Analysis of GameStop's Inventory and Gross Profit Margin

School: California State University, Fullerton - Course: ACCT 460 - Subject: Accounting

Uyen Ho Luis Garcia Mario Pineda Viet Nguyen Acct 460: Seminar in Financial Statement Analysis Ongoing Project Model:Gamestop (GME) Inventory for GameStop is merchandise inventory, and it consists of games, hardware and accessories, and collectibles. Their largest vendors are Nintendo, Sony, Microsoft, U&I Entertainment and Electronic Arts, which collectively accounted for most of their new product purchases in fiscal 2021.They have established price protections and return rights with their primary gaming product vendors to reduce their risk of inventory obsolescence. They purchase their new products worldwide from several manufacturers, software publishers, and distributors. Merchandise inventory is 100% finished goods, and raw materials and work in process is 0% as they obtain their inventory from vendors. GameStop uses the average cost method. Under the average cost method, as new products are received from vendors, its current cost is added to the existing cost of product on- hand and this amount is re-averaged over the cumulative units. Pre-owned gaming systems traded in by customers are recorded as inventory at the amount of the store credit given to the customer. The relative size of inventory is $900 million. In the year 2020, they had $859.70 million worth of inventory. In 2021, they had $602.50 million in merchandise inventory. Lastly, in 2022 they had $915 in merchandise inventory. Merchandise inventory has stayed pretty consistent over the 3-year period. One reasonable explanation for 2021 dropping in inventory was because of Covid. Again, as mentioned in module 5, there was also supply chain issues. Moreover, in year 2022, post covid that amount of inventory surpassed the amount reported in 2020.

Compute gross profit margin in percentage terms. Consider the current economic environment and the companies' competitive landscape. Read the MD&A to determine senior management's take. Can we explain any changes in gross profit levels? Within 10 years, 2012-2022, GameStop has generated highest percentage of 31.17% in 2016 and lowest percentage of 22.42% in 2022. The gross profit margin is generated based on the number of revenue and cost of good sold. Therefore, we can explain the changes in gross profit levels by analyzing the company's total sales, product cost (included raw materials and labor cost) and product prices. Have cost for raw materials and labor increased during the year? Based on GameStop's 2022 10-K report, the labor cost increased as they insource talents and transfer into a technology company. Plus, we also notice a raw material shortage due to the impact of COVID-19 and any turnover in senior management. Have sales volumes softened? Their sales volumes increase from fiscal 2020-2022 by 18.1%, however, have softened compared to fiscal 2012-2019. What has happened to unit prices? GameStop does not mention unit prices in their 10-K report. However, they are trying to keep the unit price at competitive price range since they recognize mass merchants and regional chains, computer product and consumer e-store, other gaming stores, direct sales by software publisher, etc. Does the company face any inventory-related risk? What has been done to mitigate this risk? Read the MD&A As GameStop is a brick-and-mortar store, they also face inventory-related risk while stocking the physical products in-store. The most likely risk that could happen is inventory obsolescence. Because GameStop is seasonal store, their sales are picked up during fourth fiscal quarter, which also includes holiday seasons. Therefore, they have to be ready with a massive number of products. After the holiday seasons, the company usually still has some products in stock that can't sell well during the seasons. If these products are out-trend, GameStop has the risk of losing money on these products. Plus, while storing the physical products, GameStop faces inventory discrepancy between physical counts and reports.We are required to make adjustments to inventory to reflect potential obsolescence or over-valuation as a result of cost exceeding market. In valuing inventory, we consider quantities on hand, recent sales, potential