GameStop 2004 Annual Report Download - page 30

Our wholly-owned subsidiary Babbage's began operations in November 1996. In October 1999,
Babbage's was acquired by, and became a wholly-owned subsidiary of, Barnes & Noble. In June 2000,
Barnes & Noble acquired Funco and thereafter, Babbage's became a wholly-owned subsidiary of Funco. In
December 2000, Funco changed its name to GameStop, Inc.
Growth in the video game industry is driven by the introduction of new technology. In October 2000,
Sony introduced PlayStation 2 and, in November 2001, Microsoft introduced Xbox and Nintendo introduced
GameCube. Nintendo introduced the Game Boy Advance SP in March 2003 and the DS in November 2004.
As is typical following the introduction of new video game platforms, sales of new video game hardware
generally increase as a percentage of sales in the Ñrst full year following introduction. As video game platforms
mature, the sales mix attributable to complementary video game software and accessories, which generate
higher gross margins, generally increases in the second and third years. The net eÅect is generally a decline in
gross margins in the Ñrst full year following new platform releases and an increase in gross margins in the
second and third years. Unit sales of maturing video game platforms are typically also driven by manufacturer-
funded retail price decreases, further driving sales of related software and accessories. The retail prices for the
PlayStation 2, the Xbox and the GameCube were reduced in May 2002 and May 2003, resulting in an
increase in unit sales and sales of the related software and accessories. In September 2003, Nintendo reduced
the retail price of the GameCube, which resulted in a signiÑcant increase in unit sales and sales of the related
software and accessories during the fourth quarter of 2003. In March 2004, Microsoft reduced the retail price
of the Xbox and, in May 2004, Sony reduced the retail price of the PlayStation2. We expect that the installed
base of these hardware platforms and sales of related software and accessories will increase in the future. Sony
launched the PSP in March 2005 and the Company anticipates that Microsoft will launch the Xbox 2 in
November 2005. Because of these anticipated launches, we expect that our gross margin will decline from
Ñscal 2004 to Ñscal 2005.
Critical Accounting Policies
The Company believes that the following are its most signiÑcant accounting policies which are important
in determining the reporting of transactions and events.
Use of Estimates. The preparation of Ñnancial statements in conformity with GAAP requires manage-
ment to make estimates and assumptions that aÅect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the Ñnancial statements and the reported amounts
of revenues and expenses during the reporting period. In preparing these Ñnancial statements, management
has made its best estimates and judgments of certain amounts included in the Ñnancial statements, giving due
consideration to materiality. Changes in the estimates and assumptions used by management could have
signiÑcant impact on the Company's Ñnancial results. Actual results could diÅer from those estimates.
Revenue Recognition. Revenue from the sales of the Company's products is recognized at the time of
sale. The sales of used video game products are recorded at the retail price charged to the customer. Sales
returns (which are not signiÑcant) are recognized at the time returns are made. Subscription and advertising
revenues are recorded upon release of magazines for sale to consumers and are stated net of sales discounts.
Magazine subscription revenue is recognized on a straight-line basis over the subscription period.
Merchandise Inventories. Our merchandise inventories are carried at the lower of cost or market using
the average cost method. Used video game products traded in by customers are recorded as inventory at the
amount of the store credit given to the customer. In valuing inventory, management is required to make
assumptions regarding the necessity of reserves required to value potentially obsolete or over-valued items at
the lower of cost or market. Management considers quantities on hand, recent sales, potential price protections
and returns to vendors, among other factors, when making these assumptions.
Property and Equipment. Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation on furniture, Ñxtures and equipment is computed using the straight-line method
over estimated useful lives (ranging from two to eight years). Maintenance and repairs are expensed as
incurred, while betterments and major remodeling costs are capitalized. Leasehold improvements are
capitalized and amortized over the shorter of their estimated useful lives or the terms of the respective leases,
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