GMEB Gamestop Corp

GameStop Corp. (NYSE:GME)(NYSE:GME.B), the world's largest video game and entertainment software retailer, today reported sales and earnings for the second quarter ended July 29, 2006. Company sales increased 132% to $963.3 million, when compared with $415.9 million in sales from the prior year quarter, with comparable store sales increasing 3.9%. New video game software increased 8% over the prior year quarter, with NEW SUPER MARIO BROS. from Nintendo and NCAA FOOTBALL '07 from Electronic Arts topping the list of best-selling new titles for the quarter. GameStop's net earnings for the second quarter of 2006 were $3.2 million, including merger-related expenses of $2.6 million ($1.6 million, net of tax benefits). Diluted earnings per share were $0.04, including merger-related expenses of $0.02 per diluted share, exceeding previously released guidance. "The outstanding execution by our store associates in the second quarter accelerated the adoption of Nintendo's new DS Lite hand-held system and the sell through of Microsoft's Xbox 360 console," indicated R. Richard Fontaine, Chairman and Chief Executive Officer of GameStop Corp. "Our 56% increase in hardware sales during the quarter is particularly notable as the performance and momentum clearly positions GameStop as the major launch partner for Sony and Nintendo with the release later this year of their PlayStation 3 and Wii consoles." "A major milestone of the quarter was completing the integration of GameStop and Electronics Boutique. It is a testimony to the hard work and partnership of all our team members that, with the recently completed installation of a singular, unified POS system, we have completed the integration of two sizable companies, and did so on time and without any disruptions to our business nor deterioration in customer service," concluded Chairman Fontaine. "Without a doubt, we are excited about the new platform launches and the exceptional franchise titles being released in the upcoming months," indicated Daniel DeMatteo, Vice Chairman and Chief Operating Officer of GameStop Corp. "In fact, when you look at the range of new titles, starting with next week's release of MADDEN NFL '07 from Electronic Arts, and continuing with FINAL FANTASY XII by Square Enix, LEGEND OF ZELDA: TWILIGHT PRINCESS from Nintendo and GEARS OF WAR by Microsoft, we are looking at one of the best lineups in years for all platforms." Guidance Update For the third quarter of fiscal 2006, comparable store sales are projected to range from +4.0% to +6.0%. Diluted earnings per share for the third quarter are expected to range from $0.20 to $0.22. Full year fiscal 2006 diluted earnings per share are now expected to range from $1.94 to $2.04. We continue to believe that full year fiscal 2006 comparable store sales will increase between 7% and 9%, and total sales will increase between 15% and 17%, on a pro forma basis. Note that guidance includes projected stock-based compensation expenses of $0.17 per diluted share for fiscal 2006. Note that guidance does not include merger costs related to the business combination, which we project could range from $0.03 to $0.04 per diluted share for fiscal 2006. Second quarter fiscal 2005 pro forma statements of operations have been provided in Schedule III as if the acquisition of Electronics Boutique Holding Corp. took place at the beginning of fiscal 2005. In addition, the pro forma statements of operations include stock-based compensation expense as if SFAS No. 123R was implemented at the beginning of fiscal 2005. Conference Call and Webcast Information A conference call with GameStop Corp.'s management is scheduled for August 17, 2006 at 11:00 AM EDT to discuss the second quarter sales and earnings results. The conference call will be simulcast on the Internet at (http://www.gamestop.com/investor-relations/). The conference call will be archived on the website until August 31, 2006. About GameStop Corp. Headquartered in Grapevine, TX, GameStop Corp. (NYSE:GME) (NYSE:GME.B) is the world's largest video game and entertainment software retailer. The company operates 4,592 retail stores across the United States and in fourteen countries worldwide. The company also owns two e-commerce sites, GameStop.com and EBgames.com, and Game Informer(R) magazine, a leading multi-platform video game publication. GameStop Corp. sells new and used video game software, hardware and accessories for next generation video game systems from Sony, Nintendo, and Microsoft. In addition, the company sells PC entertainment software, related accessories and other merchandise. General information on GameStop Corp. can be obtained at the company's corporate website: http://www.gamestop.com/investor-relations/. Safe Harbor This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, the outlook for the third quarter of fiscal 2006 and beyond, future financial and operating results, projected store openings, the company's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of GameStop's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the risk that the cost savings and other synergies from the combination with Electronics Boutique may not be fully realized or may take longer to realize than expected; the inability to obtain sufficient quantities of product to meet consumer demand; the timing of the release of the next generation consoles, including Sony's PlayStation 3 and Nintendo's Wii, and related video game titles; and economic and other events that could reduce or impact consumer demand. Additional factors that could cause GameStop's results to differ materially from those described in the forward-looking statements can be found in GameStop's Annual Report on Form 10-K for the fiscal year ended January 28, 2006 filed with the SEC and available at the SEC's Internet site at http://www.sec.gov. -0- *T GameStop Corp. Statements of Operations (in thousands, except per share data) 13 weeks 13 weeks ended ended July 29, 2006 July 30, 2005 --------------- ------------- Sales $963,347 $415,930 Cost of sales 664,083 287,775 --------------- ------------- Gross profit 299,264 128,155 Selling, general and administrative expenses 239,251 104,311 Depreciation and amortization 26,328 10,654 Stock-based compensation 5,360 -- Merger expenses 2,572 -- --------------- ------------- Operating earnings 25,753 13,190 Interest expense, net 20,209 144 Debt extinguishment expense 191 -- --------------- ------------- Earnings before income tax expense 5,353 13,046 Income tax expense 2,176 5,143 --------------- ------------- Net earnings $3,177 $7,903 =============== ============= Earnings per common share: Basic $0.04 $0.15 Diluted $0.04 $0.14 Weighted average common shares outstanding: Basic 75,074 51,646 Diluted 78,829 56,508 Percentage of Sales: -------------------- Sales 100.0% 100.0% Cost of sales 68.9% 69.2% --------------- ------------- Gross profit 31.1% 30.8% SG&A expenses 24.8% 25.1% Depreciation and amortization 2.7% 2.5% Stock-based compensation 0.6% -- Merger expenses 0.3% -- --------------- ------------- Operating earnings 2.7% 3.2% Interest expense, net 2.1% 0.1% Debt extinguishment expense -- -- --------------- ------------- Earnings before income tax expense 0.6% 3.1% Income tax expense 0.3% 1.2% --------------- ------------- Net earnings 0.3% 1.9% =============== ============= GameStop Corp. Statements of Operations (in thousands, except per share data) 26 weeks 26 weeks ended ended July 29, 2006 July 30, 2005 -------------- -------------- Sales $2,003,374 $890,657 Cost of sales 1,402,076 636,465 -------------- -------------- Gross profit 601,298 254,192 Selling, general and administrative expenses 470,721 203,297 Depreciation and amortization 52,260 20,848 Stock-based compensation 10,550 -- Merger expenses 3,898 -- -------------- -------------- Operating earnings 63,869 30,047 Interest expense, net 39,538 227 Debt extinguishment expense 191 -- -------------- -------------- Earnings before income tax expense 24,140 29,820 Income tax expense 9,262 11,591 -------------- -------------- Net earnings $14,878 $18,229 ============== ============== Earnings per common share: Basic $0.20 $0.36 Diluted $0.19 $0.33 Weighted average common shares outstanding: Basic 74,233 51,323 Diluted 78,650 55,499 Percentage of Sales: -------------------- Sales 100.0% 100.0% Cost of sales 70.0% 71.5% -------------- -------------- Gross profit 30.0% 28.5% SG&A expenses 23.5% 22.8% Depreciation and amortization 2.6% 2.3% Stock-based compensation 0.5% -- Merger expenses 0.2% -- -------------- -------------- Operating earnings 3.2% 3.4% Interest expense, net 2.0% 0.1% Debt extinguishment expense -- -- -------------- -------------- Earnings before income tax expense 1.2% 3.3% Income tax expense 0.5% 1.3% -------------- -------------- Net earnings 0.7% 2.0% ============== ============== GameStop Corp. Balance Sheets (in thousands, except per share data) July 29, July 30, 2006 2005 ----------- --------- ASSETS: Current assets: Cash and cash equivalents $218,726 $98,954 Receivables, net 28,596 9,418 Merchandise inventories 574,067 257,396 Prepaid expenses and other current assets 37,374 24,302 Prepaid taxes 79,395 12,534 Deferred taxes 46,349 5,435 ----------- --------- Total current assets 984,507 408,039 ----------- --------- Property and equipment: Land 10,073 2,000 Buildings & leasehold improvements 280,723 120,145 Fixtures and equipment 375,736 210,942 ----------- --------- 666,532 333,087 Less accumulated depreciation and amortization 235,299 144,353 ----------- --------- Net property and equipment 431,233 188,734 ----------- --------- Goodwill, net 1,392,926 320,888 Other noncurrent assets 46,570 3,011 ----------- --------- Total assets $2,855,236 $920,672 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $366,221 166,070 Accrued liabilities 281,969 103,706 Note payable, current portion 12,173 12,173 ----------- --------- Total current liabilities 660,363 281,949 Deferred taxes 12,196 19,898 Other long-term liabilities 38,868 15,503 Notes payable, long-term portion 12,685 24,347 Senior floating and fixed rate notes payable, net of discount 935,431 -- ----------- --------- Total liabilities 1,659,543 341,697 ----------- --------- Stockholders' equity: Preferred stock - authorized 5,000 shares; no shares issued or outstanding -- -- Class A common stock - $.001 par value; authorized 300,000 shares; 45,245 and 25,163 shares issued, respectively 45 25 Class B common stock - $.001 par value; authorized 100,000 shares; 29,902 shares issued and outstanding 30 30 Additional paid-in-capital 983,562 519,113 Accumulated other comprehensive income (loss) 4,773 (43) Retained earnings 207,283 109,850 Treasury stock, at cost 0 and 3,263 shares, respectively -- (50,000) ----------- --------- Total stockholders' equity 1,195,693 578,975 ----------- --------- Total liabilities and stockholders' equity $2,855,236 $920,672 =========== ========= Schedule I GameStop Corp. Sales Mix 13 Weeks Ended 13 Weeks Ended July 29, 2006 July 30, 2005 ------------------- ------------------- Percent Percent Sales of Total Sales of Total ---------- -------- -------- ---------- Sales (in millions): New video game hardware $157.5 16.4% $51.6 12.4% New video game software 330.7 34.3% 139.8 33.6% Used video game products 308.7 32.0% 153.2 36.8% Other 166.4 17.3% 71.3 17.2% ---------- -------- -------- ---------- Total $963.3 100.0% $415.9 100.0% ========== ======== ======== ========== Schedule II GameStop Corp. Gross Profit Mix 13 Weeks Ended 13 Weeks Ended July 29, 2006 July 30, 2005 ------------------- ------------------- Gross Gross Gross Profit Gross Profit Profit Percent Profit Percent ---------- -------- -------- ---------- Gross Profit (in millions): New video game hardware $14.0 8.9% $2.5 4.8% New video game software 72.7 22.0% 28.9 20.7% Used video game products 153.9 49.9% 70.8 46.2% Other 58.7 35.3% 26.0 36.5% ---------- -------- Total $299.3 31.1% $128.2 30.8% ========== ======== Schedule III GAMESTOP CORP. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) For the Historical Historical thirteen GameStop Electronics weeks ended Corp. Boutique GameStop July 30, July 30, July 30, Pro Forma Corp 2005 2005 (a) 2005 (a) Adjustments Pro Forma ---------- ---------- ----------- --------- Sales $415,930 $446,511 $-- $862,441 Cost of sales 287,775 311,592 -- 599,367 ---------- ---------- ----------- --------- Gross profit 128,155 134,919 -- 263,074 Selling, general and admin. expenses 104,311 120,090 -- 224,401 Depreciation and amortization 10,654 11,573 427 (c) 22,654 Merger- related expenses -- 1,400 (1,400)(b) -- Stock based compensation -- -- 2,785 (j) 2,785 ---------- ---------- ----------- --------- Operating earnings 13,190 1,856 (1,812) 13,234 Interest expense, net 144 (675) 20,424 (d), (e) 19,893 Merger- related interest expense -- -- -- -- ---------- ---------- ----------- --------- Earnings (loss) before income tax expense (benefit) 13,046 2,531 (22,236) (6,659) Income tax expense (benefit) 5,143 911 (8,502)(f) (2,448) ---------- ---------- ----------- --------- Net earnings (loss) $7,903 $1,620 $(13,734) $(4,211) ========== ========== =========== ========= Net earnings (loss) per common share--basic $0.15 (h) $0.06 $ $(0.06)(i) ========== ========== =========== ========= Weighted average shares of common stock--basic 51,646 25,096 (4,867)(g) 71,875 ========== ========== =========== ========= Net earnings (loss) per common share-- diluted $0.14 (h) $0.06 $ $(0.06)(i) ========== ========== =========== ========= Weighted average shares of common stock-- diluted 56,508 25,467 (10,100)(g), (k) 71,875 ========== ========== =========== ========== GAMESTOP CORP. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share data) (a) Certain reclassifications have been made to the historical presentation of GameStop and EB to conform to the presentation used in the unaudited pro forma condensed consolidated statement of operations. (b) To give effect to the exclusion of certain expenses of $1,400 which are directly attributable to the merger and are believed to be of a one-time or short-term nature. (c) To give effect to the intangible asset amortization and depreciation on the property and equipment adjustment based on the preliminary allocation of the purchase price over estimated useful lives. (d) To give effect to the interest expense incurred related to the receipt of $941,472 resulting from issuance of $650,000 in senior notes, at an interest rate of 8.0% and $300,000 in senior floating rate notes at an interest rate of LIBOR plus 3.875%. The senior notes were issued at a discount of $8,528 and interest expense includes the amortization of this discount over seven years. (e) To give effect to the amortization of deferred financing fees relating to the $400 million revolving credit facility, the senior floating rate notes and the senior notes over five, six and seven years to match the terms, respectively. (f) Represents the aggregate pro forma effective income tax effect of Notes (b), (c), (d) and (e) above. (g) The pro forma earnings per share have been adjusted to reflect the issuance of 20,229 shares of GameStop Class A common stock to EB common stockholders as if they were issued on January 30, 2005 and to reflect the elimination of the outstanding shares of Electronics Boutique. (h) The holders of Historical GameStop Class A and Class B common stock generally had identical rights, except that the holders of Historical GameStop Class A common stock were entitled to one vote per share and the holders of Historical GameStop Class B common stock were entitled to ten votes per share on all matters to be voted on by stockholders. Earnings per common share amounts represent per share amounts for both classes of common stock. (i) The holders of GameStop Class A and Class B common stock generally have identical rights, except that the holders of GameStop Class A common stock are entitled to one vote per share and the holders of GameStop Class B common stock are entitled to ten votes per share on all matters to be voted on by stockholders. Earnings per common share amounts represent per share amounts for both classes of common stock. (j) To give effect to the stock-based compensation expense as if SFAS 123R had been adopted as of January 30, 2005. (k) To remove the effect of securities that are anti-dilutive in nature due to the pro forma loss in the 13 weeks ended July 30, 2005. *T