IB Equity Research

June 27, 2014

GAMESTOP
Thesis Overview
GameStop (GME) is a global specialty retailer of video game hardware/software/accessories
and mobile phone re-commerce (unlocking etc.). The Company derives a substantial portion
of its gross margin (41%) from the purchase and resale of used games, typically from
customers, but increasingly from liquidation closeouts and other retailers clearing inventory.
The value proposition of GME starts (and ends) with the premise that gamers seek salvage
value from their games, particularly those shiny new $60 ones. Salvage value serves as credit
toward future hardware/software/accessory purchases without the headache/fees and two-step
process of selling for cash into Amazon/eBay/Craigslist before outlaying the next purchase.
The GameStop trade-in model is relatively seamless and allows the Company to maintain a
negative working capital balance that outpaces any big-box specialty retailer.
Management has amply demonstrated to be a group of smart capital allocators within the
business and the shareholder base. We estimate average sales per square foot of $900-$950 to
outpace Best Buys $750-$800 despite GME possessing more than triple the store units (albeit
at one-twentieth the square footage). GameStops latest store expansion plan is focused on the
relatively young Tech Brands segment (where gross margins are not far off the used game
segment) following last years tactical acquisitions of Apple and AT&T mobile phone
resellers. Free cash flow after acquisitions has not gone below $380MM annually in over six
years and management has returned all $1.7 billion (37% of market cap) of it to shareholders
through dividends and buybacks.
The bearish thesis against GME has long been that either:
1. Some hyper-efficient retailer like WalMart will enter the used game market and take
away significant share
2. Digital game copies (which have no salvage value) will replace physical discs and
render the gamer value proposition obsolete
WalMart in the past tried a version of the used game model using a third party kiosk approach
not unlike what it does today with Jackson Hewitt for tax preparation. The effort failed
miserably after the partner went out of business, but now they seem back for more, this time
without a third party. While this approach wont likely have the same poor result, we believe
that GME has a defensible market share based on
store network distribution (small units in strip mall locations, accessible to both
urban/rural consumers);
supply chain efficiency;
general brand ecosystem (staff members are typically avid gamers who are
genuinely interested in chatting up and advising consumers)
As for digital, Microsoft tried a wholesale switch last year with the launch of its Xbox One, to
which gamers responded with a vehement NO prompting a swift (and embarrassing)
turnaround. Gamers are a unique, informed subset of consumer group who hold major sway in
an industry that has withstood a secular trend in the growth of the casual mobile game market.
Stock Rating BUY
Catalyst Category Value
Price Target $57.70

Price (6/26/14): $40.57
Upside/(Downside): 42%
Ticker: GME
Exchange: NYSE
Industry: Specialty Retail


Trading Stats ($USD millions)
Market Cap: $4,619

Adj. Enterprise Value: $7,617
Price / FY15E Free Cash Flow: 6.9x
Dividend Yield: 3%
Price / FY14E EPS: 11.1x
Price / FY15E EPS: 8.4x
Adj. EV / FY14E EBITDAR: 6.2x
Adj. EV / FY15E EBITDAR: 5.3x

Source: Company filings, analyst estimates

Price Performance
52 Week range:
$33.25 - $56.28



Analyst Details
IB Username: Stilian Morrison
Employer: Independent Analyst
Job Title: Analyst

Analyst Disclosure
GME Position Held: Yes











IB Equity Research
June 27, 2014

Company Overview
GME expects to get to almost 7,000 total stores by the end of the current fiscal year as it expands its Tech Brands segment to
roughly 8% of the store base. The average video game store is roughly 1,400 square feet vs. a range on tech brand locations of
900 to 2,600 square feet. Tech Brands represents the latest in a series of patient acquisitions into new verticals that started with
digital/DLC for video games and moved into mobile/tablets, wireless, and the powerful Apple hardware ecosystem.

Source: 2014 Investor Day presentation
Recent Trading Levels


Trading Price: 40.57 $
52-week high 56.28
52-week low 33.25
Diluted Shares Outstanding: 113.858
Market Cap 4,619 $
Long-Term Debt 79
Operating Lease Commitments 3,128
Cash and Equivalents (209)
Lease-Adjusted Enterprise Value 7,617 $
FY2014 FY2015
Adj. EV / EBITDAR 6.2x 5.3x
P/E 11.1x 8.4x
P/FCF 14.3x 6.9x
EBITDAR 1,221 $ 1,445 $
EPS 3.64 $ 4.81 $
FCFPS 2.83 $ 5.85 $
Hstorical Trading
(1) Adjusted for dividends and splits
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IB Equity Research
June 27, 2014

Market Overview
Video Games
The video game market is somewhat asynchronous or acyclical with the macroeconomic business cycle in that the timing of new
consoles tends to dominate any broader retail trend. This is not to say that GME shares did not suffer immeasurably in the dark
days of 2008, but rather that operations held up well: sales still grew 3% and 4% in the 2008-2009 calendar years, with firm
margin holds above calendar 2007 and over $800 million in free cash flow.
Far more important are console cycles: the launch of new (and more powerful) gaming hardware to replace the prior generations
machines. There is a three-fold impact across the video game landscape:
1. New hardware sales experience a one-time surge along with greater software attachment as eager gamers add launch-
day titles to complement their new systems. From GMEs perspective, this surge has typically lasted about one to two
years (see FY07 which followed the November 2005 and November 2006 launches of Xbox 360 and PS3, respectively)
2. New software sales experience a more prolonged surge for two to three years as development cycles adapt to the
capabilities and consumer reception of the new software
3. Used game/product sales, interestingly, grow and become more profitable through the refresh phase as gamers
seek to trade in their older generation hardware/software to earn credit against the new. The margin
improvement is indicative of GMEs ability to extract greater share of the salvage value from gamers as
perceived obsolescence leads to more price compromises on the gamers part.

Industry watchers who were tolling the death knell of physical formats were probably surprised by NPD's May 2014 statistics in
which gamers spent $274 million on physical software, 20% more than April and 57% more than prior year. The industry
pipeline for new titles is expected to be considerably stronger next year and it appears that none of these major titles are being
marketed as all-digital formats. Indeed, the console cycles sophomore expansion of new game supply is generally consistent
with the prior game cycle. A prolonged new game cycle suggests a likely second wind for the used game refresh as gamers work
through launch year supply before turning their attention (and trade-in credits) elsewhere.



GME Historical Segment Sales Trends
$872
$1,471
$1,814
$2,270
$2,435
$2,538
$2,680
$2,652
$2,661
$2,709
(10%)
(5%)

5%
10%
15%
20%
25%
30%
35%
40%
-
500
1,000
1,500
2,000
2,500
3,000
New VG h/w New VG s/w Used VG Other Used VG Consol
IB Equity Research
June 27, 2014

In terms of distribution, GameStops highest spending gamers tend to be in smaller cities like Huntington, NY or Laredo, TX.
Below is a map of Huntington with the locations of video game retailers relative to one another and the city center. Game Stop
has four stores within a 14.5 mile perimeter right outside the official border of Huntington and across the East Jericho Turnpike.
World Gamer Nation (WGN) and Play N Trade both have superior locations, but lack the footprint and larger scale of GME;
WGN is a single store and Play N Trade appears to be a sub-$50 million business with just over 100 stores nationwide.


IB Equity Research
June 27, 2014

Tech Brands
An aspect of the equity upside in GME is the Companys expansive push in its Tech Brands segment. Management devoted a
substantial portion of its most recent investor day to addressing the market potential herein. Indeed, the various sectors and sub-
segments, most notably re-commerce, are capably positioned for robust growth as mobile phone cycles. Re-commerce, while a
much smaller market, is growing rapidly and is very much analogous to the trade-in business model of the used game market,
GMEs hallmark sector.

In targeting these verticals, management has sought to make Tech Brands at least 10% of consolidated earnings by FY 2016
through expansion to 1,000 stores. Excluding the Apple ecosystem (Simply Mac), whose (10% of Tech Brands) stores require
~$175K in capex, the majority of the segments units require on average half the capex dollars of GameStop video game stores.
Contributions margins at the ATT (Spring Mobile), currently 75% of Tech Brand footprint, are relatively close in dollar terms to
the flagship video game units.


IB Equity Research
June 27, 2014

Valuation
Various forward multiple methods are applicable to valuing GME, including P/E, P/FCF, and lease-adjusted enterprise value
(AEV) to EBITDAR. The former are perhaps more applicable against the relatively sparse comparable universe with differing
rent models among Big Box retailers. We arrive at a target price of $57.70 that is consistent with 12x FY15 P/E and 10x FY15
FCF.
The stock remains heavily shorted with the latest numbers showing 15 days to cover and 30% interest of float. A sustained
earnings beat or spate of good industry news through the rest of the fiscal year might well trigger some manner of squeeze.
Base Case Annual Financial Projections


FY2011 FY2012 FY2013 LTM Apr-14 FY2014 FY2015 FY2016 FY2017 FY2018
Stores 6,683 6,602 6,675 6,980 6,980 6,980 6,980 6,980
Sales 9,551 $ 8,887 $ 9,040 $ 9,171 $ 9,380 $ 10,601 $ 11,070 $ 11,441 $ 11,828 $
% growth 0.8% (7.0%) 1.7% 4.8% 3.8% 13.0% 4.4% 3.4% 3.4%
Gross profit 2,680 $ 2,652 $ 2,661 $ 2,709 $ 2,877 $ 3,144 $ 3,252 $ 3,358 $ 3,468 $
% margin 28.1% 29.8% 29.4% 29.5% 30.7% 29.7% 29.4% 29.4% 29.3%
SG&A 1,842 1,836 1,892 1,924 2,069 2,120 2,173 2,228 2,283
% growth 8.4% (0.3%) 3.1% 9.3% 2.5% 2.5% 2.5% 2.5%
D&A in COGS 2 2 3 3 2 2 2 2 2
EBITDA 840 $ 818 $ 771 $ 788 $ 811 $ 1,026 $ 1,081 $ 1,133 $ 1,187 $
% margin 8.8% 9.2% 8.5% 8.6% 8.6% 9.7% 9.8% 9.9% 10.0%
Rent 399 395 391 391 410 419 419 419 419
Rent/store 60 $ 59 $ 59 $ 60 $ 60 $ 60 $ 60 $ 60 $
EBITDAR 1,239 $ 1,213 $ 1,162 $ 1,179 $ 1,221 $ 1,445 $ 1,500 $ 1,552 $ 1,606 $
% margin 13.0% 13.6% 12.9% 12.9% 13.0% 13.6% 13.5% 13.6% 13.6%
EBITDA 840 $ 818 $ 771 $ 788 $ 811 $ 1,026 $ 1,081 $ 1,133 $ 1,187 $
Capex (165) (140) (126) (126) (160) (140) (140) (140) (140)
EBITDA-Capex 675 $ 678 $ 646 $ 662 $ 652 $ 886 $ 941 $ 993 $ 1,047 $
Cash interest (25) (3) (3) (2) (3) (3) (3) (3) (3)
Cash taxes (211) (246) (238) (186) (223) (295) (312) (330) (349)
Stock comp 19 20 19 20 19 19 19 19 19
Provision for inventory reserve 31 43 41 41 41 41 41 41 41
Change in NWC (22) (23) 179 9 (56) 22 9 8 9
Acquisitions (30) (2) (109) (137) (103) - - - -
Other (6) (12) (5) (5) (5) (5) (5) (5) (5)
FCF 431 $ 456 $ 530 $ 400 $ 322 $ 666 $ 691 $ 725 $ 760 $
FCF excl. acquisitions 461 $ 458 $ 640 $ 537 $ 425 $ 666 $ 691 $ 725 $ 760 $
FCF/share 3.06 $ 3.61 $ 4.48 $ 3.46 $ 2.83 $ 5.85 $ 6.07 $ 6.36 $ 6.67 $
EBITDA 840 $ 818 $ 771 $ 788 $ 811 $ 1,026 $ 1,081 $ 1,133 $ 1,187 $
D&A (186) (177) (167) (164) (168) (179) (186) (186) (186)
Interest, net (20) (3) (5) (4) (5) (5) (5) (5) (5)
Tax expense (211) (225) (215) (220) (223) (295) (312) (330) (349)
Adj. Net income 423 $ 413 $ 386 $ 399 $ 415 $ 547 $ 579 $ 612 $ 647 $
Weighted avg shares - diluted 141 126 118 116 114 114 114 114 114
Adj. EPS 3.00 $ 3.27 $ 3.26 $ 3.44 $ 3.64 $ 4.81 $ 5.08 $ 5.38 $ 5.69 $
IB Equity Research
June 27, 2014



FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 LTM Apr-14 FY2014 FY2015 FY2016 FY2017 FY2018
Stores 4,490 4,778 5,264 6,207 6,450 6,670 6,683 6,602 6,675 6,980
Sales
New VG h/w 503 1,074 1,669 1,860 1,757 1,720 1,612 1,333 1,730 1,926 1,823 2,005 2,005 2,005 2,005
New VG s/w 1,245 2,013 2,801 3,685 3,731 3,969 4,048 3,582 3,481 3,338 3,318 3,883 4,116 4,239 4,366
Used VG 808 1,316 1,587 2,027 2,394 2,470 2,620 2,431 2,330 2,360 2,520 2,822 2,963 3,111 3,267
Other 536 917 1,038 1,234 1,197 1,315 1,271 1,540 1,499 1,547 1,719 1,891 1,986 2,085 2,189
Consol 3,092 5,319 7,094 8,806 9,078 9,474 9,551 8,887 9,040 9,171 9,380 10,601 11,070 11,441 11,828
Gross Profit
New VG h/w 31 77 108 113 114 125 114 102 177 201 170 150 150 150 150
New VG s/w 267 427 582 768 795 820 839 786 805 784 774 854 885 911 939
Used VG 383 652 772 975 1,121 1,141 1,221 1,170 1,094 1,122 1,247 1,383 1,422 1,462 1,503
Other 192 315 352 415 405 453 506 593 585 602 686 756 794 834 876
Consol 872 1,471 1,814 2,270 2,435 2,538 2,680 2,652 2,661 2,709 2,877 3,144 3,252 3,358 3,468
Sales Mix
New VG h/w 16.3% 20.2% 23.5% 21.1% 19.3% 18.2% 16.9% 15.0% 19.1% 21.0% 19.4% 18.9% 18.1% 17.5% 17.0%
New VG s/w 40.3% 37.8% 39.5% 41.8% 41.1% 41.9% 42.4% 40.3% 38.5% 36.4% 35.4% 36.6% 37.2% 37.1% 36.9%
Used VG 26.1% 24.7% 22.4% 23.0% 26.4% 26.1% 27.4% 27.3% 25.8% 25.7% 26.9% 26.6% 26.8% 27.2% 27.6%
Other 17.3% 17.2% 14.6% 14.0% 13.2% 13.9% 13.3% 17.3% 16.6% 16.9% 18.3% 17.8% 17.9% 18.2% 18.5%
Consol 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Sales Growth
New VG h/w n/m 55.4% 11.5% (5.6%) (2.1%) (6.3%) (17.3%) 29.7% 57.0% 5.4% 10.0%
New VG s/w n/m 39.2% 31.6% 1.2% 6.4% 2.0% (11.5%) (2.8%) (6.1%) (4.7%) 17.0% 10.0% 7.0% 3.0%
Used VG n/m 20.6% 27.7% 18.1% 3.2% 6.1% (7.2%) (4.1%) (1.0%) 8.2% 12.0% 5.0% 5.0% 5.0%
Other n/m 13.2% 18.9% (3.0%) 9.9% (3.4%) 21.2% (2.7%) (2.4%) 14.7% 10.0% 5.0% 5.0% 5.0%
Consol n/m 33.4% 24.1% 3.1% 4.4% 0.8% (7.0%) 1.7% 4.8% 3.8% 13.0% 4.4% 3.4% 3.4%
Comp store sales 11.9% 24.7% 12.3% (7.9%) 1.1% (2.1%) (8.0%) 3.8% 6.0%
Gross Margin
New VG h/w 6.1% 7.2% 6.5% 6.1% 6.5% 7.3% 7.0% 7.6% 10.2% 10.4% 9.3% 7.5% 7.5% 7.5% 7.5%
New VG s/w 21.4% 21.2% 20.8% 20.9% 21.3% 20.7% 20.7% 21.9% 23.1% 23.5% 23.3% 22.0% 21.5% 21.5% 21.5%
Used VG 47.4% 49.5% 48.7% 48.1% 46.8% 46.2% 46.6% 48.1% 47.0% 47.5% 49.5% 49.0% 48.0% 47.0% 46.0%
Other 35.8% 34.4% 33.9% 33.6% 33.8% 34.4% 39.8% 38.5% 39.1% 38.9% 39.9% 40.0% 40.0% 40.0% 40.0%
Consol 28.2% 27.7% 25.6% 25.8% 26.8% 26.8% 28.1% 29.8% 29.4% 29.5% 30.7% 29.7% 29.4% 29.4% 29.3%
Gross Profit Mix
New VG h/w 3.5% 5.2% 6.0% 5.0% 4.7% 4.9% 4.2% 3.8% 6.6% 7.4% 5.9% 4.8% 4.6% 4.5% 4.3%
New VG s/w 30.6% 29.0% 32.1% 33.8% 32.7% 32.3% 31.3% 29.7% 30.3% 28.9% 26.9% 27.2% 27.2% 27.1% 27.1%
Used VG 43.9% 44.3% 42.6% 42.9% 46.1% 44.9% 45.6% 44.1% 41.1% 41.4% 43.3% 44.0% 43.7% 43.5% 43.3%
Other 22.0% 21.4% 19.4% 18.3% 16.6% 17.8% 18.9% 22.4% 22.0% 22.2% 23.8% 24.1% 24.4% 24.8% 25.3%
Consol 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
IB Equity Research
June 27, 2014

Public Equity Comps

Risk Factors
Digital Format
While an industry-wide shift toward digital copies of games is highly unlikely, a more conceivable risk to the thesis is that more
consumers migrate toward digital formats. The latest NPD numbers suggest that there is, as yet, no immediate danger in the face
of a strong software pipeline. Meanwhile, management is ably positioning the Company to be an active player in digital formats
by touting the application of its rewards programs to that subset of customers.
Secular Decline
Bears see GME as the next Circuit City, Blockbuster or RadioShack, an aging brick and mortar specialty retailer that will die at
the hands of the behemoth online marketplace. The flaw in that logic is that gamers have heretofore shown themselves to
generally be a distinct animal from other consumers of specialty electronics, as evidenced by the Companys sustainable top-line
development through both console and macroeconomic cycles. This is not to say that there might not be a latent effect pending,
but such observations have thus far failed to manifest. For now, GMEs store network and brand ecosystem have allowed it to
hold serve as it explores newer growth verticals.
Used Game Disruption (WalMart effect)
WalMarts deft management of supply chain and powerful competitiveness will likely scare some shareholders off, but the truth
is that any Big Box retailer lacks the network capability to hit the high dollar gamer markets in the same manner as GameStop.
Square footage per store associate is 10x higher in a Big Box format vs. GameStop such that it is unlikely for gamers to have the
same meaningful and efficient customer experience. Moreover, GameStop has the distinct advantage of having to only worry
about a narrow (niche) category of inventory to effectively manage within overall working capital needs.
Conclusion
GameStop is a nimble specialty retailer that has mastered the ability to effectively deploy capital into both real estate and
inventory (the two critical assets on or off any retailers balance sheet), and in turn return capital to its shareholders. While the
shares remain elevated from their 2010-2012 levels, valuations are definitively attractive ahead of a full new software calendar
that should beneficially hit multiple parts of the P&L (notably, an extension of the trade-in phase to the console cycle). The Tech
Brands segment is still de minimis, but management has outlined an ambitious, albeit achievable, store plan to make this vertical
a credible aspect of the future company. In the interim, we are confident in the Companys near-term ability to add further
channels (buying from liquidation closeouts and retailer inventory purges) to bolster its flagship video game business.

Valuation Operating
Adj. EV/
P/E P/FCF EBITDAR Dividend Sales SSS % LTM Margins LTM
Company FY2014 FY2015 FY2014 FY2014 Yield Stores Avg sq ft per sq ft FQ2 FQ3 FQ4 FQ1 GM EBITDAR FCF
GME 11.1x 8.4x 14.3x 6.2x 2.9% 6,980 1,400 938 $ (0.6%) 0.3% (1.2%) (1.9%) 29.5% 12.9% 4.4%
BBY 13.3x 11.8x 16.4x 6.1x 2.5% 1,963 27,880 769 $ (10.7%) 20.5% 7.8% 5.8% 22.1% 6.6% 1.5%
WMT (1) 14.5x 13.3x NM 8.1x 2.6% 10,359 98,551 467 $ (0.3%) (0.3%) (0.4%) (0.1%) 24.8% 8.1% (0.1%)
(1) Store statistics exclude Sam's Club