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 SECon March 23, 2021. OVERVIEW GameStop Corp.(" GameStop," "we," "us," "our," or the "Company"), a Delawarecorporation 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 more information.
GameStopis on a strategic path to fully leverage our unique position and brand in gaming. GameStopis 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 take measures that include:
•Increase the size of our addressable market by offering a wide selection of products and expanding our product catalog across PC games, collectibles, consumer electronics, toys, augmented reality, virtual reality , blockchain technology and other categories that represent natural extensions of our business;
• Expand fulfillment operations to improve delivery speed and service to our customers;
• Create a superior customer experience, including establishing a
•Building technology capabilities, including investing in new systems, modernized e-commerce assets and an expanded and 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 millionof total outstanding debt and raising $1,672.8 millionin 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.
REMEMBER ACCOUNT INFORMATION
The following table shows the number of stores by segment at the end of fiscal 2021 compared to the end of fiscal 2020.
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. 21 --------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
The following table presents certain income statement items (in millions) and as a percentage of net sales:
Fiscal Year 2021 Fiscal Year 2020 Change Amount Percent of Amount Percent of $ % Net Sales Net Sales Net sales
$ 6,010.7100.0 % $ 5,089.8100.0 % $ 920.918.1 % 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 1,709.6 28.4 1,514.2 29.7 195.4 12.9 % expenses 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 (395.4) (6.6) (269.9) (5.3) (125.5) (46.5) % income taxes 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 - - (0.7) - 0.7 100.0 % tax 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:
Fiscal Year 2021 Fiscal Year 2020 Change Net Sales Percent of Net Sales Percent of $ % Net Sales Net Sales Hardware and accessories
$ 3,171.752.8 % $ 2,530.849.7 % $ 640.925.3 % 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 $ 6,010.7100.0 % $ 5,089.8100.0 % $ 920.918.1 % 22
The following table shows net sales by reportable segment:
Fiscal Year 2021 Fiscal Year 2020 Change Net Sales Percent of Net Sales Percent of $ % Net Sales Net Sales United States
$ 4,186.569.7 % $ 3,417.167.1 % $ 769.422.5 % 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 $ 6,010.7100.0 % $ 5,089.8100.0 % $ 920.918.1 % 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, Canadaand Europesegments improved by 22.5%, 28.6% and 14.1%, respectively, while net sales in our Australiasegment 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 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 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 millionin 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 millionrelated 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, “Impairment of assets”, 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, Texasfor an aggregate total of $43.7 million, the sale of our Australian headquarters in Eagle Farm, Queenslandfor $27.0 million, and the sale of our Canadian headquarters in Brampton, Ontariofor 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 millionwas 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 23
-------------------------------------------------------------------------------- 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 millionmake-whole premium paid upon the voluntary early redemption of the outstanding balance of such notes.
We recognized an income tax benefit of
$14.1 millionrepresenting an effective tax rate of 3.6% in fiscal 2021, compared to an income tax benefit of $55.3 millionrepresenting 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. 24 --------------------------------------------------------------------------------
CASH AND CAPITAL RESOURCES
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 millionand an additional $389.6 millionof 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 billionin aggregate gross proceeds from sales under the ATM Transactions, and paid an aggregate of $10.1 millionin 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 millionaggregate principal amount of our then outstanding 6.75% Senior Notes due 2021 ("2021 Senior Notes") and the remaining $216.4 millionaggregate 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 millionmake-whole premium. In the first quarter of 2021, we repaid our then outstanding borrowings of $25.0 millionunder 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 millionas 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 millionwith 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.
Independent of Revolver 2026, we issue letters of credit and bank guarantees, sometimes backed by cash collateral. From
See Item 8, Notes to Consolidated Financial Statements, Note 14, “Debt”, for more information.
The following table provides a summary of our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows:
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 Effect of exchange rate on cash, cash equivalents and restricted cash
(16.6) 16.3 (32.9)
Increase in cash, cash equivalents and restricted cash
$ 121.5 $ 563.4Operating Activities In fiscal 2021, cash used in operating activities was $434.3 million, compared to cash provided by operating activities of $123.7 millionin 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 25 -------------------------------------------------------------------------------- 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.
In fiscal 2021, cash used in investing activities was
$64.8 millioncompared to cash provided by investing activities of $36.9 millionin 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, Texasof $43.7 million, the sale of our Australian headquarters in Eagle Farm, Queenslandfor $27.0 million, the sale of our Canadian headquarters in Brampton, Ontariofor approximately $16.7 million, and net proceeds of $8.6 millionfrom the sale of our corporate aircraft
In fiscal 2021, cash provided by financing activities was
$1,200.6 millioncompared to cash used in financing activities of $55.4 millionin 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 millionfor withholding obligations upon the vesting of shares of restricted stock, repaid at maturity $73.2 millionof 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 millionof our outstanding borrowing under our 2022 Revolver. Cash used in financing activities in 2020 was primarily due to the repayment of $130.3 millionof our 2021 Senior Notes through a combination of open market transactions and an optional early redemption of $125.0 millionof our 2021 Senior Notes, at par, in December 2020, partially offset by a net $25.0 milliondraw down on our 2022 Revolver and $47.1 millionin proceeds from term loans entered into by our French subsidiary, Micromania SAS.
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 $5.20and $6.00per 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 $5.20per 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 $5.19per share. We did not repurchase shares during fiscal 2021 or fiscal 2020. As of January 29, 2022, we have $101.3 millionremaining under the repurchase authorization.
OFF-BALANCE SHEET ARRANGEMENTS
We had no significant off-balance sheet arrangements
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, N ote 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 stocks of goods
26 -------------------------------------------------------------------------------- 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, 2022would have affected net earnings by approximately $1.6 millionin fiscal 2021.
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 millionin fiscal 2021. A 10% change in our gift card breakage rate at January 29, 2022would have affected net earnings by approximately $11.2 millionin fiscal 2021.
We account for income taxes using an asset-liability approach, and deferred taxes are determined based on the estimated future tax effect of differences between the financial reporting and the tax bases of assets and liabilities. using current tax rates. Due to our operations in many foreign countries, our overall 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 millionas 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 millionas 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 27 -------------------------------------------------------------------------------- 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 PRINCIPLES
See Section 8, Notes to the Consolidated Financial Statements, Note 3, “New Accounting Pronouncements”, for recent accounting standards and pronouncements.
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