GameStop Corp (GME) 2002 Q4 法說會逐字稿

Good afternoon everyone and welcome to today's Electronics Boutique's fourth quarter and fiscal year end conference call.

You should have all received a copy of the press release issued after the close of the market today. If you did not, please contact Electronic's Boutique, and we will send you one and confirm your name on the e-mail list.

With us today from management are Mr. Jeff Griffiths, President and Chief Executive Officer, Jim Smith, Chief Financial Officer, and other members of the senior management.

Before we begin the call, I'd just like to remind everyone that statements contained in today's press release and on this conference call including without limitation statements regarding future growth and opportunities in the video gaming industry and for the company.

The timing and costs for discontinuing the EB Kids operations, and the sale of the BC Sports collectible business. The number of new stores in fiscal year 2003. And projected earnings and comparable sales in the first quarter of fiscal year 2003 and for the full year are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the company's recent filings with the Securities and Exchange Commission.

Also, a telephone play back of the conference call will be available from eight p.m. today through March 21st at 11:59 p.m. eastern time. And will be archived on EB's Web site, www.ebholdings.com for two weeks.

Some of the material presented in this evening may become outdated during the time, and EB undertakes no obligation to review or update this information provided during the conference call. Now I would like to turn the call over to Mr. Griffiths, please go ahead.

Good afternoon. And thank you for joining us today.

As I stated in the release issued this afternoon, our results for the fourth quarter and fiscal year reflect continued strong and growing consumer interest in new technology platforms. Sales momentum grew throughout the year.

And our holiday season, as you know, was excellent which greatly contributed to our record sales and solid profitability for fiscal 2002.

We are now in what is regarded as one of the most exciting periods in gaming history.

Certainly Sony's PlayStation2 which reached its current installed base in half the time it took PlayStation1 to reach the same base, remains an exceptionally strong product for us and continues to fuel our growth. In addition to contributions from the expanding line up of PlayStation2 software titles and Game Boy Advance.

As you know, excitement within the gaming industry further intensified with the launch of Microsoft's Xbox and Nintendo's GameCube last fall. And them momentum continues to build across multiple platforms.

Our break down of sales by category for the fourth quarter, as a percent of total sales was video game software 45 percent compared with 42 percent for the same period in 2000. Video game hardware, 26 percent compared with 17 percent for the same period in 2000.

PC games nine percent compared with 15 percent for the same period in 2000. PC education and productivity one percent versus three percent a year ago. Accessories 13 percent versus 15 percent last year. And toys and trading cards were five percent versus seven percent in 2000.

Our hardware to software tie ratios for Q4 were 4.1 to one for Xbox in software, and 1.8 to one for accessories.

For GameCube it was 4.91 for software, and 3.4 to one for accessories.

And for PlayStation2 it was 13.1 for software and 3.4 to one for accessories.

Top titles for the quarter included

,

and

also the PlayStation2 and

for the Xbox.

To summarize, following are a few points to support the positive outlook for our business. In North America, the installed base for PlayStation2 will more than double from a current seven million units of hardware to about 15 million by year end.

And PlayStation2 software sales will climb from 25 million units to 44 million units 2002.

Both Xbox and GameCube are enjoying tremendous consumer acceptance with expectations that four to five million units each will be sold in the U.S. this year.

Additionally, over 20 million units of software for each platform will be sold this year.

The launch of Xbox and GameCube in Europe and Australia planned for the first half of the year, will support our growing presence in these regions and add to the overall excitement across all formats.

Anticipated top titles for the first quarter will add to consumer demand. These include the following video games,

,

and

all for the PlayStation2.

and

for the Xbox.

and

for the PC.

With the introduction of significant new software titles, the pre owned market will continue to be an important component of our overall growth strategy.

We remain confident that the tie ratios for PlayStation2, Game Boy Advance GameCube and Xbox will continue to grow as the install base expands. This will continue to drive higher margin sales.

We are under on schedule with plans to discontinue operations for EB Kids. And are presently conducting store closing sales.

As recently announced, we have retained TM capital corporation to facilitate the sale of BC Sports Collectibles which is expected to be completed during the second quarter. I might add the positive business environment for the gaming industry and it's solid growth potential further validates our decision in the fourth quarter to discontinue our EB Kids operations and sell the BC Sports Collectibles business, in order to focus exclusively on Electronics Boutique core business.

On a final note, over the past year, we added 200 stores to our base which exceeded our goal of 175 new stores. Included in this total were 35 stores in the European markets. So we are particularly pleased with our progress.

We expect to open an additional 200 stores worldwide in this fiscal year.

I would now like to have Jim Smith take a moment and review our financial performance for the fourth quarter and the fiscal year, and then open the session for questions-and-answers.

Thank you, Jeff.

.

Total revenues for the 13 week fiscal fourth quarter increased 47 percent to 490.5 million from 340 million -- 334 million reported for the 14 week period ended February 3rd, 2001.

Net income for the same 13 week period more than doubled to 27 million or $1.02 per diluted share. Excluding the 14.9 million pre tax charge of 35 cents per diluted share related to cost associated with the recently announced decision to discontinue the EB Kids operations and sell the BC Sports Collectibles.

Net income for the 14 week period a year earlier was 13.1 million or 58 cents per diluted share. For the 52 week fiscal year ended February 2, 2002, total revenues climbed to 32 percent to a record $1 billion from 770.8 million a year ago.

Net income for the same period was 26.9 million or $1.11 per diluted share excluding the 14.9 million pre tax charge in the fourth quarter. Excluding income attributable to a breakup fee paid in fiscal 2001 by

related to a merger agreement between our two companies, net income for the 53 weeks a year earlier was 13.9 million 62 cents per diluted share.

As of February 2nd, 2002, we had 937 stores in operation representing a 27 percent increase over the 737 stores in operation a year earlier.

Selling and general and administrative expenses for the 53 week fiscal year ended February 2nd declined as a percentage of total revenues by 1.1 percent to 17.7 percent.

Primarily as a result of the strong comp store sales performance and our efforts controlling expense growth.

As noted in our release today we expect fiscal 2003 first quarter earnings to be in the range of one cent to three cents per diluted share excluding the results of operations of the EB Kids and BC Sports Collectibles businesses. This estimate is based on achieving a comparable stores sales increase of approximately 10 percent for the 13 week period ending May 4th, 2002.

For the fiscal year, we expect earnings to be in the range of $1.52 to $1.58 per diluted share excluding the operations that are being discontinued. Comparable sales for the fiscal year are expected to increase in the range of 10 to 15 percent.

We'd now like to open the call to questions.

If you would like to ask a question during this time, simply press star then the number on your telephone key pad. If you would like to withdraw your question press the pound key. One moment for your first question.

Your first question is from

of

.

Hi.

A couple of questions. One you didn't mention any GameCube games, could you maybe talk about that?

There weren't any GameCube that broke into the top quantity. I can find the top GameCube game.

But it would significantly blow the games I mentioned. Let's see,

was number one.

number two. But there were probably about 15 or 16 games ahead of those.

OK. Actually to be fair, I was looking to see if there -- when you think there is going to be some more major GameCube games coming out in terms of the schedule going forward?

I think in the back half of the year we'll see some pretty major ones. Nothing in the very near term.

OK. Could you comment too on Sony's announcement about the Greatest Hits program and what that means to your business?

The Greatest Hits programs never have had a major impact on our business because market share for us traditionally is very high with titles the first month or two that they're out.

Once the title's been in the market that long, at the lower price point it becomes more of a mass market title. It's also impacted by our involvement in the pre owned business.

So, I mean if you look at the PlayStation1 Greatest Hits, I mean our share on those titles was in the two to five percent range. I mean I think it's a positive thing for the industry, but it doesn't have a huge impact on our business.

What kind of impact though does it have on your pre owned? I guess your emphasis on pre owned in past -- in the prior generation might not have been as significant. But does it lead to some kind of price degradation?

Not really because, again, those titles are older. So the natural pre owned price point on those titles was usually at or below the classics retail price points were at by the time they were reintroduced.

So, again it's -- we've been able to manage the business so that they can co-exist effectively.

OK. And can you talk about your pre owned business currently how it was in the fourth quarter, and outlook for the year?

The pre owned business in the fourth quarter exceeded our expectations. And we have very aggressive plans for it in the upcoming year with opening upwards to 100 strip center stores, with pre owned being a higher percentage of their business than it is in the mall stores.

We have a lot of aggressive marketing programs in place and in the future to really drive that business, to help drive our margins.

OK. and then on that note, last question. Could you comment on strip stores, how many you had open by the end of the year? Is it 100 new for 2002? And what kind of results you saw there?

Yeah, it's 100 new for 2002. The number at the end of the year...

I think it was about 75.

About 75.

And those stores are performing to our expectations. What we're finding is that they are ramping up a little bit slower than we originally expected. The margins are a little bit better than we expected.

And the second year numbers are much better than we expected. So we're very excited about the -- about this model.

What's driving the improvement in the second year?

You know, I think that with a mall store, you have so much natural traffic immediately after you open, you know, because a mall has 50 -- 60,000 people walking through it each week. It's very easy to become aware of you quickly after you open your doors.

With a strip store, it takes a bit longer for people to find you with the marketing. You know, between finding the store and the marketing that we're doing it just -- it takes longer for the customer to find the location.

But once they do, it, you know, they appear to be loyal. And their shopping patterns appear to be pretty regular.

OK. Thanks.

Sure.

Your next question is from

of SWS.

Good afternoon.

And congratulations on a great quarter and a great year.

Thank you.

Jeff, can you give us any type of break out in the video game business in terms of percentages that you did in GameCube, Xbox, and PS 2?

We normally don't break it out to that much detail for competitive reasons.

I will say that the -- the PS 2 was by far the largest, Xbox was by far the second largest, and GameCube was a distant third.

Second question, can you -- I may have missed this if you mentioned it. In terms of your first quarter guidance, what kind of range of comps are you looking for?

We said approximately 10 percent.

OK. And is there any particular reason, why you would be less than the 20 percent that Game Stop has predicted? Or are you just trying to be conservative?

Well I think they still are going to receive some benefit from the

stores in the first quarter of this year, because the PlayStation2 was still on allocation in the first quarter last year. And our feeling is that they probably received about the same number of PS2s that we received in the first quarter of last year.

Because Sony wasn't really giving them any credit for the

stores when they were doing their allocations. So I think they'll benefit from that somewhat in the first quarter.

The other thing is, you know, we're planning our business based upon the way we feel is the most conservative way to do it. There is some upside potential certainly.

What has been the historical spread if you go back over the last three or four quarters between your comps and theirs?

I don't recall. I mean there's has been higher each quarter.

And I, again, contribute -- attribute that to the -- with the benefit that they're getting from the

stores which had virtually no new product or very little new product in them, prior to their involvement getting involved in those stores.

I believe that the comps in the mall stores are probably pretty similar between us and them.

OK. Last question, the video rental chains have talked quite a bit about expanding their presence in the video game business.

In fact, Blockbuster had indicated it plans to launch the sale of new video game hardware and software and actively pursue the pre owned business.

Could you care to comment on what kind of competitive threat you think that might be?

Well, you know, I think any time you have a retail company with the number of outlets that they have and the traffic that they have, we certainly need to be aware of that. They have been in the games business for over 10 years.

They -- primarily as a rental vehicle.

I know that they have in the past tried to sell new product and have not -- had not met with much success when they tried that.

You know, I think that we still have the advantages of having a dedicated sales force of being more focused on the pre sell and reserve and building demand for the product. We're a lot closer to the business and our ability to micro manage it. You know, I think that they are going to have a trade off that movies are their priority and games will -- they'll never be as close to the games business.

But that doesn't mean we're not going to take them very seriously and watch what they do.

Have you considered offering rental in your strip stores?

We've tested it.

And again, it's not something that we're really interested in pursuing.

Thank you.

Your next question is from

of Pacific Edge Investments.

Thank you.

Can you talk a little bit about what you expect seasonality will be for the hardware sales coming up this year?

I think it's going to follow a more traditional pattern than it did last year. I mean last year, hardware sales were somewhat suppressed early in the year, for the whole market because of allocation issues.

Right.

With play station too. You know, I think that we're going to find a better flow of product throughout the year with PS2 and with Xbox, here probably will continue to be some allocation issues with GameCube.

But I think we'll see a pattern similar to what we saw like in 1997 and '98 which were the, you know, the comparable years to this stage of the cycle. It will be heavily skewed towards the fourth quarter. And if there is a price drop at some point in time, prior to the fourth quarter, we'll see something of a bump then.

So what would that imply though about the normal sequential trends throughout the year by quarter. So for example what would your -- your expectations for the June quarter versus the March quarter calendar, I guess adjusted for your own business?

The June quarter probably is going to be a bit lower volume than the March quarter which is traditional. Usually the second quarter is the lowest volume quarter.

OK. Thanks.

Your next question is from

of Arcadia.

Hi. Can you hear me?

Yes.

Hi, Jeff.

Can you talk about the -- you mentioned a little Nintendo in the back half having some titles you're looking forward to. Could you give us a sense of what your big drivers are going to be this year? Maybe can you touch on some of the highlights of what you brought away from the PlayStation -- the definition PlayStation meeting?

We're not really prepared to talk about individual titles for the latter part of the year. We'll probably work on that more in the second and third quarter. I mean it's hard to talk about titles this far out.

OK. Because this time last year, we knew, you know, we had a pretty good idea that

and

and, you know,

and so on were probably going to release. Are there any sequels or anything you can talk about or highlight?

Again, I, you know, we'll be better prepared to do that in the second quarter call because that will be, you know, around E3 or, you know, first quarter call which is around E3 time.

Right. OK.

OK. And then it seems like both Nintendo and Microsoft have been diverting some hardware to other markets as they're opening them around the world. Can you -- have you been informed by them when the supply is likely to be increased again? So that maybe demand or that supply might finally exceed demand, and you guys could build some inventory for a change?

You know, I think there's Microsoft -- we believe Microsoft's done a pretty good job with the flow of the Xbox even as they have been building product for the launch in Europe which actually is happening today. Nintendo was very tight. January and February I think that the quantities for Nintendo are getting better this month.

I don't have much visibility beyond that. Like I said earlier, I think Nintendo is probably going to continue to be tight.

OK. Thank you.

Your next question is from

of CL King and Associates.

Good afternoon.

Several questions. If we back out the inventory right down it looks like your gross margin for the fourth quarter is only down about 20 basis points, which was pretty good considering the big increase in hardware sales. What was going on there that would have offset the negative gross margin impact of the hardware sales?

Well I -- we knew at the outset of this year or this past year, that we were going to have a major challenge with margin because of hardware being such a huge percent to the total sales. So we had put a number of initiatives in place earlier in the year, which we monitored throughout the year and made adjustments as necessary. One of which was an aggressive expansion of the pre owned business which we came very close to achieving our internal goals on that.

We also made it a decision to work on higher margins on PC games because we felt that it was a category that was going to show little or no growth during the past year. And, you know, we just didn't think it made sense to be fighting for market share in a category that wasn't going to grow.

So we made some pricing adjustments in that category. We gave up a little bit of volume, but we ended up -- it ended up being a much more profitable category for us than it had been in the previous year both in terms of margin percentage and dollars delivered

And then we, you know, we did -- we believe we did a better job managing the inventory in terms of how we allocated product to the stores. So our freight expense was down. Our handling cost, distribution cost were down. And that was a result of some of the investments we made in technology in 2000.

Same store sales assumptions are you assuming positive comps for all four quarters?

Yes, we are.

OK. Even the fourth quarter when you're going against those monster numbers?

Yes. We believe that the fourth quarter, you know, the hardware market is going to be much larger than it was last year because you're going to have a price move on at least two of the three systems before then. So the unit sales will probably be greater than last year. And the software increases is going to be significant if you remember the numbers we gave earlier in the conversation.

So yeah, even with the big fourth quarter numbers. I don't think you're going to see, you know, 30, 40 percent comp increase again, but you will see positive increases.

OK. Inventory per store by my calculation it looks like it went up almost 18 percent at year end. You're looking at 10 percent comps for the first quarter. Are you over inventory?

No, I mean the increase in inventory is pretty consistent with the increase in sales in the fourth quarter. We did open a lot of stores in the fourth quarter. So you tend to be buying a lot of inventory to fill those stores.

But no, we're -- I mean I think we're probably a little bit more comfortable with the business now than we were a year ago, so that we're probably a little bit more aggressive. But definitely not. No. We don't believe there's a problem with the inventory.

We're really comfortable there.

, this is Jim. As a follow up to that the average units in the store, you're carrying a lot of PS2, Xbox, GameCube, all at much higher prices points than last year's products for the PS1 and Nintendo 64.

Plus we have the supply of hardware across all three platforms to some extent in the store, whereas last year, we were probably in very short supply of PS2 hardware. And you had lower price points on the hardware systems last year. So we were expecting an increase on an average per store year-over-year on that basis alone.

OK. Out of the 200 stores that you'll be opening this year, you said about 100 will be in strip centers. Could you just break out the remainder between U.S. mall based stores and Europe?

Yeah, the U.S. total is going to be about 130.

I believe Canada is about 30, Australia 10 and Europe about 30. And they're rough numbers at this point. But it would probably pretty close to that.

And there's always the, you know, the potential for that number to be higher. If we find good opportunities we're not going to pass on them just to hit a number.

OK. So the 130 is strip and mall combined in the U.S.

Yes.

Well just one final quick question, and I'll somebody else get on. What were EB World.com sale during the fourth quarter?

we've decided to stop reporting on our Internet business for competitive reasons at this point going forward. It's not a material piece of the overall business.

OK. Did it meet your expectations?

Yes.

Yes.

OK. Thank you.

Yes, I think we had

commented in the sales call for the holiday that we had actually seen triple digit year-over-year growth during the fourth quarter. But we've decided at this point going forward that we don't want to discuss separately the Internet business. Like I said, it's a small part of the overall piece. And we're going to hold back on that.

OK. Thanks a lot.

Your next question is from

of Eastborne Capital.

Hi, guys.

Hi.

I was wondering in terms of guidance next year in making our models, tax rate that you're expecting for next year?

At this point it's probably -- we're planning comparable to this year. We will work with our tax advisors on forecasting with all of the international components of our model of our model. And factoring in that the tax deferral items because of the year end reserves we set up for the closures, how they'll impact next year's rate.

But I believe it will be about the same as this year. And I'm not expecting it to increase.

OK.

I think we have 38.2 in there for this year right now.

Got it. That was actually about it. Thanks.

Your next question is from

of Wedbush Morgan Securities.

Hi, good quarter.

Thank you.

I wanted to ask a couple of questions about the strip center stores. And I was curious as, you know, you've been opening who do you find your best co-tenants to be within the strips? And what your plans for marketing?

Well I mean we're trying a lot of different types of strips at this point.

We're finding that we like being with anchors like Wal-Mart or Toys R Us who all ready have, you know, there are people coming to those stores for the product. And I think they find that our stores are a more preferable place to shop. So we're looking at centers that have good traffic with our types of demographics.

As far as marketing, we're doing a combination of in the markets where we have a cluster of stores that can support it we're doing combination of print, cable TV, radio.

Our focus on expansion this year,

is to try to put, you know, keep that grouping process together so we can take advantage of the advertising.

OK. Great. Thank you very much.

Your next question is from

of SWS.

Yes, two quick follow up questions.

The first one is can you refresh my memory on the reason why the share base went up Q4 over Q3? And what the implications are of that for the balance of this year?

Well we had the secondary offering at the very beginning of Q3. And we've had some -- with the price run up there is some dilution with the stock.

So for on the basic shares it was some exercising of options in the fourth quarter primarily.

I mean are -- should we expect to see that kind of increase over the balance of this year? Could you care to give us a little guidance as to what you think the diluted share base will be?

I think it will start out the first quarter about the same as the fourth in that 26.3 range, 26.4. And it might grow say 100 a quarter or so. I don't think you'll see a big increase next year as you did this year.

OK.

It's part of the function of the stock price, too,

.

I mean if we -- I'd love to sit here and say it went up because we had a great run up in the price.

Fair enough. Second question is by my calculation in order to get to two or three cents a share in the first quarter, your combination of your gross margin or your SG&A has got to improve by about 100 basis points. Does that sound reasonable?

And are you in fact, expecting a higher gross margin?

Yes. I do expect the margin to improve. And a slight improvement in SG&A leverage. But I do expect an improvement in the margin in the fourth quarter. I mean last year it was severely depressed by all of the hardware on PS2 sales in the first quarter.

Thanks a lot. And good luck on the year.

Thank you.

Once again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question is from

of Wellington Management.

Hi.

Can you help me just sort of get -- sort of straighten out my thinking when I think about the industry growth and expectations for the industry growth in the coming year. A lot of people were talking about 20 to 25 percent growth.

And then when I listened to some of the numbers you put out there in terms of, you know, Sony was at the end of the year, probably I don't know eight million units and going to 15 million units. And Xbox and GameCube, you know, selling a million to a million-and-a-half units and then going to four to five million units.

That seems like pretty good growth year over year, and yet your comps are expected to go 10 to 15 percent. So it would sound like intuitively you'd be losing market share based on that. Would -- can you kind of help me think about that?

Well, you know, it's -- there -- we probably will lose some share in hardware business. We usually do lose share in hardware after the first year. Our focus is on significant share position in software and accessories for PS2, Xbox, and to a lesser degree GameCube.

Our share in the older platforms like the PS1s, Game Boy Color, and Dreamcast and all of those will decline much more rapidly than they will for the whole market. So it's just -- it's where we are in the cycle with each product.

And that's why, you know, we're going to see -- we should see some improvement in margin this year because of the shift in software being a greater percentage of our total business.

OK. Thanks.

At this time, there are no further questions.

OK. We appreciate your time this afternoon. As well as your support and confidence in Electronics Boutique.

We look forward to talking with all of you again in May when we announce our fiscal first quarter results. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.

END