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 disclosures under Part I, Item 1A, “Risk Factors.”
In Management’s Discussion and Analysis of Financial Condition and Results of Operations, we provide a detailed analysis for fiscal 2021 compared to fiscal 2020. For a comparison of our results of operations for fiscal 2020 compared to fiscal 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended January 30, 2021, as filed with the SEC on March 23, 2021.
OVERVIEW
GameStop Corp. (“GameStop,” “we,” “us,” “our,” or the “Company”), a Delaware corporation established in 1996, is a leading specialty retailer offering games and entertainment products through its ecommerce properties and thousands of stores.
The COVID-19 pandemic has impacted the global economy, changed consumer behaviors and disrupted global supply chains, and may continue to do so. The extent of the impact of the COVID-19 pandemic on our business and financial results will depend on future developments. See Item 1A of Part I, "Risk Factors" for additional information.
BUSINESS PRIORITIES
GameStop is on a strategic path to fully leverage our unique position and brand in gaming. GameStop is focused on transforming into a customer-obsessed technology company to delight gamers and is actively focused on efforts to (1) establish ecommerce excellence (2) expand our selection to deliver a market-leading offering in gaming & entertainment, (3) leverage existing strengths and assets (4) invest in new growth opportunities.
We are taking steps that include:
•Increasing the size of our addressable market by offering vast product selection and growing our product catalog across PC gaming, collectibles, consumer electronics, toys, augmented reality, virtual reality, blockchain technology, and other categories that represent the natural extensions of our business;
•Expanding fulfillment operations to improve speed of delivery and service to our customers;
•Building a superior customer experience, including by establishing a U.S.-based customer care operation supported by frictionless ecommerce and in-store experience; and
•Strengthening technology capabilities, including by investing in new systems, modernized ecommerce assets and an expanded, experienced talent base.
We believe these future transformation efforts are an important aspect of our continued business to enable long-term value creation for our shareholders. Accordingly, we prioritize long-term revenue growth and market leadership over short-term margins.
In fiscal 2021 we further strengthened our balance sheet by eliminating $314.6 million of total outstanding debt and raising $1,672.8 million in gross equity capital through an at-the-market offering. The Company will continue to invest in growth initiatives, while continuing to prioritize maintaining a strong balance sheet. Connected to our transformation efforts, we have incurred and may continue to incur severance, store closure costs and expenses for consultants and advisors. See "Consolidated Results of Operations—Selling, General and Administrative Expenses" for additional information.
STORE COUNT INFORMATION
The following table presents the number of stores by segment as of the end of fiscal 2021 compared to the end of fiscal 2020.
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| January 30, 2021 | | Net Disposals | | January 29, 2022 |
United States | 3,192 | | | (174) | | | 3,018 | |
Canada | 253 | | | (22) | | | 231 | |
Australia | 417 | | | — | | | 417 | |
Europe | 954 | | | (47) | | | 907 | |
Total Stores | 4,816 | | | (243) | | | 4,573 | |
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, sales impacts related to temporary store closures, 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. During fiscal 2021 and 2020, we generated approximately 37% and 42%, respectively, of our sales during the fourth quarter.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents certain statement of operations items (in millions) and as a percentage of net sales:
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| | Fiscal Year 2021 | | Fiscal Year 2020 | | Change | | |
| | Amount | | Percent of Net Sales | | Amount | | Percent of Net Sales | | $ | | % | | | | |
Net sales | | $ | 6,010.7 | | | 100.0 | % | | $ | 5,089.8 | | | 100.0 | % | | $ | 920.9 | | | 18.1 | % | | | | |
Cost of sales | | 4,662.9 | | | 77.6 | | | 3,830.3 | | | 75.3 | | | 832.6 | | | 21.7 | % | | | | |
Gross profit | | 1,347.8 | | | 22.4 | | | 1,259.5 | | | 24.7 | | | 88.3 | | | 7.0 | % | | | | |
Selling, general and administrative expenses | | 1,709.6 | | | 28.4 | | | 1,514.2 | | | 29.7 | | | 195.4 | | | 12.9 | % | | | | |
Asset impairments | | 6.7 | | | 0.1 | | | 15.5 | | | 0.3 | | | (8.8) | | | (56.8) | % | | | | |
Gain on sale of assets | | — | | | — | | | (32.4) | | | (0.6) | | | 32.4 | | | 100.0 | % | | | | |
Operating loss | | (368.5) | | | (6.1) | | | (237.8) | | | (4.7) | | | (130.7) | | | (55.0) | % | | | | |
Interest expense, net | | 26.9 | | | 0.4 | | | 32.1 | | | 0.6 | | | (5.2) | | | (16.2) | % | | | | |
Loss from continuing operations before income taxes | | (395.4) | | | (6.6) | | | (269.9) | | | (5.3) | | | (125.5) | | | (46.5) | % | | | | |
Benefit tax expense | | (14.1) | | | (0.2) | | | (55.3) | | | (1.1) | | | 41.2 | | | 74.5 | % | | | | |
Net loss from continuing operations | | (381.3) | | | (6.3) | | | (214.6) | | | (4.2) | | | (166.7) | | | (77.7) | % | | | | |
Loss from discontinued operations, net of tax | | — | | | — | | | (0.7) | | | — | | | 0.7 | | | 100.0 | % | | | | |
Net loss | | $ | (381.3) | | | (6.3) | % | | $ | (215.3) | | | (4.2) | % | | $ | (166.0) | | | (77.1) | % | | | | |
Net Sales
The following table presents net sales by significant product category:
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| | Fiscal Year 2021 | | Fiscal Year 2020 | | Change | | |
| | Net Sales | | Percent of Net Sales | | Net Sales | | Percent of Net Sales | | $ | | % | | | | |
Hardware and accessories | | $ | 3,171.7 | | | 52.8 | % | | $ | 2,530.8 | | | 49.7 | % | | $ | 640.9 | | | 25.3 | % | | | | |
Software | | 2,014.8 | | | 33.5 | | | 1,979.1 | | | 38.9 | | | 35.7 | | | 1.8 | % | | | | |
Collectibles | | 824.2 | | | 13.7 | | | 579.9 | | | 11.4 | | | 244.3 | | | 42.1 | % | | | | |
Total | | $ | 6,010.7 | | | 100.0 | % | | $ | 5,089.8 | | | 100.0 | % | | $ | 920.9 | | | 18.1 | % | | | | |
The following table presents net sales by reportable segment:
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| | Fiscal Year 2021 | | Fiscal Year 2020 | | Change | |
| | Net Sales | | Percent of Net Sales | | | | Net Sales | | Percent of Net Sales | | | | $ | | % | | | | | |
United States | | $ | 4,186.5 | | | 69.7 | % | | | | $ | 3,417.1 | | | 67.1 | % | | | | $ | 769.4 | | | 22.5 | % | | | | | |
Canada | | 332.3 | | | 5.5 | | | | | 258.4 | | | 5.1 | | | | | 73.9 | | | 28.6 | % | | | | | |
Australia | | 591.8 | | | 9.8 | | | | | 625.3 | | | 12.3 | | | | | (33.5) | | | (5.4) | % | | | | | |
Europe | | 900.1 | | | 15.0 | | | | | 789.0 | | | 15.5 | | | | | 111.1 | | | 14.1 | % | | | | | |
Total | | $ | 6,010.7 | | | 100.0 | % | | | | $ | 5,089.8 | | | 100.0 | % | | | | $ | 920.9 | | | 18.1 | % | | | | | |
Net sales increased $920.9 million, or 18.1%, in fiscal 2021 compared to fiscal 2020. Net sales during fiscal 2021 in our United States, Canada and Europe segments improved by 22.5%, 28.6% and 14.1%, respectively, while net sales in our Australia segment decreased 5.4%, when compared to fiscal 2020.
The increase in net sales was primarily attributable to ongoing demand of the new gaming consoles from Sony and Microsoft, the continued sell-through of the Nintendo gaming product lines, an increase in store traffic compared to the prior year during the onset of the COVID-19 pandemic, and the impact of our product category expansion efforts.
Gross Profit
Gross profit increased $88.3 million, or 7.0%, in fiscal 2021 compared to fiscal 2020, and gross profit as a percentage of net sales decreased to 22.4% in fiscal 2021 compared to 24.7% in fiscal 2020. Our gross profit for fiscal 2021 reflects a shift in product mix towards higher dollar lower margin categories such as new console hardware and increased freight and credit card fees associated with the shift to ecommerce sales.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased $195.4 million, or 12.9%, in fiscal 2021 compared to fiscal 2020. SG&A expenses increased as a result of the impact the COVID-19 pandemic had on our store expenses in prior year as we experienced temporary store closures beginning in March of 2020. Contributing to the increase in SG&A expenses are costs associated with our transformation into a technology company, which include increased labor costs as the Company in-sources talent and expands its capabilities to support growth, severance expenses, and increased marketing and customer care costs. We expect to continue to incur costs associated with our transformation initiatives. The increase in SG&A expenses is partially offset by the continued benefit from lower store occupancy costs as a percent of sales driven by our cost reduction initiatives in 2020 and 2021. These net reductions include 243 permanent store closures since January 30, 2021.
Asset Impairments
Asset impairments decreased $8.8 million, or 56.8% in fiscal 2021 compared to fiscal 2020. In the first quarter of fiscal 2021, we recognized $0.6 million in asset impairment charges related to our right-of-use lease assets. In the fourth quarter of fiscal 2021, we incurred impairment charges of $6.1 million related to store-level property and equipment, right-of-use asset and other asset impairment charges. See Item 8, Notes to the Consolidated Financial Statements, Note 9, "Asset Impairments," for additional information related to the impact on our segments. Gain on Sale of Assets
During fiscal 2020 in separate unrelated transactions, and to unaffiliated third parties, we completed sale and leaseback transactions for our corporate headquarters, a refurbishment center, and ancillary office space in Grapevine, Texas for an aggregate total of $43.7 million, the sale of our Australian headquarters in Eagle Farm, Queensland for $27.0 million, and the sale of our Canadian headquarters in Brampton, Ontario for approximately $16.7 million.
The net proceeds from the sale of these assets were used for general corporate purposes. As a result of the transactions that occurred during fiscal 2020, a gain on sale of assets of $32.4 million was recognized and is included in our Consolidated Statements of Operations for fiscal 2020.
See Item 8, Notes to the Consolidated Financial Statements, Note 10, "Leases," for additional information regarding the sale and leaseback of these facilities. Interest Expense, Net
Interest expense, net decreased by $5.2 million, or 16.2%, for fiscal 2021 compared to fiscal 2020, primarily due to the voluntary early redemption of the outstanding balance of our 2023 Senior Notes in the first quarter of 2021, partially offset by a $17.8 million make-whole premium paid upon the voluntary early redemption of the outstanding balance of such notes.
Income Tax
We recognized an income tax benefit of $14.1 million representing an effective tax rate of 3.6% in fiscal 2021, compared to an income tax benefit of $55.3 million representing an effective tax rate of 20.5% in fiscal 2020. The effective tax rate of 3.6% is primarily due to not recognizing benefits on certain current period losses, the release of a valuation allowance on deferred tax assets in Australia and New Zealand, as well as income taxes due in certain foreign and state jurisdictions in which we operate. The effective tax rate of 20.5% in fiscal year 2020 was primarily due to the establishment of a full valuation allowance on U.S. deferred tax assets, a change in the tax status of certain foreign entities, and tax benefits associated with the availability of a five-year carryback period pursuant to the CARES Act. See Item 8, Notes to the Consolidated Financial Statements, Note 15, "Income Taxes," for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of liquidity are cash from operations, cash on hand, and our revolving credit facilities. As of January 29, 2022, we had total unrestricted cash on hand of $1,271.4 million and an additional $389.6 million of available borrowing capacity under our revolving credit facilities.
During fiscal 2021, we sold an aggregate of 8,500,000 shares of our common stock under our at-the market equity offering program (the "ATM Transactions"). We generated $1.68 billion in aggregate gross proceeds from sales under the ATM Transactions, and paid an aggregate of $10.1 million in commissions to the sales agent, among other legal and administrative fees. The net proceeds generated from sales under the ATM Transactions have been, and are expected to be, used for working capital and general corporate purposes, including repayment of indebtedness, funding our transformation, growth initiatives and product category expansion efforts, capital expenditures and the satisfaction of our tax withholding obligations upon the vesting of shares of restricted stock held by our executive officers and other employees.
Additionally, during the first quarter of 2021, we repaid the remaining $73.2 million aggregate principal amount of our then outstanding 6.75% Senior Notes due 2021 ("2021 Senior Notes") and the remaining $216.4 million aggregate principal amount of our then outstanding 10.00% Senior Notes due 2023 ("2023 Senior Notes"). In connection with the voluntary early redemption of our 2023 Senior Notes, we paid a $17.8 million make-whole premium. In the first quarter of 2021, we repaid our then outstanding borrowings of $25.0 million under our asset-based revolving credit facility due November 2022 ("2022 Revolver"). In the second quarter of 2021, at the request of Micromania SAS, the six separate unsecured term loans held by our French subsidiary, Micromania SAS, for a total of €40.0 million ($44.6 million as of January 29, 2022) were extended for five years. On November 3, 2021, we entered into an asset-based secured revolving credit facility which provides for a borrowing capacity of $500 million with a maturity date of November 3, 2026 (the "2026 Revolver"). See Item 8, Notes to the Consolidated Financial Statements, Note 14, "Debt," for additional information. On an ongoing basis, we evaluate and consider certain strategic operating alternatives, including divestitures, restructuring or dissolution of unprofitable business segments, as well as equity and debt financing alternatives that we believe may enhance stockholder value. The nature, amount and timing of any strategic operational change, or financing transactions that we might pursue will depend on a variety of factors, including, as of the applicable time, our available cash and liquidity and operating performance, our commitments and obligations, our capital requirements, limitations imposed under our credit arrangements and overall market conditions.
We utilize cash generated from operations and have funds available to us under the 2026 Revolver to cover seasonal fluctuations in cash flows and to support our various initiatives. Our cash and cash equivalents are carried at cost and consist primarily of U.S.and Government Prime money market funds and cash deposits with commercial banks.
Separate from the 2026 Revolver, we issue letters of credit and bank guarantees, at times supported by cash collateral. As of January 29, 2022, we had $92.4 million of outstanding letters of credit and other bank guarantees under facilities outside of the 2026 Revolver.
See Item 8, Notes to the Consolidated Financial Statements, Note 14, "Debt," for additional information. Cash Flows
The following table presents a summary of our cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows:
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| | 2021 | | 2020 | | Change |
Cash (used in) provided by operating activities | | $ | (434.3) | | | $ | 123.7 | | | $ | (558.0) | |
Cash (used in) provided by investing activities | | (64.8) | | | 36.9 | | | (101.7) | |
Cash provided by (used in) financing activities | | 1,200.6 | | | (55.4) | | | 1,256.0 | |
Exchange rate effect on cash, cash equivalents and restricted cash | | (16.6) | | | 16.3 | | | (32.9) | |
Increase in cash, cash equivalents and restricted cash | | $ | 684.9 | | | $ | 121.5 | | | $ | 563.4 | |
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Operating Activities
In fiscal 2021, cash used in operating activities was $434.3 million, compared to cash provided by operating activities of $123.7 million in fiscal 2020. Cash used in operating activities during fiscal 2021 was primarily attributable to an increase in merchandise inventory levels when compared to prior year to, among other things, support our product category expansion efforts, and to mitigate the full impact of global supply chain issues. The increase in merchandise inventory levels was
accompanied by an increase in associated payables. Cash provided by operating activities in fiscal 2020 was primarily due to improvements in working capital as a result of optimizing inventory and accounts payable levels through the cash conversion cycle and more efficient carrying levels of inventory.
Investing activities
In fiscal 2021, cash used in investing activities was $64.8 million compared to cash provided by investing activities of $36.9 million in fiscal 2020. Cash used in investing activities during fiscal 2021 was primarily attributable to continued technological investments, and investments in two new fulfillment centers. Cash provided by investing activities in the fiscal 2020 was primarily attributable to the net proceeds from the sale and leaseback of properties including our corporate headquarters, a refurbishment center and ancillary office space in Grapevine, Texas of $43.7 million, the sale of our Australian headquarters in Eagle Farm, Queensland for $27.0 million, the sale of our Canadian headquarters in Brampton, Ontario for approximately $16.7 million, and net proceeds of $8.6 million from the sale of our corporate aircraft
Financing activities
In fiscal 2021, cash provided by financing activities was $1,200.6 million compared to cash used in financing activities of $55.4 million in fiscal 2020. Cash provided by financing activities in fiscal 2021 was primarily due to the sale of shares of our common stock in connection with the ATM transactions for aggregate net proceeds of $1.673 billion. These proceeds were partially offset by a payment of $136.8 million for withholding obligations upon the vesting of shares of restricted stock, repaid at maturity $73.2 million of our then outstanding 2021 Senior Notes, and the voluntary early redemption of our outstanding 2023 Senior Notes for an aggregate of $234.2 million. We also repaid $25.0 million of our outstanding borrowing under our 2022 Revolver. Cash used in financing activities in 2020 was primarily due to the repayment of $130.3 million of our 2021 Senior Notes through a combination of open market transactions and an optional early redemption of $125.0 million of our 2021 Senior Notes, at par, in December 2020, partially offset by a net $25.0 million draw down on our 2022 Revolver and $47.1 million in proceeds from term loans entered into by our French subsidiary, Micromania SAS.
Share Repurchases
On March 4, 2019, our Board of Directors approved a share repurchase authorization allowing us to repurchase up to $300.0 million of our Class A Common Stock. The authorization has no expiration date.
On June 11, 2019, we commenced a modified Dutch auction tender offer for up to 12.0 million shares of our Class A Common Stock with a price range between $5.20 and $6.00 per share. The tender offer expired on July 10, 2019. Through the tender offer, we accepted for payment 12.0 million shares at a purchase price of $5.20 per share for a total of $62.9 million, including fees and commissions. The shares purchased through the tender offer were immediately retired.
In addition to the equity tender offer described above, during the second half of fiscal 2019, we executed a series of open market repurchases for an aggregate of 26.1 million shares of our Class A Common Stock totaling $135.8 million, including fees and commissions. These repurchased shares were immediately retired.
In aggregate, during fiscal 2019, we repurchased a total of 38.1 million shares of our Class A Common Stock, totaling $198.7 million, for an average price of $5.19 per share. We did not repurchase shares during fiscal 2021 or fiscal 2020. As of January 29, 2022, we have $101.3 million remaining under the repurchase authorization.
OFF-BALANCE SHEET ARRANGEMENTS
We had no material off-balance sheet arrangements as of January 29, 2022 other than those disclosed Item 8, Notes to the Consolidated Financial Statements, Note 16, "Commitments and Contingencies". CRITICAL ACCOUNTING 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 Item 8, Notes to the Consolidated Financial Statements, Note 2, "Summary of Significant Accounting Policies," 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 our most difficult, subjective or complex judgments. Valuation of 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 gaming systems 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 write-downs of inventory to reflect volumes or pricing of inventory which we believe represents the net realizable value. A 10% change in our obsolescence reserve percentage at January 29, 2022 would have affected net earnings by approximately $1.6 million in fiscal 2021.
Customer Liabilities
Our PowerUp Rewards loyalty program allows enrolled members to earn points on purchases in our stores and on some of our websites that can be redeemed for rewards and discounts. We allocate the transaction price between the product and loyalty points earned based on the relative stand-alone selling prices and expected point redemption. The portion allocated to the loyalty points is initially recorded as deferred revenue and subsequently recognized as revenue upon redemption or expiration. The two primary estimates utilized to record the deferred revenue for loyalty points earned by members are the estimated retail price per point and estimated amount of points that will never be redeemed, which is a concept known in the retail industry as "breakage." Additionally, we sell gift cards to our customers in our retail stores, through our website and through selected third parties. At the point of sale, a liability is established for the value of the gift card. We recognize revenue from gift cards when the card is redeemed by the customer and recognize estimated breakage on gift cards in proportion to historical redemption patterns.
The two primary estimates utilized to record the balance sheet liability for loyalty points earned by members are the estimated redemption rate and the estimated weighted-average retail price per point redeemed. We use historical redemption rates experienced under our loyalty program as a basis for estimating the ultimate redemption rate of points earned. We estimate breakage of loyalty points and unredeemed gift cards based on historical redemption rates. The weighted-average retail price per point redeemed is based on our most recent actual loyalty point redemptions and is adjusted as appropriate for recent changes in redemption values, including the mix of rewards redeemed. Our estimate of the amount and timing of gift card redemptions is based primarily on historical transaction experience.
We continually evaluate our methodology and assumptions based on developments in redemption patterns, retail price per point redeemed and other factors. Changes in the ultimate redemption rate and weighted-average retail price per point redeemed have the effect of either increasing or decreasing the deferred revenue balance through current period revenue by an amount estimated to cover the retail value of all points previously earned but not yet redeemed by loyalty program members as of the end of the reporting period. A 10% change in our customer loyalty program redemption rate or a 10% change in our weighted-average retail value per point redeemed at January 29, 2022, in each case, would have affected net earnings by approximately $4.6 million in fiscal 2021. A 10% change in our gift card breakage rate at January 29, 2022 would have affected net earnings by approximately $11.2 million in fiscal 2021.
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.
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. We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. 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. Based on our analysis, we have determined that it is more likely than not that some portion of our deferred tax assets will not be realized. Our valuation allowances increased to $338.3 million as of January 29, 2022, primarily due to cumulative losses in certain jurisdictions. See Item 8, Notes to the Consolidated Financial Statements, Note 15, "Income Taxes," for additional information. 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 $12.9 million as of January 29, 2022. Considerable management judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulations and taxing
authority rulings, as well as to the expiration of statutes of limitations in the 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.
Our judgments and estimates concerning uncertain tax positions may change as a result of evaluation of new information, such as the outcome of tax audits or changes to or further interpretations of tax laws and regulations. Our judgments and estimates concerning realizability of deferred tax assets could change if any of the evaluation factors change. If such changes take place, there is a risk that our effective tax rate could increase or decrease in any period, impacting our net earnings.
RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
See Item 8, Notes to the Consolidated Financial Statements, Note 3, "New Accounting Pronouncements," for recent accounting standards and pronouncements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of GameStop Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of GameStop Corp. and subsidiaries (the "Company") as of January 29, 2022, and January 30, 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, for the 52 week periods ended January 29, 2022, January 30, 2021 and February 1, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 29, 2022, and January 30, 2021, and the results of its operations and its cash flows for the 52 week periods ended January 29, 2022, January 30, 2021 and February 1, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 17, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Merchandise Inventories - Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company carries merchandise inventories at the lower of cost or market generally using the average cost method. In valuing merchandise inventories, the Company is required to adjust inventory to reflect potential obsolescence or the over-valuation resulting from carrying value exceeding market value. In valuing inventory, management makes significant judgements and estimates and involves the consideration of excess quantities on hand, recent sales prices, potential price protections, returns to vendors and other factors. Such judgements and estimates are more significant for certain inventory product types.
We identified the reserve for certain merchandise inventory products as a critical audit matter because of the significant estimates and assumptions management makes to estimate the excess, slow-moving, and obsolete inventory adjustments, involving the consideration of excess quantities on hand, recent sales prices, potential price protections, returns to vendors and other factors to estimate future customer demand. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of related assumptions, as well as the inputs and related calculations, to evaluate whether merchandise inventory reserves for certain inventory products were appropriately recorded as of January 29, 2022.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the excess, slow-moving, and obsolete merchandise inventory reserve for certain inventory products included the following, among others:
a.We tested the effectiveness of controls over the valuation of inventories.
b.We evaluated the appropriateness and consistency of management’s methods and assumptions used in developing their estimate of the excess, slow-moving, and obsolete inventory reserve, which included consideration of reserve trends.
c.We performed analysis of key product metrics, inventory turnover and product margins, to identify and evaluate slow moving inventory categories, negative margins, or other unusual trends.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 17, 2022
We have served as the Company's auditor since 2013.
GAMESTOP CORP.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value per share)
| | | | | | | | | | | | | | |
| | January 29, 2022 | | January 30, 2021 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 1,271.4 | | | $ | 508.5 | |
Restricted cash | | 33.1 | | | 110.0 | |
Receivables, net of allowances of $3.3 and $3.6, respectively | | 141.1 | | | 105.3 | |
Merchandise inventories | | 915.0 | | | 602.5 | |
Prepaid expenses and other current assets | | 238.2 | | | 224.9 | |
Total current assets | | 2,598.8 | | | 1,551.2 | |
Property and equipment, net | | 163.6 | | | 201.2 | |
Operating lease right-of-use assets | | 586.6 | | | 662.1 | |
Deferred income taxes | | 16.3 | | | — | |
Long-term restricted cash | | 15.4 | | | 16.5 | |
Other noncurrent assets | | 118.6 | | | 41.6 | |
Total assets | | $ | 3,499.3 | | | $ | 2,472.6 | |
| | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 471.0 | | | $ | 341.8 | |
Accrued liabilities and other current liabilities | | 668.9 | | | 626.8 | |
Current portion of operating lease liabilities | | 210.7 | | | 227.4 | |
Short-term debt, including current portion of long-term debt, net | | 4.1 | | | 121.7 | |
Borrowings under revolving line of credit | | — | | | 25.0 | |
Total current liabilities | | 1,354.7 | | | 1,342.7 | |
Long-term debt, net | | 40.5 | | | 216.0 | |
Operating lease liabilities | | 393.7 | | | 456.7 | |
Other long-term liabilities | | 107.9 | | | 20.5 | |
Total liabilities | | 1,896.8 | | | 2,035.9 | |
Stockholders’ equity: | | | | |
Class A common stock — $.001 par value; authorized 300.0 shares; 75.9 and 65.3 shares issued and outstanding, respectively | | 0.1 | | | 0.1 | |
Additional paid-in capital | | 1,577.5 | | | 11.0 | |
Accumulated other comprehensive loss | | (68.7) | | | (49.3) | |
Retained earnings | | 93.6 | | | 474.9 | |
Total stockholders' equity | | 1,602.5 | | | 436.7 | |
Total liabilities and stockholders’ equity | | $ | 3,499.3 | | | $ | 2,472.6 | |
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 | | 2019 |
Net sales | | $ | 6,010.7 | | | $ | 5,089.8 | | | $ | 6,466.0 | |
Cost of sales | | 4,662.9 | | | 3,830.3 | | | 4,557.3 | |
Gross profit | | 1,347.8 | | | 1,259.5 | | | 1,908.7 | |
Selling, general and administrative expenses | | 1,709.6 | | | 1,514.2 | | | 1,922.7 | |
Goodwill and asset impairments | | 6.7 | | | 15.5 | | | 385.6 | |
Gain on sale of assets | | — | | | (32.4) | | | — | |
Operating loss | | (368.5) | | | (237.8) | | | (399.6) | |
| | | | | | |
Interest expense, net | | 26.9 | | | 32.1 | | | 27.2 | |
Loss from continuing operations before income taxes | | (395.4) | | | (269.9) | | | (426.8) | |
Income tax (benefit) expense | | (14.1) | | | (55.3) | | | 37.6 | |
Net loss from continuing operations | | (381.3) | | | (214.6) | | | (464.4) | |
Loss from discontinued operations, net of tax | | — | | | (0.7) | | | (6.5) | |
Net loss | | $ | (381.3) | | | $ | (215.3) | | | $ | (470.9) | |
| | | | | | |
Basic loss per share: | | | | | | |
Continuing operations | | $ | (5.25) | | | $ | (3.30) | | | $ | (5.31) | |
Discontinued operations | | — | | | (0.01) | | | (0.08) | |
Basic loss per share | | $ | (5.25) | | | $ | (3.31) | | | $ | (5.38) | |
| | | | | | |
Diluted loss per share: | | | | | | |
Continuing operations | | $ | (5.25) | | | $ | (3.30) | | | $ | (5.31) | |
Discontinued operations | | — | | | (0.01) | | | (0.08) | |
Diluted loss per share | | $ | (5.25) | | | $ | (3.31) | | | $ | (5.38) | |
| | | | | | |
Weighted-average shares outstanding: | | | | | | |
Basic | | 72.6 | | | 65.0 | | | 87.5 | |
Diluted | | 72.6 | | | 65.0 | | | 87.5 | |
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 | | 2019 |
Net loss | | $ | (381.3) | | | $ | (215.3) | | | $ | (470.9) | |
Other comprehensive Loss: | | | | | | |
Foreign currency translation adjustments | | (19.4) | | | 29.5 | | | (24.5) | |
Total comprehensive loss | | $ | (400.7) | | | $ | (185.8) | | | $ | (495.4) | |
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | |
Net loss | | $ | (381.3) | | | $ | (215.3) | | | $ | (470.9) | |
Adjustments to reconcile net loss to net cash flows from operating activities: | | | | | | |
Depreciation and amortization | | 77.2 | | | 80.7 | | | 96.2 | |
Loss (gain) on retirement of debt | | 18.2 | | | (1.5) | | | — | |
Goodwill and asset impairments | | 6.7 | | | 15.5 | | | 385.6 | |
Stock-based compensation expense | | 30.5 | | | 7.9 | | | 8.9 | |
Deferred income taxes | | (16.3) | | | 80.3 | | | 61.4 | |
Loss (gain) on disposal of property and equipment, net | | 5.4 | | | (27.3) | | | 1.9 | |
Loss on divestiture | | — | | | — | | | 9.1 | |
Other | | (3.5) | | | 2.4 | | | 4.1 | |
Changes in operating assets and liabilities: | | | | | | |
Receivables, net | | (38.4) | | | 39.8 | | | (10.9) | |
Merchandise inventories | | (329.6) | | | 282.4 | | | 361.1 | |
Prepaid expenses and other current assets | | (6.5) | | | 8.4 | | | 3.6 | |
Prepaid income taxes and income taxes payable | | (21.7) | | | (87.0) | | | (75.9) | |
Accounts payable and accrued liabilities | | 224.4 | | | (78.6) | | | (792.8) | |
Operating lease right-of-use assets and lease liabilities | | (0.9) | | | 19.0 | | | 4.1 | |
Changes in other long-term liabilities | | 1.5 | | | (3.0) | | | — | |
Net cash flows (used in) provided by operating activities | | (434.3) | | | 123.7 | | | (414.5) | |
Cash flows from investing activities: | | | | | | |
Capital expenditures | | (62.0) | | | (60.0) | | | (78.5) | |
Proceeds from sale of property and equipment | | — | | | 95.5 | | | — | |
Proceeds from divestitures, net of cash sold | | — | | | — | | | 5.2 | |
Proceeds from company-owned life insurance, net | | — | | | — | | | 12.0 | |
Other | | (2.8) | | | 1.4 | | | 0.4 | |
Net cash flows (used in) provided by investing activities | | (64.8) | | | 36.9 | | | (60.9) | |
Cash flows from financing activities: | | | | | | |
Proceeds from issuance of common stock, net of costs | | 1,672.8 | | | — | | | — | |
Net repayments of senior notes | | (307.4) | | | (130.3) | | | (404.5) | |
Repurchase of common shares | | — | | | — | | | (198.7) | |
Proceeds from French term loans | | — | | | 47.1 | | | — | |
Dividends paid | | — | | | (0.3) | | | (40.5) | |
Borrowings from the revolver | | — | | | 150.0 | | | — | |
Repayments of revolver borrowings | | (25.0) | | | (125.0) | | | — | |
Settlement of stock-based awards | | (136.8) | | | 3.1 | | | (1.0) | |
Payments of financing costs | | (3.0) | | | — | | | — | |
Net cash flows provided by (used in) financing activities | | 1,200.6 | | | (55.4) | | | (644.7) | |
Exchange rate effect on cash, cash equivalents and restricted cash | | (16.6) | | | 16.3 | | | (6.9) | |
Increase (decrease) in cash, cash equivalents and restricted cash | | 684.9 | | | 121.5 | | | (1,127.0) | |
Cash, cash equivalents and restricted cash at beginning of period | | 635.0 | | | 513.5 | | | 1,640.5 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 1,319.9 | | | $ | 635.0 | | | $ | 513.5 | |
See accompanying notes to consolidated financial statements.
75.GAMESTOP CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions, except for per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | | | Total Stockholders' Equity |
| | Shares | | Amount | |
Balance at February 3, 2019 | | 102.0 | | | $ | 0.1 | | | $ | 27.7 | | | $ | (54.3) | | | $ | 1,362.7 | | | | | $ | 1,336.2 | |
Net loss | | — | | | — | | | — | | | — | | | (470.9) | | | | | (470.9) | |
Foreign currency translation | | — | | | — | | | — | | | (24.5) | | | — | | | | | (24.5) | |
Dividends declared, $0.38 per common share | | — | | | — | | | — | | | — | | | (38.5) | | | | | (38.5) | |
Stock-based compensation expense | | — | | | — | | | 8.9 | | | — | | | — | | | | | 8.9 | |
Repurchase of common shares | | (38.1) | | | — | | | (35.6) | | | — | | | (163.1) | | | | | (198.7) | |
Settlement of stock-based awards | | 0.4 | | | — | | | (1.0) | | | — | | | — | | | | | (1.0) | |
Balance at February 1, 2020 | | 64.3 | | | 0.1 | | | — | | | (78.8) | | | 690.2 | | | | | 611.5 | |
Net loss | | — | | | — | | | — | | | — | | | (215.3) | | | | | (215.3) | |
Foreign currency translation | | — | | | — | | | — | | | 29.5 | | | — | | | | | 29.5 | |
Stock-based compensation expense | | — | | | — | | | 7.9 | | | — | | | — | | | | | 7.9 | |
Settlement of stock-based awards | | 1.0 | | | — | | | 3.1 | | | — | | | — | | | | | 3.1 | |
Balance at January 30, 2021 | | 65.3 | | | 0.1 | | | 11.0 | | | (49.3) | | | 474.9 | | | | | 436.7 | |
Net loss | | — | | | — | | | — | | | — | | | (381.3) | | | | | (381.3) | |
Foreign currency translation | | — | | | — | | | — | | | (19.4) | | | — | | | | | (19.4) | |
Stock-based compensation expense | | — | | | — | | | 30.5 | | | — | | | — | | | | | 30.5 | |
Issuance of common stock, net of cost | | 8.5 | | | — | | | 1,672.8 | | | — | | | — | | | | | 1,672.8 | |
Settlement of stock-based awards | | 2.1 | | | — | | | (136.8) | | | — | | | — | | | | | (136.8) | |
Balance at January 29, 2022 | | 75.9 | | | $ | 0.1 | | | $ | 1,577.5 | | | $ | (68.7) | | | $ | 93.6 | | | | | $ | 1,602.5 | |
See accompanying notes to consolidated financial statements.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
1. General Information
The Company
GameStop Corp. ("GameStop," "we," "us," "our," or the "Company"), a Delaware corporation established in 1996, is a leading specialty retailer offering games and entertainment products through its ecommerce properties and thousands of stores.
We operate our business in four geographic segments: United States, Canada, Australia and Europe. The information contained in these consolidated financial statements refers to continuing operations unless otherwise noted. See Note 6, "Segment Information," for additional information. Basis of Presentation and Consolidation
Our consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Our former Spring Mobile business is presented as discontinued operations in the statements of operations for periods presented. The Consolidated Statements of Cash flows is presented on a combined basis for all periods presented and, therefore, does not segregate cash flows from continuing and discontinued operations. The information contained in these notes to our consolidated financial statements refers to continuing operations unless otherwise noted.
Our fiscal year is composed of the 52 or 53 weeks ending on the Saturday closest to the last day of January. Fiscal year 2021 consisted of the 52 weeks ended on January 29, 2022 ("fiscal 2021"). Fiscal year 2020 consisted of the 52 weeks ended on January 30, 2021 ("fiscal 2020"). Fiscal year 2019 consisted of the 52 weeks ended on February 1, 2020 ("fiscal 2019").
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.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
We consider all short-term, highly-liquid instruments purchased with a remaining 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
Restricted cash of $48.5 million and $126.5 million as of January 29, 2022 and January 30, 2021, respectively, consists primarily of bank deposits that collateralize our obligations to vendors and landlords.
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 gaming systems and other products traded in by customers are recorded as inventory at the amount of the store credit given to the customer. We are required to make adjustments to inventory to reflect potential obsolescence or over-valuation as a result of cost exceeding market. In valuing inventory, we consider quantities on hand, recent sales, potential price protections, returns to vendors and other factors. 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 January 29, 2022 and January 30, 2021 were $34.6 million and $45.2 million, respectively.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
Assets Held-for-Sale
As of February 1, 2020, our corporate aircraft was classified as assets held-for-sale which had an estimated fair value, less costs to sell, of $11.8 million. We recognized impairment charges of $3.2 million on our corporate aircraft during the 52 weeks ended January 30, 2021, which was partially attributable to recent economic impacts associated with the COVID-19 pandemic. On June 5, 2020, we sold our corporate aircraft with net cash proceeds from the sale totaling $8.6 million, net of costs to sell. No gain or loss on the sale of the aircraft was recognized.
Property and Equipment
The following table presents property and equipment, net:
| | | | | | | | | | | | | | | | | |
| Estimated Useful Lives (Years) | | January 29, 2022 | | January 30, 2021 |
Land | N/A | | $ | 4.2 | | | $ | 4.6 | |
Buildings and leasehold improvements | 1-10 | | 457.8 | | | 496.6 | |
Fixtures and equipment | 3-10 | | 731.4 | | | 817.7 | |
Total property and equipment | | | 1,193.4 | | | 1,318.9 | |
Accumulated depreciation | | | (1,029.8) | | | (1,117.7) | |
Property and equipment, net | | | $ | 163.6 | | | $ | 201.2 | |
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation on fixtures and equipment is computed using the straight-line method over their estimated useful lives. Maintenance and repairs are expensed as incurred, while improvements 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, which includes reasonably certain renewal options. Costs incurred in purchasing or developing management information systems are capitalized and included in fixtures and equipment. These costs are amortized over their estimated useful lives from the date the technology becomes operational. Our total depreciation expense was $73.6 million, $76.8 million and $90.8 million for fiscal 2021, 2020 and 2019, respectively in selling, general and administrative ("SG&A") expenses in our Consolidated Statements of Operations.
We periodically review our property and equipment when events or changes in circumstances indicate that its carrying amounts may not be recoverable or its depreciation or amortization periods should be accelerated. We assess recoverability based on several factors, including our intention with respect to our stores and those stores' projected undiscounted cash flows. An impairment loss is recognized for the amount by which the carrying amount of the assets exceeds its fair value, determined based on an estimate of discounted future cash flows or readily available market information for similar assets. We recorded impairment losses of $3.8 million, $7.2 million and $6.6 million in fiscal 2021, 2020 and 2019, respectively in our Consolidated Statements of Operations. See Note 9, "Asset Impairments," for additional information regarding our asset impairment charges. Share Repurchases
On March 4, 2019, our Board of Directors approved a new share repurchase authorization allowing our management to repurchase up to $300 million of our Class A Common Stock with no expiration date. In aggregate, during fiscal 2019, we repurchased a total of 38.1 million shares of our Class A Common Stock, totaling $198.7 million, at an average price of $5.19 per share. We did not repurchase shares during fiscal 2021 or fiscal 2020. As of January 29, 2022, we have $101.3 million remaining under the repurchase authorization.
Digital Assets
We account for digital assets in accordance with ASC 350, Intangibles-Goodwill and Other (Topic 350). Our digital assets are initially recorded at cost. Accordingly, if the fair market value at any point during the reporting period is lower than the carrying value, an impairment loss equal to the difference will be recognized in SG&A expenses in our Consolidated Statement of Operations. This new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains or losses on the sale of digital assets, if any, will be recognized based on the fair value upon sale or disposal of the assets in SG&A expenses in our Consolidated Statement of Operations.
In January 2022, we entered into a partnership with Immutable X Pty Limited (“IMX”) and Digital Worlds NFTs Ltd. ("Digital Worlds") pursuant to which the Company is entitled to receive digital assets in the form of IMX tokens once certain milestones have been achieved. Upon entering the agreements, we recognized a noncurrent receivable and deferred revenue of $79 million determined at the fair value of the digital asset at the date of the agreement. Once the IMX tokens are received, we
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
would record the digital asset as an indefinite-lived intangible asset and derecognize the noncurrent receivable. The deferred revenue will be recognized over the term of the agreement. Noncurrent receivables and deferred revenue are recognized in other noncurrent assets and other long-term liabilities, respectively, on our Consolidated Balance Sheets.
Goodwill and Intangible Assets
Goodwill represents the excess purchase price over tangible net assets and identifiable intangible assets acquired. Intangible assets are recorded apart from goodwill if they arise from a contractual right and are capable of being separated from the entity and sold, transferred, licensed, rented or exchanged individually. We are required to evaluate goodwill and other intangible assets not subject to amortization for impairment at least annually. This annual test is completed at the beginning of the fourth quarter of each fiscal year or when circumstances indicate the carrying value of the goodwill or other intangible assets might be impaired. Goodwill has been assigned to reporting units for the purpose of impairment testing.
We recognized goodwill impairment charges of $363.9 million in fiscal 2019 in our Consolidated Statements of Operations, primarily due to a decline in our market capitalization. As a result of the goodwill impairment charge, we have no remaining goodwill.
Our indefinite-lived intangible assets consist of trade names that are not amortized but are required to be evaluated at least annually for impairment. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is impaired by the amount of the excess. The fair value of our trade names are estimated by 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. As a result of our annual impairment testing in fiscal years 2021, 2020 and 2019, we recognized impairment charges totaling zero, $1.1 million and $2.3 million, respectively, associated with our trade names. See Note 11, "Intangible Assets" for additional information. Our definite-lived intangible assets consist primarily of leasehold rights. 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 the life of the asset.
Revenue Recognition
We recognize revenue when performance obligations are satisfied by transferring goods or services to the customer in an amount that we expect to collect in exchange for those goods or services. The satisfaction of a performance obligation with a single customer may occur at a point in time or may occur over time. The significant majority of our revenue is recognized at a point in time, generally when a customer purchases and takes possession of merchandise through our stores or when merchandise purchased through our ecommerce properties is delivered to a customer. We have arrangements with customers where our performance obligations are satisfied over time, which primarily relate to extended warranties and our Game Informer magazine. In arrangements where we have multiple performance obligations, the transaction price is allocated to each performance obligation based on their relative stand-alone selling price (see "Loyalty Program").
Revenue is recognized net of sales discounts and net of an estimated sales return reserve. Our sales return policy is generally limited to 30 days or less and as such our sales returns are, and historically have been, immaterial. Revenues do not include sales taxes or other taxes collected from customers.
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. Customer liabilities and other deferred revenues for our PowerUp Rewards loyalty program, gift cards, customer credits, magazines and product replacement plans are included in accrued liabilities and other current liabilities on our Consolidated Balance Sheets.
We also sell a variety of digital products which generally allow consumers to download software or play games on the internet. The significant majority of the digital products we sell are unbundled and 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 digital product publisher. We recognize the sale of these digital products on a net basis, whereby the commissions earned are recorded as revenue.
Loyalty Program
Our PowerUp Rewards loyalty program allows members to earn points on purchases that can be redeemed for rewards that include discounts or coupons. When loyalty program members purchase our product, we allocate the transaction price between the product and loyalty points earned based on the relative stand-alone selling prices and expected point redemption. The portion allocated to the loyalty points is initially recorded as deferred revenue and subsequently recognized as revenue upon redemption or expiration.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
The two primary estimates utilized to record the deferred revenue for loyalty points earned by members are the estimated retail price per point and estimated breakage. The estimated retail price per point is based on the actual historical retail prices of product purchased through the redemption of loyalty points. We estimate breakage of loyalty points based on historical redemption rates. We continually evaluate our methodology and assumptions based on developments in retail price per point redeemed, redemption patterns and other factors. Changes in the retail price per point and redemption rates have the effect of either increasing or decreasing the deferred revenue liability through current period revenue by an amount estimated to represent the retail value of all points previously earned but not yet redeemed by loyalty program members as of the end of the reporting period. The cost of administering the loyalty program, including program administration fees, program communications and cost of loyalty cards, is recognized in SG&A expenses in our Consolidated Statement of Operations.
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, we recognize breakage in revenue upon redemption and in proportion to historical redemption patterns, regardless of the age of the unused gift cards and merchandise credit liabilities. To the extent that future redemption patterns differ from those historically experienced, there will be variations in the recorded breakage.
Vendor Arrangements
We participate in vendor cooperative advertising programs and other vendor marketing programs in which 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 is 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 gaming products that have not yet been released to the public is deferred as a reduction of inventory.
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. Vendor allowances of $71.7 million, $72.5 million and $108.5 million were recorded as a reduction of cost of sales for fiscal 2021, 2020 and 2019, respectively, in our Consolidated Statements of Operations.
Cost of Sales and Selling, General and Administrative Expenses Classification
The classification of cost of sales and SG&A expenses varies across the retail industry. We include certain purchasing, receiving and distribution costs in SG&A in the Consolidated Statements of Operations. We include processing fees associated with purchases made by credit cards and other payment methods in cost of sales in our Consolidated Statements of Operations.
Advertising Expenses
We expense advertising costs for television, print, digital advertising, and other media when the advertising takes place. Advertising expenses for fiscal 2021, 2020 and 2019 totaled $93.6 million, $58.4 million, and $66.7 million, respectively.
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. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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 15, "Income Taxes," for additional information. We do not assert indefinite reinvestment on the undistributed earnings of our foreign subsidiaries. Income tax and/or withholding tax associated with any amounts available for distribution as of January 29, 2022 is not expected to be material to our financial statements.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
Leases
We conduct the substantial majority of our business with leased real estate properties, including retail stores, warehouse facilities and office space. We also lease certain equipment and vehicles. These are generally leased under non-cancelable agreements and include various renewal options for additional periods. These agreements generally provide for minimum, and in some cases, percentage rentals, and require us to pay insurance, taxes and other maintenance costs. Percentage rentals are based on sales performance in excess of specified minimums at various stores and are accounted for in the period in which the amount of percentage rentals can be accurately estimated. All of our lease agreements are classified as operating leases.
We determine if an arrangement is considered a lease at inception. We recognize ROU assets, on the commencement date based on the present value of future minimum lease payments over the lease term, including reasonably certain renewal options. As the rate implicit in the lease is not readily determinable for most leases, we utilize our incremental borrowing rate ("IBR") to determine the present value of future payments. The incremental borrowing rate represents a significant judgment that is based on an analysis of our credit rating, country risk, corporate bond yields and the effect of collateralization. For our real estate leases, we do not separate the components of a contract, thus our future payments include minimum rent payments and fixed executory costs. For our non-real estate leases, future payments include only fixed minimum rent payments. We record the amortization of our ROU assets and the accretion of our lease liabilities as a single lease cost on a straight-line basis over the lease term, which includes option terms we are reasonably certain to exercise. We recognize our cash or lease incentives as a reduction to the ROU asset. We assess ROU assets for impairment in accordance with our long-lived asset impairment policy, which is performed periodically or when events or changes in circumstances indicate that the carrying amount may not be recoverable.
Foreign Currency
Generally, 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 into U.S. dollars at the applicable exchange rate as of the end of the balance sheet date and revenue and expenses are translated into U.S. dollars at an average rate over the period. Currency translation adjustments are recorded as a component of other comprehensive income in our Consolidated Statement of Comprehensive Loss. Currency translation adjustments related to divested foreign businesses are reclassified into earnings as a component of SG&A in our Consolidated Statements of Operations once the liquidation of the respective foreign businesses is substantially complete.
Transaction gains and losses arising from transactions denominated in foreign currencies as well as derivatives resulted in net losses of $3.4 million in fiscal 2021, net losses of $1.0 million in fiscal 2020 and net gains of $1.0 million in fiscal 2019, and are included in SG&A expenses in the Consolidated Statements of Operations. Foreign currency transaction gains and losses are the result of decreases or increases in the value of the U.S. dollar compared to the functional currencies of the countries in which we operate internationally.
We use forward exchange contracts to manage currency risk primarily related to foreign-currency denominated intercompany assets and liabilities. The forward exchange 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. See Note 12, "Fair Value Measurements and Financial Instruments," for additional information regarding our forward exchange contracts.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
3. New Accounting Pronouncements
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides practical expedients for contract modifications with the transition from reference rates, such as LIBOR, that are expected to be discontinued. This guidance is applicable for our revolving line of credit, which uses LIBOR as a reference rate. The provisions of ASU 2020-04 are effective as of March 12, 2020 and may be adopted prospectively through December 31, 2022. As of January 30, 2022, we adopted this ASU with no material impact to our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard is intended to simplify the accounting and disclosure requirements for income taxes by eliminating various exceptions in accounting for income taxes as well as clarifying and amending existing guidance to improve consistency in application of ASC 740. The provisions of ASU 2019-12 are effective for fiscal years beginning after December 15, 2021, with early adoption permitted. As of January 30, 2022, we adopted this ASU with no material impact to our consolidated financial statements.
4. Discontinued Operations
On January 16, 2019, we completed the sale of all of the equity interests in our wholly owned subsidiary Spring Communications Holding, Inc. ("Spring Mobile") to Prime Acquisition Company, LLC, a wholly owned subsidiary of Prime Communications, L.P., pursuant to an Equity Purchase Agreement dated as of November 21, 2018. The historic results of Spring Mobile, are presented as discontinued operations. For fiscal years 2020 and 2019, we recognized a net loss from discontinued operations of $0.7 million and $6.5 million in our Consolidated Statements of Operations.
The Consolidated Statements of Cash Flows is presented on a combined basis for all periods presented, therefore, does not segregate cash flows from continuing and discontinued operations. There were no significant operating noncash items for our discontinued operations for fiscal 2019, 2020 and 2021.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
5. Revenue
The following table presents net sales by significant product category:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 | | 2019 |
Hardware and accessories (1) | | $ | 3,171.7 | | | $ | 2,530.8 | | | $ | 2,722.2 | |
Software (2) | | 2,014.8 | | | 1,979.1 | | | 3,006.3 | |
Collectibles | | 824.2 | | | 579.9 | | | 737.5 | |
Total | | $ | 6,010.7 | | | $ | 5,089.8 | | | $ | 6,466.0 | |
(1) Includes sales of new and pre-owned hardware, accessories, hardware bundles in which hardware and digital or physical software are sold together in a single SKU, interactive game figures, strategy guides, mobile and consumer electronics, and the operations of our Simply Mac stores, which were sold in September 2019.
(2) Includes sales of new and pre-owned gaming software, digital software and PC entertainment software.
See Note 6, "Segment Information," for net sales by geographic location. Performance Obligations
We have arrangements with customers where our performance obligations are satisfied over time, which primarily relate to extended warranties and our Game Informer magazine. Revenues do not include sales taxes or other taxes collected from customers. We expect to recognize revenue in future periods for remaining performance obligations we have associated with unredeemed gift cards, trade-in credits, reservation deposits and our PowerUp Rewards loyalty program (collectively, “unredeemed customer liabilities”), extended warranties and subscriptions to our Game Informer magazine.
Performance obligations associated with unredeemed customer liabilities are primarily satisfied at the time our customers redeem their gift cards, trade-in credits, reservation deposits or loyalty program points for products that we offer. Unredeemed customer liabilities are generally redeemed within one year of issuance.
We offer extended warranties on certain new and pre-owned gaming products with terms generally ranging from 12 to 24 months, depending on the product. Revenues for extended warranties sold are recognized on a straight-line basis over the life of the contract.
Performance obligations associated with subscriptions to our Game Informer magazine are satisfied when magazines are delivered in print form or when made available in digital format.
The following table presents our performance obligations:
| | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 |
Unredeemed customer liabilities | | $ | 246.6 | | | $ | 244.1 | |
Extended warranties | | 82.6 | | | 65.1 |
Subscription | | 49.1 | | | 39.0 |
| | | | |
Significant Judgments and EstimatesWe accrue PowerUp Rewards loyalty points at the estimated retail price per point, net of estimated breakage, which can be redeemed by our loyalty program members for discounts on products that we offer. The estimated retail price per point is based on the actual historical retail prices of products purchased through the redemption of loyalty points. We estimate breakage of loyalty points and unredeemed gift cards based on historical redemption rates.
Contract Balances
Our contract liabilities primarily consist of unredeemed customer liabilities and deferred revenues associated with gift cards, extended warranties and subscriptions to our Game Informer magazine.
The following table presents a roll forward of our contract liabilities:
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
| | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 |
Contract liability beginning balance | | $ | 348.2 | | | $ | 339.2 | |
Increase to contract liabilities (1) | | 931.0 | | | 953.8 | |
Decrease to contract liabilities (2) | | (896.1) | | | (950.0) | |
Other adjustments (3) | | (4.8) | | | 5.2 | |
Contract liability ending balance | | $ | 378.3 | | | $ | 348.2 | |
__________________________________________(1) Includes issuances of gift cards, trade-in credits and loyalty points, new reservation deposits, new subscriptions to Game Informer and extended warranties sold.
(2) Includes redemptions of gift cards, trade-in credits, loyalty points and reservation deposits as well as revenues recognized for Game Informer and extended warranties. During fiscal 2021, there were $48.8 million of gift cards redeemed that were outstanding as of January 30, 2021. During fiscal 2020, there were $45.1 million of gift cards redeemed that were outstanding as of February 1, 2020.
(3) Primarily includes foreign currency translation adjustments.
6. Segment Information
We operate our business in four geographic segments: United States, Canada, Australia and Europe. We identify segments based on a combination of geographic areas and management responsibility. Segment results for the United States include retail operations in 50 states and Guam; our ecommerce website www.gamestop.com; Game Informer magazine; and Simply Mac, which we sold in September 2019. The United States segment also includes general and administrative expenses related to our corporate headquarters in Grapevine, Texas. 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, inter-segment loans and related interest. There were no material inter-segment sales during fiscal 2021, 2020 and 2019. Information on total assets by segment is not disclosed as such information is not used by our chief operating decision makers to evaluate segment performance or to allocate resources and capital.
The following table presents segment information:
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United States | | Canada | | Australia | | Europe | | Total |
As of and for the Fiscal Year Ended January 29, 2022 | | | | | | | | | | |
Net sales | | $ | 4,186.5 | | | $ | 332.3 | | | $ | 591.8 | | | $ | 900.1 | | | $ | 6,010.7 | |
Operating (loss) earnings | | (358.1) | | | (1.1) | | | 30.6 | | | (39.9) | | | (368.5) | |
Depreciation and amortization | | 50.7 | | | 2.9 | | | 7.0 | | | 15.9 | | | 76.5 | |
Asset impairments | | 0.2 | | | — | | | — | | | 6.5 | | | 6.7 | |
Capital expenditures | | 42.3 | | | 3.1 | | | 9.4 | | | 7.2 | | | 62.0 | |
Property and equipment, net | | 100.1 | | | 8.3 | | | 15.6 | | | 39.6 | | | 163.6 | |
| | | | | | | | | | |
As of and for the Fiscal Year Ended January 30, 2021 | | | | | | | | | | |
Net sales | | $ | 3,417.1 | | | $ | 258.4 | | | $ | 625.3 | | | $ | 789.0 | | | $ | 5,089.8 | |
Operating (loss) earnings | | (211.0) | | | (0.3) | | | 52.2 | | | (78.7) | | | (237.8) | |
Depreciation and amortization | | 51.2 | | | 3.1 | | | 7.6 | | | 18.1 | | | 80.0 | |
Asset impairments | | 11.3 | | | 0.1 | | | — | | | 4.1 | | | 15.5 | |
Capital expenditures | | 54.5 | | | 1.0 | | | 2.3 | | | 2.2 | | | 60.0 | |
Property and equipment, net | | 125.2 | | | 8.2 | | | 14.8 | | | 53.0 | | | 201.2 | |
| | | | | | | | | | |
As of and for the Fiscal Year Ended February 1, 2020 | | | | | | | | | | |
Net sales | | $ | 4,497.7 | | | $ | 344.2 | | | $ | 525.4 | | | $ | 1,098.7 | | | $ | 6,466.0 | |
Operating (loss) earnings | | (343.9) | | | (14.9) | | | 9.4 | | | (50.2) | | | (399.6) | |
Depreciation and amortization | | 57.8 | | | 3.8 | | | 8.9 | | | 24.7 | | | 95.2 | |
Goodwill and asset impairments | | 376.7 | | | 0.4 | | | 0.2 | | | 8.3 | | | 385.6 | |
Capital expenditures | | 56.8 | | | 4.2 | | | 4.5 | | | 13.0 | | | 78.5 | |
Property and equipment, net | | 164.9 | | | 17.0 | | | 32.5 | | | 61.5 | | | 275.9 | |
7. Associates' Defined Contribution Plan
We sponsor a defined contribution plan (the “Savings Plan”) for the benefit of substantially all of our U.S. associates who meet certain eligibility requirements, primarily age and length of service. The Savings Plan allows associates to invest up to 60%, subject to IRS limitations, of their eligible gross cash compensation on a pre-tax basis. Our optional contributions to the Savings Plan are generally in amounts based upon a certain percentage of the associates’ contributions. Our contributions to the Savings Plan during fiscal 2021, 2020 and 2019, were $4.5 million, $5.6 million and $6.0 million, respectively.
8. Earnings Per Share
Basic net income (loss) per common share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding and potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options, unvested restricted stock, and unvested restricted stock units outstanding during the period, using the treasury stock method. Potentially dilutive securities are excluded from the computations of diluted earnings per share if their effect would be antidilutive. A net loss from continuing operations causes all potentially dilutive securities to be antidilutive. We have certain undistributed stock awards that participate in dividends on a non-forfeitable basis, however, their impact on earnings per share under the two-class method is negligible.
The following is a reconciliation of shares used in calculating basic and diluted net income (loss) per common share (in millions, except per share data):
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 | | 2019 |
Weighted-average common shares outstanding | | 72.6 | | | 65.0 | | | 87.5 | |
Dilutive effect of stock options and restricted stock awards | | — | | | — | | | — | |
Weighted-average diluted common shares | | 72.6 | | | 65.0 | | | 87.5 | |
| | | | | | |
Anti-dilutive shares: | | | | | | |
Restricted stock units | | 0.9 | | | — | | | — | |
Restricted stock | | 0.4 | | | 1.6 | | | 1.9 | |
Stock options | | — | | | — | | | 0.2 | |
As of January 29, 2022, 8.9 million shares of our Class A common stock were directly registered with our transfer agent, ComputerShare.
9. Asset Impairments
The following is a summary of our asset impairment charges, by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United States | | Canada | | Australia | | Europe | | Total |
Fiscal 2021 | | | | | | | | | | |
| | | | | | | | | | |
Store and other asset impairment charges | | $ | 0.2 | | | $ | — | | | $ | — | | | $ | 6.5 | | | $ | 6.7 | |
Total | | $ | 0.2 | | | $ | — | | | $ | — | | | $ | 6.5 | | | $ | 6.7 | |
Fiscal 2020 | | | | | | | | | | |
Intangible asset impairment charges | | $ | 0.5 | | | $ | — | | | $ | — | | | $ | 0.6 | | | $ | 1.1 | |
Corporate aircraft impairment charges | | 3.2 | | | — | | | — | | | — | | | 3.2 | |
Store and other asset impairment charges | | 7.6 | | | 0.1 | | | — | | | 3.5 | | | 11.2 | |
Total | | $ | 11.3 | | | $ | 0.1 | | | $ | — | | | $ | 4.1 | | | $ | 15.5 | |
Fiscal 2019 | | | | | | | | | | |
Intangible asset impairment charges | | $ | 2.3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2.3 | |
Corporate aircraft impairment charges | | 8.7 | | | — | | | — | | | — | | | 8.7 | |
Store and other asset impairment charges | | 1.8 | | | 0.4 | | | 0.2 | | | 8.3 | | | 10.7 | |
Total | | $ | 12.8 | | | $ | 0.4 | | | $ | 0.2 | | | $ | 8.3 | | | $ | 21.7 | |
See Note 11, "Intangible Assets," for information regarding our prior year intangible asset impairment charges. Store and other asset impairment charges relate to our evaluation of store property, equipment and other assets in situations where an asset’s carrying value was not expected to be recovered by its future cash flows over its remaining useful life.
10. Leases
In July of 2020, we sold, in separate unrelated transactions, to unaffiliated third parties: i) our corporate headquarters and ancillary office space in Grapevine, Texas for $28.5 million, net of costs to sell and ii) a nearby refurbishment center for $15.2 million, net of costs to sell. In connection with each of the sales, we leased-back from the applicable purchasers our corporate headquarters for an initial term of ten years and refurbishment center for an initial term of two years. The leaseback agreement for the corporate headquarters contains three renewal periods of five years each; we recognized only the initial term of the lease as part of our right-of-use asset and lease liability for the corporate headquarters. The annual rent for the corporate headquarters will start at $1.7 million, plus taxes, utilities, management fees and other operating and maintenance expenses and will increase by 2.25% per year. In July 2021, we extended the term of the lease for our refurbishment center by three years through July 2025, with a five year renewal period. These leaseback agreements are accounted for as operating leases.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
With respect to the leaseback of the corporate headquarters, we agreed to provide a letter of credit to the buyer-lessor within 18 months from the closing date to secure our lease obligation. Given that the purchase price of the corporate headquarters was reduced by $2.8 million to account for the deferred issuance of this letter of credit, we recognized a contract asset for the same amount in prepaid expenses and other current assets on our Consolidated Balance Sheets, which represents the variable consideration on the purchase price. In 2021, we issued a letter of credit of $2.8 million and derecognized the contract asset. Upon delivering the letter of credit, we were entitled to a rent credit of an equivalent amount. This variable consideration was recognized in the total gain on sale of assets in our Consolidated Statements of Operations during the second quarter of 2020. The net proceeds from the sale of these assets were used for general corporate purposes.
In August 2020, we sold our Australian headquarters in Eagle Farm, Queensland to an unrelated party for approximately $27.0 million, net of costs to sell, and immediately leased back the facility for a term of ten years on market rate terms at an average annual base rent of $1.7 million, plus taxes, utilities, management fees and other operating and maintenance expenses. Additionally, in September 2020, we sold our Canadian headquarters in Brampton, Ontario for approximately $16.7 million, net of costs to sell, and leased back the facility for a term of five years on market rate terms at an average annual base rent of $0.9 million, plus taxes, utilities, management fees and other operating and maintenance expenses. We recognized only the initial term of the lease as part of our right-of-use asset and lease liability for both the Australian and Canadian headquarters. The net proceeds from the sale of these assets were used for general corporate purposes.
As a result of these transactions, we recognized total gain on sale of assets of $32.4 million in our Consolidated Statements of Operations in fiscal 2020.
The following table presents rent expenses under operating leases:
| | | | | | | | | | | | | | |
| | Fiscal Year | | Fiscal Year |
| | 2021 | | 2020 |
Operating lease cost | | $ | 296.3 | | | $ | 311.5 | |
Variable lease cost (1) | | 64.1 | | | 79.2 | |
Total rent expense | | $ | 360.4 | | | $ | 390.7 | |
(1) Variable lease cost includes percentage rentals and variable executory costs.
We had cash outflows of $262.3 million and $251.4 million in fiscal 2021 and 2020, respectively, associated with operating leases included in the measurement of our lease liabilities and we recognized $205.4 million and $132.5 million of ROU assets in fiscal 2021 and 2020, respectively, that were obtained in exchange for operating lease obligations. In fiscal 2021, we recognized $1.3 million of store-level ROU asset impairment charges compared to $2.9 million of store-level ROU asset impairment charges in fiscal 2020.
The following table presents the weighted-average remaining lease term, which includes reasonably certain renewal options, and the weighted-average discount rate for operating leases included in the measurement of our lease liabilities:
| | | | | | | | | | | | | | |
| | January 29, 2022 | | January 30, 2021 |
Weighted-average remaining lease term (years) (1) | | 4.2 | | 4.5 |
Weighted-average discount rate | | 4.3 | % | | 5.2 | % |
(1) The weighted-average remaining lease term is weighted based on the lease liability balance for each lease as of January 29, 2022 and January 30, 2021. This weighted average calculation differs from our simple average remaining lease term due to the inclusion of reasonably certain renewal options and the effect of the lease liability value of longer term leases.
The following table presents expected lease payments associated with our operating lease liabilities, excluding percentage rentals:
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
| | | | | | | | | | | | |
Period | | | | Operating Leases(1) |
Fiscal Year 2022 | | | $ | 244.0 | |
Fiscal Year 2023 | | | 145.3 | |
Fiscal Year 2024 | | | 98.0 | |
Fiscal Year 2025 | | | 65.3 | |
Fiscal Year 2026 | | | 42.5 | |
Thereafter | | | 69.4 | |
Total remaining lease payments | | | 664.5 | |
Less: Interest | | | (60.0) | |
Present value of lease liabilities(2) | | | $ | 604.5 | |
(1) Operating lease payments exclude legally binding lease payments for leases signed but not yet commenced.
(2) The present value of lease liabilities consist of $210.7 million classified as current portion of operating lease liabilities and $393.7 million classified as long-term operating lease liabilities on our Consolidated Balance Sheets.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
11. Intangible Assets
The following table presents the gross carrying amount and accumulated amortization of our intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 29, 2022 | | January 30, 2021 |
| | Gross Carrying Amount(1) | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Intangible assets with indefinite lives: | | | | | | | | | | | | |
Trade names | | $ | 5.3 | | | $ | — | | | $ | 5.3 | | | $ | 5.7 | | | $ | — | | | $ | 5.7 | |
Intangible assets with finite lives: | | | | | | | | | | | | |
Leasehold rights | | 74.7 | | | (67.9) | | | 6.8 | | | 93.3 | | | (80.5) | | | 12.8 | |
Other | | 31.7 | | | (31.7) | | | — | | | 32.7 | | | (32.7) | | | — | |
Total | | $ | 111.7 | | | $ | (99.6) | | | $ | 12.1 | | | $ | 131.7 | | | $ | (113.2) | | | $ | 18.5 | |
___________________
(1) The change in the gross carrying amount of intangible assets from January 30, 2021 to January 29, 2022 is due to the impact of exchange rate fluctuations.
Indefinite-lived Intangible Assets
Indefinite-lived intangible assets are expected to contribute to cash flows indefinitely and, therefore, are not subject to amortization but are subject to annual impairment testing. We test our indefinite-lived intangible assets on an annual basis during the fourth quarter or when circumstances indicate the carrying value might be impaired.
Our trade names consisted of Micromania, our retail operations business in France, which we acquired in 2008; and formerly ThinkGeek, a collectibles retailer, which we acquired in 2015. We no longer operate stores under the ThinkGeek brand. As a result of an impairment test performed during fiscal 2020, we recognized an impairment charge of $0.6 million and $0.5 million and related to our Micromania and ThinkGeek trade names, respectively.
As a result of impairment testing performed during fiscal 2019, we recognized an impairment charge of $2.3 million related to our ThinkGeek trade name. The impairment charge was primarily the result of increases in discount rate assumptions and downward revisions to our forecasted cash flows, consistent with those utilized in the valuation of our reporting units for goodwill impairment testing.
Finite-lived Intangible Assets
Leasehold rights, the majority of which were recorded as a result of the purchase of SFMI Micromania SAS (“Micromania”) in 2008, 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.
Other intangible assets include design portfolio and favorable leasehold interests. The design portfolio reflects the collection of product designs and ideas that were created by Geeknet and recorded as a result of the Geeknet acquisition, which have been fully amortized. 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. Favorable leasehold interests are amortized on a straight-line basis over their remaining lease term with no expected residual value. As of January 29, 2022, these amounts have been fully amortized.
As of January 29, 2022, the total weighted-average amortization period for our finite-lived intangible assets was approximately 7 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.
Intangible asset amortization expense during fiscal 2021, 2020 and 2019 was $3.6 million, $4.0 million and $5.4 million, respectively. The following table presents the estimated aggregate intangible asset amortization expense for the next five fiscal years:
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
| | | | | | | | |
Period | | Projected Amortization Expense |
Fiscal 2022 | | $ | 2.1 | |
Fiscal 2023 | | 1.6 | |
Fiscal 2024 | | 1.3 | |
Fiscal 2025 | | 0.9 | |
Fiscal 2026 | | 0.6 | |
12. Fair Value Measurements and Financial Instruments
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Applicable accounting standards require disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market-corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting our assumptions about pricing by market participants.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
Assets and liabilities that are measured at fair value on a recurring basis include our foreign currency contracts, life insurance policies we own that have a cash surrender value, and certain nonqualified deferred compensation liabilities.
We value our foreign currency contracts, our life insurance policies with cash surrender values and certain nonqualified deferred compensation liabilities based on Level 2 inputs using quotations provided by major market news services, such as Bloomberg, and industry-standard models that consider various assumptions, including quoted forward prices, time value, volatility factors, and contractual prices for the underlying instruments, as well as other relevant economic measures, all of which are observable in active markets. When appropriate, valuations are adjusted to reflect credit considerations, generally based on available market evidence.
The following table presents our assets and liabilities measured at fair value on a recurring basis, which utilize Level 2 inputs:
| | | | | | | | | | | | | | | | | | |
| | January 29, 2022 | | January 30, 2021 |
Assets: | | | | | | | | |
Foreign currency contracts (1) | | $ | 3.8 | | | | | $ | 2.5 | | | |
Company-owned life insurance(2) | | 0.6 | | | | | 2.7 | | | |
Total assets | | $ | 4.4 | | | | | $ | 5.2 | | | |
Liabilities: | | | | | | | | |
Foreign currency contracts (3) | | $ | 0.4 | | | | | $ | 2.4 | | | |
Nonqualified deferred compensation(3) | | 0.6 | | | | | 0.6 | | | |
Total liabilities | | $ | 1.0 | | | | | $ | 3.0 | | | |
___________________
(1) Recognized in prepaid expenses and other current assets on our Consolidated Balance Sheets.
(2) Recognized in other non-current assets on our Consolidated Balance Sheets.
(3) Recognized in accrued liabilities and other current liabilities on our Consolidated Balance Sheets.
We use forward exchange contracts to manage currency risk primarily related to intercompany loans and third party accounts payable denominated in non-functional currencies. 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 denominated in foreign currencies. The total gross notional value of derivatives related to our foreign currency contracts was $169.3 million and $206.9 million as of January 29, 2022 and January 30, 2021, respectively.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
The following table presents activity related to the trading of derivative instruments and the offsetting impact of related balances denominated in foreign currencies recognized in SG&A expenses in our Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2021 | | 2020 | | 2019 |
Gains (losses) on the changes in fair value of derivative instruments | | $ | 9.6 | | | $ | (6.1) | | | $ | 4.1 | |
(Losses) gains on the re-measurement of related intercompany loans and third-party accounts payable denominated in foreign currencies | | (13.0) | | | 5.1 | | | (3.1) | |
Net (losses) gains | | $ | (3.4) | | | $ | (1.0) | | | $ | 1.0 | |
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.
Assets that are Measured at Fair Value on a Nonrecurring Basis
Assets that are measured at fair value on a nonrecurring basis relate primarily to property and equipment and other intangible assets, which are remeasured when the estimated fair value is below its carrying value. For these assets, we do not adjust carrying value to fair value; rather, when we determine that impairment has occurred, the carrying value of the asset is reduced to its fair value.
In fiscal 2021, we recognized impairment charges totaling $6.7 million associated with store-level assets to reflect their fair values of $7.8 million.
In fiscal 2020, we recognized impairment charges totaling $11.2 million associated with store-level assets to reflect their fair values of $7.0 million. We also recognized impairment charges of $3.2 million, $0.5 million and $0.6 million related to our corporate aircraft, ThinkGeek trade name and Micromania trade name, respectively to reflect their fair values of $8.6 million, zero, and $5.7 million, respectively. We sold our corporate aircraft on June 5, 2020.
The fair value estimates of trade name intangibles and store-level property and equipment are based on significant unobservable inputs (Level 3) developed using company-specific information. These assets were valued using variations of the discounted cash flow method, which require assumptions associated with, among others, projected sales and cost estimates, capital expenditures, royalty rates, discount rates, terminal values and remaining useful lives. See Note 2, "Summary of Significant Accounting Policies," for additional information related to our valuation methods. Other Fair Value Disclosures
The carrying values of our cash equivalents, net receivables, accounts payable and short-term borrowings approximate their fair values due to their short-term maturities.
As of January 29, 2022, our government-subsidized low interest French term loans due October 2022 through October 2026 ("French Term Loans") had a carrying value of $44.6 million and a fair value of $37.7 million. The fair values of our French Term Loans were estimated based on a model that discounted future principal and interest payments at interest rates available to us at the end of the period for similar debt of the same maturity, which is a Level 2 input as defined by the fair value hierarchy.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
13. Accrued and Other Current Liabilities
The following table presents our accrued and other current liabilities:
| | | | | | | | | | | | | | |
| | January 29, 2022 | | January 30, 2021 |
Customer-related liabilities | | $ | 247.5 | | | $ | 251.7 | |
Deferred revenue | | 142.3 | | | 119.9 | |
Employee benefits, compensation and related taxes | | 97.9 | | | 104.4 | |
Checks and transfers yet to be presented for payment from zero balance cash accounts | | 5.3 | | | 4.1 | |
Income and other taxes payable | | 30.7 | | | 47.1 | |
Other accrued liabilities | | 145.2 | | | 99.6 | |
Total accrued and other current liabilities | | $ | 668.9 | | | $ | 626.8 | |
14. Debt
The following table presents the carrying value of our debt:
| | | | | | | | | | | |
| January 29, 2022 | | January 30, 2021 |
| | | |
Revolving credit facility due 2022 | $ | — | | | $ | 25.0 | |
French Term Loans | 44.6 | | | 48.6 | |
6.75% Senior Notes due 2021 | — | | | 73.2 | |
10.00% Senior Notes due 2023 | — | | | 216.4 | |
Less: Senior Notes unamortized debt financing costs | — | | | (0.5) | |
Total debt, net | $ | 44.6 | | | $ | 362.7 | |
Less: short-term debt and current portion of long-term debt(1) | (4.1) | | | (146.7) | |
Long-term debt, net | $ | 40.5 | | | $ | 216.0 | |
(1) Represents the current portion of the French Term Loans and the 6.75% Senior Notes due due 2021 ("2021 Senior Notes"), net of the associated unamortized debt financing costs. Prior periods include loan advances under our then outstanding asset-based revolving credit facility due November 2022 ("2022 Revolver"). The revolving credit facility of 2026 has replaced the revolving credit facility of 2022.
2021 Debt Payments
On March 15, 2021, we repaid our outstanding borrowings of $25.0 million under the 2022 Revolver.
On March 15, 2021, we repaid at maturity $73.2 million outstanding principal amount of our 2021 Senior Notes.
On April 30, 2021, we completed the voluntary early redemption of $216.4 million outstanding principal amount of our 10.00% Senior Notes due 2023 ("2023 Senior Notes"). This voluntary early redemption covered the entire amount of then outstanding 2023 Senior Notes, which represented all of our long-term debt as of the end of fiscal 2020. In connection with the voluntary early redemption of our 2023 Senior Notes, we paid approximately $219.1 million in aggregate consideration, including accrued and unpaid interest. In connection with the voluntary early redemption of our 2023 Senior Notes, we paid a $17.8 million make-whole premium which is recognized in interest expense in our Consolidated Statements of Operations. Additionally, we accelerated amortization of $0.4 million deferred financing costs associated with our 2023 Senior Notes.
French Term Loans
During 2020, our French subsidiary, Micromania SAS, entered into six separate unsecured term loans for a total of €40.0 million, or $44.6 million, as of January 29, 2022. In the second quarter of 2021, at the request of Micromania SAS, these term loans were extended for five years, with an amortization plan for the principal starting in October 2022. In connection with the extension, the interest rate increased from zero to 0.7% for three of the term loans totaling €20.0 million, and 1% for the remaining three term loans totaling €20.0 million. The French government has guaranteed 90% of the term loans pursuant to a state guaranteed loan program instituted in connection with the COVID-19 pandemic.
Each of Micromania SAS's term loans, as described above, restrict the ability of Micromania SAS to make distributions and loans to its affiliates, and include various events that would result in the automatic acceleration of the loans thereunder, including failure to pay any principal or interest when due, acceleration of other indebtedness, a change of control and certain bankruptcy, insolvency or receivership events.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
Credit Facility
In November 2021 we entered into a credit agreement (the "Credit Agreement") for a secured asset-based credit facility comprised of a $500 million revolving line of credit which matures in November 2026 ("2026 Revolver"). The 2026 Revolver includes a $50 million swing loan revolving sub-facility, a $50 million Canadian revolving sub-facility, and a $250 million letter of credit sublimit. Borrowings under the 2026 Revolver accrue interest at an adjusted LIBOR rate plus an applicable margin (ranging from 1.25% to 1.50%) or an adjusted prime rate plus an applicable margin (ranging from 0.25% to 0.50%). The 2026 Revolver replaced the 2022 Revolver.
The obligations of the borrowers under the Credit Agreement are guaranteed by the Company and certain of its subsidiaries, subject to exceptions that, among other things, limit the ability of the Company’s foreign subsidiaries to guarantee obligations owing by the Company and its domestic subsidiaries. The obligations of the Company and each subsidiary of the Company that is a borrower and/or a guarantor under the Credit Agreement are secured by substantially all of the assets of the Company and each such subsidiary, subject to customary exceptions.
The Credit Agreement places certain restrictions on the Company and its subsidiaries, including, but not limited to, limitations on additional liens, investments, acquisitions, loans, guarantees, the incurrence of additional indebtedness, certain fundamental changes, certain dispositions, certain dividends and distributions, and certain related party transactions. The Credit Agreement also provides for customary events of default, including, but not limited to, payment defaults, breaches of covenants and certain events of bankruptcy, insolvency and reorganization. In addition, in the event that excess availability under the 2026 Revolver is at any time less than the greater of (1) $12.5 million or (2) 10% of the lesser of the total commitment or the borrowing base, we will be subject to a fixed charge coverage ratio covenant of 1.0:1.0 (the "Availability Reduction").
As of January 29, 2022, total availability under the 2026 Revolver, after giving effect to the Availability Reduction was $389.6 million, with no outstanding borrowings and outstanding standby letters of credit of $60.4 million.
Cash Paid for Interest
The following table presents cash paid for interest, net of interest income:
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 | | 2019 |
Cash paid for interest | $ | 18.3 | | | $ | 32.8 | | | $ | 43.5 | |
Cash received for interest income | — | | | (1.4) | | | (9.2) | |
Cash paid for interest, net | $ | 18.3 | | | $ | 31.4 | | | $ | 34.3 | |
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
15. Income Taxes
The following table presents the (benefit) provision for income taxes from continuing operations:
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2021 | | 2020 | | 2019 |
Current tax (benefit) expense: | | | | | | | |
Federal | | | $ | (13.2) | | | $ | (154.9) | | | $ | (25.3) | |
State | | | 7.6 | | | (1.5) | | | 1.5 | |
Foreign | | | 7.8 | | | 18.8 | | | (0.1) | |
| | | 2.2 | | | (137.6) | | | (23.9) | |
Deferred tax (benefit) expense: | | | | | | | |
Federal | | | — | | | 45.5 | | | 12.6 | |
State | | | — | | | 7.6 | | | 3.2 | |
Foreign | | | (16.3) | | | 29.2 | | | 45.7 | |
| | | (16.3) | | | 82.3 | | | 61.5 | |
Total income tax (benefit) expense | | | $ | (14.1) | | | $ | (55.3) | | | $ | 37.6 | |
The following table presents the components of loss from continuing operations before income taxes:
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2021 | | 2020 | | 2019 |
United States | | | $ | (362.7) | | | $ | (224.6) | | | $ | (352.8) | |
International | | | (32.7) | | | (45.3) | | | (74.0) | |
Total | | | $ | (395.4) | | | $ | (269.9) | | | $ | (426.8) | |
The following is a reconciliation of income tax expense (benefit) from continuing operations computed at the U.S. Federal statutory tax rate to income tax (benefit) expense reported in our Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2021 | | 2020 | | 2019 |
Federal statutory tax rate | | | 21.0 | % | | 21.0 | % | | 21.0 | % |
State income taxes, net of federal effect | | | 3.1 | | | 5.0 | | | (1.0) | |
Foreign income tax rate differential | | | 0.4 | | | (3.9) | | | (0.5) | |
Change in valuation allowance | | | (33.6) | | | (41.8) | | | (17.9) | |
Change in unrecognized tax benefits | | | (1.4) | | | — | | | 3.4 | |
Foreign tax credit | | | — | | | — | | | 0.2 | |
Withholding tax expense | | | (0.3) | | | (0.3) | | | (0.2) | |
Stock-based compensation | | | 6.4 | | | — | | | — | |
Impairment of goodwill | | | — | | | — | | | (15.4) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Nondeductible interest | | | — | | | — | | | (0.1) | |
U.S. impact of foreign operations | | | — | | | 7.6 | | | — | |
Incremental benefit of net operating loss carryback | | | 3.6 | | | 23.5 | | | — | |
Loss on worthless debt and related investment | | | 5.5 | | | 10.7 | | | — | |
Simply Mac loss on sale | | | — | | | — | | | 1.6 | |
Other (including permanent differences)(1) | | | (1.1) | | | (1.3) | | | 0.1 | |
| | | 3.6 | % | | 20.5 | % | | (8.8) | % |
___________________(1) Other is comprised of numerous items, none of which is individually or in the aggregate greater than 5% of income tax expense calculated at the statutory rate.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
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 which are presented in the table below.
| | | | | | | | | | | | | | |
| | January 29, 2022 | | January 30, 2021 |
Deferred tax asset: | | | | |
Inventory | | $ | 8.6 | | | $ | 1.5 | |
Deferred rents | | 0.9 | | | 2.1 | |
Operating lease liabilities | | 180.0 | | | 212.3 | |
Stock-based compensation | | 4.7 | | | 1.5 | |
Net operating losses and other loss carryforwards | | 219.8 | | | 111.8 | |
Customer liabilities | | 15.1 | | | 18.1 | |
Credits | | 25.1 | | | 27.6 | |
Accrued compensation | | 9.3 | | | 12.9 | |
Intangible assets | | 25.5 | | | 29.8 | |
Goodwill | | 0.9 | | | 1.2 | |
Other | | 48.1 | | | 24.5 | |
Total deferred tax assets | | 538.0 | | | 443.3 | |
Valuation allowance | | (338.3) | | | (225.7) | |
Total deferred tax assets, net | | 199.7 | | | 217.6 | |
Deferred tax liabilities: | | | | |
Property and equipment | | (5.4) | | | (7.9) | |
Prepaid expenses | | (0.9) | | | (2.0) | |
Operating lease right-of-use assets | | (177.1) | | | (207.4) | |
Other | | — | | | (0.3) | |
Total deferred tax liabilities | | (183.4) | | | (217.6) | |
Net deferred tax assets | | $ | 16.3 | | | $ | — | |
The above amounts are reflected in the consolidated financial statements as: | | | | |
Deferred income taxes - assets | | $ | 16.3 | | | $ | — | |
Deferred income taxes - liabilities | | $ | — | | | $ | — | |
During fiscal 2021, we increased our valuation allowances by approximately $128.9 million in various jurisdictions where it was determined that it was more likely than not that existing gross and/or net deferred tax assets would not be realized, primarily due to cumulative losses in those jurisdictions. We also decreased our valuation allowances by approximately $16.3 million in Australia and New Zealand where it was determined in the current period that it is more likely than not that deferred tax assets will be realized. As of January 29, 2022, we maintain full valuation allowances on our deferred tax assets in all jurisdictions except for Australia and New Zealand. We will continue to assess the realizability of our gross and net deferred tax assets in all tax jurisdictions in which we do business in future periods.
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 years 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 January 29, 2022, we have approximately $8.0 million of net operating loss carryforwards in various foreign jurisdictions that expire in years 2027 through 2042, as well as $363.1 million of foreign net operating loss carryforwards that have no expiration date. In addition, we have approximately $22.2 million of foreign tax credit carryforwards that expire in years 2024 through 2027. We also have approximately $56.1 million of U.S. federal net operating loss carryovers acquired through the ThinkGeek acquisition that will expire in years 2023 through 2035. Section 382 under the Internal Revenue Code imposes limits on the amount of tax attributes that can be utilized where there has been an ownership change. The federal and state net operating loss carryovers acquired through the ThinkGeek acquisition experienced an ownership change on July 17, 2015, and we have determined that these net operating loss carryforwards will be subject to future limitation. As of January 29, 2022 we have a $168.6 million U.S. federal income tax receivable resulting from the carryback of net operating losses allowed pursuant to the CARES Act. Income tax receivable is recognized in prepaid expenses and other current assets on our Consolidated Balance Sheets.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
As of January 29, 2022, the gross amount of unrecognized tax benefits was approximately $9.1 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 $9.1 million, exclusive of any benefits related to interest and penalties.
The following table presents a reconciliation of the changes in the gross balances of unrecognized tax benefits:
| | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year |
| | | 2021 | | 2020 | | 2019 |
Beginning balance of unrecognized tax benefits | | | $ | 5.7 | | | $ | 6.5 | | | $ | 22.5 | |
Increases related to current period tax positions | | | 4.0 | | | — | | | 0.4 | |
Increases related to prior period tax positions | | | 0.7 | | | 1.2 | | | 1.6 | |
Decreases related to prior period tax positions | | | — | | | — | | | (10.2) | |
Reductions as a result of a lapse of the applicable statute of limitations | | | (0.8) | | | (0.6) | | | (4.3) | |
Reductions as a result of settlements with taxing authorities | | | (0.5) | | | (1.4) | | | (3.5) | |
Ending balance of unrecognized tax benefits | | | $ | 9.1 | | | $ | 5.7 | | | $ | 6.5 | |
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense in our Consolidated Statement of Operations. As of January 29, 2022, January 30, 2021, and February 1, 2020, we had approximately $3.8 million, $3.4 million and $2.8 million, respectively, in interest and penalties related to unrecognized tax benefit accrued, of which approximately $0.4 million of expense, $0.6 million of benefit and $2.6 million of benefit were recognized through income tax expense in fiscal 2021, 2020 and 2019, respectively. If we were to prevail on all uncertain tax positions, the reversal of these accruals related to interest and penalties 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 January 29, 2022.
We do not assert indefinite reinvestment on the undistributed earnings of our foreign subsidiaries. Income tax and/or withholding tax associated with any amounts available for distribution as of January 29, 2022 is not expected to be material to our financial statements.
Cash Paid for Income Taxes
The following table presents cash paid for income taxes, net of refunds:
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 | | 2019 |
Cash paid for income taxes | $ | 21.4 | | | $ | 8.3 | | | $ | 66.8 | |
Cash refunds received | (4.5) | | | (57.4) | | | (15.7) | |
Cash paid (refunded) for income taxes, net | $ | 16.9 | | | $ | (49.1) | | | $ | 51.1 | |
Common16. Commitments and Contingencies
Commitments
As of January 29, 2022, we had standby letters of credit outstanding in the amount of $92.4 million and other bank guarantees outstanding in the amount of $15.8 million, of which $46.1 million are cash collateralized.
As of January 29, 2022, we have purchase obligations of $699.7 million with payment dates through fiscal 2022 that represent outstanding purchase orders for merchandise from vendors. These purchase orders are generally cancellable until shipment of the products.
See Note 10, "Leases," for information regarding commitments related to our non-cancelable operating leases. Legal Proceedings
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
In the ordinary course of business, we are, from time to time, subject to various legal proceedings, including matters involving wage and hour associate class actions, stockholder actions and consumer class actions. We may enter into discussions regarding settlement of these and other types of lawsuits, and may enter into settlement agreements, if we believe settlement is in the best interest of our stockholders. We do not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material effect on our financial condition, results of operations or liquidity.
17. Common Stock and Share-Based Compensation
Common Stock
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 our Board of Directors. 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.
During 2021, we sold an aggregate of 8,500,000 shares of our common stock under our at-the market equity offering program (the "ATM Transactions"). We generated $1.68 billion in aggregate gross proceeds from sales under the ATM Transactions and paid an aggregate of $10.1 million in commissions to the sales agent, among other legal and administrative fees. These commissions and fees are recognized in additional paid-in capital on our Consolidated Balance Sheets and SG&A expenses in our Consolidated Statements of Operations.
In fiscal 2021 and 2020, we had 77.2 million and 69.9 million shares of Class A Common Stock, including unvested restricted shares, legally issued and outstanding.
Share-Based Compensation
In June 2019, we adopted the GameStop Corp. 2019 Incentive Plan (the "2019 Plan"), which provides for the grant of equity awards to our officers, associates, consultants, advisors and directors and which replaced the Amended and Restated GameStop Corp. 2011 Incentive Plan (the "2011 Plan"). Awards under the 2019 Plan may take the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance awards and other share-based awards, or any combination of the foregoing. The 2019 Plan allows for 6,500,000 shares of Company Class A Common Stock, plus any shares subject to 2011 Plan awards that expire, are forfeited, canceled or terminated after the adoption of the 2019 Plan. No awards were granted under the 2011 Plan after the adoption of the 2019 Plan. We have also granted restricted stock pursuant to certain "inducement" (i.e., non-plan) award agreements, in accordance with NYSE Listing Rule 303A.08. These inducement awards have generally mirrored the terms of restricted stock awards issued under our stockholder approved equity plans.
Stock Options
There were no options granted during fiscal 2021, 2020 and 2019. As of January 29, 2022, there were no outstanding and exercisable options.
There were no options exercised during fiscal 2021 and 138,480 options exercised during fiscal 2020. There was no intrinsic value of both options exercisable and options outstanding as of January 29, 2022.
Restricted Stock Units
Restricted Stock Units (RSUs) represent a right to receive one share or the value of one share upon the terms and conditions set forth in the applicable plan and award agreement. We grant RSUs to certain of our associates, officers and non-associate directors. We used the stock price on the grant date to estimate the fair value of our RSUs. The grant date fair value of RSUs is amortized to expense on a straight-line basis over the vesting period. The weighted average grant date fair value per share of our RSUs granted during the year was $179.45 in 2021. RSUs granted in 2021 are not dividend eligible.
Restricted Stock Award
The fair value of restricted stock awards (RSAs) is recognized as compensation expense on a straight-line basis between the grant date and the date the RSAs become fully vested. We have granted RSAs to certain of our associates, officers and non-associate directors. We estimate the fair value of RSAs on the grant date based on the quoted market price of our common stock.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
Shares of restricted stock granted by us are considered to be legally issued and outstanding as of the date of grant, notwithstanding that the shares remain subject to risk of forfeiture if the vesting conditions for such shares are not met and are included in the number of shares of Class A Common Stock outstanding disclosed on the cover page of this annual report on Form 10-K as of March 11, 2022. In accordance with accounting guidance, the financial statement presentation excludes unvested shares of restricted Class A Common Stock, as restricted shares are treated as issued and outstanding for financial statement presentation purposes only after such shares have vested and, therefore, have ceased to be subject to a risk of forfeiture.
Time-based RSAs and RSUs generally vest in installments, generally over a three or four year period following the date of issuance, subject to continued service with us, and subject further to accelerated vesting in the case of retirement eligibility and certain termination events.
Performance-based RSAs vest based on the achievement of certain performance measures. RSAs subject to performance measures may generally be earned in greater or lesser percentages if performance goals are exceeded or not achieved by specified amounts.
The following table presents a summary of our RSAs activity:
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| | Time-Based Restricted Stock Awards | | Performance-Based Restricted Stock Awards |
| | Shares | | Weighted- Average Grant Date Fair Value | | Shares(1) | | Weighted- Average Grant Date Fair Value |
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Nonvested shares at January 30, 2021 | | 3,005,950 | | | $ | 5.83 | | | 1,560,164 | | | $ | 6.79 | |
Granted | | 185,743 | | | $ | 117.67 | | | — | | | $ | — | |
Vested | | (2,745,804) | | | $ | 5.84 | | | — | | | $ | — | |
Forfeited | | (250,278) | | | $ | 42.30 | | | (1,367,029) | | | $ | 7.09 | |
Nonvested shares at January 29, 2022 | | 195,611 | | | $ | 65.16 | | | 193,135 | | | $ | 4.66 | |
_______________(1) On March 11, 2022, the Company determined that the performance measures have not been achieved and the performance-based RSA shares have been forfeited.
The following table presents a summary of our RSUs activity:
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| | Time-Based Restricted Stock Units |
| | Shares | | Weighted- Average Grant Date Fair Value |
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Nonvested shares at January 30, 2021 | | — | | | $ | — | |
Granted | | 1,001,565 | | | 179.45 | |
Vested | | (341) | | | 204.36 | |
Forfeited | | (64,360) | | | 197.15 | |
Nonvested shares at January 29, 2022 | | 936,864 | | | $ | 178.22 | |
In fiscal 2021, 2020 and 2019, there were 1.3 million, 4.6 million and 3.4 million, respectively, of unvested restricted stock and restricted stock units.
In fiscal 2021, 2020 and 2019, we granted 185,743, 2,068,176 and 2,398,748 shares, respectively, of time-based restricted stock with weighted-average grant date fair values of $117.67, $4.65 and $8.05, respectively. In fcal 2020 and 2019, we granted 501,612 and 1,199,042 shares, respectively, of performance-based restricted stock with weighted-average grant date fair values of $4.58 and $7.95, respectively. There were no grants of performance-based restricted stock in fiscal 2021.
During fiscal 2021, 2020 and 2019, we included compensation expense relating to the grants of restricted share awards and units in the amounts of $30.5 million, $7.9 million and $8.9 million, respectively, in SG&A expenses in our Consolidated Statements of Operations. As of January 29, 2022, there was $10.3 million of unrecognized compensation expense related to nonvested time-based restricted shares that is expected to be recognized over a weighted-average period of 2.8 years. As of January 29, 2022, there was $151.2 million of unrecognized compensation expense related to nonvested time-based restricted stock units that is expected to be recognized over a weighted-average period of 3.6 years.
GAMESTOP CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except per share amounts)
The total income tax expense, inclusive of excess tax deficiencies and valuation allowances, associated with stock-based compensation was zero, $1.0 million and $1.2 million for fiscal 2021, 2020 and 2019, respectively. The total fair value of RSAs and RSUs vested, as of their respective vesting dates, was $16.8 million, $5.1 million, and $4.6 million during fiscal 2021, 2020 and 2019.