Report template gme v5

CFA Student Research This report is published for educational purposes only by

students competing in the CFA Institute Research

Challenge.

Ticker: NYSE: GME Recommendation: HOLD

Price: $23.72 Price Target: $25.11

Earnings/Share*

Apr. Jul. Oct. Jan. Year P/E Ratio

2009A $0.42 $0.23 $0.31 $1.29 $2.25 8.8x

2010A 0.48 0.26 0.36 1.56 2.66 7.9x

2011E 0.56 0.22 0.39 1.92 3.09 N/A

2012E 0.53 0.29 0.41 1.70 2.93 8.6x

* On a diluted basis

GameStop Needs To “PowerUp” To Digital Realm

Hold Rating On GameStop’s $25.11 Projected Stock Price: Per our financial projections and

valuation, we believe $25.11 is a fair 12-month target price for the stock. Based on our analysis,

several industry reports and Company guidance, our projections include three scenarios (Best,

Normal, Worst) concerning the Company’s used video products market share, used video products

gross margin, and digital market share growth rate. We used the Discounted cash flow analysis

(DCF), comparable companies, and comparable transactions to arrive at our target price.

Shift In Electronic Gaming Industry To Digital Space: Technological advances in the internet

have increased its speed and bandwidth, making it easier for customers to download games directly.

This is bound to have a two-fold effect on GameStop as it will decrease new video game sales and

consequently cause a decline in used video game trade-ins.

Competition Intensifies In Used Video Game Market: The competition in the ever-so-popular

used video game space may intensify to unprecedented levels. Although GameStop controls nearly

80% of the used video game market share, we firmly believe that trade-in programs of competitors

such as Best Buy will gain popularity and potentially diminish GameStop’s dominance. Large

players such as Best Buy and Wal-Mart have the resources to channelize marketing efforts to

capture additional share.

Need For Additional Acquisitions To Further Succeed In a Digital Market: GameStop has

actively pursued strategic acquisitions to increase its presence in the digital market. With the

acquisition of Spawn Labs, Impulse, and Kongregate, the Company has positioned itself well in this

market. Management’s optimistic projections unveil a 50% CAGR in digital sales, reaching $1.5B

by 2014. We firmly believe that GameStop will have to acquire additional companies to meet their

sales targets and that the growth in this segment lies in the successful integration of future

acquisitions.

Debt-free Balance Sheet Ameliorates GameStop’s Financial Position: In December 2011,

GameStop retired $125 million long term debt and established a debt-free balance sheet for 2012.

We believe the Company is poised to raise additional capital required to acquire companies in the

digital space. Further, the zero leverage also makes GameStop an attractive LBO candidate.

Source: Bloomberg, Yahoo!Finance

Source: Yahoo!Finance

*Represents the average closing stock price from Feb 1, 2012 to Feb 7, 2012

GameStop Corp.

February 7, 2012

Oleksandr Matviienko

Shiv Thukral

Abbie Fang

Xiao Wu

Computer and Electronics Retail

52 Week Price Range ($/Share) 18.34 - 28.66

Average Daily Volume 3,342,980

Beta 1.024

Dividend Yield Nil

Shares Outstanding (MM) 136.424

Market Capitalization (MM) 3,237.35

Institutional Holdings (%) 98.55

Insider Holdings (%) 1.35

Book Value per Share ($/Share) 21.71

Debt to Total Capital (%) 4.04

Return on Equity (%) 13.76

Market Profile

*All data is per last filing period. Current debt to capital = 0.

Holdings information is as on Feb 5, 2012

CFA Institute Research Challenge February 7, 2012

2

Investment Summary We initiate coverage on GameStop with a hold rating and a target price of $25.11, a 5.82% increase from its

current stock price. GameStop is the world’s largest video game and entertainment software retailer. The

Company, ranked 255 on the Fortune 500 annual listing of public companies, operates 6,627 retail outlets

across 17 countries. By retiring $125 million of long term debt in December 2011, the Company is now debt-

free. Further, the Company is likely to meet its FY 2011 EPS guidance after repurchasing 2 million shares of

common stock.

Shift In Electronic Gaming Industry To Digital Space GameStop is in the midst of a changing business environment as the industry is shifting away from consoles

and towards the digital market space. With the increased speed and bandwidth of the internet, it has become

very convenient for gamers to download digital content from their homes. Further, developers have created

online gateways where customers can download gaming content for a fee. As a result, GameStop’s new video

game sales may decline, causing a further decline in its used video game trade-ins.

Debt-free Balance Sheet Supports The Need For Additional Acquisitions in Digital Space

GameStop has made significant progress in the digital space. The Company acquired Spawn Labs, Impulse,

and Kongregate and positioned itself well in this segment. Management expects that digital sales will

increase by 50% CAGR to reach $1.5 B in 2014. We firmly believe that GameStop will have to acquire

additional companies to meet its sales targets and that the growth in this segment lies in the successful

integration of future acquisitions. Further, the debt-free balance sheet will help raise the requisite financing

on favorable terms. However, the zero leverage and steady cash flows may make GameStop also an attractive

LBO target.

Competition Intensifies In Video Game Market

Along with the transition to the digital space, the industry is also characterized by an increase in competition

levels, especially in the used products segment. GameStop operates in an industry where both suppliers and

buyers have significant bargaining power. In addition, there are a plethora of inexpensive substitutes

available for entertainment. Also, the presence of gigantic players such as Best Buy and Wal-Mart intensifies

the competition levels. At present, according to industry analysts, GameStop controls approximately 80% of

the used video products market. Even though the Company’s dominance is highly pronounced, we believe

that the trade-in programs of such players as Best Buy may potentially gain popularity, thereby depleting

GameStop’s share. Large players such as Target and Wal-Mart have ample resources at hand, and can

channelize targeted marketing efforts to capture additional used video product share.

Figure 1: GameStop Stock Price History Note: Peer Group Average represents average stock returns of peer companies selected for this analysis (see Peer analysis

section)

Source: Bloomberg & Yahoo!Finance


3

Estimated Stock Price

Pro

ba

bil

ity

Den

sity

$25.11

$28.87

$32.64

$21.34

$17.57

66%

95%

Figure 3: Price Probability

Distribution

Valuation We give GameStop a Hold Rating and forecast that stock price will be trading at $25.11 at the end of the next

12 months. In calculating this target price we used DCF method as a primary price determinant, and

comparable companies and transaction multiples analysis to define a range of possible prices. The multiples

approach also served as a means to check the accuracy of the DCF output.

DCF Method

For DCF valuation, free cash flow to firm was calculated and then discounted for 4Q2011 and FY2012-2015.

Additionally, we analyzed three scenarios: best-case, normal-case, and worst-case. Detailed explanations are

contained in Financial projections section. The price ranges for each of three scenarios were determined

using sensitivity (discount rate/terminal growth rate) tables. Normal-case DCF price was assumed to be the

base of our recommendation. Estimated WACC was 10.08%. Please, refer to Appendix 1 for WACC

calculation and Appendix 2 for the DCF model.

Comparable Companies Method

We used such metrics as EV/Sales, EV/EBITDA and P/E as a base for multiples approach in general.

Moreover, we used trailing and forward multiples to determine both current and expected market valuation

metrics. Peer analysis section describes companies which were selected as a base for this approach and

analyzes GameStop’s relative standing among its peers. Trailing max/min multiples for GameStop were

determined using average and median peers’ multiples. Please, refer to Appendix 3 for detailed data.

Combined with GameStop’s respective financial metrics, this analysis yielded the price range between $17

and $24. The relatively low valuation on EV/Sales can be explained by GameStop’s current relatively high

EV/Sales multiple. Please refer to Appendix 4 for details. Further, forward multiples analysis was done for

FY2011 and FY2012. Max/min multiples for GameStop were determined using average and median peers’

multiples. Combined with GameStop’s respective financial metrics, this analysis yielded the price range

between $16 and $24 for FY2011 and $15 and $23 for FY2012. Please refer to Appendix 5 and 6 for details.

Comparable Transactions Method

Four transactions within the last two years were selected as comparable. They involved companies which

were engaged in specialty electronics retail operations. Please, find the description of selected transactions as

well as target companies’ description in Appendix 7.

Max/min multiples for GameStop were determined using average and median comparable transaction

multiples. Combined with GameStop’s respective financial metrics, this yielded the price range between $28

and $36. It is worth noting that transaction multiples valuation, as a rule, gives higher price range because

valuation multiples include acquisition premium. This yielded higher results in comparison to comparable

companies’ method. Please refer to Appendix 8 for detailed results.

Valuation Results Reconciliation

Based on the analyses presented above, the given “football field” graph presents a reconciliation of valuation

results obtained by using different methods.

Figure 4: GameStop Valuation “Football Field”

Source: CFA University Team

15.00 20.00 25.00 30.00 35.00

Trans EV/Sales, EV/EBITDA combined

Trailing peers, EV/Sales

Trailing peers, EV/EBITDA

Trailing peers, P/E

FY2011 peers, EV/Sales

FY2011 peers, EV/EBITDA

FY2011 peers. P/E

FY2012 peers, EV/Sales

FY2012 peers. EV/EBITDA

FY2012 peers, P/E

DCF range

Current Price:

$24

DCF PRICE:

$25

GAMESTOP'S

VALUATION

FOOTBALL

FIELD

Figure 2: Valuation Methodology




4

Figure 5: Video Products

Markets Projections

Figure 6: GameStop’s Global

Market Share and Total Gross

Margin

Source: GameStop, EIU, Bloomberg, CFA

University Team

Risks to the Price Target

Further, we have conducted a risk analysis to our target price estimation. Please refer to Appendix 9 for

details.

Financial Projections We projected various line items on GameStop’s financial statements such as revenue, cost of goods sold,

other operating expenses, working capital accounts, capital expenditures, and other operating and non-

operating items. These projections were performed using historical data, trends, and various financial and

economic agencies such as Bloomberg, Reuters, NPD Group, and Economist Intelligence Unit (EIU). The

most important drivers for GameStop’s valuation model are described below.

Total Video Game and Products Market Dynamics We projected market for new video software and hardware, PC entertainment software, and other related

products separately for USA, Canada, Australia and Europe. These projections were based on historical

figures provided in GameStop’s 10-Ks, data on projected industry dynamics from NPD Group, and expected

household audio and video equipment nominal market demand growth from EIU.

We projected market dynamics for digital mobile, social, console, and PC games based on historical 2010

numbers for north-american market ($6 billion) and expected 2014 figure ($12 billions), as given in

GameStop’s 10-K. We extrapolated north-american digital market dynamics to market dynamics in Europe

and Australia to have separate projections for geographical regions GameStop operates in.

We projected used video products market dynamics separately for USA, Canada, Australia, and Europe. This

forecast was based on industry analysts data concerning used video product market in North America in 2010

and our analysis on potential market in Europe and Australia which was based on historical inter-relations

between market for new video software and hardware, PC entertainment software, and other related products

in North America, Europe and Australia. Further, the analysis included GameStop’s revenue from used video

products market from all geographical locations shares dynamics. We also used personal disposable income

(in PPP terms) expected growth rates from EIU to forecast used video product market dynamics. GameStop’s Market Share Dynamics

We forecast GameStop’s market share for each geographical market. The forecasts were based on historical

market shares dynamics and various statistical techniques used to extrapolate the historical performance into

the future (exponential smoothing and moving averages). Further, the analysis included our considerations of

general industry trends and anticipated dynamics such as entrance of new competitors into used video

products market, competition concentration in digital video market, Power-Up rewards program expansion

etc. We created three scenarios concerning GameStop’s used video product market share in FY2015 and

digital market share growth which eventually drove our revenue projections. The detailed analysis is given in

Scenario and Sensitivity analyses section. Please find detailed dynamics of GameStop’s market shares in

different markets according to different scenarios in Appendix 10.

Gross Profit Margin Dynamics We forecast gross profit margins separately for GameStop’s main products. The forecast was based on

historical data and used various statistical tools (exponential smoothing and moving averages) to extrapolate

expected future dynamics, while taking into account the seasonality of gross profit margins as well as

projected product mix shift towards digital content and anticipated increase in digital and used products

competition. We created three case scenarios concerning GameStop’s used video product margin in FY2015.

The detailed analysis is given in Scenario and Sensitivity analyses section. Please find detailed dynamics of

GameStop’s gross profit margins according to various scenarios in Appendix 11.

Other Operating Items

Such items as capital expenditures, acquisitions, working capital needs, depreciation and amortization, share

repurchases were taken into account when we created GameStop’s financial model. The capital expenditures

forecast was based on management’s projections for FY2011 and were adjusted to take into account the

projected depreciation and disposal rates. Further, these projections also included the anticipated EIU’s

Producer Price Index (PPI) projections going forward. Acquisitions were projected based on GameStop’s

average historical acquisition budget, adjusted for PPI index going further. The split of acquisition

expenditures between PPE and Intangibles (which depreciate and amortize, respectively), and goodwill, was

made according to historical split between these items from GameStop’s acquisition history. The projection

of capital and acquisition expenditures is consistent with anticipated digital market revenue and profit growth

rates. Further, they reflect both recent digital acquisitions trend and management’s strategy concerning an

operational shift into digital industry. The depreciation and amortization rate was forecast based on the

average useful life of assets in online retail/digital industry and the projected decrease in physical store count.

Working capital items were forecast based on the GameStop’s historical data as well as peer average figures,

Source: GameStop, EIU, CFA University

Team


5

Figure 7: Working Capital

Accounts

Figure 8: Sensitivity Analysis

Figure 10: Liquidity, Efficiency

& Leverage Analysis

Source: Bloomberg, CFA University Team

combined with projected revenue and cost of goods sold. As of January 2012, GameStop had approximately

$330 million remaining from announced earlier share repurchase program. We assumed this amount would

be spent evenly through FY2012-2015 on share repurchases. We forecast average share repurchase price

equal to our fair value price of $25.11. We forecast no dividend payments and terminal growth rate of 2.5%,

which is consistent with GameStop’s projected revenue growth rates and anticipated long-term US and global

GDP growth rates.

Scenario and sensitivity analyses We believe complete investment analysis should entail several scenarios dependent on key value drivers. One

of the most important value drivers for GameStop are: 1) the used video game market share projections; 2)

the projected digital market share growth rate; and 3) the projected used video game margins.

The best-case scenario is based

on management’s projections

concerning digital revenue

($1.5 billion in FY2014), from

which we have derived implicit

expected digital market share

growth rate. Further, the best-

case scenario incorporates

management comments

concerning the anticipated

strengths of used products

business. The Normal-case

scenario is based on industry

trends, EIU, NPD forecasts, and

different statistical methods used to derive key drivers. Worst-case scenarios represent depressed normal-case

projections, as well as some industry experts’ forecasts. Further, we conducted additional sensitivity analysis

across the aforementioned scenarios by varying 1) Weighted Average Cost of Capital and 2) Terminal

Growth Rate.

Therefore, based on the results of a given analysis we can determine the ultimate price range of DCF results

taking into account various scenarios and sensitivity factors: $19-$35. The lower range represents intersection

point of worst-case and normal-case share prices and upper range represents intersection of normal-case and

best-case share prices. Please refer to Appendix 12 for detailed results of the DCF valuation according to

different scenarios.

Financial Analysis Financial analysis is crucial in evaluating current financial position of GameStop, which will give a necessary

perspective on the company’s prospects and, therefore, build a base for a DCF analysis.

Balance Sheet & Financing

Historically, current assets represented around 43-45% of total assets. Merchandise inventories and cash

items were the major current assets representing 39-41% of total assets, while goodwill and net PP&E were

major long-term assets representing 49-51% of total assets. On the liabilities side, current liabilities were in

the order of 33-42% of total assets. Long-term liabilities, mainly in form of long-term borrowings,

represented 4-11% of total liabilities and equity. Finally, equity, mainly in form of additional paid-in capital

and retained earnings represented historically 55-57% of total assets. Main transformations, which occurred

with balance sheet structure, are stipulated by GameStop’s acquisitions. These acquisitions caused decrease

in cash by 22% and made goodwill the major item of the GameStop’s assets in 2010. Further, by redemption

of all of the long-term debt, accounts payable became a major item on a liabilities side in 2011. For detailed

balance sheet analysis please refer to Appendix 13.

Liquidity analysis: GameStop liquidity ratios are lower than its peer group average indicating a certain degree

of illiquidity. Moreover, historically, these ratios have been deteriorating.

Efficiency Analysis: GameStop is less efficient in managing its assets when compared to peer group averages.

However, the Company is more effective in managing its working capital needs than its peers. It takes

GameStop on average 2-3 days to collect its receivables and 58-79 days to sell off the inventory, by contrast,

peer average for collecting A/R is 12-13 days and for inventory is 83-97 days. This results in significantly

lower WC percentages for GameStop, which helps Company to conserve cash for its strategic needs.

Leverage Analysis: GameStop has historically and currently much less debt than its peers which makes the

Company a safer investment, as well as an attractive target for an LBO. This also helps GameStop to preserve

some cash for acquisitions or other strategic initiatives by not requiring to service any debt. Moreover,

current D/E is zero as the Company paid all of its outstanding debt in December 2011.

25.11 -1.0% -0.5% 0.0% 0.5% 1.0%

-1.0% 67.95 82.20 105.46 150.24 272.04

-0.5% 33.49 $ 35.96 $ 38.96 $ 42.71 47.50

0.0% 23.13 $ 24.06 $ 25.11 $ 26.31 27.69

0.5% 18.15 $ 18.61 $ 19.12 $ 19.67 20.28 1.0% 15.23 15.49 15.78 16.08 16.41

NORMAL CASE ANALYSIS

TERMINAL GROWTH RATE

DIS

CO

UN

T

RA

TE

Items 2010H 2011E 2012F 2013F 2014F 2015F

A/R days 2.5 2.5 2.5 2.5 2.5 2.5

Inventory

days60.8 64.6 68.5 72.3 77.1 80.0

A/P and

accruals

days

86.3 79.8 79.8 79.8 79.8 79.8

NWC as

% of

Sales

-2.85% -1.32% -0.56% 0.20% 1.15% 1.72%

Historical and Projected Working Capital Accounts

43.35 -1.0% -0.5% 0.0% 0.5% 1.0%

-1.0% 127.44 155.51 201.32 289.50 529.38

-0.5% 59.72 $ 64.58 $ 70.51 $ 77.89 87.33

0.0% 39.46 $ 41.29 $ 43.35 $ 45.71 48.42

0.5% 29.77 $ 30.68 $ 31.67 $ 32.76 33.96 1.0% 24.11 24.64 25.20 25.80 26.45

BEST CASE ANALYSIS


DIS

CO

UN

T

RA

TE

12.65 -1.0% -0.5% 0.0% 0.5% 1.0%

-1.0% 27.93 32.95 41.16 56.96 99.95

-0.5% 15.68 $ 16.55 $ 17.61 $ 18.94 20.63

0.0% 11.95 $ 12.28 $ 12.65 $ 13.07 13.56

0.5% 10.12 $ 10.28 $ 10.46 $ 10.66 10.87 1.0% 9.02 9.12 9.22 9.33 9.44

WORST CASE ANALYSIS


DIS

CO

UN

T

RA

TE

1.2 Liquidity analysis

2009 2010 3Q2011 2009 2010 3Q2011

Current ratio 1.28 1.23 1.06 1.70 1.63 1.64

Quick ratio 0.65 0.51 0.29 0.74 0.63 0.55

GameStop Peer Group Average

1.3. Efficiency analysis

2009 2010 3Q2011 2009 2010 3Q2011

Total Assets

turnover 1.92 1.89 1.84 2.38 2.44 2.33

A/R days 2.61 2.49 2.33 12.36 12.93 13.13

Inventory

days 58.50 60.81 78.87 85.89 83.64 97.25

A/P days 55.21 52.35 129.50 42.71 41.68 48.11

WC as % of

sales 5.2% 4.3% 1.4% 11% 11% 11%


1.4. Leverage analysis

2009 2010 3Q2011 2009 2010 3Q2011

Total Debt to

Equity 16.43% 8.60% 4.21% 61.15% 48.41% 55.14%

Peer Group AverageGameStop

Source: GameStop, CFA University Team


Scenario analysis

Scenario Description

DCF-derived

share price

Best-case

FY 2015 US used video products market share is 85% and used video

products gross margin is 13.5%, US digital market share CAGR growth rate

for FY2011-FY2015 is 35%, $43.35

Normal-case


products gross margin is 11.5%, US digital market share CAGR growth rate

for FY2011-FY2015 is 20%, $25.11

Worst-case


products gross margin is 10%, US digital market share CAGR growth rate

for FY2011-FY2015 is 5%, $12.65

S ource: GameS top, Bloomberg, Tulane CFA

Figure 9: Scenario Analysis



6

Figure 11: Profitability &

Solvency Analysis


Figure 12: Z-score Analysis


Figure 13: Cash Flow Analysis

Source: Bloomberg,Tulane CFA


Source: GameStop, EIU

Figure 14: Key Industry Data

Figure 15: Transforming Elecronic Gaming Industry

Source: GameStop, Bloomberg, CFA University Team

Earnings

Gross margin has been consistently improving for past three years, however, operating profit margin has been

consistently deteriorating primarily because of increased SG&A and depreciation margins. This, in turn, has

caused the net income margins to diminish. Sales growth was moderate 3-4% for past three years and was

enough to offset cost of sales growth (2-4%). However, the growth in sales was insufficient to offset

increased SG&A and DD&A, which resulted in a declining net income. FY2010, however, was an exception:

bottom line growth was 8%, primarily, due to slowdown in SG&A and DD&A margin growth. Earnings per

share, on other hand, demonstrated solid growth primarily due to aggressive share repurchases. Please, refer

to Appendix 14 for detailed calculations.

Profitability Analysis: GameStop’s profitability is generally similar to its peer group average. ROE is slightly

lesser than peer average, however, ROA is slightly higher than peer average. On the margin side, when

compared to its peers, GameStop has a weaker Gross margin, however, a stronger EBITDA and Net Income

margins.

Solvency Analysis: GameStop, as well as its peers, are solvent companies: EBIT is more than ten times higher

than interest expenses. Despite the fact that GameStop’s interest coverage was historically lower than its

peers, as of the third quarter of 2011 its solvency is stronger. Additionally, we calculated GameStop’s Z score

from 2007 to 2011 Q3. Although GameStop’s Z-score decreasing trend is observable , we believe it is not a

sign of near future financial problems, as it is still well above the 2.99 hurdle. Refer to Appendix 15 for

detailed data.

Cash Flows

GameStop generated positive net cash flows in 2006 and 2007 as the Electronic Gaming Industry expanded.

Although the cash flow from operations steadily grew from 2006 to 2009, the Company invested enormous

amounts to expand geographically by opening additional stores to satisfy the increasing demand, thereby

making the total cash flow negative in 2008. While competition intensified in the used products markets, the

stock price dipped and the Company issued a $500 M share repurchase program in 2010. Going forward, we

anticipate the Company to be cash flow positive with investments in the growing digital market space.

Industry Overview and Competitive Positioning The video game market has experienced a plunge in terms of growth rates in recent past. Per industry

estimates, the US video game industry dropped from $22 billion in 2008 to $18.5 billion in 2010. According

to industry analysts, the industry is experiencing a major shift towards online gaming and away from console

games. One of the major reasons for this shift is the end of the current cycle of the consoles with no new

consoles on the horizon till the end of 2012.

Another major trend in the industry is that

the developers believe that the ever-so-

popular Trade-In programs, now adopted

by most players, are eroding their profit

margins. In retaliation, the developers

have increasingly placed digitally

downloadable content for a fee to hinder

the use of such programs. In fact, some

developers have created online passes,

which require the consumer to pay a fee to

use any online content. Thus far, these

measures have not created much impact,

but as the industry tilts further towards

online gaming, it is bound to negatively

impact gaming providers. According to

industry sources, console internet access is

expected to penetrate the gaming industry

in the next few years, and the video

gaming industry may closely resemble the

PC gaming market where digital distributers retain a bulk of the market share. In fact, the next generation

Nintendo console is already focused on revamping social online gaming for consoles and it is expected that

Microsoft and Sony would follow suit.

Because online content causes hindrance in profits from used sales, developers have an enhanced incentive

for pushing for this change. Also, with the availability of inexpensive substitutes such as mobile applications,

free-to-play social media games, consumers are reluctant to pay upfront costs for online gaming merchandise.

2.2. Profitability analysis

2009 2010 3Q2011 2009 2010 3Q2011

ROIC* 13.43% 13.30% 12.34% 13.89% 12.83% 12.83%

ROA 7.97% 8.14% 7.84% 6.97% 6.15% 4.94%

ROE 15.02% 14.52% 13.76% 18.39% 15.14% 13.82%

Gross

margin 26.82% 26.79% 29.07% 33.33% 33.66% 33.02%

EBITDA

margin 8.81% 8.84% 6.83% 7.23% 7.79% 6.89%

NI

margin 4.16% 4.31% 2.77% 3.16% 2.73% 0.51%

*For GME was calculated taking into account existence of

operating leases


2.3 Solvency analysis

2009 2010 3Q2011 2009 2010 3Q2011

Interest

coverage 14.03 17.91 14.45 18.26 19.77 11.01



7

Figure 16: GameStop’s

Competitive Advantage


Figure 17: Future Consoles

Source: Bloomberg

Figure 18: Projected Industry

Trends

Source: EIU

Figure 19: Companies’ USA

Market Shares



Figure 20: Porter’s Five Forces

Consequently, industry experts estimate that developers may also shift away from traditional pricing

strategies supporting the sale of games at a discount and making up the difference through DLC sales. With

these drastic changes predicted, companies such as GameStop would benefit very little from their Trade-In

programs as customers would be encouraged to connect their consoles to the internet to access online content.

Because of this shift, GameStop will have to pursue an asset-light strategy and shift their sales from physical

stores to digital sales. This would reduce the Company’s Property, Plant & Equipment and will require it to

make and integrate acquisitions to maintain its brand equity.

Players in the Industry: Cost Leaders or Product Differentiators?

The level of competition in the electronic game industry has increased manifold over the past few years. With

large merchants such as Wal-Mart, Best Buy, Amazon and Target as key players, the players in the industry

have tilted towards being a cost-effective rather than distinguishing themselves with inimitable products from

exotic suppliers. The industry itself competes with other forms of entertainment such as movies, television,

theatre, sporting events, and family entertainment centers.

GameStop and other key players have adopted Trade-In programs that allow customers to purchase new

gaming inventory at discounts or through store credits when they return used games. These discounts and

store credits characterize the cost-effectiveness of the industry. However, GameStop strives to distinguish

itself with high quality human capital providing exceptional service to its customers.

Porter’s Five Forces Analysis Bargaining Power of Suppliers: the bargaining power of suppliers is determined by their number, penetration

in the market, and industry trends. There are numerous suppliers to the Gaming industry but it is dominated

by certain key players such as Microsoft, Nintendo, and Sony. Large suppliers such as the ones mentioned

control a majority of the market share, supplying a major chunk of the inventory to gaming companies. For

example, in 2011, 72% of the new games purchased by GameStop were supplied by just five developers,

indicating a high bargaining power of suppliers.

Further, the developers are increasingly generating downloadable content for a fee which forces customers to

purchase the digital inventory. This action is targeted to discourage the “trading-in” of used games for

discounts on new ones. Given that the used-game market constitutes a major portion of the players’ revenues,

we believe that the suppliers will continue to have a high bargaining power in the industry.

Bargaining Power of Buyer: the buyer of this industry has a plethora of choices to purchase gaming software

and hardware platforms. The players in the industry comprise of large and well-spread out retail chains such

as Wal-Mart, Best Buy, Amazon, and Target along with established brands such as GameStop, Game Fly etc.

Further, the buyer also has other avenues for entertainment such as mobile applications and free-to-play

social media games. Even though companies such as GameStop have reward programs that provide discounts

and store credits to customers, we believe that the buyer still has a moderately low switching cost. Given the

large number of choices of gaming vendors and moderately low switching costs, we believe that the buyers

pose a moderate-to-high bargaining power in this industry.

Availability of Substitutes: the gaming industry has numerous entertainment substitutes. The substitutes

include movies, television, theater, sporting events, and family entertainment centers. Even though the

substitutes are large in number and popular sources of entertainment and may be appealing to some video

store customers, we believe that a “gaming-geek” would continue to prefer games over other modes of

entertainment. Therefore, we believe that the threat of substitutes is moderate in this industry.

Threat of New Entrants: the gaming industry poses high barriers to entry for new players. The infrastructure

cost of developing stores is high and new

players will find it difficult to raise adequate

capital to fulfill this need. Further, most

gaming players rely on an established brand

identity built through channelized marketing

efforts. New Entrants may find it difficult to

penetrate a saturated market such as this one

to effectively compete in the industry. Further,

we also believe that players in this industry

depend heavily on strong relationships with

developers, which would be hard to nurture

for a new entrant. Given the reasons

mentioned above, we believe that the industry

poses a low threat of new entrants.

Competition: the video gaming industry in the

US has seen an unprecedented increase in the

level of competition in the past few years.

Players such as Wal-Mart, Best Buy lever

upon their existing operations to provide


8

Figure 21: Revenue Breakdown

Source: GameStop

Figure 22: GameStop’s History and Milestones


Figure 23: Map of Operations

Source: GameStop

Figure 24: GME’s Video Store

Count

Source: Bloomberg

gaming inventory to a wide range of customers. Companies such as Amazon have also been able to capture

additional market share through its well-known brand identity, thereby enhancing the level of competition in

the gaming market space. Even though, the above mentioned companies do not have well established trade-in

programs, experts believe that streamlined marketing efforts will enable these firms to create one, thereby

increasing the level of competition. Also, with the high bargaining power of suppliers, moderate-to-high

bargaining power of buyers, and availability of viable substitutes, the competitive dynamics governing this

industry tighten further. The Herfindahl index calculations yielded the result of approximately 0.09, which

indicates that the industry is unconcentrated, thus, relatively competitive.

SWOT Analysis

On the basis of the Company’s standing and the industry trends, we have conducted a SWOT analysis. For

details, please refer Appendix 16.

Business Description GameStop’s History

GameStop’s predecessor

Babbage’s

was set-up in 1996 and was

renamed GameStop in 1999, after

Barnes & Noble acquired it.

GameStop became an independent

company in 2002 when it spun off

from its parent company at the

time, Barnes & Noble. Since then,

the Company has made a series of

acquisitions and opened numerous

stores across various geographical

locations.

In 2003, the Company acquired

controlling interest in an Irish

Electronic games retailer, Games

world Group. In 2004, GameStop procured 420,000 square feet facility in Grapevine, Texas which currently

serves as their global headquarters. Please refer to the table on the right for GameStop’s further history.

GameStop’s Geography:

GameStop operates across 17 countries in the western hemisphere. The Company operates predominantly in

the United States, Canada, Australia and several European countries. Some of the European countries include

Italy, Ireland, France, Germany, Spain, and the Nordic. In the first three quarters of 2011, approximately 70%

of the firm’s revenues came from operations in the United States. Revenue from Europe accounted for 18%,

while revenues from Australia and Canada were 6% and 5.3% respectively.

GameStop Operations & Strategy

GameStop is the world’s largest video game and entertainment software retailer. The Company, ranked 255

on the Fortune 500 annual listing of public companies, operates 6,627 retail outlets worldwide. The firm

operates these outlets under the names GameStop, EB Games, and Micromania. GameStop’s operations can

be broadly split into 4 categories: New Video Game Software, Used Video Products, Video Game Hardware

Platforms, Video Game Accessories such as digital, PC Entertainment Software, and Game Informer

magazine. Please find a detailed description of the Company’s main products in Appendix 17. Further, the

company also has established E-Commerce platforms through different websites across countries.

Customer Profile and Acquisition Strategy GameStop caters to a wide range of customers across the globe. From teenagers and young adults to middle-

aged and elderly folks, the firm’s customers represent interest from hi-fi fighting games to low-key Sudoku.

Game Informer, the largest video game publication in the US, has more than 4 million paid subscribers.

The Company has attracted a large pool of customers through a plethora of marketing initiatives such as

loyalty programs, print, broadcast, and social media. GameStop launched the PowerUp rewards loyalty

program in 2010 which allows the customers the ability to register for a free or paid membership. The

membership provides customers to redeem points for discounts or additional merchandize as well as a

subscription to the Game Informer. Through this program, the Company has added approximately 15.5

million customers since October 2010. Further, the Australian version of the PowerUp program, called EB

World program, was launched in September 2011 and has attracted an additional 100,000 members.


9

Figure 25: GameStop’s

Suppliers

Source: GameStop

Figure 26: GameStop’s Key

Digital Acquisitions

Source: GameStop

Figure 27: CFA Team Use of

Peer Analysis


Figure 28: Peer Analysis


Supplier Profile

GameStop has a vast number of suppliers but the purchases its makes is not evenly distributed. In fact, the

Company depends heavily on a handful of suppliers for the procurement of majority of its merchandise. In

2011, the Company purchased approximately 72% of its inventory from five suppliers: Microsoft, Nintendo,

Sony, Activision, and Electronic Arts.

Recent Developments

GameStop has been very active in making its financial statements look attractive. During the recent holiday

season, the Company retired $125 million long term debt, thereby establishing a debt-free balance sheet for

2012. Further, GameStop repurchased 2 million shares at an average price of $22.38 per share with 329.8

million remaining in its authorization. This allowed the Company to keep its FY2011 EPS guidance

unchanged after lowering same store sales guidance.

GameStop recently launched three android based gaming tablets in more than 200 stores. The tablets are

Acer's 7-inch ICONIA, the 10-inch Asus Eee Pad transformer, and the Samsung 10-inch Galaxy tab. They

come with 7 free games, Kongregate arcade, digital Game Informer, and a web application that provides

product advice and a list of games available with the android marketplace. As the Android sales are projected

to rapidly grow to $116 million by 2015, per industry reports, we believe the Company will be much

benefitted using this platform. The firm plans to exploit this opportunity to position itself as a key player in

the US Android tablet market. Further, in September 2011, GameStop launched iOS device trade-ins,

whereby gamers can obtain cash or in-store credits for their used iPads, iPhones, and iPods.

GameStop has made a series of strategic acquisitions to expand its presence in foreign markets and enhance

its competitiveness. GameStop merged with EB games in 2005 which allowed GameStop to enhance its

presence in the UK and Ireland. In 2008, GameStop acquired Micromania, a leading video game retailer in

France. In 2010, the Company acquired Kongregate and strengthened its digital platform and enhanced its

commitment to become the gaming aggregator of choice. In 2011, GameStop acquired Spawn Labs to

increase the spectrum of its digital game products and service offerings. Further, the Company acquired

Impulse to provide a digital distribution platform to quickly locate and download games through the internet.

Therefore, the Company’s strategy to acquire complementary firms serves as a unique methodology to

continuous growth. Please refer for an exhaustive list of acquisitions to Appendix 18.

Peer Analysis GameStop operates in an industry that is mature and highly fragmented. Its competitors range from large-cap

companies like Wal Mart ($207 billion) and Target ($34 billion) to micro-cap companies like hhgregg ($361

million) and Game

Group ($160

million). To

conduct the peer

analysis we chose

companies which

have

similar to

GameStop’s

operations,

business model,

revenue structure,

and online

operations.

GameStop’s relative valuation is mostly superior to its peers as it has the highest EV/Sales and EV/

EBITDA multiples. Its P/E is also in the upper range. Combined with low debt levels it can be inferred that

market perceives GameStop as an industry leader. For detailed description of a peer companies please refer to

Appendix 19.

Investment Risks GameStop is subject to a tremendous amount of risk which can be classified into Operational, Strategic, and

Financial risks, which may potentially tarnish its growth and sustainability. Key risks are detailed below.

Operations Risk Enhanced dependence on few suppliers: the Company critically depends on few vendors for adequate and

timely development of software and hardware products. Further, GameStop’s sales are heavily correlated

with the timeliness of delivery of gaming inventory. If the vendors fail to provide quality hardware and

software on time, it could severely impact GameStop’s sales and brand image. Also, GameStop is heavily

dependent on a few suppliers. In 2011, 72% of the purchases made by the Company came from Microsoft,

% of Total

Purchase

1 Microsoft 18%

2 Nintendo 16%

3 Sony 16%

4 Activision 12%

5 Electronic Arts 10%

Total 72%

S. No. Supplier Name

Peer Analysis

Company Ticker Market cap Net debt P/E P/BV EV/Sales EV/EBITDA D/E ROIC Gross margin

GameStop Corp GME 3,717.78 -317.9 8.70 1.15 0.35 4.10 4.21% 12.34% 29.07%

Best Buy Co, Inc. BBY 9,285.63 -115 7.86 1.59 0.19 3.12 35.71% 16.40% 24.33%

RadioShack Corp RSH 1,160.12 -1.3 9.01 1.45 0.26 3.64 83.35% n/a 42.83%

Bic Camera, Inc. 3048 982.01 564.4 7.79 1.02 0.21 n/a 98.32% n/a 24.68%

GEO Holdings Corp 2681 655.64 164.52 4.90 1.04 0.26 2.62 74.72% 13.18% 44.11%

hhgregg, Inc. HGG 361.15 31.79 8.19 1.24 0.18 3.50 11.68% n/a 28.56%

Village Vanguard Co Ltd 2769 160.62 37.67 5.52 0.59 0.30 3.02 34.97% 8.92% 42.33%

Game Group PLC GMG 159.88 149.54 n/a 0.35 0.12 3.78 47.22% n/a 24.33%


10

Figure 29: Investment Risks

Source: GameStop

Figure 30: Projected Currency

Fluctuations

Source: EIU

Source: Bloomberg

Figure 31: GameStop’s ROIC

and ROE Performance

Nintendo, Sony, Activision, and Electronic Arts. Because the Company procures most of its inventory from

such few suppliers, GameStop may not be able to obtain favorable terms on negotiated contracts, which can

negatively impact the firm’s financial position.

Further, because the Company has operations in 17 countries across the world, its vendors also carry the

burden of the poor economic conditions that prevail. If the vendors are unable to provide marketing support,

it could have a negative impact on GameStop’s earnings.

Intensified Competition in the Gaming Industry: the industry is flooded with numerous competitors which has

intensified the rivalry among all players in gaming industry space. As pressure intensifies, GameStop may

reduce prices and increase capital spending, which will reduce margins and profitability. Further, trade-in

programs for other players are expected to expand and gain on GameStop’s program.

Necessity to Effectively Manage Stores: with widespread operations, effective store management becomes

critical. If the Company fails to manage stores well, it can adversely affect its sales and profitability. Further,

if the Company is unable to renew leases for stores on competitive terms, its cost structure is bound to

increase. Also, the Company’s success depends upon its continued ability to attract, motivate, and retain

talented human capital. Failure to retain key personnel and attract talent can potentially damage the smooth

business operations.

Strategic Risks Industry Shift & Technological changes: the electronic game industry is witnessing a major shift from

hardware consoles to sophisticated software platforms and digital online gaming. Although the Company has

made a few acquisitions to enter the digital space, it is highly uncertain that it will be able to keep pace with

the changing trends of this highly competitive industry. Failure to adapt to technological advances may

render GameStop’s existing business model obsolete.

Further, with the changing industry trends, the Company is exposed to lose out on the used video game

markets. As more and more developers publish downloadable content and charge a fee, GameStop’s used

video game revenues are bound to diminish. As the exchange of used games drive revenues for new gaming

products (through store credits), the Company may also lose out on sales of new video games.

Acquisitions, Investments, and Competing in a New Market: GameStop has made and may make investments

and strategic acquisitions to expand into the digital, social media, browser, and mobile gaming market space.

The Company acknowledges that it may have to liquidate a portion of its ownership or raise debt-capital to

finance future acquisitions. If GameStop is unable to successfully integrate its acquisitions and capitalize on

its investments, it will be unable to adapt to the shift in the industry towards digital media.

Further, as the industry evolves to the digital media, mobile, and browser gaming spaces, the Company has

had to alter its strategy to meet consumer expectations. Although the Company has seen success in its recent

android venture, there is no guarantee that future strategies and their execution would be as successful. Also,

the company aspires to close stores that are not meeting its profitability hurdles. If the Company is unable to

transfer customers to nearby stores, the sales may drop substantially, leaving the company in a poor financial

condition.

Financial Risks Foreign Currency Risk: the Company uses forward exchange contracts, foreign currency options and

currency swaps to mitigate currency risks related to intercompany loans and foreign currency assets and

liabilities. The foreign currency contracts are not hedges and therefore the changes in the fair value is

recognized in the earnings. In FY 2010, the Company recognized a loss of $7.1 million due to these

derivative instruments. Although we encourage the use of financial derivatives to manage currency risk, the

fluctuations caused in their fair value can potentially impact GameStop’s bottom line.

Potential changes in Global Tax Rate: because the Company operates across several countries, it is subject to

different tax rates and varied tax-accounting policies. If these rates were to change in an unfavorable

direction, GameStop may have to bear a significant financial impact.

Management Background & Corporate Governance We firmly believe GameStop’s biggest intangible resource is its vast and talented human capital. Please refer

Appendix 20 for a snapshot of some of the members of GameStop’s management team.

Corporate Social Responsibility GameStop is a socially responsible organization. The Company strongly believes that the communities it

serves forms an integral part of its organizational culture. The firm chooses to support organizations whose

goals align with the Company’s desire to effectively serve the community. GameStop and it’s non-profit

partner, Make-A-Wish foundation, work together to provide shopping sprees to children across the US. The

process is well established as the children, their families, and their wish granters visit the nearest GameStop

stores to purchase gaming inventory. GameStop takes pride in supporting the foundation and makes

continuous efforts to makes the children’s dreams come true!


11

Appendices Appendix 1. WACC Calculations

Source: Indicated above

Appendix 2. DCF Calculations


Item Value Description, Sources

Risk-free rate 2.00% Average YTM of 10-year US government bonds for January 2012, source: Federal Reserve

Equity beta 1.024 GME's monthly returns for past 5 years were regressed on S&P 500, source: Bloomberg

Market risk premium 6.72% Arithmetic average of MRP between 1926-2010, source: Ibbotson

Size premium 1.20% Mid-cap company, source: Ibbotson

Cost of equity 10.08% Risk-free rate + adjusted beta*Market risk premium + Specific risk premium

Cost of debt

Pre-tax cost of debt 5.50% Determined using ADamodaran credit rating calculation sheet combined with our assumptions

Tax rate 34.30% Average historical tax rate

After-tax cost of debt 3.61% Pre-tax cost of debt * (1-tax rate)

Weighted average cost of capital ("WACC")

Share of Equity 100.00% Based on management guidance

Share of Debt - 1-Share of Equity

WACC 10.08% % Equity * CAPM + % Debt * After-tax cost of debt

WACC Calculations

Capital Asset Pricing Model ("CAPM")

DCF 2010H 1-3Q 2011H 4Q 2011E 2011E 2012F 2013F 2014F 2015F TV

Sales USD $9,473,700.00 $5,971,900.00 $3,605,812.91 $9,577,712.91 $9,829,232.08 $10,119,922.09 $10,457,970.44 $10,856,269.63

COGS USD 6,936,100.00 4,233,900.00 2,761,661.51 6,995,561.51 7,196,718.00 7,426,504.82 7,692,098.71 8,004,327.60

EBIT USD 662,600.00 267,400.00 402,375.71 669,775.71 601,082.35 533,398.01 464,246.64 461,171.91

EBIT % 6.99% 4.48% 11.16% 6.99% 6.12% 5.27% 4.44% 4.25%

EBIAT USD 433,771.61 176,333.65 264,378.66 440,072.29 394,937.71 350,466.11 305,030.60 303,010.36 310,585.62

Corrections USD

CAPEX USD -240,100.00 -162,800.00 -114,800.00 -277,600.00 -282,603.75 -289,103.64 -296,331.23 -304,035.84 -380,791.57

DD&A USD 176,800.00 142,100.00 51,076.22 193,176.22 235,631.03 277,713.75 322,977.08 371,503.97 380,791.57

Delta NWC USD -123,200.00 -58,900.00 -84,312.26 -143,212.26 -71,309.22 -75,274.20 -100,555.41 -66,305.81 -67,963.46

FCFF USD 247,271.61 96,733.65 116,342.61 212,436.25 276,655.77 263,802.01 231,121.04 304,172.68 242,622.16

Discount rate % 10.08% 10.08% 10.08% 10.08% 10.08% 10.08%

Period years 0.13 1.13 2.13 3.13 4.13

Factor for the whole period 0.99 0.90 0.82 0.74 0.67

Discounted FCFF USD 114,954.14 248,320.22 215,098.30 171,192.56 204,669.03

PV of TV USD 2,153,376

Terminal Growth rate % 2.5%

Enterprise Value USD 3,107,610

EBITDA multiple 4.03

Sales multiple 0.32

Net Debt USD (317,900)

Cash, equivalents, S-T inv USD 442,600

Total Debt USD 124,700

Equity Value USD 3,425,510

# of shares 136,424

Price Per Share USD 25.11$


12

Trading Peers Analysis, As Of Latest Historical Filling Period

Company M Cap Net debt TEV Revenue, LTM EBITDA, LTM Net income, LTM TEV/Revenue TEV/EBITDA P/E

Best Buy Co, Inc. 9285.63 -115 9170.63 50642 3081 1118 0.18 2.98 8.31

RadioShack Corp 1160.12 -1.3 1158.82 4404.8 318.6 117.3 0.26 3.64 9.89

Bic Camera, Inc. 982.01 564.4 1546.41 7504.08 290.12 110.91 0.21 5.33 8.85

GEO Holdings Corp 655.64 164.52 820.16 3187.8 311.8 126.2 0.26 2.63 5.20

hhgregg, Inc. 361.15 31.79 392.94 2210.81 112.19 46.81 0.18 3.50 7.72

Village Vanguard Co Ltd 160.62 37.67 198.29 497.79 50.53 22.27 0.40 3.92 7.21

Game Group PLC 159.88 149.54 309.42 2491.59 79.49 n/a 0.12 3.89 n/a

Min 0.12 2.63 5.20

Max 0.40 5.33 9.89

Average 0.23 3.70 7.86

Median 0.21 3.64 8.01

Standard deviation 0.09 0.86 1.60

Appendix 3. Trading Peers Trailing Multipes Analysis, As Of Latest Filling Period

Source: Bloomberg Appendix 4. Target Price Determination On Basis Of Trading Peers Trailing Multipes Analysis


Appendix 5. Trading Peers Forward Multiples Analysis

Source: Bloomberg

Trading Peers Forward Analysis

TEV/Revenue TEV/EBITDA P/E TEV/Revenue TEV/EBITDA P/E

Best Buy Co, Inc. 0.16 2.64 6.83 0.16 2.66 6.20

RadioShack Corp 0.22 3.17 8.40 0.21 2.90 7.02

Bic Camera, Inc. n/a n/a n/a n/a n/a n/a

GEO Holdings Corp n/a n/a n/a n/a n/a n/a

hhgregg, Inc. 0.22 4.64 10.40 0.20 4.22 9.35

Village Vanguard Co Ltd 0.28 2.77 4.66 0.26 n/a 4.13

Game Group PLC 0.08 5.18 n/a 0.08 3.33 12.79

Min 0.08 2.64 4.66 0.08 2.66 4.13

Max 0.28 5.18 10.40 0.26 4.22 12.79

Average 0.19 3.68 7.57 0.18 3.28 7.90

Median 0.22 3.17 7.62 0.20 3.12 7.02

Standard deviation 0.08 1.16 2.43 0.07 0.69 3.31

CompanyFY2011 FY2012

Trailing Comparable Peers Valuation

GME Financial

data

Revenue Average

Multiple

Revenue Median

Multiple

EBITDA Average

Multiple

EBITDA Median

Multiple

P/E Average

Multiple

P/E Median

MultipleTEV min TEV max Net debt P min P max

$ 9,664,658 0.23 0.21 1,991,653.04 2,219,816.74 -317,900.00 16.93$ 18.60$

$ 771,554 3.70 3.64 2,806,315.78 2,854,044.68 -317,900.00 22.90$ 23.25$

$ 402,977 7.86 8.01 3,168,255.90 3,228,007.81 0.00 23.22$ 23.66$


13

Appendix 6. Target Price Determination On Basis Of Trading Peers Forward Multipes Analysis


Appendix 7. Comparable Transactions Analysis and Acquired Companies Description


Acquired Companies Description

Source: Bloomberg

Appendix 8. Target Price Determination On Basis Of Comparable Tramsactions Multipes Analysis


Target Companies Description

Company Description

Culture Convenience Club Co. Ltd.

Operations included sales and rental of videos, DVDs, CDs, books, game software and other entertainment content

TSUTAYA stores. Also operated online information distribution service

Soft Map Co. Ltd.

Operated retail stores specialized in computers, software, digital products and related supplies based in Tokyo

metropolitan area. Also traded second-hand products and an online business.

Warehouse Co. Ltd.

Provided leisure related services. Rental division operated 24-hour DVD and CD rental stores in Tokyo, Saitama and Chiba

Prefectures. Amusement Facilities division operated 12 game centers, karaoke facilities, and pool halls

Sumiya Co. Ltd. Operations included retail of A V software and consumer electronics. Also involved in selling furniture

Comparable Transactions Analysis

Date of

Acquisition Target Acquirer Deal Value

Announced

premium

Target's Net

Debt

TEV, Minority

Perspective

Target LTM

Revenue

Target LTM

EBITDA

Target LTM

Net income TEV/Revenue TEV/EBITDA P/E

2/3/2011

Culture Convenience

Club Co Ltd MM Holdings Co Ltd 1250.8 27.9% 383.412 1,285.24 1989.13 232.63 61.14 0.65 5.52 14.75

10/14/2009 Sofmap Co Ltd Bic Camera Inc 60.38 -6.54% 38.6688 103.00 1018.71 8.09 0.30 0.10 excl 215.14

5/14/2010 Warehouse Co Ltd Geo Holdings Corp 57.39 18.6% 25.8476 72.56 107.072 21.05 -18.21 0.68 3.45 n/a

11/5/2009 Sumiya Co Ltd

Culture Convenience Club

Co Ltd 5.16 6.58% 28.5277 33.35 103.335 -6.05 -18.45 0.32 n/a n/a

Min 0.10 3.45 Excl

Max 0.68 5.52 Excl

Average 0.44 4.49 Excl

Median 0.48 4.49 Excl

Standard

deviation 0.28 1.47 Excl

Comparable Transactions Valuation

GME Financial

data

Revenue average

multiple

Revenue median

multiple

EBITDA average

multiple

EBITDA median

multiple

P/E average

multiple

P/E median

multipleTEV min TEV max Net debt P min P max

$ 9,664,658 0.44 0.48 4,222,632.93 4,681,802.74 -317,900.00 33.28$ 36.65$

$ 771,554 4.49 4.49 3,461,174.19 3,461,174.19 -317,900.00 27.70$ 27.70$

$ 402,977 Excluded Excluded Excluded Excluded Excluded Excluded Excluded

Forward Comparable Peers Valuation, FY2011

GME Financial

data

Revenue average

multiple

Revenue median

multiple

EBITDA average

multiple

EBITDA median

multiple

P/E average

multiple

P/E median


$ 9,577,713 0.19 0.22 1,838,920.88 2,107,096.84 -317,900.00 15.81$ 17.78$

$ 862,952 3.68 3.17 2,735,557.63 3,175,663.11 -317,900.00 22.38$ 25.61$

$ 428,377 7.57 7.62 3,243,884.11 3,262,090.13 0.00 23.78$ 23.91$

Forward Comparable Peers Valuation, FY2012

GME Financial

data

Revenue average

multiple

Revenue median

multiple

EBITDA average

multiple

EBITDA median

multiple

P/E average

multiple

P/E median


$ 9,829,232 0.18 0.20 1,788,920.24 1,965,846.42 -317,900.00 15.44$ 16.74$

$ 836,713 3.28 3.12 2,606,362.18 2,742,328.11 -317,900.00 21.44$ 22.43$

$ 394,938 7.90 7.02 2,772,462.74 3,119,218.05 0.00 20.32$ 22.86$


14

Appendix 9. Key Risks To Price Target

Source: CFA University Team Appendix 10. GameStop’s Projected Market Shares On Different Markets According to Three Scenarios

Risk Factors DescriptionRisk

Probability

Potential Impact

on Price Target*

Used video products market

conjuncture

Used video products business is one of the key segments of GameStop.

Therefore, its dynamics significantly influence the valuation. If used video

game market has better than expected dynamics, GameStop price will be

higher than our estimates and vice-versa.

High

Digital sales growth

As the gaming industry experiences a shift to digital realm, it is crucial for

GameStop to adapt to this change. The management is optimistic

concerning digital sales growth rate and we incorporated this into our

valuation to a reasonable extent. If used digital sales market grows better-

than expected, GameStop price will be higher than our estimates and vice-

versa.

High

Cyclicity of target industry

The retail undustry in general and specialty retail in particular are

extremely vulnerable to cyclical sales and profitability fluctuations,

especially during holiday seasons. The cyclicity is oftentimes hard to

analyze and predict in monetary terms.

Average

Lack of potentially attractive

acquisition targets or

inability to succesfully

integrate acquisitions into

GameStop's business model

We projected high level of acquisitions and capital expenditures to sustain

GameStop's expansion into digital business to support projected digital

sales and market share growth. The inability to actually acquire attractive

companies or succesfully integrate them into the business model would

result in GameStop's share price decline

Average


15


16


Appendix 11. GameStop’s Projected Gross Margins According to Base Scenarios


1.32%

1.02%

8.65%

9.29%

4.78%

4.46%

12.04%

13.50%

11.50%

10.00%

0.50%

2.50%

4.50%

6.50%

8.50%

10.50%

12.50%

2010H 2011E 2012F 2013F 2014F 2015F

Gross Profit Margins Projected Dynamics

New video game hardware New video game software

Other Used video products, Best-case

Used video products, Normal-case Used video products, Worst-case


17

Appendix 12. GameStop’s DCF “Football Field”


9.00 19.00 29.00 39.00 49.00 59.00 69.00 79.00

Best

Normal

Worst

Lower Range: $18.61-$18.94

~~ $19

Upper Range:

$30.68-$42.71

~~ $35

GAMESTOP's

DCF

FOOTBALL

FIELD


18

Appendix 13. Vertical and Horizontal Historical Balance Sheet Analysis


1.1. Vertical and horizontal analysis

Balance Sheet

Assets 2009H 2010H

1-3Q

2011H 2008-2009H 2009-2010H

1-3Q

2010H - 1-

3Q 2011H

Current assets

Cash and near cash items 18.27% 14.04% 8.15% 56.61% -21.49% 144.45%

Accounts and notes receivables 1.29% 1.29% 1.07% -3.00% 2.34% -1.27%

Merchandise inventories 21.26% 24.83% 32.73% -2.06% 19.35% -8.45%

Deferred income taxes 0.43% 0.57% 0.56% -10.23% 35.85% 39.40%

Prepaids 1.20% 1.49% 2.08% 0.51% 27.44% 37.24%

Other CA 0.48% 0.33% 0.26% 53.79% -30.38% 1.30%

Total Current Assets 42.93% 42.55% 44.84% 17.01% 1.29% 5.92%

Long-term assets

Goodwill 39.28% 39.42% 37.92% 4.53% 2.56% 2.78%

Gross PP&E 25.14% 28.02% 27.69% 14.85% 13.88% 9.41%

Accumulated DD&A 13.36% 15.90% 16.59% 23.55% 21.67% 17.24%

Net PP&E 11.79% 12.12% 11.10% 6.36% 5.07% -0.52%

Other L-T Assets 6.00% 5.90% 6.14% 4.98% 0.54% 9.53%

Total Long-term assets 57.07% 57.45% 55.16% 4.95% 2.86% 2.80%

Total assets 100.00% 100.00% 100.00% 9.81% 2.19% 4.17%

Liabilities and Shareholders' Equity

Current liabilities

Accounts payables 19.41% 20.30% 26.95% -8.23% 6.90% -3.32%

Accrued liabilities 12.76% 12.97% 13.07% 22.80% 3.94% 25.79%

Taxes payable 1.25% 1.24% 0.00% n/a 1.29% -100.00%

Current portion of L-T debt 0.00% 0.00% 2.30% n/a n/a 100.00%

Short-term borrowings 0.00% 0.00% 0.00% n/a n/a n/a

Total Current Liabilities 33.41% 34.52% 42.31% 5.95% 5.56% 10.58%

Long-term liabilities n/a n/a n/a

Long-term borrowings 9.03% 4.92% 0.00% -18.03% -44.33% -100.00%

Deferred taxes 0.51% 1.48% 1.23% n/a 193.73% 273.28%

Other L-T liabilities 2.09% 1.90% 1.94% -0.66% -7.32% 5.20%

Total L-T Liabilities 11.64% 8.30% 3.17% -11.32% -27.14% -53.04%

Total Liabilities 45.05% 42.81% 45.49% 0.88% -2.88% 1.03%

Equity

Total preferred equity 0.00% 0.00% 0.00% n/a n/a n/a

Class A CS 0.00% 0.00% 0.00% 21.95% -50.00% -99.99%

Additional paid-in-capital 24.43% 18.34% 14.03% -7.42% -23.26% 354.59%

Accum other comprh inc 2.31% 3.21% 4.23% -503.50% 41.67% -85.33%

Retained earnings 28.21% 35.66% 36.28% 36.97% 29.19% -28.86%

Noncontrolling interest 0.00% -0.03% -0.03% n/a 600.00% 14.12%

Total equity 54.95% 57.19% 54.51% 18.41% 6.35% 6.94%

Total liabilities and Equity 100.00% 100.00% 100.00% 9.81% 2.19% 4.17%

Vertical analysis Horizontal analysis


19

Appendix 14. Vertical and Horizontal Historical Income Statement Analysis


Appendix 15. Altman Z-Score Calculations


2.1. Vertical and horizontal analysis

Income statement

2009H 2010H

1-3Q

2011H 2008-2009H 2009-2010H

1-3Q

2010H - 1-

3Q 2011H

Sales 100.00% 100.00% 100.00% 3.09% 4.36% 3.30%

Cost of Sales 73.18% 73.21% 70.93% 1.65% 4.41% 2.14%

Gross profit 26.82% 26.79% 29.07% 7.25% 4.23% 6.27%

SG&A 18.01% 17.95% 22.25% 12.76% 3.99% 9.10%

DD&A 1.79% 1.84% 2.35% 12.13% 7.44% 8.49%

Operating earnings 7.02% 6.99% 4.48% -5.65% 4.02% -6.78%

Interest income -0.02% -0.02% -0.01% -81.07% -18.18% -48.22%

Interest expense 0.50% 0.39% 0.31% -10.02% -18.50% -39.61%

Debt extinguishment expense 0.06% 0.06% 0.01% 127.37% 13.21% -89.94%

EBT 6.48% 6.56% 4.17% -7.17% 5.59% -1.04%

Income taxes 2.34% 2.27% 1.42% -9.70% 0.85% 2.63%

Consolidated NI 4.14% 4.29% 2.75% -5.67% 8.28% -2.83%

Net loss attributable to noncontrolling interests 0.02% 0.01% 0.02% n/a -25.00% -19.61%

Consolidated net income attributable to GameStop 4.16% 4.31% 2.77% -5.27% 8.14% -2.95%

Basic net income per common share -6.15% 17.47% 4.46%

Diluted net income per common share -5.46% 17.78% 5.45%

Vertical Analysis Horizontal Analysis

Altman Z-score calculation

In thousands 2007 2008 2009 2010 3Q2011

Current Assets 1,794,717 1,818,041 2,127,300 2,154,800 2,436,100

Current Liabilities 1,260,557 1,562,711 1,655,700 1,747,800 2,298,800

Total Assets 3,775,891 4,512,590 4,955,300 5,063,800 5,432,600

Retained Earnings 288,291 398,282 377,300 408,000 403,021

EBIT 501,421 675,119 637,000 662,600 643,148

Market Value of Equity 8,499,357 4,154,887 3,319,383 3,244,780 3,717,780

BV of Total Liabilities 1,913,445 2,212,909 2,232,300 2,167,900 2,471,100

Sales 7,093,962 8,805,897 9,078,000 9,473,700 9,664,658

Altman Z-Score 5.26 3.76 3.37 3.41 3.21

For references:

Safe Zone Z Score > 2.99

Grey Zone 1.80 < Z Score < 2.99

Distress Zone Z score < 1.80


20

Appendix 16. GameStop’s SWOT Analysis


Appendix 17. GameStop’s Main Products Description

Source: GameStop

GME: SWOT Analysis

Strengths Weaknesses

Strong Client Base reflective of Market Penetration Reliance on limited number of

Recent Retirement of Debt enhances Balance Sheet

Strengthvendors

Strong FCFF generation abilityAbsense of geographical diversification

in Sales

Opportunities Threats

Poised for growth in booming Android Gaming

Market

Competition and Industry shift may

diminish "trade-in" profitability

Potential to expand in growing Digital

Distribution MarketInability to gain significant digital

Online retail market growthmarket share from proven leaders and

offset diminishing physical sales

Potential to successfully combine physical and

online retail businesses through acquisitions

S. No. Product Category Description

1 New Video Game Software

•Procured from manufacturers such as Sony Entertainment, Nintendo, Microsoft & third party manufacturers such as

Electronic Arts and Activision

•GME carries more than 1000 SKUs across numerous genres

2 Used Video Products •GME is the largest retailer of Used Video Products

•Offers over 3000 SKUs

•GME encourages the exchange of used products for new ones by providing store credits

•Includes Used Software, iDevices etc

3 Video Game Hardware Platforms •GME provides technology-driven hardware platforms

•Platforms include Sony PlayStation 2 and 3 and PSP, Microsoft Xbox 360 and Kinect, and the Nintendo DSi, DSi XL

and Wii

4 Video Game Accessories •GME offers more then 300 SKUs of accessories

•Accessories include PC entertainment software, digital inventory, Game Informer magazine etc


21

Appendix 18. GameStop’s Acquisitions’ Description

Source: GameStop

Appendix 19. GameStop’s Peers Description

Source: Bloomberg, Yahoo!Finance

Name of Company Acquired Deal Date Deal value ( $M) Business Description

Impulse, Inc. (United States) 31-Mar-11 N/A Operates online platforms for digital game distribution

Spawn Labs, Inc. (formerly

Virsion) (United States)31-Mar-11 N/A

Develops platforms that provide remote, real-time, interactive access

to products, content, and experiences

Kongregate, Inc.(United States) 27-Jul-10 N/A

Provides online games for players and developers. Offers action,

multiplayer, shooter, adventure and RPG,sports and racing, strategy

and defense, puzzle, music, and tutorials games, as well as online

advertising services.

Jolt Online Gaming (United

States)4-Nov-09 N/A

Based in Europe, with servers across the US, the Company supplies

rentable servers for online gamings

Micromania S.A.S. (France) 1-Oct-08 686 Popular retailer of computer games and playstations.

The Gamesman (New Zealand) 2-Jul-08 N/A Operates gaming retail stores and online gaming retail stores.

Free Record Shop Norway

(Norway)31-Mar-08 N/A

Pioneer in the distribution and sale of home entertainment products

in northwest Europe

Blockbuster Inc. - Rhino Vedio

Games Chain (United States)5-Jan-07 N/A Offers DVDs, and video games for rental and sale

Peer Companies Description

Company Description

Best buy Co, Inc.

Best Buy Co, Inc. is a specialty retailer which operates in the United States, Europe, Canada, and China. Its main products

include consumer electronics, home and office products, entertainment products, appliances, new and used video game

hardwre and software, etc. Some of its online retail operations are under the names “Best Buy”, “Best Buy Mobile”, “The

Carphone Warehouse”, and “Five Star” . Its stores offer video, audio products, mobile electronics, car stereo, and satellite

radio products, as well as, entertainment software products and appliances. Furthermore, the company delivers service

contracts and warranties, product repair, and installation services for home theaters

RadioShack Corp.

RadioShack Corporation sells consumer electronic goods and services, including postpaid and prepaid wireless handsets,

communication and home entertainment deivces, media storage, home audio and video end-products, digital cameras, general

and special purpose batteries and battery chargers, and wires and cables. Moreover, it offers prepaid consumer service

plans in its service platform to third-parties. The company operates 4,467 company-operated retail stores in the United

States and 1,304 kiosks located in Target and Sam’s Club stores. It also sells its products through radioshack.com

Bic Camera, Inc.

Bic Camera, Inc. is a retailer of audio and visual products, information communication equipment with core products such

as cameras, televisions, recorders, PCs, as well as video game software and hardware. Additionally, the company is engaged

in electronic commerce activities through biccamera.com and it also participates in the provision of satellite and cable TV

broadcasting services, installation and repair services for its goods. The company operates in Japan

GEO Holdings Corp.

Geo Holdings mainly sells audio, video and entertainment software and hardware. It also provides rental and recycling

services. Further, the company sells products and provides services online. Geo Holdings has also an amusement segment,

which operates cinemas, game and karaoke facilities

hhgregg, Inc.

hhgregg, Inc. is a retailer of consumer electronics, home appliances and related products. The company operates around 180

stores throughout the USA. It offers a selection of video products, software, hardware, as well as appliances, including

refrigerators, cooking ranges, dishwashers, freezers, washers and dryers

Village Vanguard Co. LtdVillage Vanguard Co. Ltd. is a retail company which sells video and audio products, books, along with goods for living and

decoration. The company operates in Japan and Hong Kong.

Game Group PLC

The Game Group PLC, headquartered in United Kingdom, is a specialist personal computer and video games retailer, which

uses retail outlets and eCommerce sites as trading methods. It offers a range of software and peripherals, including its own

brand accessories. It provides services in the United Kingdom and the Republic of Ireland (639 stores), and five

international territories, as well as through websites game.co.uk, gameplay.co.uk and gamestation.co.uk.


22

Appendix 20. GameStop’s Key Management Description

Source: GameStop

S. No. Name Designation Association with GameStop

1 Daniel A. DeMatteo Executive Chairman & Director - Served as GameStop's CEO from 2008 to 2010

- Served as Vice Chairman and COO from 2005 to 2008

- Served as President and COO for GameStop & predecessor

companies from 1996 to 2005

2 R. Richard Fontaine Chairman International & Director - Served as Executive Chairman of the Board from 2008 until 2010

- Served as Chairman of the Board and CEO at GameStop or its

predecessor companies from 2002 until 2008

3 Michael N. Rosen Director - Serves as a Director since 2001

- Served as the Secretary at the Company or its predecessor

companies from 1999 until 200

4 Stephanie M. Shern Director - Serves as a Director since 2002

5 Edward A.Volkwein Director - Serves as a Director since 2002

6 Gerald R. Szczepanski Director - Serves as a Director since 2002

7 Stanley Steinberg Director - Serves as a Director since 2005

8 J. Paul Raines Chief Executive Officer - Serves as the CEO since 2010

- Joined GameStop in 2008 as a COO

9 Robert A. Lloyd Chief Financial Officer - Serves as the CFO since 2010

- Served as the Interim CFO from February 2010 to June 2010

- Served as the Chief Accounting Officer from 2005 to 2010

- Served as the Vice President of Finance at GameStop or

its predecessor companies from 2000 to 2005

- Served as the Controller of GameStop's predecessor

companies from 1996 to 2000


23

Appendix 21. Projected Financial Statements: Balance Sheet, Income Statement & Cash Flow Statement

UNITS 2010H 1-3Q 2011H 4Q 2011E 2011E 2012F 2013F 2014F 2015F

Income statement

Sales USD 9,473,700$ 5,971,900$ 3,605,813$ 9,577,713$ 9,829,232$ 10,119,922$ 10,457,970$ 10,856,270$

Cost of Sales USD 6,936,100 4,233,900 2,761,662 6,995,562 7,196,718 7,426,505 7,692,099 8,004,328

Gross profit USD 2,537,600 1,738,000 844,151 2,582,151 2,632,514 2,693,417 2,765,872 2,851,942

SG&A USD 1,700,300 1,328,500 390,699 1,719,199 1,795,801 1,882,306 1,978,648 2,019,266

DD&A USD 174,700 142,100 51,076 193,176 235,631 277,714 322,977 371,504

Operating earnings USD 662,600 267,400 402,376 669,776 601,082 533,398 464,247 461,172

Interest income USD (1,800) (700) 0 (700) 0 0 0 0

Interest expense USD 37,000 18,500 - 18,500 - - - -

Debt extinguishment expense USD 6,000 600 - 600 - - - -

EBT USD 621,400 249,000 402,376 651,376 601,082 533,398 464,247 461,172

Income taxes USD 214,600 84,800 138,799 223,599 206,145 182,932 159,216 158,162

Consolidated NI USD 406,800$ 164,200$ 263,577$ 427,777$ 394,938$ 350,466$ 305,031$ 303,010$

Net loss attributable to noncontrolling interests USD 1,200 1,000 - 1,000 - - - -

Consolidated net income attributable to GameStop USD 408,000 165,200 263,577 428,777 394,938 350,466 305,031 303,010

Basic net income per common share USD 2.69$ 1.17$ 1.92$ 3.04$ 2.93$ 2.67$ 2.38$ 2.43$

Diluted net income per common share USD 2.65$ 1.16$ 1.92$ 3.04$ 2.93$ 2.67$ 2.38$ 2.43$

Weighted average shares of common stock-basic USD 151,600 140,800 137,390 141,190 134,739 131,455 128,171 124,888

Weighted average shares of common stock-diluted USD 154,000 141,900 137,390 141,190 134,739 131,455 128,171 124,888


Balance Sheet

Assets

Current assets

Cash and near cash items 710,800$ 442,600$ 394,822$ 394,822$ 591,601$ 775,586$ 927,184$ 1,152,027$

Accounts and notes receivables USD 65,500 58,100 65,331 65,331 67,047 69,030 71,336 74,052

Merchandise inventories USD 1,257,500 1,778,300 1,239,020 1,239,020 1,350,326 1,471,537 1,625,273 1,754,373

Deferred income taxes USD 28,800 30,400 30,400 30,400 30,400 30,400 30,400 30,400

Prepaids USD 75,700 112,800 80,431 80,431 82,281 84,174 86,278 88,521

Other CA USD 16,500 13,900 17,531 17,531 17,934 18,347 18,806 19,295

Total Current Assets USD 2,154,800 2,436,100 1,827,536 1,827,536 2,139,590 2,449,073 2,759,276 3,118,668

Long-term assets

Goodwill USD 1,996,300 2,060,300 2,092,745 2,092,745 2,141,657 2,191,694 2,242,982 2,295,604

Gross PP&E USD 1,419,000 1,504,400 1,575,196 1,575,196 1,760,474 1,945,433 2,130,684 2,316,613

Accumulated DD&A USD 805,200 901,500 941,017 941,017 1,128,235 1,351,841 1,615,026 1,921,045

Net PP&E USD 613,800 602,900 634,179 634,179 632,239 593,592 515,658 395,568

Other L-T Assets USD 298,900 333,300 333,300 333,300 333,300 333,300 333,300 333,300

Total Long-term assets USD 2,909,000 2,996,500 3,060,224 3,060,224 3,107,196 3,118,586 3,091,941 3,024,472

Total assets USD 5,063,800$ 5,432,600$ 4,887,759$ 4,887,759$ 5,246,787$ 5,567,659$ 5,851,217$ 6,143,141$

Liabilities and Shareholders' Equity

Current liabilities

Accounts payables USD 1,028,100$ 1,464,300$ 1,025,129$ 1,025,129$ 1,054,606$ 1,088,279$ 1,127,199$ 1,172,953$

Accrued liabilities USD 657,000 709,800 503,873 503,873 518,361 534,912 554,042 576,531

Taxes payable USD 62,700 - - - - - - -

Current portion of L-T debt USD - 124,700 - - - - - -

Short-term borrowings USD - - - - - - - -

Total Current Liabilities USD 1747800 2298800 1,529,001 1,529,001 1,572,967 1,623,191 1,681,241 1,749,484

Long-term liabilities USD

Long-term borrowings USD 249,000 - - - - - - -

Deferred taxes USD 74,900 67,000 67,000 67,000 67,000 67,000 67,000 67,000

Other L-T liabilities USD 96,200 105,300 111,881 111,881 114,455 117,087 120,014 123,135

Total L-T Liabilities USD 420,100 172,300 178,881 178,881 181,455 184,087 187,014 190,135

Equity

Total preferred equity USD - - - - - - - -

Class A CS USD 100.00 100.00 100.00 100.00 99.99 99.99 99.99 99.98

Additional paid-in-capital USD 928,900 762,000 716,800 716,800 634,350 551,900 469,450 387,000

Accum other comprh inc USD 162,500 230,000 230,000 230,000 230,000 230,000 230,000 230,000

Retained earnings USD 1,805,800 1,971,000 2,234,577 2,234,577 2,629,515 2,979,981 3,285,011 3,588,022

Noncontrolling interest USD (1,400) (1,600) (1,600) (1,600) (1,600) (1,600) (1,600) (1,600)

Total equity USD 2,895,900 2,961,500 3,179,877 3,179,877 3,492,365 3,760,381 3,982,961 4,203,522

Total liabilities and Equity USD 5,063,800$ 5,432,600$ 4,887,759$ 4,887,759$ 5,246,787$ 5,567,659$ 5,851,217$ 6,143,141$


24



Cash Flow statement

CF from operating activities

Consolidated net income USD 406,800$ 164,200$ 263,577$ 427,777$ 394,938$ 350,466$ 305,031$ 303,010$

Adjustments to reconcile net income to net cash flows

Depreciation and amortization (including amounts in cost of sales) USD 176,800 142,100 51,076 193,176 235,631 277,714 322,977 371,504

Provision for inventory reserves USD 27,500 0 - - - - - -

Amortization and retirement of deferred financing fees and issue discounts USD 5,000 2,300 - 2,300 - - - -

Stock-based compensation expense USD 29,600 14,500 - 14,500 - - - -

Deferred income taxes USD 38,200 (10,500) - (10,500) - - - -

Excess tax (benefits) expense realized from exercise of stock-based awards USD (18,600) 200 - 200 - - - -

Loss on disposal of property and equipment USD 7,600 9,500 - 9,500 - - - -

Changes in other long-term liabilities USD (7,200) 1,300 6,581 7,881 2,573 2,632 2,927 3,120

Change in value of forex contracts USD 0 0 0 0 0 0

Changes in operating assets and liabilities, net

Receivables, net USD 200 8,500 (7,231) 1,269 (1,716) (1,983) (2,306) (2,717)

Merchandise inventories USD (227,200) (502,400) 539,280 36880 (111,307) (121,210) (153,737) (129,100)

Prepaid expenses and other current assets USD (10,500) (7,800) 28,738 20938 (2,253) (2,305) (2,563) (2,732)

Prepaid income taxes and accrued income taxes payable USD 22,300 (88,000) - (88,000) - - - -

Accounts payable and accrued liabilities USD 140,700 477,100 (645,099) (167,999) 43,966 50,224 58,050 68,243

Net cash flows provided by operating activities USD 591,200 211,000 236,922 447,922 561,833 555,538 530,379 611,329

Cash flows from investing activities:

Purchase of property and equipment USD (197,600) (127,300) (42,700) (170,000) (173,910) (177,910) (182,358) (187,099)

Acquisitions, net of cash acquired USD (38,100) (27,900) (72,100) (100,000) (108,694) (111,194) (113,974) (116,937)

Other USD (4,400) (7,600) 0 (7,600) 0 0 0 0

Net cash flows used in investing activities USD (240,100) (162,800) (114,800) (277,600) (282,604) (289,104) (296,331) (304,036)

Cash flows from financing activities:

Repurchase of notes payable USD (200,000) (125,000) (124,700) (249,700) 0 0 0 0

Purchase of treasury shares USD (381,200) (216,900) (45,200) (262,100) (82,450) (82,450) (82,450) (82,450)

Borrowings from the revolver USD 120,000 35,000 - 35,000 - - - -

Repayment of revolver borrowings USD (120,000) (35,000) 0 (35,000) 0 0 0 0

Borrowings for acquisition USD 0 0 0 0 0 0

Repayments of acquisition borrowings USD 0 0 0 0 0 0

Issuance of shares relating to stock options USD 10,800 14,500 - 14,500 - - - -

Excess tax benefits (expense) realized from exercise of stock-based awards USD 18,600 (200) 0 (200) - - - -

Other USD (3,800) - - - - - - -

Net cash flows provided by (used in) financing activities USD (555,600) (327,600) (169,900) (497,500) (82,450) (82,450) (82,450) (82,450)

Exchange rate effect on cash and cash equivalents USD 9,900 11,200 - 11,200 - - - -

Net increase (decrease) in cash and cash equivalents USD (194,600) (268,200) (47,778) (315,978) 196,779 183,984 151,598 224,843

Cash and cash equivalents at beginning of period USD 905,400 710,800 442,600 710,800 394,822 591,601 775,586 927,184

Cash and cash equivalents at end of period USD 710,800 442,600 394,822 394,822 591,601 775,586 927,184 1,152,027


25

Disclosures:

Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company.

The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [The conflict of interest is…]

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company.

Market making:

The author(s) does [not] act as a market maker in the subject company’s securities.

Ratings guide:

Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater

over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index.

A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used

as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of

an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA

Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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