GameStop (GME) currently has net cash of $225 million backed up by annual operating cash flows of $591M in FY2011. Unlike recent B&M failures such as Borders, Blockbuster, and struggling B&M stores such as RadioShack (RSH) and Macy’s (M), GameStop has a low debt ratio of 5.5% debt to assets and 8.4% debt to equity.
During the past four years, GME has eliminated $612.17M in debt while still increasing worldwide store growth. Under the current $500M share and debt repurchase program, GME is projected to end FY2012 with no long-term debt outstanding. GME has showcased financial discipline by keeping its growth in-line with available cash and has not issued debt since 2006.
Corresponding to the earnings miss reaction, GME is trading at a P/E of 7, P/B of 1.08, and P/S of 0.32 (market cap of $2.75B).
Return to Shareholders
Over the past two years, GME’s shares outstanding have been reduced from 163.8M to 141.9M, which represents a 13.7% reduction (8.62% reduction from Q2-11 to Q2-12). This has allowed GameStop’s EPS to stay relatively strong. As of Q2-12, GME still has roughly $348M available in its February 2011 authorized share and debt repurchase program.
Reports have suggested that GME’s sales and total profits would drop in Q2-11. However, it doesn’t take a Goldman Sachs analyst to realize that hardware sales would slump in Q2 as well as the fact that new releases were extremely weak. The Xbox 360 starts at $99 on GME, which doesn’t add much to sales or leave much left for profit.
The second best-selling game of Q2-11 was listed as NCAA 2012, which came out on July 12. GME’s quarter ended July 31, so this only accounts for 19 days of shelf sales. The best-selling game was L.A. Noire, which although receiving decent reviews, is nothing to compare to a Halo, Call of Duty, or Bioshock type release.
Used Sales Strong
The y/y drop in new game sales and hardware sales were disappointing; however, most investors seem to be missing the important fact that GME’s high margin business (used game sales) continued to grow and the profit margin increased by 250 basis points. Used video games now make up 36.3% of GME’s sales (31.4% last year), but account for 46.2% of gross profit.
Online Revenue Growth
With the recent acquisitions of Kongregate and Impulse Driven, GME is ramping up its focus on digital sales. GME only recently announced completion of its Impulse integration on July 13 (18 operating days of full integration in the quarter), but digital sales still witnessed a 69% increase y/y.
With full Impulse and Kongregate integration, expect Q3-12 sales to receive strong contributions from the online/digital sector. With the extremely low trading P/E, I firmly believe that analysts are over-reacting to what should have been expected results, and that GME provides solid long-term value.