S&P Assigns 'BB+' Rating to GameStop (GME)

Standard & Poor's Ratings Services said it assigned its 'BB+' corporate credit rating to Grapevine, Texas-based GameStop (NYSE: GME). The outlook is stable.

At the same time, we assigned a 'BB+' issue-level rating to the company's proposed $250 million senior notes with a '3' recovery rating. The '3' recovery rating, indicates our expectation of meaningful (50%-70%) recovery in the event of a payment default.We also assigned a 'BBB' issue-level rating and '1' recovery rating to the GameStop's existing $400 million ABL revolving credit facility due March 2019. The '1' recovery rating indicates our expectation of a very high (90%-100%) recovery in the event of payment default.

The company will use the proceeds from the transaction to repay revolver borrowings and for general corporate purposes, including acquisitions.

"GameStop participates in the highly competitive and fragmented video game, consumer electronics, and wireless services industries. The company has a leading market position in its core video game business, broad geographic footprint, and strong brand recognition," said credit analyst Samantha Stone. "The company is expanding its product offerings into mobile wireless and consumer electronics services (including Apple-focused stores), but we expect the preowned video game products category to remain the critical segment of GameStop's business model for at least the near term, representing
approximately 30% of sales and close to 50% of gross profit. We expect acquisitions to mainly occur in the mobile and Apple-related businesses. The company's operation is also highly seasonal, because it generates approximately 40% of sales and more than 50% of operating earnings during the year-end holiday season."

The stable rating outlook on GameStop reflects our expectation for continued positive operating momentum because of higher growth in hardware and software sales, and an improving overall sales mix that will benefit profitability and continue to enhance the company's credit profile.

Downside Scenario

We could lower the rating if a sluggish economic recovery and competitive pressures (such as a large shift in gaming away from the company's core business toward mainly digital) hurt profitability, leading to debt leverage approaching mid-3.0x with no expectation of improvement. Under this scenario, we would reassess our financial risk profile assessment to "significant". Alternatively, a downgrade would occur because of a more aggressive financial policy that results in debt-financedshareholder friendly returns.

Upside scenario

We consider an upgrade into the investment-grade category unlikely over the near term. We could raise the rating if we concluded that the company's competitive position was positioned to sustain good growth and maintain its market position as a result of significant traction in its mobile and consumer electronics business that would lead to less dependence on the introduction of new video game products, as well as offset the risk of delivery of video games shifting purely to digital. In addition, we would also have to be comfortable with the company's longer term financial policy with regard to share repurchases and dividends and were convinced that debt leverage would be sustained in the low-2.0x area.

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