Financial Analysis Report on GameStop Corp

Background Information

GameStop Corp. is an American multichannel retailer of video game, wireless services, and consumer electronics. The company was established in 1984, in Texas where its headquarters are currently located. The company has about 6690 retail stores in different parts of the world that include Europe, New Zealand, Australia, Canada, and the United States. The company operates under the electronic stores industry with its major competitors including MetroPCS, GoPhone, Boost, AT & T, Apple, T-Mobile, Sprint, Verizon, JB HIFi stores, K-Mart, Auchan, FNAC, Saturn, Media Markt, Best Buy Co., Inc., Amazon.com, Inc., Target Corporation, and Wal-Mart Stores among others. The company has more than 45,000 employees around the world and revenue of $9296.0 million as recorded on January 2015 (New.GameStop, 2015). This paper focuses on evaluating the company’s financial strength with intention of establishing its ability to have a long-term partnership with High Technology Corporation

Financial Analysis

Description 2013 2014 2015
Revenue 8886.7 9039.5 9296
Net Income -269.7 354.2 393.1
Gross Profit 2651.5 2661.1 2783
Total Assets 3872.2 4091.4 4246.3
Total Liabilities 1585.9 1840 2178.6
Total Equity 2286.3 2251.4 2067.7
Working Capital 295.6 223.6 422.8

 

The financial analysis focuses on the company’s financial report as provided in three most recent years that include 2013, 2014, and 2015. According to this report, the company demonstrates a positive trend based on its revenue. The company has been experiencing steady increase on its revenue from 2013 to 2015. The company gross profit also demonstrates the same trend as well as the company’s assets, and liabilities. The company net income also demonstrates a positive trend. However, the company recorded huge losses in 2013 not due to low revenue or high operation cost but because it incurred unexceptional cost as a result of impaired good will. Consequently, the company had to use its net income to pay for the impaired goodwill. The company also recorded a decrease in working capital in 2014 though the value was almost doubled in the 2015, which was a great improvement. However based on the analysis, the company demonstrates great ability to continue growing financially.

  GameStop Corp Amazon.com Inc Best Buy Co., Inc Wal-Mart Stores Inc. Electronic Stores Industry
Market Cap: 4.65B 203.83B 11.82B 231.43B 11.98B
Employees: 18,000 154,100 125,000 2,200,000 125.00K
Qtrly Rev Growth (yoy): 0.03 0.15 -0.01 0 0.3
Revenue (ttm): 9.36B 91.96B 40.26B 485.52B 40.26B
Gross Margin (ttm): 0.3 0.3 0.22 0.25 0.24
EBITDA (ttm): 806.00M 4.87B 2.14B 35.88B 2.14B
Operating Margin (ttm): 0.07 0 0.04 0.05 0.02
Net Income (ttm): 398.90M -406.00M 814.00M 15.84B N/A
EPS (ttm): 3.58 -0.88 2.55 4.98 2.55
P/E (ttm): 12.18 N/A 13.16 14.44 13.34
PEG (5 yr expected): 0.81 31.61 1.07 3.46 1.07

 

Compared to its competitors that include Amazon, Best Buy, Wal-Mart, and the entire electronic store industry, GameStop Corp is still a young company which experiences high competition in the market (Yahoo Finance, 2015). It is dominated by its competitors in the market even after managing market capitalization of 4.65 billion, which is quite low as compared to the industry average market capitalization of 11.98 billion. It has the least level of revenue as compared to its competitors. Its revenue is far much below the average revenue of the industry. However, despite of this, the company revenue growth is much higher than that of Wal-Mart that experienced no growth at all and Best Buy that experienced a negative revenue growth. It is only Amazon that registers higher growth than GameStop although the average revenue growth rate in the industry is much higher than in all other companies compared in this case. This is a clear indication that other competing companies are also growing at a very high rate and there may be a very stiff completion in this industry in the future. The company also registered a higher net income as compared to Amazon which experienced losses in the year (Morningstar, 2015a). However, Mal-Mart and Best Buy are far much ahead of GameStop based on the net income. However, generally, the company is trending positively and thus; it still has a high ability to remain in the market and to experience growth in the future.

Financial Ratios

Below is the company’s financial ratio as provided by Morningstar.com and Returns.com

Description 2013 2014 2015
Profitability      
Return on Assets % -6.01 8.61 9.43
Return on Equity % -10.12 15.61 18.2
Return on Invested Capital -10.02 15.74 17.14
Interest Coverage -9.69 102.57 57.85
Liquidity      
Current ratio 1.17 1.13 1.26
Quick ratio 0.41 0.36 0.44
Financial Leverage 1.81 1.82 2.05
Debt/Equity 0 0 0.17
Efficiency Ratio      
Days sales outstanding 2.83 3.26 4.03
Days Inventory 67.58 67.82 55.6
Payable Period 49.03 47.35 44.77
       
Earnings per share (USD) -2.3 2.99 3.4
Divided s (USD) 0.8 1.1 1.3
       
Payout ratio % 0 32.5 39.4

 

Ratios are used to evaluate the company’s financial health, the company’s operation efficiency and profitability. He profitability ratios that include return on assets, return of equity and return on invested capital measures the company’s ability to convert assets, capital and equity into revenue. Based on the above data the company has a very low ability of profiting from its capital equity and assets. However, the trend shows that the company’s ability to convert capital, assets and equity into revenue is increasing. The company has a high liquidity with high current ratio which implies that it can easily manage to cater for its current expenses using current assets. The level of efficiency seems to be at average but without a defined trend. The table below compares the financial ratio performance of the GameStop and its competitors as well as the entire industry in the last financial year.

Description GameStop Best Buy Amazon Wal-Mart (Industry)
Profitability          
Return on Assets % 9.43 8.43 -0.51 8.01 3.12
Return on Equity % 18.2 27.46 -2.35 20.76 7.91
Return on Invested Capital 17.14 21.43 -0.55 13.63 5.91
Interest Coverage 57.85 16.41 0.47 11.08 6.16
Liquidity          
Current ratio 1.26 1.51 1.12 0.97 1.64
Quick ratio 0.44 0.66 0.82 0.24 0.9
Financial Leverage 2.05 3.05 5.07 2.5  
Debt/Equity 0.17 0.32 1.16 0.54 0.71
Efficiency Ratio          
Days sales outstanding 4.03 11.71 21.29 5.06  
Days Inventory 55.6 61.53 45.69 44.99  
Payable Period 44.77 59.21 91.88 37.9  
Earnings Per Share 3.4 3.49 -0.52 5.05  
Dividends 1.3 0.72 0 1.92  
Payout Ratio % 39.4 24.2 0 40.2  

 

GameStop has a high ability of converting its assets into revenue as compared to its competitors. Its return on equity is also more than that of Amazon, return on capital is high than that of Walmart and Amazon and its interest cover is high than all its evaluated competitors. Its level of profitability is far above the industry average.  GameStop also has a large value of quick ratio as compared to Wal-Mart and Amazon, large quick ratio as compared to Walmart, and a lower debt to equity ratio. This shows that the company does not depend on debts as much as it depends on equity and thus, it has a more health financial situation as compared to its competitors.  The company can be considered to have an average efficiency as compared to its competitors. It has the second best payout ratios, and dividends. It can therefore be concluded that GameStop has a more health financial situation as compared to Amazon and Wal-Mart. It also has above average industrial performance in terms of financial ratio.

Return on Equity

According to DuPont analysis, return on equity is impacted by three elements that include operating efficiency evaluated by profit margin, efficiency of asset use evaluated by total asset turnover and financial leverage evaluated by equity multiplier. In this regard ROE is computed as: Profit margin (Profit/sale) x total Asset Turnover (Sales/Assets) x equity Multiplier (Assets/equity). The ROE using the DuPont analysis for the last three years is provided in the table below

Description 2013 2014 2015
profit -269.7 354.2 393.1
Sales /revenue 8886.7 9039.5 9296
profit Margin (Profit /revenue) -0.0303 0.0392 0.043
sales 8886.7 9039.5 9296
Assets 3872.2 4091.4 4246.3
Total Asset Turnover   (Sales/Assets) 2.295 2.209 2.189
Asset 3872.2 4091.4 4246.3
Equity 2286.3 2251.4 2067.7
Equity Multiplier (Asset/Equity) 1.694 1.817 2.054
ROE (profit margin x total asset turnover x equity multiplier) -0.118 0.157 0.1933

 

Based on this calculation, the company’s return on equity is quite low though it demonstrates a positive trend and thus, it can be concluded that the company is improving its efficiency in utilizing equity to generate net profit. The company experienced a negative return on equity in 2013. However, it has since then been able to rectify and demonstrate a positive growth. However, more need to be done to enhance the rate of return from the equity since based on the previous analysis it is the major source of capital for the company (Morningstar, 2015c).

The table below represents the DuPont analysis of the GameStop competitors in last financial Year. Base on this analysis GameStop takes the third position in its ability to convert equity into net profit. Best Buy is the best company, followed by the Wal-Mart while Amazon takes the last position. However, the gap between the first three is not very big and thus, GameStop still has a high ability to compete with the top competitors in the market.

Description Amazon Wal-Mart Best Buy GameStop
profit -406 16363 1233 393.1
Sales /revenue 88988 485651 40339 9296
profit Margin 0.00456 0.0337 0.0306 0.043
sales 88988 485651 40339 9296
Assets 54505 203706 11729 4246.3
Total Asset Turnover 1.633 2.384 3.439 2.189
Asset 54505 203706 11729 4246.3
Equity 10741 81394 4995 2067.7
Equity Multiplier 5.0745 2.503 2.348 2.054
ROE -0.038 0.201 0.247 0.1933

Other Areas of Financial Analysis

Apart from financial ratios, there are a number of financial aspects that can be used to evaluate the financial situation of accompany. This includes Beta value, stock growth and capital spending. The table below shows the condition of GameStop Company based on the three factors for the last three years.

  2013 2014 2015
Outstanding stock (million) 126 118 113
Beta Value  – 0.56 0.87
Capital spending 81 130 976
Earnings per share (USD) -2.3 2.99 3.4
Divided s (USD) 0.8 1.1 1.3
Payout ratio % 0 32.5 39.4

 

Based on the above table the company stock has been demonstrating a positive growth with steady positive increase in the earnings per share, divided and the payout ratio. Increase in the rate of divided and earnings per share are a clear indication of positive growth in the company.  The company’s outstanding stock has been going down though the returns involved are still high. The company capital spending has also been increasing with time, with 2015 signifying a great of spending. The company’s beta value is also increasing. Although the beta value remains below 1 and thus showing minimal risks, the value is increasing steadily which is a clear indication that the company is tending to increase its investment and operation risk, as well as its returns (CNN Money, 2015).

Description GameStop Best Buy Amazon Wal-Mart
Outstanding stock (million) 113 354 462 3243
Beta Value 0.87 3.29 1.48 0.41
Capital spending 976 1580 8265 41086
Earnings per share (USD) 3.4 3.49 -0.52 5.05
Divided s (USD) 1.3 0.72 0 1.92
Payout ratio % 39.4 24.2 0 40.2

 

The GameStop Company is experiencing stiff competition from its competitors. Best Buy and Amazon Company have a very high beta which is far beyond 1. This implies the two companies are working at a higher risk and thus they stand a higher chance of having greater return as compared to GameStop (Morningstar, 2015d). However, GameStop has better dividends as compared to best buy and Amazon. In addition, the company has better earning per share as compared to Amazon. All the three competitors have high outstanding stock as compared to GameStop. However, despite of all, the company shows that it still have a position in the market.

Stock Performance

The graph above represents the GameStop stock exchange market performance for the past one year. The company’s shares have been trading between $32 and $45. The worst performance was experienced between September and January where major decline in price was recorded at 19.91%. However, this later changed to form a positive trend where the trend has turned positive. The company shares are currently gaining back their initial value, the value they had before the September drop. Currently, GameStop shares are trading between $42 and $45 which is a great sign of growth and expansion of the company’s market in the electronic store industry. Compared to one of its most great competitor Best Buy whose performance is demonstrated in the graph below, GameStop company demonstrates a better performance in the in the market for the last 1 year. According to this graph the company share is experiencing a drop in its share prices. In the last one year, the prices of the company’s share have been changing between $30 and $40. However, the current prices are currently at $34 and thus, it is performing much worse than the GameStop in the market and thus, GameStop can be considered to be in a better financial chance of gaining more market shares in the future (CNN Money.

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