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| GME > SEC Filings for GME > Form 10-Q on 5-Sep-2012 | All Recent SEC Filings |
5-Sep-2012
Quarterly Report
The following discussion should be read in conjunction with the information contained in our condensed consolidated financial statements, including the notes thereto. Statements regarding future economic performance, management's plans and objectives, and any statements concerning assumptions related to the foregoing contained in Management's Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements. Certain factors, which may cause actual results to vary materially from these forward-looking statements, accompany such statements or appear in GameStop's Annual Report on Form 10-K for the fiscal year ended January 28, 2012 filed with the Securities and Exchange Commission (the "SEC") on March 27, 2012 (the "Form 10-K"), including the factors disclosed under "Item 1A. Risk Factors."
General
GameStop Corp. (together with its predecessor companies, "GameStop," "we," "us," "our," or the "Company") is the world's largest multichannel video game retailer. We sell new and used video game hardware, physical and digital video game software, accessories, as well as PC entertainment software and other merchandise primarily through our GameStop, EB Games and Micromania stores. As of July 28, 2012, we operated 6,628 stores in the United States, Australia, Canada and Europe. We also operate electronic commerce Web sites www.gamestop.com, www.ebgames.com.au, 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; Spawn Labs, a streaming technology company; a digital PC distribution platform available at www.gamestop.com/pcgames; and an online consumer electronics marketplace available at www.buymytronics.com.
Our fiscal year is composed of 52 or 53 weeks ending on the Saturday closest to January 31. The fiscal year ending February 2, 2013 ("fiscal 2012") consists of 53 weeks and the fiscal year ended January 28, 2012 ("fiscal 2011") consists of 52 weeks.
Growth in the video game industry is generally driven by the introduction of new technology. The current generation of hardware consoles (the Sony PlayStation 3, the Microsoft Xbox 360 and the Nintendo Wii) were introduced between 2005 and 2007. The Nintendo DSi XL was introduced in early 2010, the Nintendo 3DS was introduced in March 2011 and the Sony PlayStation Vita was introduced in February 2012. 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 margins in the first full year following new platform releases and an increase in gross margins in the years subsequent to the first full year following the launch period. 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. However, the current generation of hardware consoles is now over five years old and consumer demand is abating. We have seen and expect to continue to see declines in new hardware and software sales in fiscal 2012 due to the age of the current console cycle. The introduction of new consoles or further price cuts on the current generation of consoles could partially offset these declines.
We expect that future growth in the video game industry will also be driven by the sale of video games delivered in digital form and the expansion of other forms of gaming. We currently sell various types of products that relate to the digital category, including digitally downloadable content, Xbox LIVE, PlayStation and Nintendo network point cards, as well as prepaid digital and online timecards. We expect our sales of digital products to increase in fiscal 2012. We have made significant investments in e-commerce, digital kiosks and in-store and Web site functionality to enable our customers to access digital content and eliminate friction in the digital sales and delivery process. We plan to continue to invest in these types of processes and channels to grow
our digital sales base and enhance our market leadership position in the video game industry and in the digital aggregation and distribution category. In fiscal 2011, we also launched our mobile business, selling an assortment of gaming-certified tablets and accessories in approximately 1,600 stores in the United States and approximately 800 international stores. We also began accepting trades of pre-owned mobile devices in all of our United States stores, and, as of July 28, 2012, approximately 3,800 stores are selling these refurbished devices. More stores will be added as inventory levels increase. We also intend to continue to invest in customer loyalty programs designed to attract and retain customers.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and do not include all disclosures required under GAAP for complete financial statements. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. For a summary of significant accounting policies and the means by which we develop estimates thereon, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K.
Goodwill. Under the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 350 ("ASC 350"), the Company is required to test its goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performs its annual impairment test as of the beginning of the fourth quarter each fiscal year. The Company has determined that the recent decrease in its market capitalization below the total equity on its condensed consolidated balance sheet for a sustained period of time indicated that an interim impairment test of its goodwill was required under the provisions of ASC 350. Accordingly, the Company has begun the work to perform the interim impairment test of its goodwill and expects to complete the test by the end of the third quarter of fiscal 2012.
To perform step one of the two-step goodwill impairment test, the Company must estimate the fair value of each reporting unit. Because quoted market prices for the Company's reporting units are not available, the Company must exercise judgment in determining the estimated fair value of each reporting unit. The Company uses all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the assets. A key component of these fair value determinations is a reconciliation of the sum of these net present value calculations to the Company's market capitalization. Given that the Company's market capitalization as of the beginning of the third quarter of fiscal 2012 was approximately $780 million below its stockholders' equity and the balance of the Company's goodwill recorded on its consolidated balance sheet as of July 28, 2012 is $1,981.8 million (comprised of goodwill of $1,153.5 million, $137.2 million, $206.5 million and $484.6 million in its United States, Canada, Australia and Europe reporting units, respectively), any impairment charge resulting from performing step two of the impairment test would be material to the Company's consolidated financial statements. Given the amount of the excess of calculated fair value over carrying value for each reporting unit as of the fiscal 2011 annual goodwill impairment test, the Company believes that any impairment charge resulting from the goodwill impairment test would be substantially concentrated in its Canada, Australia and Europe reporting units.
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