The following aspects of Gamestop’s business were not thoroughly researched for this paper and should be to complete the analysis:
Leasing versus Ownership:
Gamestop uses a combination of leasing and owning for its retail locations and distribution centers. It is possible that the renewing leases could help or hurt Gamestop in some significant way or that the financing environment might affect how these leases are paid. Lease accounting is discussed in the 10K on page 35 and page 49.
Tax Rates:
The model uses a standard 35% corporate tax rate. Gamestop has some tax credits that can be used in the future to potentially help its earnings, but has also had some historical years with effective tax rates above 35%. These were not used in the model and should be to get a more accurate price.
Choosing a Different WACC:
After attempting to use comparable companies to Gamestop to select the model’s Weighted Average Cost of Capital, I set this value to 8% as it seemed the most reasonable. A more rigorous model for selecting the WACC involving different comparison companies or industry information could be used.
Better Methods for Modeling Future Sales
Despite all the discussion about what might affect Gamestop’s sales in the future, the model uses a simple method for growing and declining sales. The first couple projected years grow based on previous sales growth rates due to the launch of new game hardware. Then the last few years show steady sales decline based on the reasons given in the thesis.
A better, potentially more accurate method for estimating future revenue would include factors such as projected consumer spending patterns, more precise adjustments for the potential hardware and software sales with a new gaming generation (which could be determined using patterns from past generation launches), and other sector and economic factors.
Investigate the Increase in Selling, General, and Administrative Expenses:
Why has SG&A increased by $400 million in five years? This is the primary question which came to mind when building the model.
On page 38, Gamestop notes: “Selling, general and administrative expenses decreased by $6.2 million, or 0.3%, from $1,842.1 million in fiscal 2011 to $1,835.9 million in fiscal 2012. This decrease was primarily due to changes in foreign exchange rates which had the effect of decreasing expenses by $26.7 million when compared to fiscal 2011 offset partially by expenses for the 53rd week in fiscal 2012. Selling, general and administrative expenses as a percentage of sales increased from 19.3% in the fiscal 2011 to 20.7% in fiscal 2012. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to deleveraging of fixed costs as a result of the decrease in comparable store sales. Included in selling, general and administrative expenses are $19.6 million and $18.8 million in stock-based compensation expense for fiscal 2012 and fiscal 2011, respectively.“
This does not explain the $400 million increase from 2008 to 2011. Although sales grew by approximately $700 million from 2008 to 2011, sales dropped in fiscal 2012 back to 2008 levels, while SG&A remained stagnant, presumably for the fixed cost/same-store sales decrease reasons listed above. If revenue remains around the 2008 levels, it would be worth investigating if Gamestop could bring its SG&A costs down as well.
Next: Conclusion
Previous: Valuing The Stock
Logan Frederick 