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April 16, 2012
RETAIL (Specialty)
Henry Fund Research
GameStop (GME)
Investment Recommendation
Current Price
$21.23
Target Price Range
$20-24
Seth Goldstein
[email protected]
SELL
INVESTMENT THESIS
 (-) Video game developers, like EA, have begun
discouraging gamers from playing used games by
shutting down their online servers for video games
over two years old. We project this will slow the
growth of used game sales to around 3%, from, its
five-year CAGR of 14%.
 (-) Microsoft’s “New Xbox” and Sony’s PlayStation
4, which are expected to be released in November
2013, are anticipated to take measures to increase
the costs for used games such as requiring access
code purchases. We project these extra costs to
further decrease used video game demand.
Source: Bloomberg
Key Stock Statistics
52-Week Price Range
$18.34-28.66
Market Capitalization (B)
$2.91
Shares Outstanding (M)
133.98
Institutional Ownership
6.80%
60-Month Beta
0.98
Dividend Yield
2.76%
Price/Earnings (ttm)
9.80
Price/Book
0.96
Price/Sales
0.30
ROA (ttm)
6.86%
ROE(ttm)
11.45%
Projected 5-Year Growth
-3.49%
EPS ($)
Year
EPS
2009
2.28
2010
2.68
2011
2.42
2012E
3.13
2013E
3.27
2014E
3.05
All earnings represent earnings from operations and have been filtered
from net nonrecurring gains.
Valuation Models
Discounted Cash Flow
21.71
Economic Profit
21.71
Relative P/E
38.23
Dividend Discount Model
14.84
 (-) The Xbox Live and PlayStation Network
markets already sell new games available to
download. We project the majority of new games
will be available to purchase online by 2016, which
will decrease sales for brick-and-mortar retailer.
 (-) GME’s $1 Value over the past three and five
years is -0.33 and -0.01, respectively. For each $1
in retained earnings, the stock price has fallen by
an average of -$0.33 over the past three years and
-$0.01 over the past five years.
 (-) GME recently settled a class action lawsuit over
consumers having to pay an additional fee to
access downloadable content for some of its used
games. This forced GME to drop the prices on
some of its used games that previously sold for
around $5 less than the new game.
 (+) GME is now free of all long-term debt excluding
operating leases. We view this move as positive to
protecting shareholders in the case of a significant
decline in revenue and earnings.
 (+) Management recently initiated a $0.15
1
quarterly dividend beginning in 2012 Q1. Also, the
Board of Directors approved a $500MM share
repurchase plan. We like management’s plan to
return capital to shareholders.
Important disclosures appear on the last page of this report.
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
EXECUTIVE SUMMARY
2011 was a year of transition for GameStop Corp.
(GME, the Company). The Company paid off all of its
non-lease long-term debt and initiated a $0.15 quarterly
1
dividend that will begin in 2012 Q1. Additionally, GME
acquired Impulse, a digital PC distribution platform and
Spawn Labs, a streaming technology firm, as part of an
overall strategy to increase its online revenues, which
2
grew 57% in 2011. We view these moves as favorable
to GME’s future as we project the video game industry
to transition into a digital marketplace over the next five
years.
Gross Profit by Merchandise Segment, Source: GME SEC Filings
GME also reports its revenues based on four categories
of merchandise: New Video Game Hardware, New
Video Game Software, Used Video Game Products and
Other. In 2011, around 77% of GME’s gross profit came
from New Video Game Software and Used Video Game
Products. While New Video Game Software generated
42.2% of 2011 total revenues, Used Video Game
1
Products provided the highest gross margin at 46.6%.
Over the next two years, Nintendo (NTDOY), Microsoft
(MSFT) and Sony (SNE) are all projected to release
new consoles, which could allow users to download
new games and may contain features that would hurt
the used video game market. Measures are already
being taken by game developers, like Electronic Arts
3
(EA), to reduce the features of used video games. We
see the used video game market shrinking over the
next five to ten years.
Additionally, GME’s same store sales were down 2.1%
4
in 2011. We project this decline in same store sales to
continue as the video game market goes digital.
Although we were pleased with management’s strategy
to pursue online growth as well as the decisions to
adjust the capital structure and return profits to
shareholders, GME is currently trading within the range
of our price target and we are rating the stock a SELL.
COMPANY DESCRIPTION
Revenues by Merchandise Segment, Source: GME SEC Filings
GME is the world’s largest video game retailer. The
Company sells both new and used video game
hardware, software, PC software and merchandise in
its stores as well as digital video game and PC software
online. GME operates in four segments based on
geography: United States, Canada, Australia and
1
Europe. The Company aligns management with
shareholder interests through its ESOP, where
5
management currently owns 5.48%.
New Video Game Hardware
Video Game hardware currently includes products from
Microsoft (Xbox 360 and Kinect), Nintendo (DSi, DSi
XL, 3DS and Wii) and Sony (PlayStation 3 and PSP).
NTDOY’s Wii U is scheduled to come out in November
of 2012. MSFT’s new Xbox (referred to as “New Xbox”
due to lack of the console being publicly named) and
SNE’s new PlayStation (referred to as PS4) are
6
expected to be out in time for the 2013 holiday season.
We project the new consoles will increase this
segment’s revenues at around a 10% CAGR between
2013 and 2015, as was the case from 2006 to 2008
when the Xbox 360 and PS3 were new. During this
time, the Video Game Hardware segment averaged
21.61% of total revenues, as compared to an average
1
of 18.13% from 2009 to 2011.
2
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
New Video Game Software
RECENT DEVELOPMENTS
Video Game Software includes over 800 different units
such as EA’s Madden NFL, MSFT’s Halo, NTDOY’s
Super Mario and Activision Blizzard’s (ATVI) Call of
6
Duty. The number of new games has declined over the
past few years and is not expected to increase until
1
after the new consoles are released.
Used Video Game Lawsuit
On April 9, 2012, a California class action lawsuit was
settled between GME and the law firm Barron and Budd
(B&B) regarding downloadable content (DLC) that the
packaging of certain used video games claims is free.
Because the video games are used, gamers must pay a
$15 fee to access the DLC. Many of GME’s newer used
games were selling for around $5 less than the cost of
buying the game new, which caused consumers to pay
16
more for the used game than to buy it new.
Although we project this segment to grow around 2%
per year through the end of 2014, we see a -5% annual
decline in this segment’s revenues beginning in 2015
due to video game developers selling new games
online that will be available for download on to the new
consoles as well as increased competition from other The terms of the settlement include GME having to pay
retailers such as Wal-Mart (WMT), Target (TGT), consumers in the class the $15 required to access the
Amazon (AMZN) and Best Buy (BBY).
DLC as well as post signs in its stores that some video
games may require additional an additional purchase.
Used Video Game Products
Additionally, GME dropped the prices of many of the
used games mentioned in the lawsuit. Although the
GME classifies itself as the largest used video game current lawsuit only applies to California consumers,
retailer in the world. In 2011, the Used Video Game B&B is collecting claims from users in other states and
segment saw over $2.6BB in revenues and was GME’s we project the lower used game prices to occur in all of
second largest segment only to New Video Game GME’s stores.16
Software. This segment consists primarily of used video
games that consumers can trade in for discounts on As a result of the lower prices, we are projecting GME’s
other products through GME’s PowerUp Rewards Used Video Game Products category to see at a 1.0%
1
program.
CAGR in 2012 and 2013, versus its 4.6% CAGR from
1
2009 to 2011.
We project this segment to experience the greatest
decline starting at -7.5% in 2014 and decreasing further 2011 Annual and Q4 Results
each year to -25% in 2017 due to both the new
consoles and game developers limiting the In 2011, GME’s Revenues were up 0.81% to $9.55BB
attractiveness of used video games to the consumers.
from $9.47BB in 2010, although its United States
segment revenues were down 0.66% from $6.68BB to
1
$6.64BB. As a whole, U.S. video game sales were
down over 8% to $17.02BB in 2011 versus $18.59BB in
The Other category comprises non-video game 2010.7
merchandise. This includes PC Software from
publishers such as EA, MSFT and ATVI. Another part The industry also experienced a 21% year-over-year
of this segment is Downloadable Content and revenue decline in December from $5.07BB in 2010 to
Subscription/Time/Points Cards, which allow users to $3.99BB in 2011. December typically accounts for
access both GME’s online content as well as MSFT’s around 28% of annual video game sales.8 GameStop’s
1
Xbox Live and SNE’s PlayStation Network.
2011 Q4 sales were down 3.6% compared to 2010.
Although the Company does not report December
This segment is also made up of video game sales, it reports Holiday sales, which are revenues
accessories such as special controllers or video game during the nine-week period from November and
strategy guides. In 2011, GME began selling what it December. In 2011, Holiday sales were down 2.0%
calls Mobile Products, which consists of refurbished from the 2006 to 2010 five-year average.4
1
iPods, iPhones, iPads and other tablets.
Other
Although we were pleased to see GME’s sales have
outperformed the video game industry, we are bearish
on the industry as a whole through the end of 2013
when the New Xbox and PS4 are expected to be
released.
We like GME’s addition of refurbished Apple products
as well as other tablets and project this segment to
grow at a slow but steady 0.5% annually due to the
variety of merchandise.
3
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
we projected the PV of leases to decline at a CAGR of
-2.8% due to fewer total stores each year.
Capital Allocation
In February 2012, GME announced a $0.15 quarterly
dividend beginning in 2012 Q1. This was the first
dividend in company history. Using our 2012 EPS
projection of $3.14, we calculated a payout ratio of just
over 19%. Given the used video game industry’s
unpredictability due to the upcoming console releases,
we feel GME’s initial dividend is slightly aggressive and
projected it to stay constant over the next six years.
Sources: Gamasutra, GameStop News Release
While GME’s 2011 Q4 operating earnings were in line
with managerial guidance at $1.73 per share, the
Company’s actual earnings were $1.28 due to an asset
impairment and restructuring charge of $81.2MM that
was incurred due to international goodwill impairment
and lease termination fees. 2011 EPS was $2.42,
4
compared to $2.68 in 2010.
Additionally, The Board of Directors also authorized
$500MM in share repurchases, which replaced the
4
$253MM that was on the existing plan. We calculated
GME will have enough capital to continue this plan over
the next six year and project shares outstanding to
decrease at a CAGR of -3.7%.
INDUSTRY TRENDS
Management provided 2012 EPS guidance of at least
an 8% growth over its 2011 $2.87 EPS, which excluded
Moving Online
4
the special charges. We project a 2012 EPS of $3.17,
excluding any additional asset impairment or special
In 2011, GME saw a 57% increase in digital revenue
charges. This is slightly below consensus estimates of
5
from 2010. While we like the Company’s response to
16
$3.19.
this industry trend, we see the online revenue growth as
partially a result of cannibalization, which also factored
Long-Term Debt and Leases
in its same store sales being down -2.1% in 2011. We
see customers making digital purchases that they
In December of 2011, GME retired the remaining would have previously made in GME’s stores, versus
$125MM of its outstanding senior notes, making the the digital revenues coming from new customer
company debt-free excluding leases. In its 2011 Annual sources.
Report, the company listed a total of $1,125MM in
leases. We calculated the present value (PV) of GME’s
To begin 2012, new video game sales were down 34%
leases to be around $963MM, down 11.13% from our
and 20% year-over-year in January and February,
1
calculated 2010 PV of $1,083MM.
respectively. In February, new video game and console
sales netted $1.06BB, however the combination of used
games, social and mobile titles, digital downloads,
10
rentals and online subscriptions brought in $600MM.
In February 2012, EA reported a 79% increase in yearover-year digital revenue in its FY 2012 Q3 Earnings
release. Additionally, EA is projecting its digital
revenues to increase 42% from FY 2011. In 2011, EA
announced a restructuring plan related to its packaged
goods and distribution businesses, which made up 46%
of its revenues in 2009 but are expected to be only 11%
18
in 2012. EA’s biggest customer is GME. In 2011,
GME accounted for over 15% of EA’s total revenues.
Sources: GME SEC Filings, Henry Fund Research
The decline reflects management’s strategy of closing
stores that do not meet its profitability goals. In 2011,
GME opened 285 new stores and closed 272.
Management has projected the Company will open new
1
150 stores and close 200 during 2012. Going forward,
4
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
While we do project consumers downloading these
games to take away from traditional video game
revenue streams such as new and used games on
gaming consoles, we see the industry’s revenues
growing in 2013-2015 as the New Xbox and PS4 are
released.
EA’s Segment Mix, Source: Electronic Arts
Similarly, ATVI’s digital revenues have experienced a
15.28% CAGR from 2009 to 2011. GME is ATVI’s
second biggest customer (only to WMT). In 2010, GME
accounted for 12% of ATVI’s revenues, yet in 2011,
ATVI did not have any customers account for at least
10% of total revenues. We see this as a shift for ATVI’s
distribution and project it will increasingly sell a greater
percent of its products through its own online
23
distribution.
Sources: GME SEC Filings, Henry Fund Research
MARKETS AND COMPETITION
Within the video game retail industry, the threat of new
entrants is high. This is due to the ease with which a
retailer can add a video game section. General retail
companies like WMT and TGT and electronics stores
like Best Buy (BBY) already have a video game section.
Any retail companies in these industries could easily
add one a video game section by creating shelf
12
space. Additionally, with a growing percentage of
industry revenues coming from online sources, GME’s
current suppliers like EA and ATVI are beginning to sell
their products online. In addition to other traditional
retail stores, GME has to compete with online
distribution platforms as well.
ATVI Revenues 2009 – 2011, Source: SEC
Because the video game industry is constantly adapting
to new technology, the threat of substitute products is
high. The most recent example of this is the emergence
of the smartphone and tablet video game markets,
where the devices are not made specifically to play
video games, like the traditional consoles, but the
number of video game users from these devices has
been growing faster than the rest of the video game
12
industry.
Smartphones and Tablets
Around 49.7% of all cellular phone subscribers own a
11
smartphone. As smartphones continue to gain market
share, we project mobile gaming users, who account for
9
55% of all video game players, to increase. Many of
these mobile games are free and the average game
12
costs less than $5. Because of the low revenue
generated per-game, we do not see mobile gaming
developers as a growth industry, but do note the
Finally, the rivalry among existing competitors is intense
significant increase in smartphone video game play.
due to the large number of retailers that sell video game
Tablets are expected to be one of the video game products. Because customers buy the exact same
industry’s fastest growing segments. In 2011, video products at any of the retail stores, price becomes the
game revenues from tablets were $491MM. In 2014, biggest factor in customer selection and margins on
the revenues are expected to be $3.1BB, which would new products are lower as a result. GME has found a
19
niche by also focusing on used video game products,
indicate an 84.82% CAGR.
5
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
which other nationwide retailers have not been able to decline in video game sales being enough to
12
imitate.
significantly affect overall performance. This contrasts
with GME, who, with the exception of its refurbished
smartphones and tablets, is a pure-play retailer within
the video game industry.
Sources: Thomson Reuters, Henry Fund Research
GME is well capitalized compared to the other firms
within the video game industry. The Company has a
higher Dividend Yield, lower forward P/E, lower Priceto-Tangible Book Value (Shareholders’ Equity minus
Goodwill), lower Debt-to-Equity and a higher forward
21
Revenue-per-Share than the average of its peers.
While we like GME’s position compared to other retail
firms, we are bearish on brick-and-mortar retail video
game stores due to our projections of a digital transition
in the video game industry. In its November 2011 10-Q,
BBY listed video gaming as a reason for its same store
22
sales decline.
BBY and WMT’s 52-Week Price Movements, Source: Bloomberg
ECONOMIC OUTLOOK
Consumer Spending
The video game industry sells products and services
that are discretionary. In the immediate years after the
financial crisis of 2008, the video game industry
experienced a weakened demand as consumers had
12
less per capita disposable income.
Additionally, GME has a higher ROIC and lower forward
EV to Sales than the average of its peers. The
Company does have a lower Net Margin and a lower 1Year Stock return than its peers. Although GME had a
higher year-over-year EPS than its peers, the majority
of big players in the video game industry saw a decline
22
in EPS from 2010 to 2011, including GME.
The decline in disposable income had an adverse effect
on industry revenues. We see consumer spending on
discretionary purchases as a product of disposable
income, which is affected by unemployment and
consumer confidence. Unemployment has declined
from a peak of 10.0% in 2009 to a current level of
14
8.2%. Our Henry Fund unemployment projections are
15
8.0% in six months and 7.4% in two years.
Sources: Thomson Reuters, Henry Fund Research
confidence to
While electronics retailers like BBY can be affected by Additionally, we project consumer
15
video game sales, GME’s competitors like WMT and increase over the next two years. As unemployment
TGT, see less than 2% of their total revenues from decreases, consumers have more income for
12
video games. For general retailers, we do not see a
6
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
discretionary purchases. When consumers’ confidence playing video games, we project these new gamers to
rises, they are more likely to make retail purchases.
play mostly mobile, tablet and social media games. This
provides limited interactions for GME to increase its
customer base in these emerging segments.
Source: Bloomberg
For video game retailers, like GME, consumer
Source: Entertainment Software Association
confidence levels have not returned to 2008 levels, and
retail sales have followed. From the industry peak of CATALYSTS FOR CHANGE
$41.2BB in 2008, revenues have declined the last three
years and are expected to slightly decline in 2012 New Consoles
before increasing in 2013 due to the New Xbox and
12
PS4 releases.
In November 2013, MSFT is expected to release its
New Xbox and SNE is expected to release its PS4.
While these new consoles are projected to still have
disc ports, rumors suggest the New Xbox and PS4 are
unlikely to play video games designed for previous
8
consoles, as the current Xbox 360 and PS3 allow. This
means that all users who switch to the new MSFT and
SNE system will no longer be able to play any of their
old games.
Also, there is speculation that the New Xbox and PS4
will require users to pay an additional fee to play a used
game. This would work by requiring the initial user to
enter in a registration number when the game is first
played to fully unlock the game. When a different gamer
tries to play the used game, the game would then
require the user to pay an additional fee and register
online. This is the same way that PC games currently
8
work.
Source: IBISWorld
GME was able to increase its revenues in both 2009
and 2010 due to opening more stores, however its
same store sales were down -7.9% in 2009 compared
with an average increase of 16.3% from 2006 to 2008.
The Company’s same store sales increased 1.1% in
1
2010 but then fell -2.1% in 2011. We project GME will
see some added revenues from an increase in
consumers’ discretionary income going forward as
customers gain confidence and return to making
discretionary purchases within the video games
industry.
Changing Demographics
This practice already exists with many games on the
current Xbox 360 and PS3 consoles. Game developers
such as EA already require used game users to
purchase an additional online pass to access the full
features of the game. EA has also shut down its online
servers for the majority of its games that are over two
3
years old. This is a change for EA, who kept its servers
6
open for many three-year old games the previous year.
Demographics in the video game industry are rapidly
changing. In 2011, 29% of all gamers were over the
age of 50. This is up from 9% in 1999. Additionally,
9
42% of all gamers are now women. Although there are
many new segments of the population who are now
In addition to weakening the used game market, the
New Xbox and PS4 are expected to eventually offer
new versions of every game on each system’s
8
respective online platform. The current online markets
(MSFT’s Xbox Live and SNE’s PlayStation Network)
7
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
INVESTMENT NEGATIVES
already allow users to purchase and download some
games.
 (-) Video game developers, like EA, have begun
discouraging gamers from playing used games by
shutting down their online servers for video games
over two years old. We project this will slow the
growth of used game sales to around 3%, from, its
five-year CAGR of 14%.
 (-) Microsoft’s “New Xbox” and Sony’s PlayStation
4, which are expected to be released in November
2013, are anticipated to take measures to increase
the costs for gamers who play used games such
as requiring access code purchases. We project
these extra costs to further decrease the demand
for used video games.
Sources: GME SEC Filings, Henry Fund Research
 (-) The Xbox Live and PlayStation Network
markets already sell new games available to
download. We project the majority of new games
will be available to purchase online by 2016, which
will decrease sales for brick-and-mortar retailer.
While we do not see this happening with the majority of
new games until 2015-16, we project GME’s revenues
will suffer in the future due to the industry deterring
used video game play as well as shifting to an online
distribution for new video games. Additionally, with the
smartphone and tablet video games taking some
revenues away from traditional PC and console video
game systems, we are bearish on the brick-and-mortar
side of the video game retail industry. As the industry
moves to a digital distribution, we see the game
developers distributing content directly to the system
manufacturers’ online networks, with the retailers
beginning to get cut out of the process.
 (-) The market for video games on smartphones
and tablets, most of which are free or low-cost
(under $5), is the fastest growing segment of the
video game industry. GME currently has limited
access to these potential customers, who now
7
make up 55% of all video game users.
 (-) GME’s $1 Value over the past three and five
years is -0.33 and -0.01, respectively. This means
that for each $1 in retained earnings, the stock
price has fallen by an average of -$0.33 over the
past three years and -$0.01 over the past five
years.
INVESTMENT POSITIVES
 (+) GME is now free of all long-term debt excluding
operating leases. We view this move as positive to
protecting shareholders in the case of a significant
decline in revenue and earnings.
 (-) GME recently settled a class action lawsuit over
consumers having to pay an additional fee to
access downloadable content for some of its used
games. This forced GME to drop the prices on
some of its used games that previously sold for
around $5 less than the new game.
 (+) Management recently initiated a $0.15
1
quarterly dividend beginning in 2012 Q1.
Additionally, the Board of Directors approved a
$500MM share repurchase plan. We have a
favorable view of management’s plan to return
capital to shareholders.
VALUATION
5
 (+) In 2011, GME’s online revenues grew 57%.
Through acquisition, GME is investing in
generating more revenues online. As the video
game industry moves from the traditional brickand-mortar to a more digital market, we are
pleased to see management taking action to
adapt.
Assumptions
The assumptions that provide the basis for our model
begin with GME’s revenues. We analyzed the
Company’s revenues by looking at sales-per-store per
operating segment as well as growth rates for the four
merchandise categories. When projecting future
revenues, we grew the sales-per-store until 2014 for all
four segments. We think management is doing an
adequate job of handling store locations and chose our
8
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
per-store growth rates based on the merchandise
categories. In 2013 and 2014, we are predicting a 10%
growth in the New Video Game Hardware category,
which has been declining since 2008, because of the
New Xbox and PS4.
Expenses, Other Current Assets, Deferred Revenue,
and Accrued Liabilities as a percentage of revenue
based on recent three and five year averages.
Relative P/E
In modeling GME on a relative P/E basis, the price
returned was almost double GME’s current trading
price. This is in line with our expectations because the
average forward P/E of GME’s peers is 11.9. With the
exception of BBY, every other company is currently
16
trading at a forward P/E well above that of GME.
We believe this is accurate as the future of video game
brick-and-mortar retailers is more uncertain than both
other retailers and other companies within the video
game industry, such as EA or ATVI. In summary,
although the relative P/E model suggested GME is
Source: GME SEC Filings, Henry Fund Research
significantly undervalued, we place a greater emphasis
Beginning in 2015, a full year after the New Xbox and on our DCF/EP model when calculating GME’s intrinsic
PS4 are released, we are predicting a -11% decline in value.
Used Video Game revenues, as well as a -2% drop in
New Video Game Hardware and a 5% fall in New Video Buy Discipline
Game Software. To account for online growth, we
slightly reduced the impact of our original decline in all Our SELL rating on GME derives from our bearish
three categories. We grew the Other category at a slow stance on the economic future of video game brick-andand steady rate due to the addition of refurbished Apple mortar retail sales. We like the Company’s
products. Our COGS was based on the average COGS fundamentals as well as management’s capital
investment and allocation decisions in preparing for the
per merchandise category over the past three years.
future, however the stock is currently trading in the
The rest of the model was based on total revenues and range of our price target.
number of stores. Management indicated it plans to
reduce the total number of stores by 50 during 2012.
We reduced the total number of stores by 25 each year
starting in 2013, as we see management keeping a
close watch on store profitability. Based on fewer stores
each year, we also reduced Net Property and
Equipment and Operating Leases.
As Benjamin Graham wrote in Security Analysis, “the
danger of paying the wrong price is almost as great as
17
that of buying the wrong issue.” Because entry price is
a critical aspect of any investment, we would change
our recommendation should GME’s price fall to a level
that provides significant upside to our intrinsic value
calculations.
Additionally, in the future, should GME be able to
transition its Impulse or another digital distribution
platform and become an exclusive new video game
retailer on the Xbox Live, PlayStation Network or other
substantial digital market, the Company would then be
able to increase its digital market share of video game
sales. In this event, we would revisit our future revenue
and cost projections in order to incorporate this
information in to our model.
Source: GME SEC Filings, Henry Fund Research
Additionally, we reduced Inventories after 2014, when
we predict a revenue slowdown and reduced Accounts
Payable to match Inventories. We kept most balance
sheet categories such as Receivables, Prepaid
9
THE UNIVERSITY OF IOWA
Henry Fund Research
Henry B. Tippie School of Management
18. “Electronic Arts Inc. Q3 FY 2012 Results.” Electronic Arts.
http://files.shareholder.com/downloads/ERTS/1775597122x
0x539025/23054fd7-0504-4bf9-a87123f2f97fa0c8/Q3FY12_EarningsSlides_FINAL.pdf
REFERENCES
1.
“GME 10-K.” SEC. www.sec.gov
2.
“GME 2011 Earnings – 2012 Outlook.” GameStop.
http://phx.corporate-ir.net/phoenix.zhtml?c=130125&p=irolpresentations
3.
“Online
Service
Updates.”
http://www.ea.com/1/service-updates
4.
5.
Electronic
19. “Analyst: Tablet gaming revenues to surpass $3.1B by
2014.”
Gamasutra.
http://www.gamasutra.com/view/news/166542/Analyst_Tabl
et_gaming_revenues_to_surpass_31B_by_2014.php
Arts.
20. “EA 10-K.” SEC. www.sec.gov
“GameStop Reports Sales and Earnings for Fiscal 2011.”
GameStop.
http://phx.corporateir.net/phoenix.zhtml?c=130125&p=irolnewsArticle&ID=1675331&highlight=
“GameStop
Corp
–
Ownership.”
MSN
Money.
http://investing.money.msn.com/investments/institutionalownership?symbol=gme
6.
GamesIndustry International. http://www.gamesindustry.biz/
7.
“A disappointing December leads to 2011 retail video game
declines.”
Gamasutra.
http://www.gamasutra.com/view/news/39625/A_disappointi
ng_December_leads_to_2011_retail_video_game_declines
.php
8.
“PlayStation 4 name Orbis, won’t play PS3 titles, will block
used games – rumor.” GamesIndustry International.
http://www.gamesindustry.biz/articles/2012-03-28playstation-4-named-orbis-wont-play-ps3-titles-will-blockused-games-rumor
9.
“2011 Essential Facts About The Computer And Video
Game Industry.” Entertainment Software Association.
21. “GameStop Corp: Comparables.” Thomson Reuters.
22. “BBY 10-Q.” SEC. www.sec.gov
23. “ATVI 10-K.” SEC. www.sec.gov
IMPORTANT DISCLAIMER
This report was created by a student(s) enrolled in the Applied
Securities Management (Henry Fund) program at the University of
Iowa’s Tippie School of Management. The intent of these reports is
to provide potential employers and other interested parties an
example of the analytical skills, investment knowledge, and
communication abilities of Henry Fund students.
Henry Fund
analysts are not registered investment advisors, brokers or officially
licensed financial professionals. The investment opinion contained in
this report does not represent an offer or solicitation to buy or sell any
of the aforementioned securities. Unless otherwise noted, facts and
figures included in this report are from publicly available sources. This
report is not a complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa, its faculty,
staff, students, or the Henry Fund may hold a financial interest in the
companies mentioned in this report.
10. “Video game sales take another plunge in February.” USA
Today.
http://content.usatoday.com/communities/gamehunters/pos
t/2012/03/video-game-sales-take-another-plunge-infebruary/1#.T3yi4NUyD31
11. “Smartphones Account for Half of all Mobile Phones,
Dominate New Phone Purchases in the US.” The Nielsen
Company.
http://blog.nielsen.com/nielsenwire/online_mobile/smartpho
nes-account-for-half-of-all-mobile-phones-dominate-newphone-purchases-in-the-us/
12. “Video Games in the U.S.” IBISWorld. March 2012.
13. “Consumer Expenditure Tables.” Bureau of Labor
Statistics. http://www.bls.gov/cex/csxstnd.htm#2003
14. “Economic
Calendar.”
Bloomberg.
http://www.bloomberg.com/markets/economic-calendar/
15. Source: Henry Fund Research
16. Source: Factset.
17.
“Security Analysis.” Graham, Benjamin. Dodd, David. 2009
6th Edition. McGraw Hill Company.
10
GameStop Corp
Revenue Decomposition
All Figures in millions
Fiscal Years Ending Dec. 31
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
Operating Segments Revenue
United States
Canada
Austrailia
Europe
Total
6275.0
491.4
530.2
1781.4
9078.0
6681.2
502.3
565.2
1725.0
9473.7
6637.0
498.4
604.7
1810.4
9550.5
6650.69
499.43
605.95
1814.13
9570.19
6836.25
513.36
622.85
1864.75
9837.22
6876.02
516.35
626.48
1875.60
9894.45
6513.53
489.13
593.45
1776.72
9372.83
5992.09
449.97
545.94
1634.48
8622.48
5519.56
414.49
502.89
1505.59
7942.53
Same Store Sales Increase (Decrease)
-7.90%
1.1%
-2.1%
Product Segments Revenue
New video game hardware
New video game software
Used video game products
Other
Total
1756.5
3730.9
2394.1
1196.5
9078.0
1720.0
3968.7
2469.8
1315.2
9473.7
1611.6
4048.2
2620.2
1270.5
9550.5
1559.99
4086.89
2646.40
1276.91
9570.19
1715.99
4165.02
2672.87
1283.35
9837.22
1887.59
4244.63
2472.40
1289.83
9894.45
1849.84
4032.40
2194.26
1296.33
9372.83
1664.85
3830.78
1823.98
1302.87
8622.48
1631.55
3639.24
1362.28
1309.45
7942.53
19.35%
41.10%
26.37%
13.18%
100.00%
18.16%
41.89%
26.07%
13.88%
100.00%
16.87%
42.39%
27.44%
13.30%
100.00%
16.30%
42.70%
27.65%
13.34%
100.00%
17.44%
42.34%
27.17%
13.05%
100.00%
19.08%
42.90%
24.99%
13.04%
100.00%
19.74%
43.02%
23.41%
13.83%
100.00%
19.31%
44.43%
21.15%
15.11%
100.00%
20.54%
45.82%
17.15%
16.49%
100.00%
Operating Segment % Total Revenue
United States
Canada
Austrailia
Europe
Total
69.12%
5.41%
5.84%
19.62%
100.00%
70.52%
5.30%
5.97%
18.21%
100.00%
69.49%
5.22%
6.33%
18.96%
100.00%
69.49%
5.22%
6.33%
18.96%
100.00%
69.49%
5.22%
6.33%
18.96%
100.00%
69.49%
5.22%
6.33%
18.96%
100.00%
69.49%
5.22%
6.33%
18.96%
100.00%
69.49%
5.22%
6.33%
18.96%
100.00%
69.49%
5.22%
6.33%
18.96%
100.00%
# Stores
United States
Canada
Austrailia
Europe
Total
Sales per store
Sales per store growth
United States Sales per Store
Canada Sales per Store
Austrailia Sales per Store
Europe Sales per Store
United States Sales per Store Growth
Canada Sales per Store Growth
Austrailia Sales per Store Growth
Europe Sales per Store Growth
4429
337
388
1296
6450
1.41
-0.79%
1.42
1.46
1.37
1.37
-5.11%
-13.55%
-8.02%
29.88%
4536
345
405
1384
6670
1.42
0.92%
1.47
1.46
1.40
1.25
3.96%
-0.15%
2.13%
-9.32%
4503
346
411
1423
6683
1.43
0.61%
1.47
1.44
1.47
1.27
0.07%
-1.06%
5.43%
2.07%
4453
347
412
1421
6633
1.44
0.96%
1.49
1.44
1.47
1.28
1.33%
-0.08%
-0.04%
0.35%
4423
348
413
1416
6600
1.49
3.30%
1.55
1.48
1.51
1.32
3.49%
2.49%
2.54%
3.15%
4398
349
414
1414
6575
1.50
0.96%
1.56
1.48
1.51
1.33
1.15%
0.29%
0.34%
0.72%
4373
350
415
1412
6550
1.43
-4.91%
1.49
1.40
1.43
1.26
-4.73%
-5.54%
-5.50%
-5.14%
4348
350
415
1412
6525
1.32
-7.65%
1.38
1.29
1.32
1.16
-7.48%
-8.01%
-8.01%
-8.01%
4323
350
415
1412
6500
1.22
-7.53%
1.28
1.18
1.21
1.07
-7.35%
-7.89%
-7.89%
-7.89%
-3.20%
0.96%
3.96%
0.20%
10.05%
0.96%
1.98%
0.20%
10.05%
-5.00%
-10.00%
0.20%
-5.03%
-5.00%
-15.00%
0.20%
-5.03%
-5.00%
-22.50%
0.20%
0.00%
-5.00%
-33.75%
0.20%
Product Segment % Total Revenue
New video game hardware
New video game software
Used video game products
Other
Growth Rates
New video game hardware
New video game software
Used video game products
Other
GameStop Corp
Income Statement
All Figures in millions
Fiscal Years Ending Dec. 31
2009
2010
Sales
Cost of sales
Gross profit
9,078.00
6,643.35
2,434.65
9,473.70
6,936.10
2,537.60
Selling, general & administrative expenses
Depreciation & amortization
Asset Impairment and restructuring charges
Goodwill Impairment
Operating earnings (loss)
1,635.12
162.50
0.00
0.00
637.03
Interest income
Interest expense
Debt extinguishment expense
Earnings (loss) before income tax expense (benefit)
Total current income tax expense (benefit)
Income tax expense (benefit)
Consolidated net income (loss)
Net loss attributable to noncontrolling interests
Consolidated net income attributable to GameStop Corp.
Weighted average shares outstanding - basic
Net earnings (loss) per common share - basic
Dividends per share
Total Dividends Paid
2011
9,550.50
6,871.00
2012E
9,570.19
6,873.67
2013E
9,837.22
7,098.72
2014E
9,894.45
7,218.08
2015E
9,372.83
6,869.77
2016E
8,622.48
6,343.67
2017E
7,942.53
5,917.75
2,679.50
2,696.53
2,738.50
2,676.37
2,503.06
2,278.81
2,024.77
1,698.80
174.70
1.50
0.00
662.60
1,842.10
186.30
43.40
37.80
1,847.05
200.12
0.00
0.00
1,869.07
214.96
0.00
0.00
1,855.21
230.91
0.00
0.00
1,733.97
248.03
0.00
0.00
1,573.60
266.43
0.00
0.00
1,429.65
286.19
0.00
0.00
569.90
649.36
654.47
590.25
521.05
438.78
308.93
2.18
-45.35
-5.32
588.53
214.01
212.80
375.73
1.54
377.26
164.53
2.28
1.80
-37.00
-6.00
621.40
176.40
214.60
406.80
1.20
408.00
151.60
2.68
0.90
-20.70
-1.00
1.00
5.00
0.00
1.00
2.50
0.00
1.00
0.00
0.00
1.00
0.00
0.00
1.00
0.00
0.00
1.00
0.00
0.00
0.00
0.00
0.00
0.00
549.10
655.36
657.97
591.25
522.05
439.78
309.93
210.60
235.93
236.87
212.85
187.94
158.32
111.57
210.60
338.50
235.93
419.43
236.87
421.10
212.85
378.40
187.94
334.11
158.32
281.46
111.57
198.35
1.40
1.00
1.00
1.00
1.00
1.00
1.00
339.90
420.43
422.10
379.40
335.11
282.46
199.35
139.90
133.90
128.95
124.18
119.59
115.17
110.91
2.42
3.13
3.27
3.05
2.79
2.44
1.79
0.00
0.00
0.60
80.34
0.60
77.37
0.60
74.51
0.60
71.75
0.60
69.10
0.60
66.55
GameStop Corp
Balance Sheet
All Figures in millions
Fiscal Years Ending Dec. 31
2009
2010
2011
655.00
64.40
1137.50
44.70
79.90
15.80
2012E
1128.43
69.20
1155.97
0.00
66.99
19.45
2013E
1469.81
71.13
1188.23
0.00
68.86
20.00
2014E
1770.11
71.54
1195.14
0.00
69.26
20.11
2015E
1996.23
67.77
1132.13
0.00
65.61
19.05
2016E
2161.90
62.34
1041.50
0.00
60.36
17.53
2017E
2261.36
57.43
959.37
0.00
55.60
16.15
Cash & cash equivalents
Receivables, net
Merchandise inventories, net
Deferred income taxes - current
Prepaid expenses
Other current assets
Total current assets
Total property & equipment
Less accumulated depreciation & amortization
Net property & equipment
Goodwill, net
Other intangible assets
Other noncurrent assets
Total assets
905.42
64.01
1053.55
21.23
59.43
23.66
2127.30
1246.01
-661.81
584.20
1946.51
259.86
37.45
4955.33
710.80
65.50
1257.50
28.80
75.70
16.50
2154.80
1419.00
-805.20
613.80
1996.30
254.60
44.30
5063.80
1997.30
1501.30
2440.05
2818.02
3126.16
3280.79
3343.63
3349.90
-928.00
1614.27
-1020.06
1705.38
-1121.26
1801.62
-1232.49
1903.30
-1354.77
2010.72
-1489.17
2124.20
-1636.90
573.30
594.21
584.12
569.13
548.53
521.55
487.29
2019.00
209.10
48.70
2019.00
204.10
50.87
2019.00
199.10
53.14
2019.00
194.10
55.51
2019.00
189.10
57.99
2019.00
184.10
60.57
2019.00
179.10
63.27
4847.40
5308.23
5673.38
5963.90
6095.41
6128.85
6098.57
Accounts payable
Deferred revenue
Accrued liabilities
Taxes payable
Total current liabilities
Senior notes payable, long-term portion, net
Deferred taxes
Other long-term liabilities
Total liabilities
Class A common stock
Additional paid-in capital, net of Treasury stock
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Equity (deficit) attributable to GameStop Corp. stockholders
Equity (deficit) attributable to noncontrolling interest
Total equity
961.67
61.20
570.90
61.90
1594.47
447.34
25.47
103.83
2171.11
0.16
1210.54
114.70
1397.76
1028.10
74.90
582.10
62.70
1672.90
249.00
74.90
96.20
2093.00
0.10
928.90
162.50
1805.80
804.30
84.60
665.20
79.80
1028.58
88.01
694.03
69.74
1057.28
93.16
736.81
71.68
1063.43
96.50
765.43
72.10
1007.37
94.13
748.87
68.30
926.72
89.18
711.53
62.83
853.64
84.60
676.94
57.88
1633.90
1880.36
1958.94
1997.45
1918.67
1790.27
1673.05
0.00
67.10
106.20
0.00
11.20
95.70
0.00
5.60
98.37
0.00
2.80
98.94
0.00
1.40
93.73
0.00
0.00
86.22
0.00
0.00
79.43
1807.20
1987.26
2062.91
2099.20
2013.80
1876.49
1752.48
0.10
726.60
169.70
2145.70
3042.10
-1.90
0.10
666.38
169.70
2485.79
3321.97
-1.00
0.10
611.15
169.70
2830.52
3611.47
-1.00
0.10
560.49
169.70
3135.41
3865.70
-1.00
0.10
514.04
169.70
3398.77
4082.61
-1.00
0.10
471.43
169.70
3612.13
4253.36
-1.00
0.10
432.36
169.70
3744.93
4347.09
-1.00
2723.16
2897.30
-0.15
2723.01
-1.40
2895.90
3040.20
3320.97
3610.47
3864.70
4081.61
4252.36
4346.09
Total Liabilities & Equity
4894.12
4988.90
4847.40
5308.23
5673.38
5963.90
6095.41
6128.85
6098.57
GameStop Corp
Cash Flow Statement
All Figures in millions
Fiscal Years Ending Dec. 31
2012E
2013E
2014E
2015E
2016E
2017E
420.43
97.06
-11.20
-4.80
-18.47
12.91
-3.65
224.28
3.41
28.83
-10.06
-10.50
728.24
422.10
106.20
-5.60
-1.93
-32.25
-1.87
-0.54
28.70
5.15
42.78
1.95
2.67
567.35
379.40
116.24
-2.80
-0.41
-6.91
-0.40
-0.12
6.15
3.34
28.61
0.42
0.57
524.08
335.11
127.27
-1.40
3.77
63.01
3.65
1.06
-56.06
-2.36
-16.55
-3.80
-5.22
448.48
282.46
139.40
-1.40
5.43
90.63
5.25
1.53
-80.65
-4.95
-37.34
-5.47
-7.50
387.39
199.35
152.73
0.00
4.92
82.13
4.76
1.38
-73.08
-4.58
-34.60
-4.95
-6.80
321.26
Payment of Dividends
Proceeds from issuance of (Repurchases of) common stock
Net cash provided by financing activities
-80.34
-60.22
-140.56
-77.37
-55.23
-132.60
-74.51
-50.65
-125.16
-71.75
-46.46
-118.21
-69.10
-42.61
-111.71
-66.55
-39.07
-105.62
Capital expenditures (change in gross PPE)
-112.97
-2.17
0.90
-114.24
-91.10
-2.27
0.00
-93.37
-96.25
-2.37
0.00
-98.62
-101.68
-2.48
0.00
-104.15
-107.42
-2.59
0.00
-110.00
-113.48
-2.70
0.00
-116.18
473.43
655.00
1128.43
341.37
1128.43
1469.81
300.30
1469.81
1770.11
226.12
1770.11
1996.23
165.68
1996.23
2161.90
99.46
2161.90
2261.36
Net earnings
Add: Depreciation & amortization
Add: Change in deferred taxes
Change in A/R
Change in Inventory
Change in Prepaid Expenses
Change in other current assets
Change in A/P
Change in Deferred Revenue
Change in Accrued liabilities
Change in income taxes payable
Change in other long-term liabilities
Cash from operating activities
Changes in other noncurrent assets
Change in non-controlling interest
Net Cash Used for investing activities
Change in Cash
+Cash, Beginning of Year
Cash, End of Year
GameStop Corp
Common Size Income Statement
All Figures in millions
Fiscal Years Ending Dec. 31
2006
100.00%
72.34%
27.66%
2007
100.00%
74.43%
25.57%
2008
100.00%
74.22%
25.78%
2009
100.00%
73.18%
26.82%
2010
100.00%
73.21%
26.79%
2011
100.00%
71.94%
28.06%
2012E
100.00%
71.82%
28.18%
2013E
100.00%
72.16%
27.84%
2014E
100.00%
72.95%
27.05%
2015E
100.00%
73.29%
26.71%
2016E
100.00%
73.57%
26.43%
2017E
100.00%
74.51%
25.49%
Selling, general & administrative expenses
Depreciation & amortization
Asset Impairment and restructuring charges
Goodwill impairment
Operating earnings (loss)
18.80%
2.07%
0.00%
0.00%
6.27%
16.66%
1.84%
0.00%
0.00%
7.07%
16.41%
1.65%
0.00%
0.00%
7.67%
18.01%
1.79%
0.00%
0.00%
7.02%
17.93%
1.84%
0.02%
0.00%
6.99%
19.29%
1.95%
0.45%
0.40%
5.97%
19.30%
2.09%
0.00%
0.00%
6.79%
19.00%
2.19%
0.00%
0.00%
6.65%
18.75%
2.33%
0.00%
0.00%
5.97%
18.50%
2.65%
0.00%
0.00%
5.56%
18.25%
3.09%
0.00%
0.00%
5.09%
18.00%
3.60%
0.00%
0.00%
3.89%
Interest income
Interest expense
Debt extinguishment expense
Earnings (loss) before income tax expense (benefit)
Income tax expense (benefit)
Consolidated net income (loss)
Net loss attributable to noncontrolling interests
Consolidated net income attributable to GameStop Corp.
0.21%
-1.59%
-0.11%
4.78%
1.81%
2.98%
0.00%
2.98%
0.19%
-0.87%
-0.18%
6.22%
2.15%
4.06%
0.00%
4.06%
0.13%
-0.57%
-0.03%
7.20%
2.68%
4.52%
0.00%
4.52%
0.02%
-0.50%
-0.06%
6.48%
2.34%
4.14%
0.02%
4.16%
0.02%
-0.39%
-0.06%
6.56%
2.27%
4.29%
0.01%
4.31%
0.01%
-0.22%
-0.01%
5.75%
2.21%
3.54%
0.01%
3.56%
0.01%
0.05%
0.00%
6.85%
2.47%
4.38%
0.01%
4.39%
0.01%
0.03%
0.00%
6.69%
2.41%
4.28%
0.01%
4.29%
0.01%
0.00%
0.00%
5.98%
2.15%
3.82%
0.01%
3.83%
0.01%
0.00%
0.00%
5.57%
2.01%
3.56%
0.01%
3.58%
0.01%
0.00%
0.00%
5.10%
1.84%
3.26%
0.01%
3.28%
0.01%
0.00%
0.00%
3.90%
1.40%
2.50%
0.01%
2.51%
Sales
Cost of sales
Gross profit
GameStop Corp
Common Size Balance Sheet
All Figures in millions
Fiscal Years Ending Dec. 31
Cash & cash equivalents
Receivables, net
Merchandise inventories, net
Deferred income taxes - current
Prepaid expenses
Other current assets
Total current assets
Total property & equipment
Less accumulated depreciation & amortization
Net property & equipment
Goodwill, net
Other intangible assets
Other noncurrent assets
Total assets
Accounts payable
Deferred revenue
Accrued liabilities
Taxes payable
Total current liabilities
Deferred taxes
Other long-term liabilities
Total liabilities
Class A common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings (accumulated deficit)
Equity (deficit) attributable to GameStop Corp. stockholders
Equity (deficit) attributable to noncontrolling interest
Total equity
Total Liabilities & Equity
2009
9.97%
0.71%
11.61%
0.23%
0.65%
0.26%
23.43%
13.73%
-7.29%
6.44%
21.44%
2.86%
0.41%
54.59%
2010
7.50%
0.69%
13.27%
0.30%
0.80%
0.17%
22.75%
14.98%
-8.50%
6.48%
21.07%
2.69%
0.47%
53.45%
2011E
6.86%
0.67%
11.91%
0.47%
0.84%
0.17%
20.91%
15.72%
-9.72%
6.00%
21.14%
2.19%
0.51%
50.76%
2012E
11.79%
0.72%
12.08%
0.00%
0.70%
0.20%
25.50%
16.87%
-10.66%
6.21%
21.10%
2.13%
0.53%
55.47%
2013E
14.94%
0.72%
12.08%
0.00%
0.70%
0.20%
28.65%
17.34%
-11.40%
5.94%
20.52%
2.02%
0.54%
57.67%
2014E
17.89%
0.72%
12.08%
0.00%
0.70%
0.20%
31.60%
18.21%
-12.46%
5.75%
20.41%
1.96%
0.56%
60.28%
2015E
21.30%
0.72%
12.08%
0.00%
0.70%
0.20%
35.00%
20.31%
-14.45%
5.85%
21.54%
2.02%
0.62%
65.03%
2016E
25.07%
0.72%
12.08%
0.00%
0.70%
0.20%
38.78%
23.32%
-17.27%
6.05%
23.42%
2.14%
0.70%
71.08%
2017E
28.47%
0.72%
12.08%
0.00%
0.70%
0.20%
42.18%
26.74%
-20.61%
6.14%
25.42%
2.25%
0.80%
76.78%
10.59%
2.19%
6.29%
0.68%
17.56%
0.28%
1.14%
23.92%
0.00%
13.33%
1.26%
15.40%
30.00%
0.00%
30.00%
53.91%
10.85%
2.56%
6.14%
0.66%
17.66%
0.79%
1.02%
22.09%
0.00%
9.81%
1.72%
19.06%
30.58%
-0.01%
30.57%
52.66%
8.42%
0.00%
6.97%
0.84%
17.11%
0.70%
1.11%
18.92%
0.00%
7.61%
1.78%
22.47%
31.85%
-0.02%
31.83%
50.76%
10.75%
0.00%
7.25%
0.73%
19.65%
0.12%
1.00%
20.77%
0.00%
6.96%
1.77%
25.97%
34.71%
-0.01%
34.70%
55.47%
10.75%
0.00%
7.49%
0.73%
19.91%
0.06%
1.00%
20.97%
0.00%
6.21%
1.73%
28.77%
36.71%
-0.01%
36.70%
57.67%
10.75%
0.00%
7.74%
0.73%
20.19%
0.03%
1.00%
21.22%
0.00%
5.66%
1.72%
31.69%
39.07%
-0.01%
39.06%
60.28%
10.75%
0.00%
7.99%
0.73%
20.47%
0.01%
1.00%
21.49%
0.00%
5.48%
1.81%
36.26%
43.56%
-0.01%
43.55%
65.03%
10.75%
0.00%
8.25%
0.73%
20.76%
0.00%
1.00%
21.76%
0.00%
5.47%
1.97%
41.89%
49.33%
-0.01%
49.32%
71.08%
10.75%
0.00%
8.52%
0.73%
21.06%
0.00%
1.00%
22.06%
0.00%
5.44%
2.14%
47.15%
54.73%
-0.01%
54.72%
76.78%
GameStop Corp
Value Driver Estimation
All Figures in millions
Fiscal Years Ending Dec. 31
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
5,318.90
-3847.46
-1000.14
-110.18
361.13
7,093.96
-5280.26
-1182.02
-131.28
500.41
8,805.90
-6535.76
-1445.42
-146.36
678.35
9,078.00
-6643.35
-1635.12
-164.13
635.40
9,473.70
-6936.10
-1698.80
-176.80
662.00
9,550.50
-6871.00
-1842.10
-188.60
648.80
9,570.19
-6,873.67
-1,847.05
-200.12
649.36
9,837.22
-7,098.72
-1,869.07
-214.96
654.47
9,894.45
-7,218.08
-1,855.21
-230.91
590.25
9,372.83
-6,869.77
-1,733.97
-248.03
521.05
8,622.48
-6,343.67
-1,573.60
-266.43
438.78
7,942.53
-5,917.75
-1,429.65
-286.19
308.93
37.80%
96.05
32.00
4.29
0.00
0.00
0.00
70.08
132.33
34.60%
152.77
21.30
-4.77
0.00
0.00
2.84
44.96
172.13
37.20%
235.67
18.77
-4.32
0.00
0.00
1.93
56.10
252.05
36.20%
212.80
16.42
-0.79
0.00
5.48
1.58
48.66
235.50
34.50%
214.60
12.77
-0.62
0.00
1.52
2.62
62.91
230.88
38.40%
210.60
7.95
-0.35
14.52
2.46
4.19
62.29
239.36
36.00%
235.93
1.80
-0.36
0.00
0.00
0.00
56.77
237.37
36.00%
236.87
0.90
0.00
0.00
0.00
0.00
55.19
237.77
36.00%
212.85
0.00
0.00
0.00
0.00
0.00
53.66
212.85
36.00%
187.94
0.00
0.00
0.00
0.00
0.00
52.17
187.94
36.00%
158.32
0.00
0.00
0.00
0.00
0.00
50.72
158.32
36.00%
111.57
0.00
0.00
0.00
0.00
0.00
49.31
111.57
Change in Deferred Taxes
0.00
40.66
-13.25
0.00
53.81
-13.15
0.00
23.62
30.20
25.47
21.23
27.85
74.90
28.80
41.86
67.10
44.70
-23.70
11.20
0.00
-11.20
5.60
0.00
-5.60
2.80
0.00
-2.80
1.40
0.00
-1.40
0.00
0.00
-1.40
0.00
0.00
0.00
NOPLAT
215.55
315.13
456.50
427.76
472.98
385.74
400.79
411.10
374.60
331.71
279.06
197.35
319.13
34.27
675.39
37.88
425.64
56.02
801.03
52.78
0.00
1335.46
-844.38
-362.46
-1206.83
528.35
65.98
1075.79
59.10
15.41
1744.64
-1047.96
-471.81
-1519.78
544.68
64.01
1053.55
59.43
23.66
1745.34
-961.67
-570.90
-1532.57
568.42
65.50
1257.50
75.70
16.50
1983.62
-1028.10
-582.10
-1610.20
573.03
64.40
1137.50
79.90
15.80
1870.63
-804.30
-665.20
-1469.50
574.21
69.20
1155.97
66.99
19.45
1885.83
-1028.58
-694.03
-1722.61
590.23
71.13
1188.23
68.86
20.00
1938.45
-1057.28
-736.81
-1794.10
593.67
71.54
1195.14
69.26
20.11
1949.72
-1063.43
-765.43
-1828.86
562.37
67.77
1132.13
65.61
19.05
1846.94
-1007.37
-748.87
-1756.24
517.35
62.34
1041.50
60.36
17.53
1699.08
-926.72
-711.53
-1638.26
476.55
57.43
959.37
55.60
16.15
1565.09
-853.64
-676.94
-1530.58
832.06
28.69
860.75
-56.05
0.00
-56.05
128.63
511.67
0.00
727.82
31.77
759.59
-47.42
0.00
-47.42
224.86
549.25
247.79
867.47
35.40
1150.66
-42.94
-104.49
-147.42
212.76
584.20
259.86
838.33
37.45
1135.64
-61.20
-103.83
-165.03
373.42
613.80
254.60
1083.20
44.30
1382.10
-74.90
-96.20
-171.10
401.13
573.30
209.10
962.59
48.70
1220.39
-84.60
-106.20
-190.80
163.21
594.21
204.10
935.82
50.87
1190.80
-88.01
-95.70
-183.71
144.35
584.12
199.10
909.81
53.14
1162.05
-93.16
-98.37
-191.53
120.86
569.13
194.10
884.51
55.51
1134.12
-96.50
-98.94
-195.44
90.69
548.53
189.10
859.92
57.99
1107.00
-94.13
-93.73
-187.86
60.82
521.55
184.10
836.01
60.57
1080.68
-89.18
-86.22
-175.41
34.51
487.29
179.10
812.77
63.27
1055.14
-84.60
-79.43
-164.02
1309.00
1352.47
1777.36
1767.57
2198.22
2004.02
1764.50
1698.98
1628.67
1558.37
1487.65
1412.92
315.13
43.46
24.07%
271.67
225.55
456.50
424.89
33.75%
31.61
363.95
427.76
-9.79
24.07%
437.55
306.13
472.98
430.65
26.76%
42.32
352.02
385.74
-194.21
17.55%
579.94
235.30
400.79
-239.51
20.00%
640.30
263.65
411.10
-65.53
23.30%
476.63
290.35
374.60
-70.31
22.05%
444.91
258.33
331.71
-70.30
20.37%
402.02
220.26
279.06
-70.72
17.91%
349.78
172.41
197.35
-74.72
13.27%
272.08
95.55
Revenue
-COGS
-SG&A
-Depreciation & Amortization
EBITA
Effective Tax Rate*
Income Tax Provision
+Tax Shield on Interest Expense
-Tax on Investment Income
+Tax Shield on Amortized Goodwill
+Tax Shield on Investing Losses
+Tax Shield on Disposal of Property and Equipment
+Tax from Interest on Leases
Total Adjusted Taxes
Deferred Tax Liabilities
Deferred Tax Assets
Normal Cash (Min 6% of sales or cash on balance sheet)
+Accounts Receivable
+Inventory
+Prepaid Expenses
+Other Current Assets (assumed to be operating)
13.64
41.05
-
Current Operating Assets
1066.67
-717.87
-300.96
-1018.83
Accounts Payable
Accrued Expenses
Current Operating Liabilities
Operating Working Capital
Net Property & Equipment
47.84
456.46
+Net Non-Intangible Assets (Non-Goodwill)
+Present Value of Operating Leases
+Other Assets
Long-Term Operating Assets
-Deferred Revenue
-Other Liabilities
Long-Term Operating Liabilities
Invested Capital
NOPLAT
Change in Invested Capital
Return on Invested Capital (Previous Year Invested Capital/Current Year NOPLAT)
Free Cash Flow (NOPLAT - Change in Invested Capital)
Economic Profit (Previous Year Invested Capital * (Current Year ROIC - WACC)
-
GameStop Corp
Weighted Average Cost of Capital (WACC) Estimation
Total Capital
Weight of Debt
Long-Term Debt
PV Operating Leases
Total Debt
Tax Rate
Comparable Cost of Debt
After-Tax Cost of Debt
Weight of Equity
Market Cap
Shares Outstanding
Price
Risk-Free Rate
Beta
Market Risk Premium
Cost of Equity
Weighted Cost of Debt
Weighted Cost of Equity
WACC
*Risk Free Rate = 30-Year Treasury Yield as of 4/6/2012
4061.37
24%
0
962.59
962.59
36%
5.62%
3.60%
76%
3098.785
139.9
22.15
3.14%
0.98
4.80%
7.85%
0.85%
5.99%
6.84%
GameStop Corp
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
3%
41.3%
6.84%
7.85%
Fiscal Years Ending Dec. 31
2011E
DCF Model
FCF
NOPLAT
CV
Discount Factor
PV
Value of Operating Assets
EP Model
EP
CV
Beginning Capital CV
Discount Factor
PV
PV EP + CV
IC 2011
Value of Operating Assets
2013E
2014E
2015E
2016E
2017E
640.30
476.63
444.91
402.02
349.78
1.07
599.29
1.14
417.52
1.22
364.78
1.30
308.50
1.39
251.22
272.08
197.35
4761.72
1.39
3419.98
263.65
290.35
258.33
220.26
172.41
95.55
3274.08
1.07
246.76
1.14
254.34
1.22
211.80
1.30
169.02
1.39
123.83
1.39
2351.52
5361.29
3357.27
2004.02
5361.29
Non-operating Assets
Excess Cash
81.97
Short-Term
Long-Term
PV Operating Leases
PV ESOP
Minority Interest Liabilities
-1469.50
-106.20
-962.59
-67.69
-1.00
Non-Equity Claims
Equity Value
Current Shares Outstanding
Price End FY2011
Adjustment for Partial-Year
Intrinsic Value Per Share
2012E
2836.28
133.90
21.18
1.0106408
21.41
GameStop Corp
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending Dec. 31
2011E
2012E
2013E
2014E
2015E
2016E
2017E
EPS
Key Assumptions
CV growth
CV ROE
Cost of Equity
3%
12.66%
7.85%
Future Cash Flows
P/E Multiple
EPS(next period)
Future Stock Price
Dividends Per Share
Future Cash Flows
3.17
Discounted Cash Flows
Intrinsic Value
$
15.38
3.38
3.33
3.26
3.09
6.99
2.71
$
0.60 $
0.60 $
0.60 $
0.60 $
0.60 $
$
0.60
18.93
$
0.56 $
0.52 $
0.48 $
0.44 $
0.41 $
12.97
GameStop Corp
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
EPS
EPS
Ticker
Company
Price
2012E
2013E
BBY
$3.52
$3.76
Best BUY Co Inc
$ 21.92
WMT
$4.86
$5.31
Wal-Mart Stores Inc
$ 61.87
TGT
$4.29
$4.84
Target Corp
$ 57.60
RSH
$0.65
$0.69
Radioshack Corp
$ 6.18
EA
$0.85
$1.15
Electronic Arts Inc
$ 15.28
ATVI
$0.97
$1.07
Activision Blizzard Inc $ 12.27
MSFT
$2.69
$3.01
Microsoft Corp
$ 31.44
Average
GME
GameStop Corp
Implied Value:
Relative P/E (EPS12)
Relative P/E (EPS13)
PEG Ratio (EPS12)
PEG Ratio (EPS13)
$3.17
$ 22.15
$
$
$
$
38.14
35.55
(15.62)
(15.01)
$3.38
P/E 12
6.2
12.7
13.4
9.5
18.0
12.6
11.7
12.0
P/E 13
5.8
11.7
11.9
9.0
13.3
11.5
10.4
10.5
7.0
6.5
Est.
5yr Gr.
7
9.7
11.4
3.1
17.6
11.31
13.96
-3.66
PEG 12
0.89
1.31
1.18
3.07
1.02
1.12
0.84
1.3
PEG 13
0.83
1.20
1.04
2.89
0.75
1.01
0.75
1.2
(1.9)
(1.8)
GameStop Corp
Key Management Ratios
Fiscal Years Ending Dec. 31
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
Liquidity Ratios
Current ratio (Current Assets / Current Liabilities)
Quick ratio ((Current Assets - Inventory - Prepaid Expenses) / Current Liabilities)
Cash ratio (Cash / Current Liabilities)
Operation cash flow ratio ((CF From Operating Activities / (Long-Term Debt + Minimum Payment on Leases)
1.33
0.64
0.57
0.45
1.29
0.49
0.42
0.39
1.22
0.48
0.40
0.56
1.30
0.65
0.60
0.67
1.44
0.80
0.75
0.53
1.57
0.93
0.89
0.51
1.71
1.09
1.04
0.45
1.87
1.25
1.21
0.40
2.00
1.40
1.35
0.34
Activity or Asset-Management Ratios
DSO ratio (365 / (Sales / A/R))
Asset Turnovers (Sales / Total Assets)
Inventory turnover (COGS / Avg. Inventory)
Inventory conversion (365 / Inventory turnover)
Payables turnover ((COGS + Change in Inventory) / Avg. A/P)
DPO ratio (265 / Payables turnover)
2.57
1.83
6.24
58.50
6.59
55.39
2.52
1.87
6.00
60.81
7.18
50.86
2.46
1.97
5.74
63.61
7.37
49.54
2.64
1.80
5.99
60.89
7.52
48.53
2.64
1.73
6.06
60.27
6.84
53.38
2.64
1.66
6.06
60.26
6.81
53.57
2.64
1.54
5.90
61.83
6.57
55.52
2.64
1.41
5.84
62.53
6.47
56.45
2.64
1.30
5.92
61.71
6.56
55.68
Financial Leverage Ratios
Debt ratio (Total Assets / Total Liabilities)
Debt to equity ratio ((Long-Term Debt + Minimum Payment on Leases) / Avg. Shareholder's Equity)
Times-interest-earned ratio* (Operating Earnings / Interest Expense)
2.28
0.57
14.05
2.42
0.54
17.91
2.68
0.38
27.53
2.67
0.34
129.87
2.75
0.31
261.79
2.84
0.28
0.00
3.03
0.25
0.00
3.27
0.23
0.00
3.48
0.22
0.00
26.82%
7.02%
4.16%
7.97%
15.02%
26.79%
6.99%
4.31%
8.14%
14.52%
28.06%
5.97%
3.56%
6.86%
11.45%
28.18%
6.79%
4.39%
8.28%
13.22%
27.84%
6.65%
4.29%
7.69%
12.18%
27.05%
5.97%
3.83%
6.52%
10.15%
26.71%
5.56%
3.58%
5.56%
8.43%
26.43%
5.09%
3.28%
4.62%
6.78%
25.49%
3.89%
2.51%
3.26%
4.64%
0.00%
0.00
0.00%
0.00
0.00%
0.00
19.15%
5.22
18.37%
5.44
19.69%
5.08
21.48%
4.66
24.55%
4.07
33.55%
2.98
Profitability Ratios
Gross margin (Gross Profit / Sales)
Operating margin (Operating Earnings / Sales)
Profit margin (Net Income / Sales)
ROA (Net Income / Avg. Total Assets)
ROE (Net Income / Avg. Shareholder's Equity)
Payout Policy Ratios
Payout ratio (EPS / Dividends Per Share)
Dividend cover** (1 / Payout ratio)
*0 LTD from 2011 forward, projected to be no interest after 2013
**No Dividend in 2009 - 2011
GameStop Corp
Sensitivity Analysis
21.41
31%
32%
33%
34%
35%
36%
37%
38%
39%
40%
3.00%
25.96
25.47
24.98
24.49
23.99
23.50
22.99
22.49
21.98
21.48
4.00%
25.55
25.07
24.58
24.09
23.59
23.09
22.59
22.09
21.58
21.07
5.00%
25.14
24.66
24.17
23.67
23.18
22.68
22.18
21.67
21.17
20.66
21.41
4.00%
5.00%
6.00%
7.00%
7.42%
8.00%
9.00%
10.00%
11.00%
16.00%
27.80
26.48
25.09
23.64
23.02
22.13
20.56
18.91
17.19
17.00%
27.37
26.04
24.66
23.21
22.58
21.70
20.12
18.48
16.76
18.00%
26.94
25.61
24.23
22.78
22.15
21.27
19.69
18.04
16.33
21.41
3.0%
3.5%
4.0%
4.5%
4.8%
5.0%
5.5%
6.0%
6.5%
0.7
55.23
47.11
40.79
35.73
33.14
31.58
28.11
25.17
22.65
0.8
48.14
40.79
35.08
30.53
28.20
26.80
23.69
21.05
18.78
0.9
42.45
35.73
30.53
26.38
24.27
22.99
20.16
17.77
15.71
21.41
7.00%
8.00%
9.00%
9.92%
11.00%
12.00%
13.00%
14.00%
0.50%
11.18
11.57
11.97
12.35
12.81
13.26
13.72
14.19
1%
12.37
12.76
13.17
13.56
14.04
14.49
14.96
15.45
1.50%
13.78
14.18
14.61
15.01
15.49
15.96
16.44
16.94
21.41
19.00%
19.50%
20.00%
20.50%
Gross Margin New Video Game Software
20.70%
21.00%
21.50%
22.00%
22.50%
23.00%
5.50%
12.43
14.36
16.30
18.24
19.02
20.18
22.12
24.06
25.99
27.93
21.41
38.00%
38.50%
39.00%
39.50%
40.00%
40.50%
41.00%
41.50%
42.00%
42.50%
45.00%
16.44
17.12
17.80
18.48
19.16
19.84
20.52
21.20
21.88
22.56
Tax Rate
Dep & Amortization Exp
P&E Growth
5.64%
24.87
24.39
23.90
23.40
22.91
22.41
21.91
21.40
20.90
20.39
6.00%
24.72
24.23
23.74
23.25
22.75
22.26
21.76
21.25
20.74
20.23
7.00%
24.29
23.80
23.31
22.82
22.32
21.82
21.32
20.82
20.31
19.80
8.00%
23.85
23.36
22.87
22.38
21.88
21.38
20.88
20.38
19.87
19.36
9.00%
23.40
22.91
22.42
21.93
21.43
20.93
20.43
19.92
19.42
18.91
19.00%
26.50
25.18
23.79
22.35
21.72
20.84
19.26
17.61
15.90
20.00%
26.07
24.75
23.36
21.91
21.29
20.40
18.82
17.18
15.46
21.00%
25.64
24.31
22.93
21.48
20.85
19.97
18.39
16.75
15.03
22.00%
25.21
23.88
22.50
21.05
20.42
19.54
17.96
16.31
14.60
1.1
33.85
28.11
23.69
20.16
18.37
17.28
14.89
12.86
11.11
1.2
30.53
25.17
21.05
17.77
16.10
15.09
12.86
10.97
9.34
1.3
27.66
22.65
18.78
15.71
14.15
13.20
11.11
9.34
7.81
1.4
25.17
20.45
16.82
13.92
12.45
11.56
9.59
7.92
6.49
CV Growth NOPLAT
2%
2.50%
15.48
17.57
15.90
18.01
16.33
18.46
16.75
18.89
17.25
19.41
17.73
19.91
18.23
20.43
18.75
20.97
3%
20.21
20.67
21.14
21.59
22.14
22.67
23.21
23.77
3.50%
23.65
24.13
24.63
25.11
25.69
26.25
26.82
27.42
4%
28.30
28.82
29.36
29.88
30.50
31.10
31.72
32.36
6.00%
13.29
15.22
17.16
19.10
19.88
21.04
22.98
24.92
26.85
28.79
Gross Margin New Video Game Hardware
6.50%
7.00%
7.50%
8.00%
14.14
15.00
15.86
16.72
16.08
16.94
17.80
18.66
18.02
18.88
19.74
20.60
19.96
20.82
21.68
22.54
20.73
21.59
22.45
23.31
21.90
22.76
23.62
24.48
23.84
24.70
25.55
26.41
25.77
26.63
27.49
28.35
27.71
28.57
29.43
30.29
29.65
30.51
31.37
32.23
9.50%
19.30
21.24
23.18
25.11
25.89
27.05
28.99
30.93
32.87
34.81
9.00%
18.44
20.38
22.32
24.26
25.03
26.19
28.13
30.07
32.01
33.95
45.50%
17.25
17.93
18.61
19.29
19.97
20.65
21.33
22.01
22.69
23.37
Gross Margin Used Video Game Software
46.00%
46.50%
47.00%
47.50%
18.06
18.88
19.69
20.50
18.74
19.56
20.37
21.18
19.42
20.23
21.05
21.86
20.10
20.91
21.73
22.54
20.78
21.59
22.41
23.22
21.46
22.27
23.09
23.90
22.14
22.95
23.76
24.58
22.82
23.63
24.44
25.26
23.50
24.31
25.12
25.94
24.18
24.99
25.80
26.61
48.00%
21.31
21.99
22.67
23.35
24.03
24.71
25.39
26.07
26.75
27.43
48.50%
22.12
22.80
23.48
24.16
24.84
25.52
26.20
26.88
27.56
28.24
SG&A
18.41%
26.76
25.43
24.05
22.60
21.97
21.09
19.51
17.87
16.15
Beta
Risk-free Rate
Depreciation Growth Rate
Gross Margin Other
0.98
38.63
32.35
27.49
23.61
21.64
20.45
17.82
15.58
13.67
GameStop Corp
Common Size Income Statement
Fiscal Years Ending Dec. 31
2005
2006
2007
2008
2009
2010
2011
3-Year
5-year
Low Price
High Price
Average Price
Change in Price
Retained EPS
$1 Value
9.40
21.29
15.34
19.26
28.90
24.08
8.74
1.06
8.28
25.65
62.30
43.97
19.90
1.82
10.92
17.98
57.04
37.51
-6.46
2.44
-2.65
20.44
32.42
26.43
-11.08
2.28
-4.85
17.20
25.22
21.21
-5.22
2.68
-1.95
19.77
28.21
23.99
2.78
2.42
1.15
-2.44
7.39
-0.33
-0.09
11.65
-0.01