GameStop's Accounting Policies - Faculty

oppositemincedManagement

Oct 28, 2013 (3 years and 11 months ago)

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About GameStop

Originated from Babbage’s


Barnes and Noble acquired Babbage’s and
Funco

Inc.


Funco

Inc. changed it’s name to GameStop

GameStop Facts

Over 6,400 stores located around the globe.

Sells merchandise under both GameStop and EB
Games

Publishes
Game Informer
, the leading gaming
magazine.

GameStop Products

New and Used Video Games

Gaming Consoles

Computer Games

Handheld Game devices and Games


Strengths and Weaknesses

Owns 50% share of new
release market

Internet usage

International Presence

Used Game market being
threatened

Pushy Employees

Relies heavily on a few
large suppliers

Opportunities and Threats

Opportunity to jump on
the digital download
market

Potential Buy
-
Out
situation

Economy as a whole

Supply Factors

Porter’s 5 Forces
Highlights

GameStop is dominant in its industry

New entrants are a threat, no large barriers to
entry

Substitutes are at a minimum with the advances
in modern technology

Porter’s con.

GameStop’s size allows them freedom from
being pushed around by both suppliers and
consumers.

The company should continue to be profitable in
their respective industry.

Future Profitability

GameStop should continue to be profitable.

Solid strategy from new releases all the way to
used games.

Competition amongst gaming giants keeps
GameStop in business

GameStop’s Accounting
Policies



Principles



Conformities

1.
GAAP

2.
SFAS



Merchandise Inventory

Approved at the lowest cost.

New product received from retailers.

Returned or traded
-
in products.

Inventory adjustments.

Physical inventory counts.


Revenue Recognition

Used and new inventory.


Sales returns.


Subscription and advertising.


Income Taxes

SFAS 109.


Tax returns.


Maintaining accruals.

Financial Analysis

Benchmarking with Best Buy and Industry as a whole

Sales:

Erratic and sensitive to the economy

Dependant on new technology releases

05
-
06 skyrocketing growth of 70%

tapered off with the economy decline




Compared to Competition

ROE

Net PM

D/E

Sales

Asset X

GameStop

20.2

3.7

0.28

33.15

2.37

Best Buy

22.7

2.8

0.26

12.4

2.9

Industry

20.9

3.1

0.29

10.4

2.5

ROE DuPont Analysis

GME DUPONT

2005

2006

2007

2008

2009


Net Profit
Margin

0.036

0.028

0.039

0.043

0.041

x Total Asset
Turnover

2.707

2.229

2.472

2.107

x Total
Leverage

0.611

2.558

2.202

1.991

= Return on
Equity

0.179

0.220

0.236

0.173

Predicting Sales

Sales proved to be difficult to pin down to one
specific variable

Variables include

GDP growth rate

New technology introduction

Mergers/Acquisitions and new stores opened


GDP and GME


GDP Growth

GME

-3
-2
-1
0
1
2
3
4
2005
2006
2007
2008
2009
GDP

GDP
0
10
20
30
40
50
60
70
80
1
2
3
4
5
GME

GME
Predicting Sales Cont…

GDP is expected to grow at 3% this year

GME should be growing with it

We expect GME to grow at a larger rate than
GDP

Industry average (5 years) is 14.6%

A more specific solution is found in EPS
estimates



Forecasting Sales
Solution


Analysts consensus is a EPS of 2.62

This is a 15.4% growth from previous year

Assuming that other variables will stay are current
rate of sales

Sales growth for 2010 = 15.4%

Confident in estimate due to positive macro
-
economic variables and consistency with industry
average.

WACC as Discount Rate

Cost of Equity = 8.93%

CAPM

Risk free rate = 2.42% (5 yr Treasury Bond yield)

R(m)= 8.72%

Beta = 1.0338

Cost of Debt is set at 0 (no available bonds)

BETA

y = 1.0338x + 0.0211

R² = 0.1551

-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
GME

GME
Linear (GME)
DCF Valuation

DCF Valuation = $54.02 share price

E
-
Val expected stock price currently = $51.73
share price

STOCK IS A BUY!

Our conclusions match analysts predictions on
stock price movement.