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

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Financial Analysis

Description 201320142015
Revenue8886.79039.59296
Net Income-269.7354.2393.1
Gross Profit2651.52661.12783
Total Assets3872.24091.44246.3
Total Liabilities1585.918402178.6
Total Equity2286.32251.42067.7
Working Capital295.6223.6422.8

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.

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 GameStop CorpAmazon.com IncBest Buy Co., IncWal-Mart Stores Inc.Electronic Stores Industry
Market Cap:4.65B203.83B11.82B231.43B11.98B
Employees:18,000154,100125,0002,200,000125.00K
Qtrly Rev Growth (yoy):0.030.15-0.0100.3
Revenue (ttm):9.36B91.96B40.26B485.52B40.26B
Gross Margin (ttm):0.30.30.220.250.24
EBITDA (ttm):806.00M4.87B2.14B35.88B2.14B
Operating Margin (ttm):0.0700.040.050.02
Net Income (ttm):398.90M-406.00M814.00M15.84BN/A
EPS (ttm):3.58-0.882.554.982.55
P/E (ttm):12.18N/A13.1614.4413.34
PEG (5 yr expected):0.8131.611.073.461.07

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.

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Financial Ratios

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

Description 201320142015
Profitability   
Return on Assets %-6.018.619.43
Return on Equity %-10.1215.6118.2
Return on Invested Capital-10.0215.7417.14
Interest Coverage-9.69102.5757.85
Liquidity   
Current ratio1.171.131.26
Quick ratio0.410.360.44
Financial Leverage1.811.822.05
Debt/Equity000.17
Efficiency Ratio   
Days sales outstanding2.833.264.03
Days Inventory67.5867.8255.6
Payable Period49.0347.3544.77
    
Earnings per share (USD)-2.32.993.4
Divided s (USD)0.81.11.3
    
Payout ratio %032.539.4

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.

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Description GameStopBest BuyAmazon Wal-Mart(Industry)
Profitability     
Return on Assets %9.438.43-0.518.013.12
Return on Equity %18.227.46-2.3520.767.91
Return on Invested Capital17.1421.43-0.5513.635.91
Interest Coverage57.8516.410.4711.086.16
Liquidity     
Current ratio1.261.511.120.971.64
Quick ratio0.440.660.820.240.9
Financial Leverage2.053.055.072.5 
Debt/Equity0.170.321.160.540.71
Efficiency Ratio     
Days sales outstanding4.0311.7121.295.06 
Days Inventory55.661.5345.6944.99 
Payable Period44.7759.2191.8837.9 
Earnings Per Share3.43.49-0.525.05 
Dividends1.30.7201.92 
Payout Ratio %39.424.2040.2 

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.

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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

Description201320142015
profit-269.7354.2393.1
Sales /revenue8886.79039.59296
profit Margin (Profit /revenue)-0.03030.03920.043
sales8886.79039.59296
Assets3872.24091.44246.3
Total Asset Turnover   (Sales/Assets)2.2952.2092.189
Asset3872.24091.44246.3
Equity2286.32251.42067.7
Equity Multiplier (Asset/Equity) 1.6941.8172.054
ROE (profit margin x total asset turnover x equity multiplier)-0.1180.1570.1933

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 AmazonWal-MartBest BuyGameStop
profit-406163631233393.1
Sales /revenue88988485651403399296
profit Margin0.004560.03370.03060.043
sales88988485651403399296
Assets54505203706117294246.3
Total Asset Turnover 1.6332.3843.4392.189
Asset54505203706117294246.3
Equity107418139449952067.7
Equity Multiplier 5.07452.5032.3482.054
ROE-0.0380.2010.2470.1933
     

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.

 201320142015
Outstanding stock (million)126118113
Beta Value –0.560.87
Capital spending81130976
Earnings per share (USD)-2.32.993.4
Divided s (USD)0.81.11.3
Payout ratio %032.539.4

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).

DescriptionGameStopBest BuyAmazon Wal-Mart
Outstanding stock (million)1133544623243
Beta Value0.873.291.480.41
Capital spending9761580826541086
Earnings per share (USD)3.43.49-0.525.05
Divided s (USD)1.30.7201.92
Payout ratio %39.424.2040.2

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.

Recommendation

Based on this analysis GameStop company is an above average company in the industry. The above analysis also demonstrates that the company has a positive financial trend and that it is able to take care of its operation with the current liabilities. The analysis also demonstrates that the company does not depend too much on debts. Its major source of capital is equity, an aspect that shows that the company has the ability of growing even further and investing more in the future using debts since it does not currently have major debt expenses. Although the company has a low ability of converting assets, equity and capital into revenue, its ability is increasing steadily and if this continues, the company may be in a better position to get more profit from its assets, equity and capital. The company revenue has also been growing steadily as well as its capital and assets. In this regard I would recommend the HTC Company to consider developing a partnership with the GameStop Corporation. Although the company seems much smaller than its competitors, it is trying to fight to get its position in the market. The company is current doing better than the Best Buy which among the most excelling company in the industry at the moment. The company has a chance of growing further given a chance and thus, the HTC Company should take GameStop Company as its partner. The company’s analysis shows that the company financial trend is positive and thus the company has the ability to sustain the HTC demands and requirements. Therefore, it should be considered for the option.        

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