better together 2005 annual report better together together we are global NORTH AMERICA STORE COUNT While 50% of all Americans play video or United States, 3,579 computer games on a regular basis, the Canada, 261 explosion of the industry is by no means just Puerto Rico, 43 Guam, 2 a phenomenon in the U.S. Our international portfolio of stores places us in the position EUROPE STORE COUNT to lead the way in bringing the gaming experience into homes worldwide. Spain, 123 Italy, 102 Germany, 77 Sweden, 47 Ireland, 28 Denmark, 23 Norway, 10 Switzerland, 9 United Kingdom, 6 Austria, 2 Finland, 1 ASIA PACIFIC STORE COUNT Australia, 152 New Zealand, 25 GameStop Corp. (NYSE:GME)(NYSE:GME.B) is the world’s largest video game and entertainment software retailer. With over 4,400 stores located throughout the United States and 14 other countries, we are the retail destination for gamers around the world. Our GameStop, EB Games and Electronics Boutique retail locations set us apart in the industry. Everything that we offer our customers—from our expansive selec- tion of new products, to our knowledgeable associates and to our value-added pre-owned products—is geared to deliver customer satisfaction. We complement our store network with GameStop.com and EBgames.com, and publish Game In- former, one of the industry’s largest circulation video game magazines. Together, we hold a passion for gaming, a commitment to our industry and a disciplined business perspective to continuously drive value with stockholders, customers, vendors and employees. letter to stockholders: By any account, 2005 was a spectacular year for Game- Stop and our stockholders. And the years ahead are expect- ed to be even more exciting, more productive, and more prof- itable because of the foundation we built in 2005. The year at GameStop is not only recapped by our exceptional re- sults, but also through the opportunities behind the num- bers. We have timed our major initiatives to maximize the po- tential just when the market is, once again, ready to take off. Fiscal 2005 sales increased an exceptional 67.7% to $3,091.8 $400 million, and operating cash fl ows of approximately $291 million. million. Net earnings grew to $100.8 million up from $60.9 million in fi scal 2004. Our gross margin increased to 28.2% While there is more work to be done to complete the merger, we are from 27.6%, while SG&A decreased from 20.3% to 19.4%. off to a strong start with considerable early benefi ts. In 2006, we are Diluted earnings per share rose to $1.61 compared to $1.05 forecasting merger synergies of between $70 million and $80 million. per diluted share in 2004, a 53% increase. At the beginning Although the company did take on $950 million in debt to complete of this fi scal year, our stock was trading at $18.90 and we the transaction, we are fully confi dent that the debt load is reasonable. closed the year at $39.14, an extraordinary 107% increase. We are now a worldwide company. Our strong sales, margin, and earnings growth are the direct GameStop completed the year with 4,490 stores in the U.S. and result of our singular focus on continuing to refi ne and build 14 countries around the world. In many of these countries we have on our very distinctive new and used business model. It is the signifi cant market share, along with sizable growth opportunities. confi dence we have in the future of this model that led to the October completion of the merger combining GameStop In the U.S., our market share in fi scal 2005 grew to just over and EB Games into one great and very effi cient company. 21% of all new video games sold according to NPD Group data. In Canada and Australia that share is even higher, while When we began to bring the two companies together, we did so Germany, Italy and Ireland are approaching those numbers. under the unifying banner of “Better Together” which, to date, has We have achieved both size and presence, and are growing exceeded our expectations. Better Together has led to a smooth faster than our own rapidly expanding industry; and are now in a integration of two former competitors and transcended being position to do so on a worldwide scale. a simple slogan; it has become the reality of our new company. During 2005, the combined companies opened 792 new By quickly bringing both management teams into a joint assessment stores, 450 domestically and 342 in international markets, of the business, we embarked on a very productive course clearly demonstrating that we continue to be a rapid-growth of instituting best practices in all stores. The result has been company. In 2006, we plan to open another 400 new stores with signifi cant fi nancial and operational synergies that have contributed approximately half in the U.S. and the remainder internationally. to a 6.2% operating margin, an end of year cash balance of over As has always been the case at GameStop, it is not the growth. Gamestop is clearly the leading retailer offering number of new stores, but the quality of new stores we next generation hardware and software. However, by also open that matters. We have always devoted time, energy, selling trailing platform products that we buy back used, capital, and hands-on senior level involvement to our real we create real value for new, more budget conscious estate management. This has paid off with a very high rate customers, thus allowing the GameStop model to reap of successful stores, and led to uncovering more growth double benefi ts from new hardware releases. opportunities in markets that are underserved. That focus will continue in the future. Leadership will be the key. Both our major “broadcast vehicles,” Game Informer It takes an extended group of experienced leaders to drive Magazine, with over 1.9 million paid subscribers and the a rapidly growing business, and we have that team. Fur- 38th largest US consumer publication, as well as the soon thermore, it takes an equally expansive team of managers to be combined GameStop.com and EBGames.com, had who are well versed in the increasingly complex business excellent years and, as a result of our merger, are going to of serving the video game customer. be even more formidable and profi table in 2006. As the video game business has become more complex As spectacular a year as GameStop had in 2005, this is with more platforms, more add ons, and more online game a business that does not allow too much time to refl ect play, our customers have come to expect that GameStop on the past. The video game business and GameStop’s store managers and store associates can talk-the-talk, be business, in particular, are always about the future. ahead of the buzz, and always know what is coming next. Our management team is deep, experienced, and com- mitted to staying ahead of opportunities. And what a future we foresee. In 2006 we will fully launch into the next generation of Since the completion of the merger, we boosted an already super-powered consoles. We look at last year’s launch strong team by naming Steve Morgan as GameStop’s new of Microsoft’s Xbox 360 as a “soft launch” due to very President. Steve was formerly President of North Ameri- restricted quantities of the hardware being available. 2006 can and Canadian stores for Electronics Boutique, and is, in our mind, the real launch (or re-launch) year of an brings added depth and perspective to our team. amazing sensory experience for the gamer. In addition, we have expanded the GameStop board with Furthermore, we are anticipating that towards the end of four new members including Electronics Boutique’s found- 2006, Sony will be releasing the PS3, the next generation er James Kim, who now serves as the Chairman and Chief of the most successful and widely used console ever. The Executive of Amkor Technology, Inc; former Electronics PS2 originally hit the market in October 2000 and our U.S. Boutique Director Stanley (“Mickey”) Steinberg, a senior stores have sold over 4 million units – and we believe the advisor to the mergers and acquisitions fi rm of Casas, PS3 could top those numbers over the next 5 years. Benjamin and While, LLC; Jerome Davis, former Global Vice President, Service Excellence at Electronic Data Sys- As amazingly powerful as both these consoles are, by tems; and Larry Zilavy, former Executive Vice President, marrying their computing and gaming horsepower to the Corporate Finance and Strategic Planning for Barnes & visually stunning HDTV capability, video gaming will move Noble, Inc. These individuals provide our board with even to an astounding new level of visual excitement. Arthur C. more depth and a very wide range of experience. Clarke once said that, “suffi ciently advanced technology is indistinguishable from magic.” While the technology And fi nally, it is a powerful statement to realize that Game- advances do seem “magical,” the sales opportunities are Stop worldwide now has over 30,000 people focused both clear and real. solely on giving full and total attention to the fastest-grow- ing, most dynamic entertainment business in the world. And there is more. Nintendo will likely hit the market late in the year with the We will continue to differentiate ourselves by maintaining sequel to the GameCube, codenamed the Revolution. And a passion for gaming and serving our gaming custom- what I fi nd particularly exciting is that Nintendo is going in ers, and also by seeking every opportunity for profi table their own unique direction.