segment in U.S. dollars were as follows (in millions):
Operating earnings (loss) by operating segment, defined as income (loss) from operations before intercompany royalty fees, net interest expense and income taxes, in U.S. dollars were as follows (in millions):
Goodwill impairments, asset impairments and restructuring charges reported in operating earnings by operating segment, in U.S. dollars were as follows (in millions):
Total assets by operating segment in U.S. dollars were as follows (in millions):
Fiscal 2013 Compared to Fiscal 2012
Video Game Brands
United States
Segment results for Video Game Brands in the United States include retail GameStop operations in 50 states, the District of Columbia, Puerto Rico and Guam, the electronic commerce Web site www.gamestop.com, Game Informer magazine,
www.kongregate.com, a digital PC game distribution platform available at www.gamestop.com/pcgames and an online consumer electronics marketplace available at www.buymytronics.com. As of February 1, 2014, the United States Video Game Brands segment included 4,249 GameStop stores, compared to 4,425 stores on February 2, 2013.
Although net sales for fiscal 2013 decreased 0.5% compared to fiscal 2012, comparable store sales increased 3.0%. The decrease in net sales was primarily due to a $185.9 million decline in sales due to a 4.1% decrease in domestic store count and sales for the 53rd week in fiscal 2012. The increase in comparable store sales was primarily due to strong performance of new video game console and title releases during the second half of the year, which more than offset the declines that had been experienced during the first half of fiscal 2013.
Asset impairments of $24.0 million were recognized in fiscal 2013 primarily related to our decision to abandon our Spawn Labs business. Asset impairments of $5.7 million were recognized in fiscal 2012 primarily related to impairment of finite-lived assets. Segment operating income for fiscal 2013 was $465.3 million compared to $501.9 million in fiscal 2012. Excluding the impact of asset impairments, segment operating income decreased $18.3 million from $507.6 million in fiscal 2012 to $489.3 million in fiscal 2013 primarily related to the impact of a decline in sales prior to the launch of the next generation consoles and the impact of lower margin console sales as a percentage of total sales, as well as the impact of the operating earnings in the 53rd week in fiscal 2012.
Canada
Segment results for Canada include retail operations in Canada and an e-commerce site. As of February 1, 2014, the Canadian segment had 335 stores compared to 336 stores as of February 2, 2013. Net sales in the Canadian segment in the 52 weeks ended February 1, 2014 decreased 2.0% compared to the 53 weeks ended February 2, 2013. The decrease in net sales was primarily attributable to unfavorable changes in exchange rates of $22.3 million for fiscal 2013 and additional sales in the 53rd week of fiscal 2012 when compared to fiscal 2013, partially offset by an increase in sales at existing stores of 5.7%. The increase in net sales at existing stores was primarily due to the launch of the next generation consoles.
The segment operating profit for fiscal 2013 was $26.6 million compared to an operating loss of $74.4 million for fiscal 2012. The increase in operating earnings was primarily due to the goodwill and asset impairment charges of $100.7 million recognized during fiscal 2012. Excluding the impact of the goodwill and asset impairment charges, adjusted segment operating earnings were $26.3 million in fiscal 2012. The increase in adjusted segment operating earnings was due to a decrease in selling, general and administrative expenses as a result of lower sales and lower store count when compared to fiscal 2012, partially offset by a $1.4 million unfavorable change in the exchange rate.
Australia
Segment results for Australia include retail operations and e-commerce sites in Australia and New Zealand. As of February 1, 2014, the Australian segment included 418 stores, compared to 416 stores as of February 2, 2013. Net sales for the 52 weeks ended February 1, 2014 increased 1.1% compared to the 53 weeks ended February 2, 2013. The increase in net sales was primarily due to a 12.6% increase in comparable store sales, partially offset by a $58.1 million reduction in sales associated with exchange rates and the additional sales in the 53rd week of fiscal 2012. The increase in sales at existing stores was due to new video game console and title releases.
The segment operating profit for fiscal 2013 was $37.5 million compared to an operating loss of $71.6 million for fiscal 2012. The increase in operating earnings was primarily due to the goodwill and asset impairment charges of $107.3 million recognized during fiscal 2012, partially offset by a $4.8 million unfavorable change in the exchange rate. Excluding the impact of the goodwill and asset impairment charges in 2012, segment operating earnings increased $1.8 million in fiscal 2013, when compared to $35.7 million in fiscal 2012.
Europe
Segment results for Europe include retail operations in 11 European countries and e-commerce operations in six countries. As of February 1, 2014, the European segment operated 1,455 stores, compared to 1,425 stores as of February 2, 2013. For the 52 weeks ended February 1, 2014, European net sales increased 7.8% compared to the 53 weeks ended February 2, 2013. This increase in net sales was partially due to the favorable impact of changes in exchange rates in fiscal 2013, which had the effect of increasing sales by $57.0 million when compared to fiscal 2012. Excluding the impact of changes in exchange rates, sales in the European segment increased 4.2%. The increase in sales was primarily due to an increase in sales at existing stores of 3.2%, offset by additional sales in the 53rd week of fiscal 2012 when compared to fiscal 2013. The increase in net sales at existing stores was primarily due to new video game console and title launches.
The segment operating profit was $44.3 million for fiscal 2013 compared to an operating loss of $397.5 million for fiscal 2012. The increase in operating earnings was primarily due to asset impairment charges of $4.7 million recognized during fiscal 2013 compared to charges totaling $467.0 million for goodwill and asset impairments and restructuring charges during fiscal 2012. Excluding the impact of the goodwill and asset impairment and restructuring charges, segment operating earnings were $49.0 million in fiscal 2013 compared to $69.5 million in fiscal 2012. The decrease in adjusted operating earnings during fiscal 2013 included the impact of a decline in sales prior to the launch of the next generation consoles and the impact of low margin consoles as a percentage of total sales, as well as the impact of the operating earnings in the 53rd week in fiscal 2012, partially offset by a $3.1 million favorable impact of the exchange rate.
Technology Brands
Segment results for the Technology Brands segment include our Simply Mac, Spring Mobile and Aio Wireless stores. As of February 1, 2014, the Technology Brands segment operated 218 stores, all of which were acquired or opened during fiscal 2013. For the 52 weeks ended February 1, 2014, Technology Brands net sales totaled $62.8 million, with an operating loss of $0.2 million that included startup costs for new stores.
Fiscal 2012 Compared to Fiscal 2011
Video Game Brands
United States
Segment results for the United States Video Game Brands segment include retail operations in 50 states, the District of Columbia, Puerto Rico and Guam, the electronic commerce Web site www.gamestop.com, Game Informer magazine, www.kongregate.com, a digital PC game distribution platform available at www.gamestop.com/pcgames and an online consumer electronics marketplace available at www.buymytronics.com. As of February 2, 2013, the United States Video Game Brands segment included 4,425 GameStop stores, compared to 4,503 stores on January 28, 2012.
Net sales for fiscal 2012 decreased 6.7% compared to fiscal 2011 and comparable store sales decreased 8.7%. The decrease in comparable store sales was primarily due to decreases in new video game hardware sales, new video game software sales, pre-owned and value video game products sales, and video game accessories sales offset partially by an increase in digital, mobile and consumer electronics and other product sales and sales for the 53rd week in fiscal 2012. The decrease in new video game hardware sales was primarily due to a decrease in hardware unit sell-through related to being in the late stages of the console cycle and sales from the launch of the Nintendo 3DS in the first quarter of fiscal 2011 which exceeded the sales from the launch of the Sony PlayStation Vita in the first quarter of fiscal 2012, offset partially by the launch of the Nintendo Wii U in the fourth quarter of fiscal 2012 and sales for the 53rd week in fiscal 2012. The decrease in new video game software sales was primarily due to declines in demand due to the late stages of the console cycle and a lack of new release video game titles in fiscal 2012 when compared to fiscal 2011, offset partially by sales for the 53rd week in fiscal 2012. The decrease in pre-owned and value video game product sales was primarily due to a decrease in store traffic related to the lack of new release video game titles in fiscal 2012 when compared to fiscal 2011 and the late stages of the console cycle, offset partially by sales for the 53rd week in fiscal 2012. The increase in digital, mobile and consumer electronics and other product sales was primarily due to an increase in sales of digital products, PC entertainment software and mobile devices in fiscal 2012 when compared to fiscal 2011 and sales for the 53rd week in fiscal 2012.
Asset impairments of $5.7 million were recognized in fiscal 2012 primarily related to impairment of definite-lived assets. Asset impairments and restructuring charges of $28.9 million were recognized in fiscal 2011 primarily related to asset impairments, severance and disposal costs associated with the exit of non-core businesses. Segment operating income for both fiscal 2012 and fiscal 2011 was $501.9 million. Excluding the impact of asset impairments and restructuring charges, adjusted segment operating income decreased $23.2 million from $530.8 million in fiscal 2011 to $507.6 million in fiscal 2012 primarily related to the decrease in comparable store sales between years.
Canada
Segment results for Canada include retail operations in Canada and an e-commerce site. As of February 2, 2013, the Canadian segment had 336 stores compared to 346 stores as of January 28, 2012. Net sales in the Canadian segment in the 53 weeks ended February 2, 2013 decreased 4.0% compared to the 52 weeks ended January 28, 2012. The decrease in net sales was primarily attributable to a decrease in sales at existing stores of 4.6%, partially offset by the favorable impact of changes in exchange rates of $1.6 million and additional sales in the 53rd week of fiscal 2012 when compared to fiscal 2011. The decrease in net sales at existing stores was primarily due to decreases in new video game hardware sales, new video game software sales and pre-owned and value video game product sales, offset partially by an increase in digital, mobile and consumer electronics and other product sales. The decrease in new video game hardware sales was primarily due to a decrease in hardware unit sell-through related to being in the late stages of the console cycle. The decrease in new video game software sales was primarily due to lower sales of new release video game titles and the late stages of the console cycle. The decrease in pre-owned and value video game product
sales was due primarily to a decrease in store traffic related to lower sales of new release video game titles and the late stages of the current console cycle. The increase in digital, mobile and consumer electronics and other product sales was primarily due to an increase in digital products and PC entertainment software sales and sales of mobile devices.
The segment operating loss for fiscal 2012 was $74.4 million compared to operating earnings of $12.4 million for fiscal 2011. The decrease in operating earnings was primarily due to the goodwill and asset impairment charges of $100.7 million recognized during fiscal 2012 compared to $1.3 million in fiscal 2011. Excluding the impact of the goodwill and asset impairment charges, adjusted segment operating earnings were $26.3 million in fiscal 2012, compared to $13.7 million in fiscal 2011. The increase in adjusted segment operating earnings was due to an increase in gross profit dollars as a result of the shift in sales mix from hardware to higher margin categories and an increase in gross profit percent in pre-owned and value video games products. The increase in adjusted segment operating earnings was also due to a decrease in selling, general and administrative expenses as a result of lower sales and lower store count when compared to fiscal 2011.
Australia
Segment results for Australia include retail operations and e-commerce sites in Australia and New Zealand. As of February 2, 2013, the Australian segment included 416 stores, compared to 411 stores as of January 28, 2012. Net sales for the 53 weeks ended February 2, 2013 increased 0.4% compared to the 52 weeks ended January 28, 2012. The increase in net sales was primarily due to the additional sales in the 53rd week of fiscal 2012 and the impact of five new stores opened after January 28, 2012, offset by a decrease in sales at existing stores of 2.4%. The decrease in sales at existing stores was due to a decrease in new video game hardware sales, new video game software sales and pre-owned and value video game product sales, offset by an increase in digital, mobile and consumer electronics and other product sales. The decrease in new video game hardware sales is primarily due to a decrease in hardware unit sell-through related to being in the late stages of the current console cycle. The decrease in new video game software sales is primarily due to lower sales of new release video game titles and the late stages of the current console cycle. The decrease in pre-owned and value video game product sales is due primarily to a decrease in store traffic related to lower sales of new release video game titles and the late stages of the current console cycle. The increase in digital, mobile and consumer electronics and other product sales was primarily due to an increase in digital products and PC entertainment software sales and sales of mobile devices.
The segment operating loss for fiscal 2012 was $71.6 million compared to operating earnings of $35.4 million for fiscal 2011. The decrease in operating earnings was primarily due to the goodwill and asset impairment charges of $107.3 million recognized during fiscal 2012 compared to $0.6 million in fiscal 2011. Excluding the impact of the goodwill and asset impairment charges, adjusted segment operating earnings remained relatively flat at $35.7 million in fiscal 2012, when compared to $36.0 million in fiscal 2011.
Europe
Segment results for Europe include retail operations in 11 European countries and e-commerce operations in six countries. As of February 2, 2013, the European segment operated 1,425 stores, compared to 1,423 stores as of January 28, 2012. For the 53 weeks ended February 2, 2013, European net sales decreased 11.1% compared to the 52 weeks ended January 28, 2012. This decrease in net sales was partially due to the unfavorable impact of changes in exchange rates in fiscal 2012, which had the effect of decreasing sales by $95.7 million when compared to fiscal 2011. Excluding the impact of changes in exchange rates, sales in the European segment decreased 5.9%. The decrease in sales was primarily due to a decrease in sales at existing stores of 8.3%, offset by additional sales in the 53rd week of fiscal 2012 when compared to fiscal 2011. The decrease in net sales at existing stores was primarily due to decreases in new video game hardware sales, new video game software sales and pre-owned and value video game product sales, offset partially by an increase in digital, mobile and consumer electronics and other product sales. The decrease in new video game hardware sales is primarily due to a decrease in hardware unit sell-through related to being in the late stages of the console cycle. The decrease in new video game software sales is primarily due to lower sales of new release video game titles and the late stages of the console cycle. The decrease in pre-owned and value video game product sales is due primarily to a decrease in store traffic related to lower sales of new release video game titles and the late stages of the console cycle. The increase in digital, mobile and consumer electronics and other product sales is due to an increase in sales of digital products, PC entertainment software and sales of mobile devices.
The segment operating loss was $397.5 million for fiscal 2012 compared to operating earnings of $20.2 million for fiscal 2011. The decrease in operating earnings was primarily due to the goodwill and asset impairments and restructuring charges of $467.0 million recognized during fiscal 2012 compared to $50.4 million during fiscal 2011. Excluding the impact of the goodwill and asset impairment charges, adjusted segment operating earnings remained relatively flat at $69.5 million in fiscal 2012 compared to $70.6 million in fiscal 2011.
Liquidity and Capital Resources
Overview
Based on our current operating plans, we believe that available cash balances, cash generated from our operating activities and funds available under our $400 million asset-based revolving credit facility (the "Revolver") together will provide sufficient liquidity to fund our operations, store openings and remodeling activities and corporate capital expenditure programs, including the payment of dividends declared by the Board of Directors, for at least the next 12 months. On an ongoing basis, we will evaluate and consider strategic acquisitions, divestitures, repurchasing shares of our common stock or other transactions to create shareholder value and enhance financial performance. Such transactions may generate proceeds or require cash expenditures.
As of February 1, 2014, $398.9 million of our total cash on hand of $536.2 million was attributable to our foreign operations. Although we may, from time to time, evaluate strategies and alternatives with respect to the cash attributable to our foreign operations, we currently anticipate that this cash will remain in those foreign jurisdictions and it therefore may not be available for immediate use; however, we believe that our existing sources of liquidity, as described more fully above, will enable us to meet our cash requirements in the next twelve months.
We had total cash on hand of $536.2 million and an additional $391.0 million of available future borrowing capacity under the Revolver. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may, from time to time, raise additional funds through borrowings or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
We have revised the presentation of outstanding checks in our prior period financial statements. Previously, we reduced cash and liabilities when the checks were presented for payment and cleared our bank accounts. As of February 1, 2014, we reduce cash and liabilities when the checks are released for payment.
The impact of this revision on our consolidated statements of cash flows for the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012 are as follows:
Cash Flows
During fiscal 2013, cash provided by operations was $762.7 million, compared to cash provided by operations of $610.2 million in fiscal 2012. The increase in cash provided by operations of $152.5 million from fiscal 2012 to fiscal 2013 was primarily due to an increase in cash provided by working capital of $176.9 million, primarily driven by a change in the timing of payments of accounts payable, partially offset by higher inventory purchases in fiscal 2013. The higher inventory purchases in fiscal 2013 were primarily due to purchases to support the launch of new consoles.
During fiscal 2012, cash provided by operations was $610.2 million, compared to cash provided by operations of $641.8 million in fiscal 2011. The decrease in cash provided by operations of $31.6 million from fiscal 2011 to fiscal 2012 was due primarily to lower net income in fiscal 2012. Cash provided by working capital increased modestly between years, due primarily to a change in the timing of payments of prepaid expenses offset partially by higher inventory purchases in fiscal 2012 and the related effects on payments of accounts payable.
Cash used in investing activities was $207.5 million in fiscal 2013, $152.7 million in fiscal 2012 and $201.6 million in fiscal 2011. During fiscal 2013, we used $125.6 million for capital expenditures primarily to open 109 Video Game Brands stores in the U.S. and internationally and to invest in information systems and digital initiatives. During fiscal 2013, we also used $77.4 million of cash primarily for the acquisition of Spring Mobile and Simply Mac. During fiscal 2012, we used $139.6 million for capital expenditures primarily to invest in information systems, distribution center capacity and e-commerce, digital and loyalty program initiatives and to open 146 stores in the U.S. and internationally. During fiscal 2011, in addition to $165.1 million of cash used for capital expenditures, we also used $30.1 million for acquisitions in support of our digital initiatives.
Cash used in financing activities was $350.6 million in fiscal 2013, $498.5 million in fiscal 2012 and $492.6 million in fiscal 2011. The cash flows used in financing activities in fiscal 2013 were primarily for the repurchase of $258.3 million of treasury shares and the payment of dividends on our Class A Common Stock of $130.9 million. The cash flows used in financing activities in fiscal 2012 were primarily for the repurchase of $409.4 million of treasury shares and the payment of dividends on our Class A Common Stock of $102.0 million. The cash flows used in financing activities in fiscal 2011 were primarily for the repurchase of $262.1 million of treasury shares and repayment of $250.0 million in principal of our senior notes. The cash used in financing activities in fiscal 2013, fiscal 2012 and fiscal 2011 was also impacted by cash provided by the issuance of shares associated with stock option exercises of $58.0 million, $11.6 million and $18.1 million, respectively.
Sources of Liquidity
We utilize cash generated from operations and have funds available to us under our revolving credit facility to cover seasonal fluctuations in cash flows and to support our various growth initiatives. Our cash and cash equivalents are carried at cost, which approximates market value, and consist primarily of time deposits with highly rated commercial banks.
On January 4, 2011, we entered into a $400 million revolving credit facility (the “Revolver”), which amended and restated, in its entirety, our prior credit agreement entered into in October 2005 (the “Credit Agreement”). The Revolver provides for a five-year, $400 million asset-based facility, including a $50 million letter of credit sublimit, secured by substantially all of our and our domestic subsidiaries’ assets. We have the ability to increase the facility, which matures in January 2016, by $150 million under certain circumstances. The Revolver was further amended and restated on March 25, 2014 as described more fully below.
The 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. Letters of credit reduce the amount available to borrow by their face value. Our ability to pay cash dividends, redeem options and repurchase shares is generally permitted, except under certain circumstances, including if Revolver excess availability is less than 20%, or is projected to be so within 12 months after such payment. In addition, if Revolver usage is projected to be equal to or greater than 25% of total commitments during the prospective 12-month period, we are subject to meeting a fixed charge coverage ratio of 1.1:1.0 prior to making such payments. In the event that excess availability under the Revolver is at any time less than the greater of (1) $40 million or (2) 12.5% of the lesser of the total commitment or the borrowing base, we will be subject to a fixed charge coverage ratio covenant of 1.1:1.0.
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 $750 million of additional unsecured indebtedness to be limited to $250 million in general unsecured obligations and $500 million in unsecured obligations to finance acquisitions valued at $500 million or more. The per annum interest rate under the Revolver is variable and is calculated by applying a margin (1) for prime rate loans of 1.25% to 1.50% above the highest of (a) the prime rate of the administrative agent, (b) the federal funds effective rate plus 0.50% or (c) the 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 2.25% to 2.50% 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 0.375% or 0.50%, depending on facility usage, for any unused portion of the total commitment under the Revolver. As of February 1, 2014, the applicable margin was 1.25% for prime rate loans and 2.25% for LIBO rate loans, while the required commitment fee was 0.50% for the unused portion of the Revolver.
The Revolver provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with covenants, any material representation or warranty made by 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 our liquidation or the liquidation of certain of our subsidiaries.
During fiscal 2013, we borrowed and repaid $130.0 million under the Revolver. During fiscal 2012 and fiscal 2011, we borrowed and repaid $81.0 million and $35.0 million, respectively, under the Revolver. Average borrowings under the Revolver for the 52 weeks ended February 1, 2014 were $14.2 million. Our average interest rate on those outstanding borrowings for the 52 weeks ended February 1, 2014 was 2.8%. As of February 1, 2014, total availability under the Revolver was $391.0 million, there were no borrowings outstanding under the Revolver and letters of credit outstanding totaled $9.0 million.
On March 25, 2014, we further amended and restated our revolving credit facility. The terms of the agreement were modified to extend the maturity date for the revolving credit facility to March 25, 2019, to increase the expansion feature under the facility from $150 million to $200 million, subject to certain conditions, and to amend certain other terms, including a reduction in the fee we are required to pay on the unused portion of the total commitment amount. The five-year, asset-based revolving credit facility has a total commitment amount of $400 million, which is subject to a monthly borrowing base calculation, and is available for the issuance of letters of credit of up to $50 million. The facility is secured by substantially all of our assets and the assets of our domestic subsidiaries. We believe the extension of the maturity date of the revolving credit facility to March 2019 helps to limit our exposure to potential tightening or other adverse changes in the credit markets.
In September 2007, our Luxembourg subsidiary entered into a discretionary $20.0 million Uncommitted Line of Credit (the “Line of Credit”) with Bank of America. There is no term associated with the Line of Credit and Bank of America may withdraw the facility at any time without notice. The Line of Credit is available to our foreign subsidiaries for use primarily as a bank overdraft facility for short-term liquidity needs and for the issuance of bank guarantees and letters of credit to support operations. As of February 1, 2014, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding of $4.3 million.
Uses of Capital
Our future capital requirements will depend on the number of new stores we open and the timing of those openings within a given fiscal year, as well as the investments we will make in e-commerce, digital and other strategic initiatives. We opened or acquired 327 stores in fiscal 2013, which includes the stores acquired in connection with the Spring Mobile and Simply Mac acquisitions, and we expect to open or acquire approximately 350 to 450 stores in fiscal 2014, including investments in our Technology Brands business. Capital expenditures for fiscal 2014 are projected to be approximately $160 million, to be used primarily to fund continued digital initiatives, new store openings and store remodels and invest in distribution and information systems in support of operations.
Between May 2006 and December 2011, we repurchased and redeemed $300 million of Senior Floating Rate Notes and $650 million of Senior Notes under previously announced buybacks authorized by our Board of Directors. The associated loss on the retirement of debt was $1.0 million for the 52 week period ended January 28, 2012, which consisted of the premium paid to retire the Notes and the write-off of the deferred financing fees and the original issue discount on the Notes.
We used cash to expand our operations through acquisitions. During fiscal 2013, fiscal 2012 and fiscal 2011, we used $77.4 million, $1.5 million and $30.1 million, respectively, for acquisitions which in fiscal 2013 were primarily related to the growth of our Technology Brands business.
Since January 2010, our Board of Directors has authorized several share repurchase programs authorizing management to repurchase our common stock. Since the beginning of fiscal 2011, the authorizations have been for $500 million at a time. Our typical practice is to seek Board of Directors’ approval for a new authorization before the existing one is fully used in order to make sure that we are always able to repurchase shares. For fiscal 2011, we repurchased 11.2 million shares at an average price per share of $21.38 for a total of $240.2 million, which excludes approximately $22 million of share repurchases that were executed at the end of fiscal 2010 but for which the settlement and related cash outflow did not occur until the beginning of fiscal 2011. For fiscal 2012, the number of shares repurchased was 19.9 million for an average price per share of $20.60 for a total of $409.4 million. For fiscal 2013, the number of shares repurchased was 6.3 million for an average price per share of $41.12 for a total of $258.3 million. Between February 2, 2014 and March 20, 2014, we have repurchased 0.6 million shares at an average price per share of $37.17 for a total of $20.6 million and we have $436.5 million remaining under our latest authorization from November 2013.
On February 8, 2012, our Board of Directors approved the initiation of a quarterly cash dividend to our stockholders of Class A Common Stock. We paid a total of $0.80 per share in dividends in fiscal 2012 and a total of $1.10 per share in fiscal 2013. On March 4, 2014, our Board of Directors authorized an increase in our annual cash dividend from $1.10 to $1.32 per share of Class A Common Stock and on that date we declared our first quarterly cash dividend for fiscal 2014 of $0.33 per share of Class A
Common Stock payable on March 25, 2014 to stockholders of record at the close of business on March 17, 2014. Future dividends will be subject to approval by our Board of Directors.
Contractual Obligations
The following table sets forth our contractual obligations as of February 1, 2014:
(1)
Purchase obligations represent outstanding purchase orders for merchandise from vendors. These purchase orders are generally cancelable until shipment of the products.
(2)
As of February 1, 2014, we had $20.6 million of income tax liability related to unrecognized tax benefits in other long-term liabilities in our consolidated balance sheet. At the time of this filing, the settlement period for the noncurrent portion of our income tax liability (and the timing of any related payments) cannot be reasonably determined and therefore these liabilities are excluded from the table above. In addition, certain payments related to unrecognized tax benefits would be partially offset by reductions in payments in other jurisdictions. See Note 13 to our consolidated financial statements for further information regarding our uncertain tax positions.
We lease retail stores, warehouse facilities, office space and equipment. These are generally leased under noncancelable agreements that expire at various dates through 2034 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for minimum and, in some cases, percentage rentals and require us to pay all insurance, taxes and other maintenance costs. Percentage rentals are based on sales performance in excess of specified minimums at various stores. We do not have leases with capital improvement funding.
As of February 1, 2014, we had standby letters of credit outstanding in the amount of $9.0 million and had bank guarantees outstanding in the amount of $18.7 million, $13.0 million of which are cash collateralized.
Recent Accounting Standards and Pronouncements
In July 2013, accounting standards update (“ASU”) 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” was issued requiring an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carryforward, a similar tax loss, or a tax credit carryforward. This ASU will be effective for us beginning the first quarter of 2014. We do not expect that this ASU will have an impact on our consolidated financial statements as we currently do not have any unrecognized tax benefits in the same jurisdictions in which we have tax loss or credit carryovers.
In March 2013, ASU 2013-05 “Foreign Currency Matters (Topic 830)” was issued providing guidance with respect to the release of cumulative translation adjustments into net income when a parent company sells either a part or all of an investment in a foreign entity. The ASU requires the release of cumulative translation adjustments when a company no longer holds a controlling financial interest in a foreign subsidiary or a group of assets that constitutes a business within a foreign entity. This ASU will be effective for us beginning the first quarter of 2014. We are evaluating the effect of this ASU, but do not expect it to have a significant impact on our consolidated financial statements.
In February 2013, ASU 2013-02 “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” was issued regarding disclosure of amounts reclassified out of accumulated other comprehensive income by component. An entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU was effective for our annual and interim periods beginning in fiscal 2013. The ASU had no effect on our consolidated financial statements as we have a single component of other comprehensive income, currency translation adjustments, which is not reclassified to net income.
Seasonality
Our business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the fourth quarter which includes the holiday selling season. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other factors, the timing of new product introductions and new store openings, sales contributed by new stores, increases or decreases in comparable store sales, the nature and timing of acquisitions, adverse weather conditions, shifts in the timing of certain holidays or promotions and changes in our merchandise mix.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk due to foreign currency and interest rate fluctuations, each as described more fully below.
Foreign Currency Risk
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. For the fiscal year ended February 1, 2014, we recognized a $20.3 million loss in selling, general and administrative expenses related to derivative instruments. The aggregate fair value of the foreign currency contracts as of February 1, 2014 was a net liability of $22.1 million as measured by observable inputs obtained from market news reporting services, such as Bloomberg and The Wall Street Journal, and industry-standard models that consider various assumptions, including quoted forward prices, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures. A hypothetical strengthening or weakening of 10% in the foreign exchange rates underlying the foreign currency contracts from the market rate as of February 1, 2014 would result in a gain or loss in value of the forwards, options and swaps of $10.5 million.
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 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.
Interest Rate Risk
Our Revolver’s per annum interest rate is variable and is based on one of (i) the U.S. prime rate, (ii) the LIBO rate or (iii) the U.S. federal funds rate. We do not use derivative financial instruments to hedge interest rate exposure. We limit our interest rate risks by investing our excess cash balances in short-term, highly-liquid instruments with a maturity of one year or less. We do not expect any material losses from our invested cash balances. Additionally, a hypothetical 10% adverse movement in interest rates would not have a material impact our financial condition, results of operations or cash flows and we therefore believe that we do not have significant interest rate exposure.
Item 8.
Financial Statements and Supplementary Data
See Item 15(a)(1) and (2) of this Form 10-K.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at the reasonable assurance level. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and that our
disclosure controls and procedures are effective at the reasonable assurance level. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports.
(b)
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective at the reasonable assurance level as of February 1, 2014.
During the fourth quarter of fiscal 2013, we completed our acquisitions of Spring Mobile and the remaining equity ownership of Simply Mac that we did not previously own and began the process of integrating Spring Mobile and Simply Mac into our operations. We have excluded Spring Mobile and Simply Mac from our assessment of our internal control over financial reporting as of February 1, 2014 as we concluded there was insufficient time between the respective acquisition dates and the end of fiscal 2013 to properly plan, document, test and remediate, if necessary, the controls of Spring Mobile and Simply Mac. We will include Spring Mobile and Simply Mac in our assessment of our internal control over financial reporting as of January 31, 2015 (the end of fiscal year 2014). Because Spring Mobile and Simply Mac do not constitute a significant portion of our operations on a consolidated basis, we do not currently expect these integration efforts to have a material effect on our internal control over financial reporting. In the aggregate, Spring Mobile and Simply Mac represented 4.3% of our consolidated assets and less than 1% of our consolidated net sales and consolidated net income attributable to GameStop Corp. as of and for the 52 weeks ended February 1, 2014.
The effectiveness of our internal control over financial reporting as of February 1, 2014 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included in this Form 10-K on page 52.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GameStop Corp
Dallas, Texas
We have audited the internal control over financial reporting of GameStop Corp. (the "Company") as of February 1, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Spring Communications, Inc. (“Spring Mobile”) and Simply Mac, Inc. ("Simply Mac"), which ownership interests were acquired on November 3, 2013 and November 7, 2013, respectively, and whose financial statements constitute approximately 4.3% of consolidated assets and less than 1% of consolidated net sales and consolidated net income attributable to the Company as of and for the 52 week period ended February 1, 2014. Accordingly, our audit did not include the internal control over financial reporting at Spring Mobile and Simply Mac. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 1, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the 52 week period ended February 1, 2014 of the Company and our report dated April 2, 2014 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
April 2, 2014
Item 9B.
Other Information
None.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance*
Code of Ethics
We have adopted a Code of Ethics for Senior Financial and Executive Officers that is applicable to our Executive Chairman, Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, any Executive Vice President and any Vice President employed in a finance or accounting role. We have also adopted a Code of Standards, Ethics and Conduct applicable to all of our management-level employees. Each of the Code of Ethics and Code of Standards, Ethics and Conduct are available on our website at www.gamestop.com.
In accordance with SEC rules, we intend to disclose any amendment (other than any technical, administrative, or other non-substantive amendment) to either of the above Codes, or any waiver of any provision thereof with respect to any of the executive officers listed in the paragraph above, on our Web site (www.gamestop.com) within four business days following such amendment or waiver.
Item 11.
Executive Compensation*
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*
Item 13.
Certain Relationships and Related Transactions, and Director Independence*
Item 14.
Principal Accountant Fees and Services*
* The information not otherwise provided herein that is required by Items 10, 11, 12, 13 and 14 will be set forth in the definitive proxy statement relating to our 2014 Annual Meeting of Stockholders to be held on or around June 24, 2014, which is to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. This definitive proxy statement relates to a meeting of stockholders involving the election of directors and the portions therefrom required to be set forth in this Form 10-K by Items 10, 11, 12, 13 and 14 are incorporated herein by reference pursuant to General Instruction G(3) to Form 10-K.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)
The following documents are filed as a part of this Form 10-K:
(1)
Index and Consolidated Financial Statements
The list of consolidated financial statements set forth in the accompanying Index to Consolidated Financial Statements at page herein is incorporated herein by reference. Such consolidated financial statements are filed as part of this Form 10-K.
(2)
Financial Statement Schedules required to be filed by Item 8 of this Form 10-K:
The following financial statement schedule for the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012 is filed as part of this Form 10-K and should be read in conjunction with our Consolidated Financial Statements appearing elsewhere in this Form 10-K:
Schedule II - Valuation and Qualifying Accounts
For the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012:
(1) Consists primarily of amounts received from vendors for defective allowances.
All other schedules are omitted because they are not applicable.
(b)
Exhibits
The information required by this Section (b) of Item 15 is set forth on the Exhibit Index that follows the Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing elsewhere in this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
GAMESTOP CORP.
By:
/s/ J. PAUL RAINES
J. Paul Raines
Chief Executive Officer and Director
Date: April 2, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Capacity
Date
/s/ J. PAUL RAINES
Chief Executive Officer and Director
April 2, 2014
J. Paul Raines
(Principal Executive Officer)
/s/ DANIEL A. DEMATTEO
Executive Chairman and Director
April 2, 2014
Daniel A. DeMatteo
/s/ ROBERT A. LLOYD
Executive Vice President and Chief
April 2, 2014
Robert A. Lloyd
Financial Officer
(Principal Financial Officer)
/s/ TROY W. CRAWFORD
Senior Vice President, Chief Accounting
April 2, 2014
Troy W. Crawford
Officer
(Principal Accounting Officer)
/s/ JEROME L. DAVIS
Director
April 2, 2014
Jerome L. Davis
/s/ R. RICHARD FONTAINE
Director
April 2, 2014
R. Richard Fontaine
/s/ THOMAS N. KELLY JR.
Director
April 2, 2014
Thomas N. Kelly Jr.
/s/ SHANE S. KIM
Director
April 2, 2014
Shane S. Kim
/s/ STEVEN R. KOONIN
Director
April 2, 2014
Steven R. Koonin
/s/ STEPHANIE M. SHERN
Director
April 2, 2014
Stephanie M. Shern
/s/ GERALD R. SZCZEPANSKI
Director
April 2, 2014
Gerald R. Szczepanski
/s/ KATHY P. VRABECK
Director
April 2, 2014
Kathy P. Vrabeck
/s/ LAWRENCE S. ZILAVY
Director
April 2, 2014
Lawrence S. Zilavy
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
GameStop Corp. Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Balance Sheets
Statements of Operations
Statements of Comprehensive Income
Statements of Changes in Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GameStop Corp.
Grapevine, Texas
We have audited the accompanying consolidated balance sheet of GameStop Corp. (the "Company") as of February 1, 2014, and the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for the 52 week period ended February 1, 2014. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of GameStop Corp as of February 1, 2014, and the results of their operations and their cash flows for the 52 week period ended February 1, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of February 1, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 2, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
April 2, 2014
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
GameStop Corp.
Grapevine, Texas
We have audited the accompanying consolidated balance sheet of GameStop Corp. as of February 2, 2013 and the related consolidated statements of operations and comprehensive income, changes in equity, and cash flows for the 53 week period ended February 2, 2013 and the 52 week period ended January 28, 2012. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GameStop Corp. at February 2, 2013 and the results of its operations and its cash flows for the 53 week period ended February 2, 2013 and the 52 week period ended January 28, 2012, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ BDO USA, LLP
BDO USA, LLP
Dallas, TX
April 3, 2013
GAMESTOP CORP.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(1)
Dividends declared per common share were $0.80 in the 53 weeks ended February 2, 2013 and $1.10 in the 52 weeks ended February 1, 2014.
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations and Summary of Significant Accounting Policies
Background
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”) is a global, multichannel video game, consumer electronics and wireless services retailer and is the world’s largest multichannel video game retailer. We sell new and pre-owned video game hardware, physical and digital video game software, video game accessories, mobile and consumer electronics as well as other merchandise primarily through our GameStop, EB Games and Micromania stores. We sell mobile and consumer electronics primarily through our Spring Mobile and Simply Mac stores. Our stores, which totaled 6,675 at February 1, 2014, are located in major regional shopping malls and strip centers. We also operate electronic commerce Web sites at www.gamestop.com, www.ebgames.com.au, www.ebgames.co.nz, www.gamestop.ca, www.gamestop.it, www.gamestop.es, www.gamestop.ie, www.gamestop.de, www.gamestop.co.uk and www.micromania.fr. In addition, we publish Game Informer magazine, operate the online video gaming Web site www.kongregate.com, a digital PC game distribution platform available at www.gamestop.com/pcgames, iOS and Android mobile applications and an online consumer electronics marketplace available at www.buymytronics.com. We operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe, and a Technology Brands segment, which was added in the fourth quarter of fiscal 2013 and includes the operations of our Spring Mobile, Simply Mac, and Aio Wireless businesses.
Our largest vendors worldwide are Sony Computer Entertainment, Microsoft, Nintendo, Electronic Arts, Inc. and Activision, which accounted for 20%, 15%, 12%, 10% and 10%, respectively, of our new product purchases in fiscal 2013, 17%, 13%, 14%, 11% and 16%, respectively, in fiscal 2012 and 15%, 17%, 16%, 13% and 11%, respectively, in fiscal 2011. In addition, Take-Two Interactive accounted for 11% of our new product purchases in fiscal 2013.
Basis of Presentation and Consolidation
Our consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries and our majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All dollar and share amounts (other than dollar amounts per share) in the consolidated financial statements are stated in millions unless otherwise indicated.
Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. Fiscal 2013 consisted of the 52 weeks ended on February 1, 2014. Fiscal 2012 consisted of the 53 weeks ended on February 2, 2013. Fiscal 2011 consisted of the 52 weeks ended on January 28, 2012.
We have revised the presentation of outstanding checks in our prior period financial statements. Previously, we reduced cash and liabilities when the checks were presented for payment and cleared our bank accounts. As of February 1, 2014, we reduce cash and liabilities when the checks are released for payment.
The impacts of revising our financial statements for the specified prior periods are as follows:
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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.
Cash and Cash Equivalents
We consider all short-term, highly-liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Our cash and cash equivalents are carried at cost, which approximates market value, and consist primarily of time deposits with highly rated commercial banks. From time to time depending upon interest rates, credit worthiness and other factors, we invest in money market investment funds holding direct U.S. Treasury obligations.
Restricted Cash
We consider bank deposits serving as collateral for bank guarantees issued on behalf of our foreign subsidiaries as restricted cash, which is included in other noncurrent assets in our consolidated balance sheets. Our restricted cash was $16.4 million and $13.4 million as of February 1, 2014 and February 2, 2013, respectively.
Merchandise Inventories
Our merchandise inventories are carried at the lower of cost or market generally using the average cost method. Under the average cost method, as new product is received from vendors, its current cost is added to the existing cost of product on-hand and this amount is re-averaged over the cumulative units. Pre-owned video game products traded in by customers are recorded as inventory at the amount of the store credit given to the customer. In valuing inventory, we are required to make assumptions regarding the necessity of reserves required to value potentially obsolete or over-valued items at the lower of cost or market. We consider quantities on hand, recent sales, potential price protections and returns to vendors, among other factors, when making these assumptions.
Our ability to assess these factors is dependent upon our ability to forecast customer demand and to provide a well-balanced merchandise assortment. Inventory is adjusted based on anticipated physical inventory losses or shrinkage and actual losses resulting from periodic physical inventory counts. Inventory reserves as of February 1, 2014 and February 2, 2013 were $76.5 million and $83.8 million, respectively.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation on furniture, fixtures and equipment is computed using the straight-line method over their estimated useful lives ranging from two to ten years. Maintenance and repairs are expensed as incurred, while betterments and major remodeling costs are capitalized. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases, including option periods in which the exercise of the option is reasonably assured (generally ranging from three to ten years). Costs incurred in purchasing management information systems are capitalized and included in property and equipment. These costs are amortized over their estimated useful lives from the date the systems become operational. Our total depreciation expense was $152.9 million, $163.1 million and $172.2 million during fiscal 2013, fiscal 2012 and fiscal 2011, respectively.
We periodically review our property and equipment when events or changes in circumstances indicate that their carrying amounts may not be recoverable or their 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 would be recognized for the amount by which the carrying amount of the assets exceeds their fair value, as approximated by the present value of their projected discounted cash flows. We recorded impairment losses of $18.5 million, $8.8 million and $11.2 million in fiscal 2013, fiscal 2012 and fiscal 2011, respectively. See Note 2 for further information regarding our asset impairment charges.
Goodwill
Goodwill represents the excess purchase price over net identifiable assets acquired. Our management is required to evaluate goodwill and other intangible assets not subject to amortization for impairment at least annually. This annual test is completed as of the beginning of the fourth quarter 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 five operating and reportable segments, including Video Game Brands in the United States, Australia, Canada and Europe, and Technology Brands in the United States, 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 those regions.
We estimate the fair value of each reporting unit based on the discounted cash flows of each reporting unit. We use a two-step process to measure any potential goodwill impairment. If the fair value of the reporting unit is higher than its carrying value, then goodwill is not impaired. If the carrying value of the reporting unit is higher than the fair value, then the second step of the goodwill impairment test is needed. The second step compares the implied fair value of the reporting unit’s goodwill with its carrying amount. The implied fair value of goodwill is determined in step two of the goodwill impairment test by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation used in a business combination and the residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of its goodwill, then an impairment loss is recognized in the amount of the excess.
During the third quarter of fiscal 2012, our management determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment test. As a result of the interim goodwill impairment test, we recorded non-cash, non-tax deductible goodwill impairments for the third quarter of fiscal 2012 of $107.1 million, $100.3 million and $419.6 million in our Australia, Canada and Europe reporting units, respectively, to reduce the carrying value of goodwill.
We completed the annual impairment test of goodwill as of the first day of the fourth quarter of fiscal 2011, fiscal 2012 and fiscal 2013 and concluded that none of our goodwill was impaired. For the fiscal 2013 annual impairment test, Technology Brands was excluded since it commenced operations during the fourth quarter and therefore was not a reporting unit subject to assessment as of our annual testing date. For our United States, Canada and Australia reporting units, the calculated fair value of each of these reporting units exceeded their carrying values by more than 20% and the calculated fair value of our Europe reporting unit exceeded its carrying value by more than 10%. For fiscal 2013, there was a $10.2 million goodwill write-off in the United States Video Game Brands segment as a result of abandoning our investment in Spawn Labs. For fiscal 2011, there was a $3.3 million goodwill write-off in the United States Video Game Brands segment as a result of the exiting of a non-core business. Note 9 provides additional information concerning the changes in goodwill for the consolidated financial statements presented.
Other Intangible Assets
Other intangible assets consist primarily of trade names, leasehold rights, advertising relationships, dealer agreements and amounts attributed to favorable leasehold interests recorded as a result of business acquisitions. 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. The estimated useful life and amortization methodology of intangible assets are
determined based on the period in which they are expected to contribute directly to cash flows. Intangible assets that are determined to have a definite life are amortized over that period. Leasehold rights which were recorded as a result of the purchase of SFMI Micromania SAS (“Micromania”) represent the value of rights of tenancy under commercial property leases for properties located in France. Rights pertaining to individual leases can be sold by us to a new tenant or recovered by us from the landlord if the exercise of the automatic right of renewal is refused. Leasehold rights are amortized on a straight-line basis over the expected lease term not to exceed 20 years, with no residual value. Advertising relationships, which were recorded as a result of digital acquisitions, are relationships with existing advertisers who pay to place ads on our digital Web sites and are amortized on a straight-line basis over 10 years. Favorable leasehold interests represent the value of the contractual monthly rental payments that are less than the current market rent at stores acquired as part of the Micromania acquisition or the EB merger. Favorable leasehold interests are amortized on a straight-line basis over their remaining lease term with no expected residual value.
Intangible assets that are determined to have an indefinite life are not amortized, but are required to be evaluated at least annually for impairment. Trade names which were recorded as a result of acquisitions, primarily Micromania, are considered indefinite-lived intangible assets as they are expected to contribute to cash flows indefinitely and are not subject to amortization, but are subject to annual impairment testing. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value as determined by its discounted cash flows, such individual indefinite-lived intangible asset is written down by the amount of the excess.
During the third quarter of fiscal 2012, our management determined that sufficient indicators of potential impairment existed to require an interim impairment test of our Micromania trade name. As a result of the interim impairment test of the Micromania trade name, we recorded a $44.9 million impairment charge during the third quarter of fiscal 2012. We completed the annual impairment tests of indefinite-lived intangible assets as of the first day of the fourth quarter of fiscal 2013 and fiscal 2012 and concluded that none of our intangible assets were impaired. We completed the annual impairment test of indefinite-lived intangible assets as of the first day of the fourth quarter of fiscal 2011 and concluded that the Micromania trade name was impaired due to revenue forecasts that had declined since the initial valuation. As a result, we recorded a $37.8 million impairment charge for fiscal 2011. The impairment charges are recorded in asset impairments and restructuring charges in our consolidated statements of operations and are recorded in the Europe segment. See Note 9.
Revenue Recognition
Revenue from the sales of our products is recognized at the time of sale, net of sales discounts and net of an estimated sales return reserve, based on historical return rates, with a corresponding reduction in cost of sales. Our sales return policy is generally limited to less than 30 days and as such our sales returns are, and have historically been, immaterial.
The sales of pre-owned video game products are recorded at the retail price charged to the customer. Advertising revenues for Game Informer are recorded upon release of magazines for sale to consumers. Subscription revenues for our PowerUp Rewards loyalty program and magazines are recognized on a straight-line basis over the subscription period. Revenue from the sales of product replacement plans is recognized on a straight-line basis over the coverage period. The deferred revenues for our PowerUp Rewards loyalty program, gift cards, customer credits, magazines and product replacement plans are included in accrued liabilities (see Note 8). Gift cards sold to customers are recognized as a liability on the consolidated balance sheet until redeemed or until a reasonable point at which breakage related to non-redemption can be recognized.
We also sell a variety of digital products which generally allow consumers to download software or play games on the internet. Certain of these products do not require us to purchase inventory or take physical possession of, or take title to, inventory. When purchasing these products from us, consumers pay a retail price and we earn a commission based on a percentage of the retail sale as negotiated with the product publisher. We recognize these commissions as revenue on the sale of these digital products.
Revenues do not include sales taxes or other taxes collected from customers.
Cost of Sales and Selling, General and Administrative Expenses Classification
The classification of cost of sales and selling, general and administrative expenses varies across the retail industry. We include purchasing, receiving and distribution costs in selling, general and administrative expenses, rather than cost of goods sold, in the consolidated statements of operations. For the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012, these purchasing, receiving and distribution costs amounted to $56.4 million, $58.8 million and $61.7 million, respectively.
We include processing fees associated with purchases made by check and credit cards in cost of sales, rather than selling, general and administrative expenses, in the consolidated statements of operations. For the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012, these processing fees amounted to $61.5 million, $54.2 million and $65.1 million, respectively.
Customer Liabilities
We establish a liability upon the issuance of merchandise credits and the sale of gift cards. Revenue is subsequently recognized when the credits and gift cards are redeemed. In addition, breakage is recognized quarterly on unused customer liabilities older than two years to the extent that our management believes the likelihood of redemption by the customer is remote, based on historical redemption patterns. Breakage has historically been immaterial. To the extent that future redemption patterns differ from those historically experienced, there will be variations in the recorded breakage.
Advertising Expenses
We expense advertising costs for newspapers and other media when the advertising takes place. Advertising expenses for television, newspapers and other media during the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012 were $57.8 million, $63.9 million and $65.0 million, respectively.
Loyalty Expenses
The PowerUp Rewards loyalty program, introduced in May 2010, allows enrolled members to earn points on purchases that can be redeemed for rewards that include discounts or merchandise. We estimate the net cost of the rewards that will be issued and redeemed and record this cost and the associated balance sheet reserve as points are accumulated by loyalty program members. The two primary estimates utilized to record the balance sheet reserve for loyalty points earned by members are the estimated redemption rate and the estimated weighted-average cost per point redeemed. Our management uses historical redemption rates experienced under the loyalty program as a basis to estimate the ultimate redemption rate of points earned. A weighted-average cost per point redeemed is used to estimate future redemption costs. The weighted-average cost per point redeemed is based on our most recent actual costs incurred to fulfill points that have been redeemed by our loyalty program members and is adjusted as appropriate for recent changes in redemption costs, including the mix of rewards redeemed. We continually evaluate our reserve methodology and assumptions based on developments in redemption patterns, cost per point redeemed and other factors. Changes in the ultimate redemption rate and weighted-average cost per point redeemed have the effect of either increasing or decreasing the reserve through the current period provision by an amount estimated to cover the cost of all points previously earned but not yet redeemed by loyalty program members as of the end of the reporting period.
Historically, the cost was recognized in selling, general and administrative expenses and the associated liability was included in accrued liabilities. However, in the fourth quarter of 2013, we determined that the net cost of the rewards that will be issued and redeemed would be better presented as cost of sales. The cost of administering the loyalty program, including program administration fees, program communications and cost of loyalty cards, will continue to be recognized in selling, general and administrative expenses. The cost of free or discounted products recognized in cost of sales for the 52 weeks ended February 1, 2014 was $18.2 million. The cost of free or discounted products for the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012 was $31.2 million and $37.8 million, respectively, all of which was recorded in selling, general and administrative expenses as discussed above. The reserve is released when loyalty program members redeem their respective points and the corresponding rewards are recorded to cost of goods sold in the period of redemption.
Income Taxes
Income tax expense includes federal, state, local and international income taxes. Income taxes are accounted for utilizing an asset and liability approach and deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting basis and the tax basis of existing assets and liabilities using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. In accordance with GAAP, we maintain liabilities for uncertain tax positions until examination of the tax year is completed by the applicable taxing authority, available review periods expire or additional facts and circumstances cause us to change our assessment of the appropriate accrual amount (see Note 13).
We plan on permanently reinvesting our undistributed foreign earnings outside the United States. Where foreign earnings are permanently reinvested, no provision for federal income or foreign withholding taxes is made. Should we have undistributed foreign earnings that are not permanently reinvested, United States income tax expense and foreign withholding taxes will be provided for at the time the earnings are generated.
Lease Accounting
We lease retail stores, warehouse facilities, office space and equipment. These are generally leased under noncancelable agreements that expire at various dates through 2034 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for minimum and, in some cases, percentage rentals and require us to pay all insurance, taxes and other maintenance costs. Leases with step rent provisions, escalation clauses or other lease concessions
are accounted for on a straight-line basis over the lease term, which includes renewal option periods when we are reasonably assured of exercising the renewal options and includes “rent holidays” (periods in which we are not obligated to pay rent). Cash or lease incentives received upon entering into certain store leases (“tenant improvement allowances”) are recognized on a straight-line basis as a reduction to rent expense over the lease term, which includes renewal option periods when we are reasonably assured of exercising the renewal options. We record the unamortized portion of tenant improvement allowances as a part of deferred rent. We do not have leases with capital improvement funding. 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.
Foreign Currency Translation
We have determined that the functional currencies of our foreign subsidiaries are the subsidiaries’ local currencies. The assets and liabilities of the subsidiaries are translated at the applicable exchange rate as of the end of the balance sheet date and revenue and expenses are translated at an average rate over the period. Currency translation adjustments are recorded as a component of other comprehensive income. Transaction and derivative net gains (losses) are included in selling, general and administrative expenses and were $3.3 million, $2.5 million and $(0.6) million for the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012, respectively. The foreign currency transaction gains and losses are primarily due to the decrease or increase in the value of the U.S. dollar compared to the functional currencies of the countries in which we operate internationally. The foreign currency transaction gains and (losses) are primarily due to fluctuations in the value of the U.S. dollar compared to the Australian dollar, Canadian dollar and euro.
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. These foreign currency contracts are not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign currency assets and liabilities (see Note 6).
New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update (“ASU”) related to the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carryforward, a similar tax loss, or a tax credit carryforward. This ASU will be effective for us beginning the first quarter of 2014. We do not expect that this ASU will have an impact on our consolidated financial statements as we currently do not have any unrecognized tax benefits in the same jurisdictions in which we have tax loss or credit carryovers.
In March 2013, the FASB issued an ASU providing guidance with respect to the release of cumulative translation adjustments into net income when a parent company sells either a part or all of an investment in a foreign entity. The ASU requires the release of cumulative translation adjustments when a company no longer holds a controlling financial interest in a foreign subsidiary or a group of assets that constitutes a business within a foreign entity. This ASU will be effective for us beginning the first quarter of 2014. We are evaluating the effect of this ASU, but do not expect it to have a significant impact on our Consolidated Financial Statements.
In February 2013, the FASB issued an ASU related to the reporting and disclosure of amounts reclassified out of accumulated other comprehensive income by component. An entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU was effective for our annual and interim periods beginning in fiscal 2013. The ASU had no effect on our consolidated financial statements as we have a single component of other comprehensive income, currency translation adjustments, which is not reclassified to net income.
2.
Asset Impairments and Restructuring Charges
Fiscal 2013
We recognized impairment charges of $9.0 million in fiscal 2013 related to our evaluation of store property, equipment and other assets in situations where the asset’s carrying value was not expected to be recovered by its future cash flows over its remaining useful life. We used a discounted cash flow method to estimate the present value of net cash flows that the fixed asset or fixed asset group is expected to generate in determining its fair value. The key inputs to the discounted cash flow model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate.
Additionally, we made a decision during the fourth quarter of fiscal 2013 to abandon our Spawn Labs business and related technology assets. As a result of this decision, we recorded impairment charges of $2.1 million related to other intangible assets and $7.4 million related to certain technology assets in connection with the exit of the Spawn Labs business, which are reflected in the asset impairments and restructuring charges line item in our consolidated statements of operations. Additionally, because we never integrated Spawn Labs into our United States Video Game Brands reporting unit, our decision to exit this business triggered an interim impairment test that resulted in a goodwill impairment charge of $10.2 million, which is reflected in the goodwill impairments line item in our consolidated statements of operations.
A summary of our asset impairment charges, by reportable segment, for the 52 weeks ended February 1, 2014 is as follows:
There were no restructuring charges for the 52 weeks ended February 1, 2014, and we did not have any amounts accrued for termination benefits as of February 1, 2014. An immaterial amount of termination benefits related to our restructuring initiatives was recorded within accrued liabilities in our consolidated balance sheet as of February 2, 2013, all of which was paid during fiscal 2013.
Fiscal 2012
During the third quarter of fiscal 2012, we recorded a $44.9 million impairment charge as a result of our interim impairment test of our Micromania trade name, which is described more fully in Note 9. The fair value of the Micromania trade name was calculated using a relief-from-royalty approach, which assumes the fair value of the trade name is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the trade name and instead licensed the trade name from another company.
In fiscal 2012, we also recorded impairments of finite-lived assets of $8.8 million consisting primarily of the remaining net book value of assets for stores we are in the process of closing or that we have determined will not have sufficient cash flow on an undiscounted basis to cover the remaining net book value of assets recorded for that store.
A summary of our asset impairment charges, by reportable segment, for the 53 weeks ended February 2, 2013 is as follows:
There were no restructuring charges during the fiscal year ended February 2, 2013.
Fiscal 2011
In the fourth quarter of fiscal 2011, we recorded total asset impairments and restructuring charges of $81.2 million, of which $37.8 million was recorded as a result of the annual impairment test of our Micromania trade name. The fair value of the Micromania trade name was calculated using a relief-from-royalty approach. See Note 9 for further information regarding the trade name impairment. In addition, $22.7 million was recorded related to the impairment of investments in non-core businesses, primarily a small retail movie chain of stores owned by us until fiscal 2011. We also incurred restructuring charges in the fourth quarter of fiscal 2011 related to the exit of certain markets in Europe and the closure of underperforming stores in the international segments, as well as the consolidation of European home office sites and back-office functions. These restructuring charges were a result of our management’s plan to rationalize the international store base and improve profitability. In addition, we recognized impairment charges related to our evaluation of store property, equipment and other assets in situations where the asset’s carrying value was not expected to be recovered by its future cash flows over its remaining useful life.
A summary of our asset impairments and restructuring charges, by reportable segment, for the 52 weeks ended January 28, 2012 is as follows:
3.
Acquisitions
Fiscal 2013 Acquisition Activity
Simply Mac -- In October 2012, we acquired a minority equity ownership interest in Simply Mac, which operates Apple specialist retail stores in Utah and Wyoming. The original equity investment was structured with an option whereby we could acquire the remaining ownership interest in Simply Mac's equity for a pre-negotiated price at a future point in time. Pursuant to this arrangement, in November 2013, we acquired the remaining 50.1% interest in Simply Mac for a purchase price of $9.5 million.
Spring Mobile -- In November 2013, we purchased Spring Communications, Inc. ("Spring Mobile"), a wireless retailer, for a purchase price of $62.6 million. As shown in the table below, the liabilities assumed in the acquisition included $34.5 million in term loans and a line of credit, of which $31.9 million, including interest, was repaid shortly after the acquisition date.
A summary of the fair values of the assets acquired and liabilities assumed in connection with the Spring Mobile acquisition is included in the table below. We determined the fair values based, in part, on a third-party valuation of the net assets acquired, which includes identifiable intangible assets of $39.6 million.
The excess of the net purchase price over the fair value of the net identifiable assets acquired of $50.2 million was recorded as goodwill as illustrated in the table above. The goodwill, which is not deductible for tax purposes, represents a value attributable to the position Spring Mobile holds as a top reseller of AT&T and its position in the marketplace which affords it the ability to acquire smaller retailers and grow its retail network. As of February 1, 2014, we had not completed the final fair value assignments and continue to analyze certain matters primarily related to the valuation of intangible assets.
In connection with our acquisition of Spring Mobile, we assumed a promissory note that Spring Mobile had previously entered into related to its prior purchase of certain wireless stores. The promissory note has a remaining term of approximately two years and had a carrying value of $4.0 million at February 1, 2014.
During the fourth quarter of 2014, Spring Mobile acquired four immaterial AT&T distributors for total consideration of $7.6 million.
We believe that Simply Mac and Spring Mobile represent important strategic growth opportunities for us within the specialty retail marketplace and also provide avenues for diversification relative to our core operations in the video game retail marketplace. The operating results of Simply Mac and Spring Mobile have been included in our consolidated financial statements beginning on the respective closing dates of each acquisition and are reported in our Technology Brands segment. The pro forma effect assuming these acquisitions were made at the beginning of each fiscal year presented herein is not material to our consolidated financial statements.
Acquisition Activity in Fiscal 2012 and Fiscal 2011
During fiscal 2012, we completed acquisitions with a total consideration of $1.5 million, with the excess of the purchase price over the net identifiable assets acquired, in the amount of $1.5 million recorded as goodwill. During fiscal 2011, we completed acquisitions with a total consideration of $30.1 million, with the excess of the purchase price over the net identifiable assets acquired, in the amount of $26.9 million, recorded as goodwill. We included the results of operations of the acquisitions, which were not material, in the financial statements beginning on the closing date of each respective acquisition. The pro forma effect assuming these acquisitions were made at the beginning of each fiscal year is not material to our consolidated financial statements. Note 9 provides additional information concerning goodwill and intangible assets.
4.
Vendor Arrangements
We and approximately 45 of our vendors participate in cooperative advertising programs and other vendor marketing programs in which the vendors provide us with cash consideration in exchange for marketing and advertising the vendors’ products. Our accounting for cooperative advertising arrangements and other vendor marketing programs results in a significant portion of the consideration received from our vendors reducing the product costs in inventory rather than as an offset to our marketing and advertising costs. The consideration serving as a reduction in inventory is recognized in cost of sales as inventory is sold. The amount of vendor allowances to be recorded as a reduction of inventory was determined based on the nature of the consideration received and the merchandise inventory to which the consideration relates. We apply a sell through rate to determine the timing in which the consideration should be recognized in cost of sales. Consideration received that relates to video game products that have not yet been released to the public is deferred.
The cooperative advertising programs and other vendor marketing programs generally cover a period from a few days up to a few weeks and include items such as product catalog advertising, in-store display promotions, Internet advertising, co-op print advertising and other programs. The allowance for each event is negotiated with the vendor and requires specific performance by us to be earned.
For fiscal 2013, we reclassified certain costs from selling, general and administrative expenses to cost of sales related to cash consideration received from our vendors to align those funds with the specific products we sell. Vendor allowances of $221.0 million were recorded as a reduction of cost of sales for the 52 week period ended February 1, 2014. For the 53 week period ended February 2, 2013 and the 52 week period ended January 28, 2012, vendor allowances recorded as a reduction of costs of sales and selling, general and administrative expenses, were $134.8 million and $90.4 million and $99.0 million and $120.9 million, respectively.
5.
Computation of Net Income (Loss) per Common 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 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. 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 reconciliation of shares used in calculating basic and diluted net income (loss) per common share is as follows:
The weighted average outstanding shares of Class A Common Stock for basic and diluted net loss per common share during the 53 weeks ended February 2, 2013 were the same as we incurred a net loss from continuing operations during that period and any effect on loss per share would have been antidilutive.
The following table contains information on share-based awards of Class A Common Stock which were excluded from the computation of diluted earnings per share because their effects were antidilutive:
6.
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, life insurance policies we own that have a cash surrender value and certain nonqualified deferred compensation liabilities that are measured at fair value on a recurring basis in periods subsequent to initial recognition.
Fair value accounting guidance requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
We value our foreign currency contracts, 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 The Wall Street Journal, and industry-standard models that consider various assumptions, including quoted forward prices, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures. When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
The following table provides the fair value of our assets and liabilities measured on a recurring basis and recorded on our consolidated balance sheets (in millions):
____________________
1 Recognized in other non-current assets in our consolidated balance sheets.
2 Recognized in accrued liabilities in our consolidated balance sheets.
We use foreign currency contracts, including forward exchange contracts, foreign currency options and cross-currency swaps, to manage currency risk primarily related to intercompany loans denominated in non-functional currencies and certain foreign currency assets and liabilities. These foreign currency contracts are not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings, thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign currency assets and liabilities. The total gross notional value of derivatives related to our foreign currency contracts was $640.6 million and $669.9 million as of February 1, 2014 and February 2, 2013, respectively.
Activity related to the trading of derivative instruments and the offsetting impact of related intercompany loans and foreign currency assets and liabilities recognized in selling, general and administrative expense is as follows (in millions):
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 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 recorded certain assets and liabilities at fair value on a nonrecurring basis as required by GAAP. Assets and liabilities that are measured at fair value on a nonrecurring basis related primarily to our tangible property and equipment, goodwill and other intangible assets.
During fiscal 2013, we recorded a $28.7 million impairment charge related to assets measured at fair value on a nonrecurring basis, comprised of $16.4 million of property and equipment impairments, $10.2 million of goodwill impairments and $2.1 million of other intangible asset impairments. During fiscal 2012, we recorded a $680.7 million impairment charge related to assets measured at fair value on a nonrecurring basis, comprised of $627 million of goodwill impairments, $44.9 million of trade name impairment and $8.8 million of property and equipment impairments. When recognizing an impairment charge, the carrying value of the asset is reduced to fair value and the difference is recorded within operating earnings in our consolidated statements of operations. The fair value measurements included in the goodwill, trade name and property and equipment impairments were primarily based on significant unobservable inputs (Level 3) developed using company-specific information. See Note 9 for further information associated with the goodwill and trade name impairments and Note 2 for further information associated with the property and equipment impairments.
Additionally, we recorded the fair value of net assets acquired and liabilities assumed in connection with the Spring Mobile and Simply Mac acquisitions in the fourth quarter of 2013. The fair value measurements were primarily based on significant unobservable inputs (Level 3) developed using company-specific information. See Note 3 for further information associated with the values recorded in the acquisitions.
Other Fair Value Disclosures
The carrying value of financial instruments such as cash and cash equivalents, receivables, net and accounts payable approximates their fair value, except for differences with respect to our senior notes that were outstanding until December 2011. As of January 28, 2012, there were no senior notes payable.
7.
Receivables, Net
Receivables consist primarily of bankcard receivables and other receivables. Other receivables include receivables from Game Informer magazine advertising customers, receivables from landlords for tenant allowances and receivables from vendors for merchandise returns, vendor marketing allowances and various other programs. An allowance for doubtful accounts has been recorded to reduce receivables to an amount expected to be collectible. Receivables consisted of the following (in millions):
8.
Accrued Liabilities
Accrued liabilities consisted of the following (in millions):
9.
Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill, by reportable segment, for the 53 weeks ended February 2, 2013 and the 52 weeks ended February 1, 2014 were as follows:
Goodwill represents the excess purchase price over tangible net assets and identifiable intangible assets acquired. Our management is 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 five operating segments, including Video Game Brands in the United States, Australia, Canada and Europe, and Technology Brands in the United States, 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 those regions.
We estimate the fair value of each reporting unit based on the discounted cash flows of each reporting unit. We use a two-step process to measure goodwill impairment. If the fair value of the reporting unit is higher than its carrying value, then goodwill is not impaired. If the carrying value of the reporting unit is higher than the fair value, then the second step of the goodwill impairment test is needed. The second step compares the implied fair value of the reporting unit’s goodwill with its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value, then an impairment loss is recognized in the amount of the excess.
During the third quarter of fiscal 2012, our management determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment test. These indicators included the recent trading prices of our Class A Common Stock and the decrease in our market capitalization below the total amount of stockholders’ equity on our consolidated balance sheet.
To perform step one of the interim goodwill impairment test, we utilized a discounted cash flow method to determine the fair value of reporting units. Our management was required to make significant judgments based on our projected annual business plans, long-term business strategies, comparable store sales, store count, gross margins, operating expenses, working capital needs, capital expenditures and long-term growth rates, all considered in light of current and anticipated economic factors. Discount rates used in the analysis reflect a hypothetical market participant’s weighted average cost of capital, current market rates and the risks associated with the projected cash flows. Terminal growth rates were based on long-term growth rate potential and a long-term inflation forecast. Given the significant decline in our market capitalization during the second quarter of fiscal 2012, we increased the discount rates for each of our reporting units from those used in step one of our fiscal 2011 annual goodwill impairment test to better reflect the market participant’s perceived risk associated with the projected cash flows, which had the effect of decreasing the fair value of each of the reporting units. We also updated its estimated cash flows from those used in step one of the fiscal 2011 annual goodwill impairment test to reflect the most recent strategic forecast, which resulted in, among other things, a decrease in the projected growth rates in store count and modifications to the projected growth rates in same-store sales.
Upon completion of step one of the interim goodwill impairment test, our management determined that the fair values of its Australia, Canada and Europe reporting units were below their carrying values and, as a result, conducted step two of the interim goodwill impairment test to determine the implied fair value of goodwill for the Australia, Canada and Europe reporting units. The calculated fair value of the United States reporting unit significantly exceeded its carrying value. Therefore, step two of the interim goodwill impairment test was not required for the United States reporting unit.
The implied fair value of goodwill is determined in step two of the goodwill impairment test by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation used in a business combination and the residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill. In the process of conducting the second step of the goodwill impairment test, we identified intangible assets consisting of trade names in our Australia, Canada and Europe reporting
units. Additionally, we identified hypothetical unrecognized fair value changes to merchandise inventories, property and equipment, unfavorable leasehold interests and deferred income taxes. The combination of these hypothetical unrecognized intangible assets and other hypothetical unrecognized fair value changes to the carrying values of other assets and liabilities, together with the lower reporting unit fair values calculated in step one, resulted in an implied fair value of goodwill below the carrying value of goodwill for the Australia, Canada and Europe reporting units. Accordingly, we recorded non-cash, non-tax deductible goodwill impairments for the third quarter of fiscal 2012 of $107.1 million, $100.3 million and $419.6 million in our Australia, Canada and Europe reporting units, respectively, to reduce the carrying value of goodwill.
There were no impairments to goodwill prior to the $627 million charge recorded in fiscal 2012, with the exception of a $3.3 million charge recorded in fiscal 2011 related to the exit of non-core operations. During fiscal 2013, $10.2 million of goodwill was expensed in the United States segment as a result of the exiting of an immaterial non-core business. Cumulative goodwill impairment losses were $640.5 million as of February 1, 2014, of which $13.5 million, $100.3 million, $107.1 million and $419.6 million were attributable to our United States, Canada, Australia and Europe reporting units, respectively.
Intangible Assets
Intangible assets, primarily from the EB merger and Micromania acquisition, consist of internally developed software, amounts attributed to favorable leasehold interests and advertiser relationships which are included in other intangible assets in the consolidated balance sheet. The trade names acquired, primarily Micromania, have been determined to be indefinite-lived intangible assets and are therefore not subject to amortization. The total weighted-average amortization period for the remaining intangible assets, excluding goodwill, is approximately six years. The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized, with no expected residual value.
As a result of the impairment indicators described in the discussion above of the interim goodwill impairment test, during the third quarter of fiscal 2012, we also tested our long-lived assets for impairment and concluded that our Micromania trade name was impaired. As a result of the interim impairment test, we recorded a $44.9 million impairment charge of our Micromania trade name for the third quarter of fiscal 2012. For fiscal 2011, we recorded a $37.8 million charge as a result of our annual impairment test of our Micromania trade name. There were no trade name impairments recorded as a result of the fiscal 2013 annual impairment test. For each impairment test, the fair value of our Micromania trade name was calculated using a relief-from-royalty approach, which assumes the fair value of the trade name is the discounted cash flows of the amount that would be paid by a hypothetical market participant had they not owned the trade name and instead licensed the trade name from another company. The basis for future cash flow projections is internal revenue forecasts, which we believe represent reasonable market participant assumptions, to which the selected royalty rate is applied. These future cash flows are discounted using the applicable discount rate, as well as any potential risk premium to reflect the inherent risk of holding a standalone intangible asset. The discount rate used in the analysis reflects a hypothetical market participant’s weighted average cost of capital, current market rates and the risks associated with the projected cash flows.
The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of February 1, 2014 and February 2, 2013 were as follows (in millions):
(1) The majority of the change in the gross carrying amount of intangible assets is due to business acquisitions (Note 3).
Intangible asset amortization expense for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 was $14.0 million, $14.3 million and $17.8 million, respectively.
The estimated aggregate intangible asset amortization expense for the next five fiscal years is as follows (in millions):
10.
Debt
On January 4, 2011, we entered into a $400 million credit agreement (the “Revolver”), which amended and restated our prior credit agreement entered into in October 2005 (the “Credit Agreement”). The Revolver provides for a five-year, $400 million asset-based facility, including a $50 million letter of credit sublimit, secured by substantially all of our assets and the assets of our domestic subsidiaries. We have the ability to increase the facility, which matures in January 2016, by $150 million under certain circumstances. The extension of the Revolver to January 2016 reduces our exposure to potential tightening or other adverse changes in the credit markets.
The 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. Letters of credit reduce the amount available to borrow by their face value. Our ability to pay cash dividends, redeem options and repurchase shares is generally permitted, except under certain circumstances, including if Revolver excess availability is less than 20%, or is projected to be within 12 months after such payment. In addition, if Revolver usage is projected to be equal to or greater than 25% of total commitments during the prospective 12-month period, we are subject to meeting a fixed charge coverage ratio of 1.1:1.0 prior to making such payments. In the event that excess availability under the Revolver is at any time less than the greater of (1) $40 million or (2) 12.5% of the lesser of the total commitment or the borrowing base, we will be subject to a fixed charge coverage ratio covenant of 1.1:1.0.
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 $750 million of additional unsecured indebtedness to be limited to $250 million in general unsecured obligations and $500 million in unsecured obligations to finance acquisitions valued at $500 million or more. The per annum interest rate under the Revolver is variable and is calculated by applying a margin (1) for prime rate loans of 1.25% to 1.5% 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 2.25% to 2.50% 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 0.375% or 0.50%, depending on facility usage, for any unused portion of the total commitment under the Revolver. As of February 1, 2014, the applicable margin was 1.25% for prime rate loans and 2.25% for LIBO rate loans, while the required commitment fee was 0.50% for the unused portion of the Revolver.
The Revolver provides for customary events of default with corresponding grace periods, including failure to pay any principal or interest when due, failure to comply with covenants, any material representation or warranty made 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 our mergers or liquidation or mergers or the liquidation of certain of our subsidiaries. During fiscal 2013, we borrowed and repaid $130.0 million under the Revolver. During fiscal 2012 and fiscal 2011, we borrowed and repaid $81.0 million and $35.0 million, respectively, under the Revolver. Average borrowings under the Revolver for the 52 weeks ended February 1, 2014 were $14.2 million. Our average interest rate on those outstanding borrowings for the 52 weeks ended February 1, 2014 was 2.8%. As of February 1, 2014, total availability under the Revolver was $391 million, there were no borrowings outstanding and letters of credit outstanding totaled $9.0 million. We are currently in compliance with the requirements of the Revolver.
On March 25, 2014, we amended and restated our revolving credit facility. The terms of the agreement were modified to extend the maturity date for the revolving credit facility to March 25, 2019, to increase the expansion feature under the facility from $150 million to $200 million, subject to certain conditions, and to amend certain other terms, including a reduction in the
fee we are required to pay on the unused portion of the total commitment amount. The five-year, asset-based revolving credit facility has a total commitment amount of $400 million, which is subject to a monthly borrowing base calculation, and is available for the issuance of letters of credit of up to $50 million. The facility is secured by substantially all of our assets and the assets of our domestic subsidiaries. We believe the extension of the maturity date of the revolving credit facility to March 2019 helps to limit our exposure to potential tightening or other adverse changes in the credit markets.
In September 2007, our Luxembourg subsidiary entered into a discretionary $20.0 million Uncommitted Line of Credit (the “Line of Credit”) with Bank of America. There is no term associated with the Line of Credit and Bank of America may withdraw the facility at any time without notice. The Line of Credit is available to our foreign subsidiaries for use primarily as a bank overdraft facility for short-term liquidity needs and for the issuance of bank guarantees and letters of credit to support operations. As of February 1, 2014, there were no cash overdrafts outstanding under the Line of Credit and bank guarantees outstanding totaled $4.3 million.
11.
Leases
We lease retail stores, warehouse facilities, office space and equipment. These are generally leased under noncancelable agreements that expire at various dates through 2034 with various renewal options for additional periods. The agreements, which have been classified as operating leases, generally provide for minimum and, in some cases, percentage rentals and require us to pay all insurance, taxes and other maintenance costs. Leases with step rent provisions, escalation clauses or other lease concessions are accounted for on a straight-line basis over the lease term, which includes renewal option periods when we are reasonably assured of exercising the renewal options and includes “rent holidays” (periods in which we are not obligated to pay rent). Cash or lease incentives received upon entering into certain store leases (“tenant improvement allowances”) are recognized on a straight-line basis as a reduction to rent expense over the lease term, which includes renewal option periods when we are reasonably assured of exercising the renewal options. We record the unamortized portion of tenant improvement allowances as a part of deferred rent. We do not have leases with capital improvement funding. 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.
Approximate rental expenses under operating leases were as follows:
Future minimum annual rentals, excluding percentage rentals, required under leases that had initial, noncancelable lease terms greater than one year, as of February 1, 2014, are approximately:
12.
Commitments and Contingencies
Commitments
We had bank guarantees relating primarily to international store leases totaling $18.7 million as of February 1, 2014 and $21 million as of February 2, 2013.
See Note 11 for information regarding commitments related to our noncancelable operating leases.
Contingencies
In the ordinary course of our business, we are, from time to time, subject to various legal proceedings, including matters involving wage and hour employee class actions and consumer class actions. We may enter into discussions regarding settlement of these and other types of lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interest of our stockholders. We do not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or liquidity.
13.
Income Taxes
The provision for income tax consisted of the following:
The components of earnings (loss) before income tax expense consisted of the following:
The difference in income tax provided and the amounts determined by applying the statutory rate to earnings (loss) before income taxes resulted from the following:
(1) Other is comprised of numerous items, none of which is greater than 1.75% of earnings before income taxes.
Differences between financial accounting principles and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities and consisted of the following components (in millions):
In addition, the valuation allowance for deferred tax assets as of the fiscal year ended January 28, 2012 was $3.4 million.
We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Internal Revenue Service (“IRS”) is currently examining our U.S. income tax returns for the fiscal years ended February 2, 2013, January 28, 2012, January 29, 2011, January 30, 2010 and January 31, 2009. We do not anticipate any adjustments that would result in a material impact on our consolidated financial statements as a result of these audits. We are no longer subject to U.S. federal income tax examination for years before and including the fiscal year ended February 2, 2008.
With respect to state and local jurisdictions and countries outside of the United States, we and our subsidiaries are typically subject to examination for three to six years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, we believe that adequate amounts of tax, interest and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to state, local or foreign audits.
As of February 1, 2014, the gross amount of unrecognized tax benefits was approximately $20.6 million. If we were to prevail on all uncertain tax positions, the net effect would be a benefit to our effective tax rate of approximately $18.5 million, exclusive of any benefits related to interest and penalties.
A reconciliation of the changes in the gross balances of unrecognized tax benefits follows (in millions):
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of February 1, 2014, February 2, 2013 and January 28, 2012, we had approximately $6.1 million, $5.4 million and $3.2 million, respectively, in interest and penalties related to unrecognized tax benefits accrued, of which approximately $1.6 million of expense, $2.3 million of benefit and $2.7 million of benefit were recognized through income tax expense in the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012, respectively. If we were to prevail on all uncertain tax positions, the reversal of these accruals would also be a benefit to our effective tax rate.
It is reasonably possible that the amount of the unrecognized benefit with respect to certain of our unrecognized tax positions could significantly increase or decrease within the next 12 months as a result of settling ongoing audits. However, as audit outcomes and the timing of audit resolutions are subject to significant uncertainty, and given the nature and complexity of the issues involved, we are unable to reasonably estimate the possible amount of change in the unrecognized tax benefits, if any, that may occur within the next 12 months as a result of ongoing examinations. Nevertheless, we believe we are adequately reserved for our uncertain tax positions as of February 1, 2014.
Deferred income taxes have not been provided for on the approximately $542.1 million of undistributed earnings generated by certain foreign subsidiaries as of February 1, 2014 because we intend to permanently reinvest such earnings outside the United States. We do not currently require, nor do we have plans for, the repatriation of retained earnings from these subsidiaries. However, in the future, if we determine it is necessary to repatriate these funds, or we sell or liquidate any of these subsidiaries, we may be required to provide for income taxes on the repatriation. We may also be required to withhold foreign taxes depending on the foreign jurisdiction from which the funds are repatriated. The effective rate of tax on such repatriations may materially differ from the federal statutory tax rate, thereby having a material impact on tax expense in the year of repatriation; however, we cannot reasonably estimate the amount of such a tax event.
14.
Stock Incentive Plan
Effective June 2013, our stockholders voted to adopt the Amended and Restated 2011 Incentive Plan (the “Amended 2011 Incentive Plan”) to provide for issuance under the 2011 Incentive Plan of our Class A Common Stock. The Amended 2011 Incentive Plan provides a maximum aggregate amount of 9.25 million shares of Class A Common Stock with respect to which options may be granted and provides for a grant of cash, granting of incentive stock options, non-qualified stock options, stock appreciation rights, performance awards, restricted stock and other share-based awards, which may include, without limitation, restrictions on the right to vote such shares and restrictions on the right to receive dividends on such shares. The options to purchase Class A common shares are issued at fair market value of the underlying shares on the date of grant. In general, the options vest and become exercisable in equal annual installments over a three-year period, commencing one year after the grant date, and expire ten years from the grant date. Shares issued upon exercise of options are newly issued shares. Options and restricted shares granted after June 21, 2011 are issued under the 2011 Incentive Plan.
Effective June 2009, our stockholders voted to amend the Third Amended and Restated 2001 Incentive Plan (the “2001 Incentive Plan”) to provide for issuance under the 2001 Incentive Plan of our Class A Common Stock. The 2001 Incentive Plan provided a maximum aggregate amount of 46.5 million shares of Class A Common Stock with respect to which options may have been granted and provided for the granting of incentive stock options, non-qualified stock options, and restricted stock, which may have included, without limitation, restrictions on the right to vote such shares and restrictions on the right to receive dividends on such shares. The options to purchase Class A common shares were issued at fair market value of the underlying shares on the date of grant. In general, the options vested and became exercisable in equal annual installments over a three-year period, commencing one year after the grant date, and expired ten years from the grant date. Shares issued upon exercise of options are newly issued shares. Options and restricted shares granted on or before June 21, 2011 were issued under the 2001 Incentive Plan.
Stock Options
We record stock-based compensation expense in earnings based on the grant-date fair value of options granted. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This valuation model requires the use of subjective assumptions, including expected option life and expected volatility. We use historical data to estimate the option life and the employee forfeiture rate, and use historical volatility when estimating the stock price volatility. We have not historically experienced material forfeitures with respect to the employees who currently receive stock option grants and thus we do not expect any forfeitures related to these awards. The weighted-average fair value of the options granted during the 52 weeks ended February 1, 2014 was estimated at $7.10 based on the following assumptions:
In addition to recognizing the estimated fair value of stock-based compensation in earnings over the required service period, we are also required to present tax benefits received in excess of amounts determined based on the compensation expense recognized on the statements of cash flows. Such tax benefits are presented as a use of cash in the operating section and a source of cash in the financing section of the consolidated statements of cash flows.
A summary of our stock option activity during the 52 weeks ended February 1, 2014 is presented below:
The following table summarizes information as of February 1, 2014 concerning outstanding and exercisable options:
The total intrinsic value of options exercised during the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 was $53.5 million, $7.7 million, and $16.0 million, respectively. The intrinsic value of options exercisable and options outstanding was $15.9 million and $20.5 million, respectively, as of February 1, 2014.
The fair value of each option is recognized as compensation expense on a straight-line basis between the grant date and the date the options become fully vested. During the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012, we included compensation expense relating to the grant of these options in the amount of $1.0 million, $2.1 million and $6.4 million, respectively, in selling, general and administrative expenses. As of February 1, 2014, the unrecognized compensation expense related to the unvested portion of our stock-based awards was $2.2 million.
Restricted Stock Awards
We grant restricted stock awards to certain of our employees, officers and non-employee directors. Restricted stock awards generally vest over a three-year period on the anniversary of the date of issuance.
The following table presents a summary of our restricted stock awards activity during the 52 weeks ended February 1, 2014:
Of the shares granted during fiscal 2013, 916 thousand shares of restricted stock were granted under the 2011 Incentive Plan, which vest in equal annual installments over three years. At the same time, an additional 262 thousand shares of restricted stock were granted under the 2011 Incentive Plan, of which 131 thousand shares vest in equal annual installments over three years based on performance targets measured at the end of fiscal 2013. The remaining 131 thousand shares of restricted stock granted are subject to performance targets which will be measured following the completion of the 52 weeks ending January 30, 2016. These grants will vest immediately upon measurement to the extent earned. Shares subject to performance measures may generally be earned in greater or lesser percentages if targets are exceeded or not achieved by specified amounts.
During the 53 weeks ended February 2, 2013, we granted 1.4 million shares of restricted stock with a weighted average grant date fair value of $23.66 per common share with fair value being determined by the quoted market price of our common stock on the date of grant. Of these shares, 783 thousand shares of restricted stock were granted under the 2011 Incentive Plan, which vest in equal annual installments over three years. At the same time, an additional 626 thousand shares of restricted stock were granted under the 2011 Incentive Plan, of which 101 thousand shares vest in equal annual installments over three years based on performance targets that were achieved and 25 thousand shares were forfeited based on fiscal 2012 performance. The remaining 500 thousand shares of restricted stock granted are subject to performance targets which will be measured following the completion of the 52 weeks ending January 31, 2015. These grants will vest immediately upon measurement to the extent earned. Shares subject to performance measures may generally be earned in greater or lesser percentages if targets are exceeded or not achieved by specified amounts. The restricted stock granted in the 52 weeks ended January 28, 2012 vest in equal annual installments over three years.
During the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012, we included compensation expense relating to the grant of these restricted shares in the amounts of $18.4 million, $17.5 million and $12.4 million, respectively, in selling, general and administrative expenses in the accompanying consolidated statements of operations. As of February 1, 2014, there was $28.1 million of unrecognized compensation expense related to nonvested restricted stock awards that is expected to be recognized over a weighted average period of 1.8 years.
Subsequent to the fiscal year ended February 1, 2014, we granted 588 thousand shares of restricted stock with a grant date fair value of $38.52 per common share and 283 thousand shares of stock options under the 2011 Incentive Plan. Of the restricted shares, 315 thousand shares vest in equal annual installments over three years. Restricted shares and options granted are subject to continued service. Of the restricted shares granted subsequent to February 1, 2014, 182 thousand shares are subject to a performance target which will be measured following the completion of the 52 weeks ending January 31, 2015 with the portion earned vesting in equal annual installments over three years. The remaining 91 thousand shares of restricted stock granted are subject to performance targets which will be measured following the completion of the 52 weeks ending January 28, 2017. These grants will vest immediately upon measurement to the extent earned. Shares subject to performance measures may generally be earned in greater or lesser percentages if targets are exceeded or not achieved by specified amounts.
15.
Employees’ Defined Contribution Plan
We sponsor a defined contribution plan (the “Savings Plan”) for the benefit of substantially all of our U.S. employees who meet certain eligibility requirements, primarily age and length of service. The Savings Plan allows employees to invest up to 60%, for a maximum of $17.5 thousand a year for 2013, of their eligible gross cash compensation invested on a pre-tax basis. Our optional contributions to the Savings Plan are generally in amounts based upon a certain percentage of the employees’ contributions. Our contributions to the Savings Plan during the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 and the 52 weeks ended January 28, 2012, were $4.8 million, $4.6 million and $4.1 million, respectively.
16.
Significant Products
Beginning with this Form 10-K, we are expanding the categories included in our disclosures on sales and gross profit by category in order to reflect recent changes in our business, the expansion of categories previously included in other and our management emphasis as we operate in the future. Our previous categories of New Video Game Hardware and New Video Game Software remain unchanged.
We are expanding our previous category of Pre-owned Video Game Products to include value-priced, or closeout, product and will be calling the category Pre-owned and Value Video Game Products now and in the future. We believe there is significant opportunity to purchase closeout and overstocked inventory from publishers, distributors and other retailers which is older new product but can be acquired for less than typical new release product costs. This product can then be resold in our Video Game Brands stores and on our Web sites as value-priced product. Our limited purchases of this product in the past have yielded significantly higher margins than new video game products, yet slightly lower margins than pre-owned video game products.
In the past, all other products we sold were categorized into “Other”, which included video game accessories, digital products, new and pre-owned mobile products, consumer electronics, revenues from our PowerUp Rewards program and Game Informer subscription sales, strategy guides, toys and PC entertainment software. We are separating our historical Other category into the following new categories:
•
Video Game Accessories, which includes new accessories for use with video game consoles and hand-held devices and software, such as controllers, gaming headsets and memory cards;
•
Digital, which includes revenues from the sale of DLC, Xbox Live, PlayStation Plus and Nintendo network points and subscription cards, other prepaid digital currencies and time cards, Kongregate, Game Informer digital subscriptions and PC digital downloads;
•
Mobile and Consumer Electronics, which includes revenues from selling new and pre-owned mobile devices and consumer electronics in Video Game Brands stores and all revenues from our Technology Brands stores;
•
Other, which includes revenues from the sales of PC entertainment software, toys, strategy guides and revenues from PowerUp Pro loyalty members receiving Game Informer magazine in physical form.
The following tables set forth net sales and gross profit (in millions) and gross profit percentages by significant product category for the periods indicated:
17.
Segment Information
We operate our business in four Video Game Brands segments: United States, Canada, Australia and Europe, and a Technology Brands segment, which was added in the fourth quarter of fiscal 2013 and includes the operations of our Spring Mobile, Simply Mac, and Aio Wireless businesses. We identify segments based on a combination of geographic areas and management responsibility. Each of the segments includes significant retail operations with all Video Game Brands stores engaged in the sale of new and pre-owned video game systems and software and related accessories and Technology Brand stores engaged in the sale of consumer electronics and wireless products and services. Segment results for the United States include retail operations in 50 states, the District of Columbia, Guam and Puerto Rico; the electronic commerce Web site www.gamestop.com; Game Informer magazine; the online video gaming Web site www.kongregate.com; a digital PC game distribution platform available at www.gamestop.com/pcgames; and an online consumer electronics marketplace available at www.buymytronics.com. Segment results for Canada include retail and e-commerce operations in Canada and segment results for Australia include retail and e-commerce operations in Australia and New Zealand. Segment results for Europe include retail operations in 11 European countries and e-commerce operations in six countries. The Technology Brands segment includes retail operations in the United States. We measure segment profit using operating earnings, which is defined as income from continuing operations before intercompany royalty fees, net interest expense and income taxes. Transactions between reportable segments consist primarily of royalties, management fees, intersegment loans and related interest. There were no intersegment sales during the 52 weeks ended February 1, 2014, the 53 weeks ended February 2, 2013 or the 52 weeks ended January 28, 2012.
Information on segments and the reconciliation of segment profit to earnings (loss) before income taxes are as follows (in millions):
18.
Supplemental Cash Flow Information
19.
Stockholders’ Equity
The holders of Class A Common Stock are entitled to one vote per share on all matters to be voted on by stockholders. Holders of Class A Common Stock will share in any dividend declared by the Board of Directors, subject to any preferential rights of any outstanding preferred stock. In the event of our liquidation, dissolution or winding up, all holders of common stock are entitled to share ratably in any assets available for distribution to holders of shares of common stock after payment in full of any amounts required to be paid to holders of preferred stock.
In 2005, we adopted a rights agreement under which one right (a “Right”) is attached to each outstanding share of our common stock. Each Right entitles the holder to purchase from us one ten-thousandth of a share of a series of preferred stock, designated as Series A Junior Participating Preferred Stock (the “Series A Preferred Stock”), at a price of $100.00 per one one thousandth of a share. The Rights will be exercisable only if a person or group acquires 15% or more of the voting power of our outstanding common stock or announces a tender offer or exchange offer, the consummation of which would result in such person or group owning 15% or more of the voting power of our outstanding common stock.
If a person or group acquires 15% or more of the voting power of our outstanding common stock, each Right will entitle a holder (other than such person or any member of such group) to purchase, at the Right’s then current exercise price, a number of shares of common stock having a market value of twice the exercise price of the Right. In addition, if we are acquired in a merger or other business combination transaction or 50% or more of our consolidated assets or earning power are sold at any time after the Rights have become exercisable, each Right will entitle its holder to purchase, at the Right’s then current exercise price, a number of the acquiring company’s common shares having a market value at that time of twice the exercise price of the Right. Furthermore, at any time after a person or group acquires 15% or more of the voting power of our outstanding common stock but prior to the acquisition of 50% of such voting power, the Board of Directors may, at its option, exchange part or all of the Rights (other than Rights held by the acquiring person or group) at an exchange rate of one one thousandth of a share of Series A Preferred Stock or one share of our common stock for each Right.
We will be entitled to redeem the Rights at any time prior to the acquisition by a person or group of 15% or more of the voting power of our outstanding common stock, at a price of $0.01 per Right. The Rights will expire on October 28, 2014.
We have 5 million shares of $0.001 par value preferred stock authorized for issuance, of which 500 thousand shares have been designated by the Board of Directors as Series A Preferred Stock and reserved for issuance upon exercise of the Rights. Each such share of Series A Preferred Stock will be nonredeemable and junior to any other series of preferred stock that we may issue (unless otherwise provided in the terms of such stock) and will be entitled to a preferred dividend equal to the greater of $1.00 or one thousand times any dividend declared on our common stock. In the event of liquidation, the holders of Series A Preferred Stock will receive a preferred liquidation payment of $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon. Each share of Series A Preferred Stock will have ten thousand votes, voting together with our common stock. However, in the event that dividends on the Series A Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, holders of the Series A Preferred Stock shall have the right, voting as a class, to elect two of our directors. In the event of any merger, consolidation or other transaction in which our common stock is exchanged, each share of Series A Preferred Stock will be entitled to receive one thousand times the amount and type of consideration received per share of our common stock. At February 1, 2014, there were no shares of Series A Preferred Stock outstanding.
Since January 2010, our Board of Directors has authorized several share repurchase programs authorizing our management to repurchase our common stock. Since the beginning of fiscal 2011, the authorizations have been for $500 million at a time. Our typical practice is to seek Board of Directors’ approval for a new authorization before the existing one is fully used in order to make sure that we are always able to repurchase shares. For fiscal 2011, we repurchased 11.2 million shares at an average price per share of $21.38 for a total of $240.2 million, which excludes approximately $22 million of share repurchases that were executed at the end of fiscal 2010 but for which the settlement and related cash outflow did not occur until the beginning of fiscal 2011. For fiscal 2012, the number of shares repurchased was 19.9 million for an average price per share of $20.60 for a total of $409.4 million. For fiscal 2013, the number of shares repurchased was 6.3 million for an average price per share of $41.12 for a total of $258.3 million. Between February 2, 2014 and March 20, 2014, we have repurchased 0.6 million shares at an average price per share of $37.17 for a total of $20.6 million and have $436.5 million remaining under our latest authorization from November 2013.
In February 2012, our Board of Directors approved the initiation of a quarterly cash dividend to our stockholders of Class A Common Stock. We paid a total of $0.80 per share in dividends in fiscal 2012 and a total of $1.10 per share in fiscal 2013. On March 4, 2014, our Board of Directors authorized an increase in our annual cash dividend from $1.10 to $1.32 per share of Class A Common Stock and approved our first quarterly cash dividend to our stockholders for fiscal 2014 of $0.33 per share of Class A Common Stock payable on March 25, 2014 to stockholders of record at the close of business on March 17, 2014. Future dividends will be subject to approval by our Board of Directors.
20.
Unaudited Quarterly Financial Information
The following table sets forth certain unaudited quarterly consolidated statement of operations information for the fiscal years ended February 1, 2014 and February 2, 2013. The unaudited quarterly information includes all normal recurring adjustments that our management considers necessary for a fair presentation of the information shown.
The following footnotes are discussed as pretax expenses.
(1)
The results of operations for the third quarter of the fiscal year ended February 2, 2013 include goodwill impairments of $627.0 million and asset impairments of $51.8 million.
(2)
The results of operations for the fourth quarter of the fiscal year ended February 1, 2014 include goodwill impairments of $10.2 million and asset impairments of $18.5 million. Additionally, results include a $33.6 million benefit associated with changes in accounting estimates primarily related to our loyalty programs and other customer liabilities.
(3)
Basic net income (loss) per common share and diluted net income (loss) per common share are calculated based on net income (loss) attributable to GameStop Corp. for the quarter. The sum of the quarters may not necessarily be equal to the full year net income (loss) per common share amount.
EXHIBIT INDEX
Exhibit
Number
Description
2.1
Agreement and Plan of Merger, dated as of April 17, 2005, among GameStop Corp. (f/k/a GSC Holdings Corp.), Electronics Boutique Holdings Corp., GameStop, Inc., GameStop Holdings Corp. (f/k/a GameStop Corp.), Cowboy Subsidiary LLC and Eagle Subsidiary LLC.(1)
2.2
Sale and Purchase Agreement, dated September 30, 2008, between EB International Holdings, Inc. and L Capital, LV Capital, Europ@Web and other Micromania shareholders.(2)
2.3
Amendment, dated November 17, 2008, to Sale and Purchase Agreement for Micromania Acquisition listed as Exhibit 2.2 above.(3)
3.1
Third Amended and Restated Certificate of Incorporation.(4)
3.2
Third Amended and Restated Bylaws.(4)
4.1
Indenture, dated September 28, 2005, by and among GameStop Corp. (f/k/a GSC Holdings Corp.), GameStop, Inc., the subsidiary guarantors party thereto, and Citibank N.A., as trustee.(5)
4.2
First Supplemental Indenture, dated October 8, 2005, by and among GameStop Corp. (f/k/a GSC Holdings Corp.), GameStop, Inc., the subsidiary guarantors party thereto, and Citibank N.A., as trustee.(6)
4.3
Rights Agreement, dated as of June 27, 2005, between GameStop Corp. (f/k/a GSC Holdings Corp.) and The Bank of New York, as Rights Agent.(7)
4.4
Form of Indenture.(8)
10.1*
Fourth Amended and Restated 2001 Incentive Plan.(9)
10.2*
Amended and Restated 2011 Incentive Plan.(10)
10.3*
Second Amended and Restated Supplemental Compensation Plan.(11)
10.4*
Form of Option Agreement.(12)
10.5*
Form of Restricted Share Agreement.(13)
10.6
Amended and Restated Credit Agreement, dated as of January 4, 2011, among GameStop Corp., as Lead Borrower for: GameStop Corp., GameStop, Inc., Sunrise Publications, Inc., Electronics Boutique Holdings Corp., ELBO Inc., EB International Holdings, Inc., Kongregate Inc., GameStop Texas Ltd., Marketing Control Services, Inc., SOCOM LLC and Bank of America, N.A., as Issuing Bank, Bank of America, N.A., as Administrative Agent and Collateral Agent, Wells Fargo Capital Finance, LLC, as Syndication Agent, U.S. Bank National Association and Regions Bank, as Co-Documentation Agents, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Bookrunner.(14)
10.7
Guaranty, dated as of October 11, 2005, by GameStop Corp. (f/k/a GSC Holdings Corp.) and certain subsidiaries of GameStop Corp. in favor of the agents and lenders.(15)
10.8
Amended and Restated Security Agreement, dated January 4, 2011, among GameStop Corp., as Lead Borrower, the Subsidiary Borrowers party hereto, and Bank of America, N.A., as Collateral Agent.(14)
10.9
Amended and Restated Patent and Trademark Security Agreement, dated January 4, 2011, among GameStop Corp., as Lead Borrower, the Subsidiary Borrowers party hereto, and Bank of America, N.A., as Collateral Agent.(14)
10.10
Mortgage, Security Agreement, and Assignment and Deeds of Trust, dated October 11, 2005, between GameStop of Texas, L.P. and Bank of America, N.A., as Collateral Agent.(15)
10.11
Mortgage, Security Agreement, and Assignment and Deeds of Trust, dated October 11, 2005, between Electronics Boutique of America, Inc. and Bank of America, N.A., as Collateral Agent.(15)
10.12
Amended and Restated Pledge Agreement, dated January 4, 2011, by and among GameStop Corp., as Lead Borrower, the Subsidiary Borrowers party hereto, and Bank of America, N.A., as Collateral Agent.(14)
10.13
Term Loan Agreement, dated November 12, 2008, by and among GameStop Corp. (f/k/a GSC Holdings Corp.), certain subsidiaries of GameStop Corp., Bank of America, N.A., as lender, Bank of America, N.A., as Administrative Agent and Collateral Agent, and Banc of America Securities LLC, as Sole Arranger and Bookrunner.(3)
Exhibit
Number
Description
10.14
Security Agreement, dated November 12, 2008, by and among GameStop Corp. (f/k/a GSC Holdings Corp.), certain subsidiaries of GameStop Corp., Bank of America, N.A., as lender and Bank of America, N.A., as Collateral Agent.(3)
10.15
Patent and Trademark Security Agreement, dated as of November 12, 2008, by and among GameStop Corp. (f/k/a GSC Holdings Corp.), certain subsidiaries of GameStop Corp., Bank of America, N.A., as lender, and Bank of America, N.A., as Collateral Agent.(3)
10.16
Securities Collateral Pledge Agreement, dated November 12, 2008, by and among GameStop Corp. (f/k/a GSC Holdings Corp.), certain subsidiaries of GameStop Corp., Bank of America, N.A., as lender, and Bank of America, N.A., as Collateral Agent.(3)
10.17*
Executive Employment Agreement, dated as of May 10, 2013, between GameStop Corp. and Daniel A. DeMatteo.(16)
10.18*
Executive Employment Agreement, dated as of May 10, 2013, between GameStop Corp. and J. Paul Raines.(16)
10.19*
Executive Employment Agreement between GameStop Corp. and J. Paul Raines, as amended on November 13, 2013.(17)
10.20*
Executive Employment Agreement, dated as of May 10, 2013, between GameStop Corp. and Tony D. Bartel.(16)
10.21*
Executive Employment Agreement, dated as of May 10, 2013, between GameStop Corp. and Robert A. Lloyd.(16)
10.22*
Executive Employment Agreement, dated as of May 10, 2013, between GameStop Corp. and Michael K. Mauler.(16)
10.23*
Executive Employment Agreement, dated as of May 10, 2013, between GameStop Corp. and Michael P. Hogan.(20)
10.24*
Retirement Policy. (18)
10.25
Second Amended and Restated Credit Agreement, dated as of March 25, 2014, by and among GameStop Corp., certain subsidiaries of GameStop Corp., Bank of America, N.A. and the other lending institutions listed therein, Bank of America, N.A., as Issuing Bank, Bank of America, N.A., as Agent, JPMorgan Chase Bank, N.A., as Syndication Agent and Wells Fargo Capital Finance, LLC and U.S. Bank National Association, as Co-Documentation Agents. (19)
10.26
Second Amended and Restated Security Agreement, dated as of March 25, 2014. (19)
10.27
Second Amended and Restated Patent and Trademark Security Agreement, dated as of March 25, 2014. (19)
10.28
Second Amended and Restated Pledge Agreement, dated as of March 25, 2014. (19)
21.1
Subsidiaries. (20)
23.1
Consent of Deloitte & Touche LLP. (20)
23.2
Consent of BDO USA, LLP. (20)
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (20)
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (20)
32.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (21)
32.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (21)
101.INS
XBRL Instance Document (22)
101.SCH
XBRL Taxonomy Extension Schema (22)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase (22)
101.DEF
XBRL Taxonomy Extension Definition Linkbase (22)
101.LAB
XBRL Taxonomy Extension Label Linkbase (22)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase (22)
* This exhibit is a management or compensatory contract.
(1)
Incorporated by reference to GameStop Holdings Corp.’s Form 8-K filed with the Securities and Exchange Commission on April 18, 2005.
(2)
Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on October 2, 2008.
(3)
Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on November 18, 2008.
(4)
Incorporated by reference to the Registrant’s 10-Q for the fiscal quarter ended August 3, 2013 filed with the Securities and Exchange Commission on September 11, 2013.
(5)
Incorporated by reference to GameStop Holdings Corp.’s Form 8-K filed with the Securities and Exchange Commission on September 30, 2005.
(6)
Incorporated by reference to the Registrant’s Form 10-Q for the fiscal quarter ended October 29, 2005 filed with the Securities and Exchange Commission on December 8, 2005.
(7)
Incorporated by reference to the Registrant’s Amendment No.1 to Form S-4 filed with the Securities and Exchange Commission on July 8, 2005.
(8)
Incorporated by reference to the Registrant’s Form S-3ASR filed with the Securities and Exchange Commission on April 10, 2006.
(9)
Incorporated by reference to Appendix A to the Registrant’s Proxy Statement for 2009 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on May 22, 2009.
(10)
Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 27, 2013.
(11)
Incorporated by reference to Appendix A to the Registrant’s Proxy Statement for 2008 Annual Meeting of Stockholders filed with the Securities and Exchange Commission on May 23, 2008.
(12)
Incorporated by reference to GameStop Holdings Corp.’s Form 10-K for the fiscal year ended January 29, 2005 filed with the Securities and Exchange Commission on April 11, 2005.
(13)
Incorporated by reference to GameStop Holdings Corp.’s Form 8-K filed with the Securities and Exchange Commission on September 12, 2005.
(14)
Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on January 6, 2011.
(15)
Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on October 12, 2005.
(16)
Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on May 13, 2013.
(17)
Incorporated by reference to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on November 15, 2013.
(18)
Incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on March 11, 2014.
(19)
Incorporated by reference to the Registrant's Form 8-K filed with the Securities and Exchange Commission on March 28, 2014.
(20)
Filed herewith.
(21)
Furnished herewith.
(22)
Submitted electronically herewith.