COMPANY UPDATE / ESTIMATE CHANGE Key Metrics GME - NYSE (as of 4/2/18) $12.82 Price Target N/A 52-Week Range $12.20 - $25.31 Shares Outstanding (mil) 101.5 Market Cap. ($mil) $1,301 3-Mo. Average Daily Volume 4,370,000 Institutional Ownership 99% Total Debt/Total Capital (2/18) 27% ROE (TTM ended 2/18) 15% Book Value/Share (2/18) $21.82 Price/Book Value 0.6x Annual Dividend Rate & Yield $1.52 11.9% EBITDA Margin (TTM ended 2/18) 7.3% EPS FY 1/31* (excludes nonrecurring items) Prior Curr. 2016 2017~ 2018E 2018E 1Q $0.66 $0.63 $0.32 2Q $0.27 $0.15 $0.07 3Q $0.49 $0.54 $0.47 4Q $2.38 $2.02 $2.14 Year $3.77 $3.34 $3.10 $3.00 P/E ~ 3.4x 3.8x 4.3x *Fiscal year ends Saturday closest to January 31 of the following year. Quarterly EPS figures may not add to annual figure due to rounding and changes in the share count from quarter to quarter. ~ represents 53-week fiscal year Revenue ($mm) Prior Curr. 2016 2017~ 2018E 2018E 1Q $1,971 $2,046 $1,850 2Q $1,632 $1,688 $1,590 3Q $1,959 $1,989 $1,905 4Q $3,045 $3,503 $3,330 Year $8,608 $9,225 $8,700 $8,675 ~ represents 53-week fiscal year Company Description: GameStop Corp. is the world s largest multi-channel videogame retailer. The company sells new and pre-owned software, hardware, and accessories for current gaming systems and the PC. Recent diversification efforts have led to a smartphone/mobile device retail sales & service presence that includes AT&T Wireless/Spring Mobile, Simply Mac, and Cricket stores, collectively referred to as technology brand stores. GME recently operated over 7,200 total stores in 14 countries. This included 3,827 U.S. videogame stores, 1,969 international videogame stores, 1,377 technology brand stores, and 103 collectible stores. Entertainment & Leisure Analyst: Jeffrey S. Thomison, CFA 502.588.9137 / JThomison@hilliard.com Institutional Sales Desk: George Moorin 502.588.9141 / GMoorin@hilliard.com J.J.B. Hilliard, W.L. Lyons, LLC April 3, 2018 GameStop Corp. GME NYSE Neutral-4 4Q Results Exceeded Expectations, But Guidance Reflects Some Challenges At Hand Investment Highlights We had mixed views on 4Q results. We note an extra week in the period compared to a year ago due to the timing of the fiscal year. Net sales rose 15.0% from the year ago period to $3.502 billion, better than the street consensus expectation of $3.300 billion. Holiday business was generally strong, including a boost to hardware sales due to Nintendo s popular Switch console. New software and the Collectibles segment also did well. Pre-owned software historically a high margin business remained on a negative trend, while the Technology Brands segment continued to struggle. Earnings beat expectations. Gross margin declined due mainly to a shift in the sales mix (more hardware). SG&A expenses rose in large part to the extra week in the quarter; otherwise, expenses were well contained, in our view. Adjusted EPS, excluding nonrecurring items such as asset impairment charges, were $2.02 compared to $2.38 a year ago. On this basis, the street consensus estimate was $1.99 and our estimate was $1.93. Management issued FY18 earnings guidance. This included a projected sales decline in the range of 2%- 6% and adjusted EPS of $3.00-$3.35. We have finetuned our financial estimates, which represent the low end of the guided range for those metrics. This reflects our assumptions regarding the Technology Brands stores as well as pre-owned software. We maintain our Neutral rating. The unusually low valuation likely reflects concerns regarding the future of GME s largest segment physical disk videogame sales as well as challenges to the businesses intended to add diversification to the overall mix. At this point, we prefer more encouraging signs regarding those businesses before contemplating a potential rating upgrade. We believe the dividend is adequately covered based on projected earnings. Note Important Disclosures on Pages 7-8. Note Analyst Certification on Page 7.
Exhibit 1 Consolidated Statements of Income (figures in millions except percentages and per share data) 14 Weeks 13 Weeks 53 Weeks 52 Weeks Ended Ended Ended Ended 02/03/18 01/28/17 % chg. 02/03/18 01/28/17 % chg. Net Sales $3,502.5 $3,045.4 15.0% $9,224.6 $8,607.9 7.2% Cost of Sales 2,478.0 2,037.5 21.6% 6,184.5 5,598.6 10.5% Gross Profit 1,024.5 1,007.9 1.6% 3,040.1 3,009.3 1.0% Selling, Gen. & Admin. Exp. 692.0 646.3 7.1% 2,363.0 2,252.6 4.9% Depreciation & Amort. 38.4 41.2 (6.8%) 150.7 165.2 (8.8%) Asset Impairment Charges 390.8 33.8 NMF 390.8 33.8 NMF Operating Income (96.7) 286.6 NMF 135.6 557.7 NMF Interest Expense, net 13.1 13.8 (5.1%) 55.3 53.0 4.3% Income Before Taxes (109.8) 272.8 NMF 80.3 504.7 NMF Taxes (Benefit) (3.9) 64.1 NMF 45.6 151.5 NMF Net Income, GAAP ($105.9) $208.7 NMF $34.7 $353.2 NMF Net Income, non-gaap $205.0 $243.8 (15.9%) $338.6 $390.9 (13.4%) Diluted EPS, GAAP ($1.04) $2.04 NMF $0.34 $3.40 NMF Diluted EPS, non-gaap $2.02 $2.38 (15.1%) $3.34 $3.77 (11.4%) Diluted Shares Outst. 101.6 102.5 (0.9%) 101.5 103.8 (2.2%) As a % of Net Sales: Gross Profit 29.25% 33.10% (385) 32.96% 34.96% (200) Selling, Gen. & Admin. Exp. 19.76% 21.22% (146) 25.62% 26.17% (55) Net Income, GAAP NMF 6.85% NMF 0.38% 4.10% NMF Net Income, non-gaap 5.85% 8.01% (215) 3.67% 4.54% (87) Source: GameStop Corp. Note: Fiscal year ends on Saturday closest to Jan. 31 Additional comments on 4Q results. The 4Q period benefited from an extra week in the period. This is based on GME s fiscal year, which ends on the Saturday closest to January 31 of each year. Remaining mindful of this benefit, we considered the quarter s new videogame hardware and software sales to be relatively strong. This reflected popular products in each category. On the hardware side, sales were positively impacted by continued success of Nintendo s Switch gaming device, which debuted in March 2017. On the software side, an array of strong titles led to good holiday sales, in our view. Originally representing a major diversification initiative, the Technology Brands segment posted a 14.2% decline in sales and a 3.2% drop in gross profit. This segment includes stores such as Spring Mobile (authorized retailer of AT&T wireless services), Simply Mac (retailer of Apple products), and Cricket (pre-paid AT&T services and devices), the latter of which was recently divested. Challenges in the quarter included a weaker-than-expected iphone X launch and a change in AT&T s dealer compensation structure earlier in the year. The young Collectibles segment (recently 103 stores) continued on a growth trajectory, with 4Q sales increasing 22.8% and gross profit up 12.4%. This business includes licensed-based interactive toys, apparel, and pop culture collectibles sold online and in physical retail stores, with a meaningful portion of the product line represented by exclusive licenses. The online effort includes ThinkGeek/Geeknet, a business acquired by GME in 2015. The $636.2 million annual sales figure for the Collectibles segment fell a bit shy of the company s original expectation of $650-$700 million, with management noting a need for some operational and inventory tweaks moving forward. Hilliard Lyons Equity Research 2 Entertainment & Leisure
Exhibit 2 Segment Analysis (figures in millions except percentages) 14 Weeks 13 Weeks 53 Weeks 52 Weeks Ended Ended Ended Ended 02/03/18 01/28/17 % chg. 02/03/18 01/28/17 % chg. Sales Mix: New Videogame Hardware $844.0 $583.0 44.8% $1,791.8 $1,396.7 28.3% New Videogame Software 1,042.3 927.4 12.4% 2,582.0 2,493.4 3.6% Pre-owned & Value 663.1 680.6 (2.6%) 2,149.6 2,254.1 (4.6%) Videogame Accessories 327.7 238.5 37.4% 784.3 676.7 15.9% Digital 61.4 57.2 7.3% 189.2 181.0 4.5% Technology Brands 219.7 256.0 (14.2%) 803.6 814.0 (1.3%) Collectibles 260.8 212.4 22.8% 636.2 494.1 28.8% Other 83.5 90.3 (7.5%) 287.9 297.9 (3.4%) Total $3,502.5 $3,045.4 15.0% $9,224.6 $8,607.9 7.2% Gross Profit Mix: New Videogame Hardware $61.5 $58.6 4.9% $163.1 $154.2 5.8% New Videogame Software 238.9 224.4 6.5% 590.3 600.4 (1.7%) Pre-owned & Value 298.1 318.9 (6.5%) 977.1 1,044.1 (6.4%) Videogame Accessories 102.9 82.8 24.3% 255.0 235.2 8.4% Digital 54.3 50.8 6.9% 162.4 155.5 4.4% Technology Brands 169.1 174.6 (3.2%) 594.0 554.6 7.1% Collectibles 77.1 68.6 12.4% 208.2 171.6 21.3% Other 22.6 29.2 (22.6%) 90.0 93.7 (3.9%) Total $1,024.5 $1,007.9 1.6% $3,040.1 $3,009.3 1.0% Margin Analysis: bp chg. bp chg. New Videogame Hardware 7.29% 10.05% (276) 9.10% 11.04% (194) New Videogame Software 22.92% 24.20% (128) 22.86% 24.08% (122) Pre-owned & Value 44.96% 46.86% (190) 45.45% 46.32% (87) Videogame Accessories 31.40% 34.72% (332) 32.51% 34.76% (224) Digital 88.44% 88.81% (37) 85.84% 85.91% (8) Technology Brands 76.97% 68.20% 877 73.92% 68.13% 578 Collectibles 29.56% 32.30% (273) 32.73% 34.73% (200) Other 27.07% 32.34% (527) 31.26% 31.45% (19) Total 29.25% 33.10% (385) 32.96% 34.96% (200) Source: GameStop Corp. Note: Fiscal year ends on Saturday closest to Jan. 31 Below the operating income line, interest expense was little changed while nonrecurring items such as impairment charges and tax reform led to a small tax benefit rather than a typical tax expense. In addition, the weighted average share count was just 0.9% lower than the year ago period, a smaller reduction than in recent quarters. We expect share buybacks to continue in FY18, and perhaps accelerate based on the current share price. Financial condition. The balance sheet remained in decent shape, in our view. Cash and equivalents at February 3, 2018 were $864.4 million. Inventory was at a higher level than a year ago, likely a function of the industry cycle and a compelling array of products. There was $817.9 million in total debt, or 27% of total capitalization. Stockholders equity at 4Q period end was $2.214 billion. Hilliard Lyons Equity Research 3 Entertainment & Leisure
Business mix transition. In fiscal 2013, GME ended the year with 6,600 videogame stores and essentially no technology-based stores (smartphone and mobile devices retailer and reseller). At the end of fiscal 2017, the company operated 5,796 videogame stores and 1,377 technology-based stores. We expect this mix to continue shifting, although gradually, in favor of the technology stores (AT&T Wireless/Spring Mobile and Simply Mac). New CEO Michael Mauler (promoted in February 2018 from GME s international operations) stated his desire to refine and improve GME s existing stores (all categories) before making any major changes to the overall store base/mix. We still expect gradual net closings of the videogame stores, however, as leases expire. Dividends. In late February 2018, after four quarters of a $0.38 per share dividend, GME announced the continuation of that rate for a fifth consecutive quarter. The company initiated dividends in 2012 and had raised the rate each year since. Given the stock s high current yield, and other opportunities for cash flow utilization, we support the decision to keep the dividend rate unchanged. At this time, we consider annual dividends sufficiently covered by earnings, and more so by cash flow. Further, the annualized rate of $1.52 per share represents a payout ratio of 51% based on our FY18 EPS estimate of $3.00. The current dividend yield is 11.9%. Outlook. Management issued financial guidance for the current FY18 year. This included a 2%- 6% decline in total sales, comparable stores sales flat to up 6%, and adjusted EPS of $3.00-$3.35. We have fine-tuned our estimates, which are featured in Exhibit 3. Our FY18 revenue estimate is lowered by $25 million while our EPS estimate is reduced by $0.10 to $3.00. These represent the low ends of management s guided ranges. We project free cash flow of roughly $300 million in FY18. This is after interest payments, taxes, and capital expenditures. This would seemingly give GME amounts available for dividends (we project $153 million in total payments), share repurchases (company spent just $22 million last year), and other options such as debt reduction or cash build-up. Valuation. GME shares are currently trading at a low 4.3x our FY18 EPS estimate. This is roughly the low end of a 10-year range, the median for which is 8.5x. Over a more recent two-year time frame, the median valuation is 6.6x. We attribute GME s recent history of low valuations to several factors, including growing concerns about the future distribution of videogames (i.e. a threat to GME s core physical goods business), the potential for a downward trend in annual earnings, and challenges associated with business diversification initiatives. Opinion. We maintain our Neutral rating on GME. Given the low valuation and high dividend yield, we are somewhat attracted to GME shares. However, offsetting factors to us include industry trends related to consumers growing comfort in downloading videogame content (entire games and incremental follow-on content), the contracting pool of used videogames for which customers can submit to stores for trade-in value (thus impacting GME s high-margin business of re-selling those games to other customers), and mixed results from the business diversification strategy. For income investors, we believe GME shares have merit. The current yield of 11.9% considerably exceeds comparable industry, sector, and market yields. We consider dividend coverage adequate at this time, although we believe earnings could be on a gradual long-term decline. The payout ratio is 51% based on our FY18 EPS estimate. Projected total payments of $153 million for the current fiscal year compares to roughly $300 million in projected free cash flow. Finally, we note the recent cash balance of $864 million. Hilliard Lyons Equity Research 4 Entertainment & Leisure
We do not anticipate major capital appreciation potential for the stock in the year ahead, unless earnings can break from projected low or no growth conditions. Asset value and the related price-to-book value multiple could offer some support to GME at current levels, in our view. However, future asset values could change to some degree should impairment charges (potentially those related to store rationalization) occur, as they have in recent years. Suitability. Our Suitability rating on GME is 4 (on a 1-to-4 scale with 1=most conservative and 4=most aggressive). This reflects consumer buying behavior trends in a digital world, the related impact on GME s store traffic, and the company s integration of, and growth plans for, non-videogame businesses, among other factors. Risks. Competitive entry in the used game business and digital downloading of content by consumers have been common concerns among investors in the past. To date, management has not seen an adverse impact from competitive entry into the used game business. Digital downloading of videogames is likely to continue growing each year, in our view, thus causing pressure on the company s traditional physical goods business. GME and the industry s major game publishers continue to work together to develop the retailer s role in the marketing and selling of both physical and digital content. Planned declines in the company s sizable videogame retailing store base with a concurrent increase in the smartphone/mobile device/satellite retailing business represents a change in focus from GME s background. There is no assurance that the company s acumen in the former will transfer to the latter. Other risk factors associated with investments in GameStop include changes or delays in publishers release schedules; relationships with publishers, distributors, and hardware manufacturers; lease terms for stores; cyclicality of industry sales; macroeconomic risk; dependence on holiday sales; ability to negotiate and integrate acquisitions; and geopolitical risks to international operations. Hilliard Lyons Equity Research 5 Entertainment & Leisure
Exhibit 3 Consolidated Statements of Income (figures in millions except per share data and percentages) 2014 2015 2016 2017 2018E Net Sales $9,296.0 $9,363.8 $8,607.9 $9,224.6 $8,675.0 Cost of Sales 6,520.1 6,445.5 5,598.6 6,184.5 5,850.0 Gross Profit 2,775.9 2,918.3 3,009.3 3,040.1 2,825.0 Nonrecurring Items 2.2 4.6 33.8 390.8 0.0 SG&A Exp. 2,001.0 2,108.9 2,252.6 2,363.0 2,204.0 EBITDA 772.7 804.8 722.9 286.3 621.0 Deprec. & Amort. 154.4 156.6 165.2 150.7 150.0 Operating Income 618.3 648.2 557.7 135.6 471.0 Interest Inc. & Other (Exp.), net 10.0 23.0 53.0 55.3 54.0 Income Before Taxes 608.3 625.2 504.7 80.3 417.0 Provision for Taxes 215.2 222.4 151.5 45.6 112.6 Net Income, GAAP 393.1 402.8 353.2 34.7 304.4 Non-GAAP Adjustments, net (0.7) 12.8 37.7 303.9 0.0 Net Income, Adjusted $392.4 $415.6 $390.9 $338.6 $304.4 Diluted EPS, Adjusted $3.47 $3.90 $3.77 $3.34 $3.00 Wtd. Diluted Shares Outst. 113.2 106.7 103.8 101.5 101.5 As a % of Net Sales Gross Profit 29.86% 31.17% 34.96% 32.96% 32.56% SG&A Exp. 21.53% 22.52% 26.17% 25.62% 25.41% EBITDA, exclud nonrecur. items 8.34% 8.64% 8.79% 7.34% 7.16% Operating Income 6.65% 6.92% 6.48% 1.47% 5.43% Net Income, Adjusted 4.22% 4.44% 4.54% 3.67% 3.51% Tax Rate 35.38% 35.57% 30.02% 56.79% 27.00% Yr-Over-Yr Growth Rates: Net Sales 2.8% 0.7% (8.1%) 7.2% (6.0%) Gross Profit 4.3% 5.1% 3.1% 1.0% (7.1%) EBITDA 0.5% 4.2% (10.2%) (60.4%) 116.9% Operating Income 4.8% (14.0%) (75.7%) 247.3% Net Income, Adjusted 10.2% 5.9% (5.9%) (13.4%) (10.1%) Diluted EPS, Adjusted 15.3% 12.4% (3.3%) (11.4%) (10.1%) Store Count: Videogame Stores, period end 6,211 6,064 5,927 5,796 5,650 Yr-over-yr store count % chg. (5.9%) (2.4%) (2.3%) (2.2%) (2.5%) Comparable-store sales % chg. 3.4% 4.3% (11.0%) 5.8% (5.0%) Tech-based stores, period end 484 1,036 1,522 1,377 1,400 Collectibles stores, period end 86 103 135 Source: GameStop Corp. and Hilliard Lyons estimates Note: Fiscal year ends on Saturday closest to Jan. 31 Additional information is available upon request. Prices of other stocks mentioned: Apple Inc. - AAPL - $166.68 - Buy AT&T Inc. - T - $35.10 - Buy Nintendo Co. Ltd - NTDOY - $55.11 Hilliard Lyons Equity Research 6 Entertainment & Leisure
Analyst Certification I, Jeffrey S. Thomison, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. Important Disclosures Hilliard Lyons' analysts receive bonus compensation based on Hilliard Lyons profitability. They do not receive direct payments from investment banking activity. Investment Ratings Buy - We believe the stock has significant total return potential in the coming 12 months. Long-term Buy - We believe the stock is an above average holding in its sector, and expect solid returns to be realized over a longer time frame than our Buy rated issues, typically 2-3 years. Neutral - We believe the stock is an average holding in its sector, is currently fully valued, and may be used as a source of funds if better opportunities arise. Underperform - We believe the stock is vulnerable to a price set back in the next 12 months. Suitability Ratings 1 - A large cap, core holding with a solid history 2 - A historically secure company which could be cyclical, has a shorter history than a "1" or is subject to event driven setbacks 3 - An above average risk/reward ratio could be due to small size, lack of product diversity, sporadic earnings or high leverage 4 - Speculative, due to small size, inconsistent profitability, erratic revenue, volatility, low trading volume or a narrow customer or product base Hilliard Lyons Investment Banking Recommended Issues Provided in Past 12 Mo. # of % of Rating Stocks Covered Stocks Covered Banking No Banking Buy 37 33% 11% 89% Hold/Neutral 69 62% 9% 91% Sell 5 5% 0% 100% As of 8 March 2018 Hilliard Lyons Equity Research 7 Entertainment & Leisure
Note: Price targets accompanying Buy ratings reflect a one year time period while price targets accompanying Long-term Buy ratings reflect a two to three year time period. Other Disclosures Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of J.J.B. Hilliard, W.L. Lyons, LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here. J.J.B. Hilliard, W.L. Lyons, LLC is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as placement agent in private transactions. The information herein has been obtained from sources we believe to be reliable but is not guaranteed and does not purport to be a complete statement of all material factors. This is for informational purposes and is not a solicitation of orders to purchase or sell securities. Reproduction is forbidden unless authorized. All rights reserved. Hilliard Lyons Equity Research 8 Entertainment & Leisure