GameStop Corp. Downgraded To 'BB-' On Weakened Competitive Position; Outlook Negative

  • GameStop Corp. recently reported weak operating performance as it continues to face competitive challenges and structural shifts away from physical video games toward digital delivery, leading to a decline in sales of new physical games and software as well as preowned video games.
  • We believe the company's competitive position has deteriorated, a trend we expect to continue. We lowered the issuer credit rating to 'BB-' from 'BB'.
  • We also lowered our issue-level rating on the company's first-lien debt to 'BB+' from 'BBB-' and our issue-level rating on the unsecured notes to 'BB-' from 'BB'. All recovery ratings are unchanged.
  • The negative outlook reflects our expectation that intense competition from online and traditional retailers will lead to further pressure on GameStop's margin in the coming 12 months.
NEW YORK (S&P Global Ratings) April 12, 2019—S&P Global Ratings today took the 
rating actions listed above. The downgrade reflects difficulties GameStop 
faces from increased competitive threats and heavy dependence on the core 
video game segment with last year's sale of mobile wireless and a slow 
transition toward collectibles. We recognize GameStop's efforts to diversify 
into higher-margin digital technology brands and collectibles. However, these 
categories still account for a small portion of the company's overall business 
(about 15% of total revenues), and have not been sufficient to offset the 
inherent business volatility in its largest business--video game hardware and 
software sales.

The negative outlook reflects our expectation that operating performance will 
remain pressured over the next 12 months. Though we recognize the company's 
efforts to increase its focus on video games and collectibles, we also believe 
soft physical video game trends will continue and expect weaker credit metrics 
with leverage in the low-3x area and funds from operations (FFO) to debt in 
the low-20% area.

We could lower the rating if secular shifts and increased competition lead to 
further erosion in GameStop's competitive position. This scenario could likely 
occur if the company inadequately invests in its store base or is unable to 
broaden its digital gaming penetration, with cash resources allocated toward 
capital returns. In this case, it could see sustained declines in same-store 
sales and adjusted EBITDA margins declining below 8%. If its competitive 
position deteriorated and we expected debt to EBITDA to approach 4x or more 
and FFO to debt to be below 20%, we could lower the ratings. 

We could revise the outlook to stable if the company's strategic initiatives 
succeed in reducing risks of persistent same-store sales declines and 
stabilized EBITDA margins around 9%. If, for instance, we expected investments 
in the digital gaming or collectible businesses to offset secular declines 
associated with physical gaming, we could revise the outlook to stable. This 
would likely result in prospects for leverage sustained at less than 4x and 
FFO to debt in 20% area. 
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