GameStop Corp (GME) 2003 Q1 法說會逐字稿

Good afternoon, and welcome to Electronics Boutique Holdings Corporation's First Quarter Fiscal 2004 Conference Call.

You should have received a copy of the press release issued after the close of market today.

If you did not, you can obtain a copy now on the Investor section of our website, www.ebholdings.com.

With you today from management are Jeff Griffiths, President and Chief Executive Officer, and Jim Smith, Chief Financial Officer.

Before we begin the call, I'd like to remind everyone that certain statements contained in today's press release and on this conference call are forward-looking statements made pursuant to the Safe Harbor provision 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 press release and the Company's recent filings with the Securities and Exchange Commission.

Throughout this conference call, we will be presenting both GAAP and non-GAAP financial results.

These non-GAAP results exclude charges associated with the closing of our EBKids business and sale of our BC Sports Collectibles business, as well as the charges associated with the adoption of a new method of accounting for vendor allowances.

As a supplemental schedule to our earnings release, we have provided a tabular reconciliation of non-GAAP measures to the corresponding GAAP measures.

All non-GAAP measures are provided as a complement to our GAAP results, and we encourage all investors to consider all measures before investing in Electronics Boutique.

Some of the material presented today may become outdated, and Electronics Boutique Holdings Corporation undertakes no obligation to revise or update the information provided during the conference call.

A telephone playback of the conference call will be available from 8.00 PM today through Midnight, May 29, 2003.

The call will also be archived on EB's website for two weeks.

Now, I'd like to turn the call over to Mr. Griffiths.

Thank you.

Good afternoon, and thank you for joining us today.

As you saw in the release issued this afternoon, we posted substantial increases in revenue and more than doubled our profits compared to last year's adjusted numbers.

These exceptionally strong results were achieved in the context of the continued sluggish economy and consumer uncertainties surrounding the war, as well as the generally flat retail environment.

Even in this environment, we still experience an increase in mall and strip traffic, and in many respects, Electronics Boutique has become a destination retailer.

EB's revenue for the quarter was $303.5m, a 27.7% increase over last year's results.

Comparable store sales increased 10.1% on strong software releases in the quarter.

Substantially contributing to revenues this quarter were our domestic software sales, which increased 34.9%.

On the hardware side, unit sales are still robust, and we were encouraged by the strong release of the Game Boy Advance SP during the quarter.

I should add that our total video game sales continue to grow faster than the industry.

We just returned from E3, and there was considerable excitement.

Console prices for the PS2 and Xbox dropped by $20, not as much as expected, but you have to understand, the total industry hardware unit sales year to date are still greater than the same period last year.

Based on the hardware manufacturers' estimates, we expect unit sales of the three consoles to increase 10% to 11% for the calendar year.

For perspective, calendar 2003 first quarter console unit sales were up 28% over last year for the NPD group.

While we do anticipate the price drop will generate increased hardware sales compared to our first quarter this year, the benefit won't be as substantial as last year's $100 drop.

We firmly believe the manufacturers are committed to hitting their annual unit targets and will do whatever is necessary to achieve this.

Jim will address the price cuts in more detail.

I'm certain that the software cycle will prove to be as strong as anticipated, and Electronics Boutique is uniquely positioned to benefit from the release of so many exciting software titles.

We were very impressed with the quality of the games being previewed at E3, especially Madden 2004, Grand Tour Racing 4, and Doom 3.

I'm confident the software publishers have designed titles that will pique the interest of the hardcore gamer to keep them coming back for more, and as the hardware prices come down and attract a broader consumer base, publishers are creating titles for those consumers as well.

We're optimistic about the new opportunities on the hardware front, in particular, with handheld devices.

We're pleased to see new industry entrants, with Nokia's plans to launch the ND--N Gauge in the fall.

Nokia clearly brings much to the table, and Sony's announcement at E3 that they intend to enter the handheld market with the introduction of the PST in the second half of next year is very positive.

With the PST, Sony is continuing to innovate and provide consumers with products that they're looking for.

Leaving the gaming side for a second, from a pure retail perspective, Electronics Boutique is sitting in an enviable position.

Our sales and traffic are up, and we continue to build an expanding customer base.

Our customers patronize us because they know they can find the titles they want.

What sets EB apart is that they can preorder new releases, trade in previously played titles, or purchase pre-owned games.

And as the consumer demographic becomes more diverse and actually older, we're benefiting from being one of the few retailers that specifically focuses on all their needs.

As our performance is consistently proving, Electronics Boutique is well positioned to provide a positive experience for customers throughout the videogame lifecycle.

Moving on to the specifics.

Comparing Q1 to the same period last year, the sales mix by category was as follows.

Videogame software was 60% versus 55% last year; videogame hardware was s15%, compared to 14% last year;

PC software was 10%, compared with 14%; accessories were flat, with 12% for this and last year's first quarter; and the other category, which includes toys and trading parts, was 3% versus 5%.

Software continues to dominate the product mix, and while we anticipate the hardware price drop will positively impact console sales, we expect the software trend to continue.

For the quarter, our software-to-hardware tie ratios for the major platforms were 28:1 for PS2, 11:1 for Xbox, 20:1 for GameCube, and 6:1 for Game Boy Advance.

Top titles for the quarter included Tom Clancy's Splinter Cell from UBI Soft for multiple platforms;

Death Jam Vendetta from Electronics Arts for multiple platforms;

Zelda the Wind Waker from Nintendo for the GameCube;

Xenosaga from Namco for PS2, Command and Conquer Generals from Electronic Arts for the PC.

And our anticipated top titles for the second quarter and through the Matrix from Atari for multiple platforms, Teminator from Idos for PS2 and PC, Brute Force for Microsoft for Xbox, and NCAA Football 2004 from Electronic Arts for multiple platforms.

We've continued expanding our store base this quarter, opening 75 new stores, increasing our store count to 1,217 as of May 3, compared to 948 stores at the end of Q1 last year.

The rebranding initiative is progressing well as we opened more stores in the prior fiscal year than originally projected and have an aggressive store-opening plan for the current year.

Between both new and existing store conversions, we anticipate nearly three-quarters of all stores will be branded EB gains by the end of this year.

Our operations in Canada and Australia, like the United States, are experiencing record sales and benefiting from similar store economics and consumer demand for both software and hardware.

Our expansion in Europe is on plan, and we're satisfied with the performance of our operations there.

The recent console price drop was more dramatic in Europe than in North America and should increase the installed console base throughout the year.

With the cycle tracking a year or more behind the U.S., EB is uniquely positioned to participate in the international industry growth.

I would now like to turn the call over to Jim to review our financial performance for the first quarter in greater detail.

And after Jim's section, we'll open the session for Q&A.

Thank you, Jeff.

As you read in the release, we had another solid quarter.

Our results continue to benefit from strong sales, particularly software, as well as the management of [indiscernible] and outstanding store economics.

On a GAAP basis, total revenues for the first quarter increased 27.7% to $303.5m from $237.6m for the same period a year earlier.

Net income for the quarter more than doubled to $3.2m, or 12 cents per diluted share, compared to net income before the cumulative effect of the change in accounting principal of $1.5m, or 6 cents per share, reported for last year's quarter.

I should point out for those of you who didn't see our news release issued on May 1 that we announced the adoption of a new accounting method for recognizing vendor allowances, DITF0216.

The new method is retroactive to the first quarter of fiscal 2003, the quarter ended May 4, 2002, and you'll note that our prior-year numbers have been restated to reflect this change.

Our adoption of this new accounting method is consistent with the March 20 clarification by FASB's Emerging Issues Task Force of the transition rules relating to accounting for vendor allowances, plus last year's first quarter includes an after-tax charge of $4.8m, or 18 cents per diluted share, which is reflected as a cumulative effect of the change in accounting principle.

The effect of this new accounting method on Q1 fiscal 2004's net income was income of $775,000, or three cents per diluted share, compared to $884,000, or three cents per share in last year's first quarter.

The current year's effect was primarily due to the reduction in inventory of approximately $32m at fiscal year-end.

The impact on future quarters will primarily be driven by the change in inventory levels.

However, we don't expect to see a material impact for the full fiscal year.

The first quarter revenues of the $303.5m compares to non-GAAP adjusted revenues of $231.5m a year ago.

Non-GAAP figures exclude the results of operations and related expenses associated with EBKids and BC Sports Collectibles and the reversal of restructuring and asset impairment charges related to those businesses.

We exited these businesses during fiscal 2003.

Last year's non-GAAP measures are presented for comparison's purposes and are intended to show how results of our operations during the current quarter compared to the adjusted prior period.

Net income of $3.2m, or 12 cents per share, compared to the non-GAAP adjusted net income before the cumulative effect of the accounting change of $2.4m, or 9 cents per share last year.

As you saw in our release and Jeff mentioned, comparable store sales for the quarter increased 10.1%.

We've had excellent sales of both new and pre-owned software, and hardware sales continue to perform.

On the hardware price cuts, many of us in the industry have been expecting a larger drop to console systems to be announced last week at E3.

We believe the console manufacturers' decisions may have been impacted by the industry's stronger level of hardware unit sales compared to last year's first quarter.

The modest price cuts announced present a challenge to achieve comparable year-over-year store sales for Q2 since last year significantly benefited from the substantial price cuts of $100 for both the PS2 and the Xbox.

As Jeff stated, we believe the console manufacturers intend to hit their annual unit targets and will take the appropriate actions to achieve their stated goals.

From a financial standpoint, the lack of a more significant price drop, in my opinion, reflects the strength of this industry today.

Looking forward for the full fiscal year, we continue to anticipate total revenues to increase in the range of 14% to 19%, with an increase in comp store sales in the range of 4% to 6%.

We continue to estimate full fiscal 2004 earnings in the range of $1.70 to $1.77 per diluted share.

For the second quarter of fiscal 2004, we anticipate earnings in the range of two to five cents per diluted share.

This estimate is based on a decrease in comparable store sales in the range of 5% to 9% in the quarter as a result of the more modest price console price cuts.

As Jeff discussed earlier, this industry continues to be healthy, and we believe Electronics Boutique is well positioned to participate in the continued industry growth.

Whether it is internationally, we're one of the only specialty retailers, video game retailers, with international operations or domestically.

We believe our revenues continue to substantially outperform the industry as a whole.

I'm pleased with the performance at EB, including the growth we've experienced at our strip center stores and our ability to control operations.

I'd now like to turn the call back to Jeff.

Thanks, Jim.

As you can tell, we remain very optimistic about the industry and feel that EB Games is in an excellent position to continue to capitalize on the strong demand by consumers for this interactive and relatively expensive form of entertainment.

I am confident this will be another good year for us as we continue to open new stores and improve our economics in anticipation of continual industry growth.

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

Your first question comes from Harry Katica with Southwest Securities.

Good afternoon, gents, and congratulation on the good quarter.

Two questions.

First of all, can you discuss why you think your same-store sales were so much better than that of your major competitor?

And it seems like your hardware business was better than theirs, if you care to comment on that.

And, also, can you comment on whether your guidance for the year includes another round of price cuts at any point during the year?

Yes, it's difficult to say why one retailer--are constantly be different than another retailer.

Um, you know, I think that just looking at our internal business, as we said, it was driven by very strong software sales.

Our hardware unit sales in the quarter were strong.

We did have positive contribution from our international divisions.

Was the international business stronger than the U.S. business?

It comps more positive than the U.S. market did.

Not overly substantial, but it did positive -- comp better.

And then to answer the second half of your question concerning our opinion on price -- was it our opinion on price drops?

Yes, are you building into your earnings guidance for the full year another round of price cuts?

We are building into our guidance the manufacturers hitting their targets.

So that would suggest that if sales slow, they'll cut prices?

If they don't slow, they'll keep them where they are.

Right.

Okay.

That's exactly right.

I think that, just to expand on that for a second, you know, I think this year is running a bit different than last year.

Last year, we had a, you know, a huge impact in the second quarter, going from 299 to 199 on the two platforms and then going down $50 on the GameCube.

And that really drove the business through July.

If -- you know, our assumption at this point is that the hardware sales in the summer so, say, the second quarter this year won't be nowhere near as dramatic as they were last year, and that's really what's leading to our comp sales decline guidance in the comp sales point.

But I think that will lead to much stronger hardware unit sales in the third and fourth quarter because, you know, the 28% increase that the industry achieved in the first three calendar months is probably going to decline now as we go up against last year's strong unit sales.

So, you know, I think as we get into August and September and maybe even October, if the unit sales are not projecting towards, say, some of these 10, 9, 10 million units and Microsoft and Nintendo's projections, then I think, yeah, we'll see another price drop at that point.

When did the price cut become effective last year?

Around the middle of May.

I don't remember the exact date.

It was probably somewhere around the 15th, the 18th, somewhere around there.

Thank you, Jeff.

Sure.

Your next question comes from Tony Gikas with U.S Banc Corp.

Piper Jaffray.

Hi, good afternoon, guys, and congrats.

Thank you.

Could you give us a little bit more color on a couple of things?

It sounds like the sales out performance during the quarter wasn't from just a few gains, like Zelda and Pokemon.

Was it really across the board where you're seeing some strength in terms of the software sales?

And then on the hardware side, what sort of an uptick did you see post-E3 with the price cuts, some of the other retailers we've been talking to said that they've seen sort of a two-fold increase following the $20 price cut.

The software in the first quarter, I would say, was not all that much different from last year in terms of how it broke out.

You know, looking at the top PS2 titles, you know, I think that we didn't have -- you know, in the first quarter last year, Grand Theft Auto 3 was clearly the dominant PS2 title, and this year it was more spread out among the titles we mentioned plus the Getaway.

XBox last year was dominated by Halo and actually, Halo was top title again this year.

So I would say it wasn't that much different really.

So it was a broad range of product sales?

Yes, yes.

Okay.

And then on the hardware price cut, the --

Well, you know, I think that the bump in relation to what we were doing on an average day of the week before was -- it was probably somewhere in that range, maybe 1.5:1 to 2:1.

But, you know, nowhere near as dramatic as what we saw last year.

Okay.

Just a quick follow-up.

You know, as we move towards the end of this year, do you see software sales broadening out a little bit as we move through the cycle and we hit that $150 sort of mass-market price point on the hardware?

Or are we going to see a similar percentage of sales taking place from the top 10 to 20 gains in the market as we've seen over the last few years?

Based upon the historical evidence, I would say it stays pretty concentrated in the top titles.

Okay.

Thanks, guys.

Sure.

Thank you.

Your next question comes from Edward Williams with Gerard Klauer.

Good afternoon.

Just a couple questions for you.

Could you comment on what your store base is like between mall and strip, as well as what's in the international markets?

Yes.

The store count at the --

Store count at the end of the quarter, Ed, was 1,217, U.S. was 917, and international was 300.

Total strips worldwide, including the few we have in Canada, was 278.

Okay.

And then the -- can you comment a little bit about what we're seeing as far as the growth rate for used software and how it compares to the total software trends at this point?

Used grew more than new.

It wasn't a significant difference, but it did grow more than new, as it has been.

And, Jim, was there any quantifiable currency translation impact on the quarter?

From a P&L point, no, but we did get favorable translation on the entire international operations, particularly Canada and Australia.

Okay.

And then, last question, looking into the October quarter, you know, when you adopted new standard, obviously it seems as though it's a pretty dramatic effect on earnings based on the year ago where their earnings in the third quarter go down and fourth quarter go up.

I take it we should be looking for something kind of following that pattern this year, and any comments just on anniversarying Grand Theft Auto?

Does it look like it would be a difficult comp in that regard, or are you expecting possible increased hardware sales to make the comp a little bit easier in the third quarter?

Addressing the 0216 issue, I think the trend will follow a similar pattern to last year.

Second quarter last year was relatively flat, I think, and we should be in that range plus or minus, depending on where inventory levels come out for the second quarter.

Third quarter, as we build inventories into the holiday season, we'll certainly have a similar negative impact as we have to defer more of that vendor revenue on to the balance sheet, and then that should be relieved as we sell through the end of the year, which is why we're giving guidance that we don't think will be in the impact on the whole fiscal year.

As you remember, we ended last year's inventory position a little heavy, I guess, to be generous to us, and with the store growth, we expect to get the inventories under control and be close to a [indiscernible] level as last year at the end of the year.

So we don't see an impact for the full fiscal year from the accounting change.

I'll let Jeff answer that.

Yes, I think that Vice City certainly presents a challenging comp.

However, if you recall, the rest of the quarter was not real strong.

Software line-up in August, other than Madden and for most of September, were relatively weak, so I think that there's an opportunity to make up those numbers earlier in the quarter.

I think your comment on the hardware is valid.

We got a huge benefit from the priced drop in the second quarter of last year, and then hardware sales leveled off to a certain extent in the third quarter so that the hardware didn't have as much of an impact in the third quarter as you would expect it to.

So it's possible we make it up from that.

You know, I think it's still too early to specifically say what's going to drive the third quarter business.

We're still in the process of formulating the new release schedule.

A lot of the titles that we saw last week that vendors are saying second half, we need more specifics on that before we can say whether they're going to be in the third quarter or the fourth quarter.

So I think that that information will become more clear over the next few months.

Thank you very much.

Sure.

Your next question comes from Bill Armstrong with C.L. King.

Good afternoon.

Could you talk about why gross margins were down slightly versus a year ago given the sales mix that favored more software?

Well, the mix didn't change that much.

If you look at it, hardware only moved by 1percentage point, and although videogame software was up 5percentage points, it basically flipped with PC because PC was down about the same amount.

So -- and margins on PC games and console games were about the same.

So that really led to margin being pretty similar.

Okay.

As far as used game trends, you sold a lot of new games in the third and fourth quarter of '02.

Are you seeing a surge in trade-ins now or recently that is being converted into used-game sales?

A lot of the trade-in activity is product that was released in the third and fourth quarter of last year.

Yes, we are.

So you're continuing to see that going into the second quarter as well?

Yes.

Okay.

Did you buy back any shares during the quarter?

During the quarter, no.

Okay.

How about after the quarter?

We have been active in the market.

Then you -- I guess you don't want to talk about how many?

I'd prefer not at this time.

Okay.

Is there any concern that there may be confusion on the part of consumers with what Sony's doing with the prices, lowering it to 179 and then they're going to be raising it again to 199, with the extra package attached to it?

You know, I don't think that the consumer is fully aware of the bundle yet.

I mean I think that consumer sees the current system at 179 and probably believes at this point that it was a price drop.

I think once the bundle becomes available with some internal improvements in it and the network adapter for $20 more, my personal opinion is that the customer who's in the market buying these systems today will opt for the 179 unit, as opposed to the 199 unit.

Because I think that, although the network adapter is a great added feature to the PS2, I think it's something that, you know, the people buying that today are people who are more the early adopters or someone who's owned the system for a while and kind of grows into the network adapter.

I don't think that the person coming into the market today to buy that system for the first time is going to appreciate what the network adapter is and want to pay the extra money for it.

So if Sony intends to continue to sell standalone systems for 179 even after the [inaudible] --

Well, that --

-- per bundle?

There's been no -- there's been no word from them, no official word from them yet on that.

I think that there's probably enough inventory in the channel to last several months at least, and at that time, you know, they'll have an opportunity to reassess their strategy, and we'll see.

Okay.

One other thing, you mentioned Nokia in your opening comments.

What sort of potential do you see from that?

I mean I think we're going to plan pretty conservatively with it this year.

I certainly think that over the long run it's a real positive for the industry to see that a company the size of Nokia and a company the size of Sony are entering the handheld market.

I think it certainly gives us, everyone involved in the industry and the consumer, an opportunity to really benefit from that, from seeing some great new products, and probably make the category a little bit more competitive for everyone, which should lead to perhaps better margins for both publishers and retailers in the category.

So it's great.

We're very excited about it.

As we learn more about it, get more information from them, understand better what kind of quantities are going to be available and what the picking's going to be, we'll build that into our plan in the third and fourth quarter.

Any concern about pricing on that product, on the [N-gage]?

I think it's still too early to tell.

I mean I've heard a price quoted that is fairly high compared to what else is on the market today, but let's wait and see what ultimately they package in with it before we draw any conclusions for that.

Right.

Because I'd heard a 299 price point, which sounds to me like they'd be lucky to sell anything at that price.

Right.

We had heard that also, but let's give it some time.

Okay.

Thanks.

Sure.

Your next question is from John Taylor with Arcadia.

Hi.

I've got a couple of questions, too.

The referencing and answer you gave a little bit earlier, so we're going to have this PS2 skew out there with the modem connectivity, etcetera, on board.

Did you see any games at the show other than sports games that looked like they might be candidates to actually get the folks that are buying those machines online?

I don't specifically have any information on specific gains in front of me, but we can certainly get that to you.

We're still kind of compiling the list of all the games that we saw there with the features, etcetera.

I've actually, quite frankly, been more focused on release dates, as opposed to features at this point.

Yeah, I'm just curious whether you're seeing anything that looks like it might attract the interest of "real" people, you know, non-sports enthusiasts, and get them online?

Yes, my assumption is that there will be.

Yeah, okay.

And then with the new accounting standard, does that impact what you guys do with vendor-of-the month payments?

It's part of -- yes.

It's a good part of the consideration that would be with all the other allowances that we get through vendors that would have to be reclassed up to a reduction in cost of sales.

Right.

So are you supposed to sort of specifically match payments, concessions, allowances, whatever, with specific inventory lots and work it through that way?

I guess the general understanding of 0216 is you're supposed to take direct, incremental and specific expenses that you can associate the vendor allowances, and to that extent, you're allowed to offset those allowances against those expenses in SG&A.

Anything left over has to be considered a reduction in the purchase price, and you either relieve it through cost of goods sold, or it stays on the balance sheet depending on whether you've sold the inventory or not at that point.

Right.

So if you were to get a specific markdown or something on a specific title but you don't apply it immediately, you would have to work it through as those titles for that specific markdown do get sold through?

We're actually not measuring the performance at the skew level.

I mean that's -- to be able to match a reimbursement from a vendor for a skew and for the expense of the advertising is almost impossible.

Your comment, you said there had been a markdown, a markdown isn't necessarily an allowance.

A markdown is reducing the price of our carrying costs for that inventory.

So, yes, we would immediately reduce the carrying value of the inventory based on the price protection provided by the vendor, and that would be relieved through cost of goods sold as we sold the product.

Okay.

Okay, great.

And then I wonder if you could clarify something you said earlier.

What was the impact on inventory in a cumulative sense with the new accounting measure?

I thought I heard you say 30-some million dollars, but that seemed [inaudible].

I said we reduced our inventory from the end of last fiscal year by $32m.

We ended up with about $226m at the end of the year, and we brought that down by $32 m to the end of the first quarter.

That was one of the issues that we addressed in our year-end conference call, and we indicated that we would correct that situation, and we've made great progress in that, and we're in plan at the end of the first quarter.

Okay, that's what that was.

All right.

And then in terms of the make up of inventory on a per-store basis, it seems like your inventory's pretty similar to where it was about a year ago.

Is there any material difference in the make-up in terms of hardware, software, on that?

Actually, inventory on a per-store basis is down about 3.5% from where it was a year ago, but the make-up and the mix is different only to the degree that our product sales -- sales product mix has changed, so there's less PC game inventory this year, there's more console game inventory, less toys and trading cards.

Okay.

The part where inventory's probably -- our inventories at the end of the quarter were probably about the same as they were last year.

Okay.

And, of course, you had the acceleration in hardware last year.

You've got a deceleration this year.

So you're probably pretty set for a while.

Is that a fair statement?

Yeah, sure.

Yeah, okay.

All right.

And then coming out of E3 was -- in discussions you had with both the format owners and the publishers, what do you think they're going to do in the way of stepped-up advertising for either product lines, specific products, brand or whatever?

Do you expect a material increase in the ad budgets for everybody?

I mean my perception was that the marketing spending plans were pretty aggressive, but they were pretty aggressive last year, too.

I wouldn't expect them to be less than last year.

I don't know if they're going to be significantly more.

Nobody's beating their chest telling you about 30% increases?

Not that I recall.

Yeah, okay.

All right.

And then, last question, we had this sort of deluge of skews that were being shipped in the -- from August through November/December timeframe last year.

What do you think the delta is going to be?

I assume there's going to be fewer skews.

Any sense of how many it's going to be versus what was shipped last year?

Well, you know, I -- we added up the number of skews we saw at the show, and what we were told was going to be shipped, and we added up what we got last year, and right now across five different formats, we're looking at about 11% increase in titles.

PS2's down a little bit.

Xbox is up, GameCube is up, Game Boy Advance is up, PC's down.

Um-hmm.

Now, some of those titles will probably not make it this year 'cause, but then there'll probably be some titles that we didn't see that will appear.

So my guess is that at the end of the year, we're going to look back and say we've probably got about the same amount of titles as we got the year before.

Um-hmm.

Okay, thank you.

Your next question is from Bill Lennon with W.R. Hembrecht.

Thank you.

A couple questions.

First, on that 10.1% comp in the quarter, could you give us an idea of what the mix was, what's the hardware comp versus software comp was?

Second question, you said the number of stores added this year was 75.

Could you remind us what the number added in Q1 of last year was?

And then, third and final question, could you remind us again what your addressable market for software in calendar year '03, what your growth rate assumption is?

All right.

And perhaps PS2, specifically, in there?

I think that was four.

Thanks.

First question, we normally don't break out comps by platform, but, you know, our software business did grow faster than our overall business, so you can assume that that was a stronger comp than hardware was.

I don't remember what -- you had a question about PS2 growth rate?

I'm sorry.

Well, let's go in order then.

Number of stores added Q1 of last year?

I know 75 this year.

What did you add last year in Q1?

I think it was about 40.

Okay.

We ended up with 948 at the end of first quarter.

Okay.

And then what addressable market -- what do you think software does this year, calendar year growth rate in North America, and what is your PS2 assumption specifically on that?

For our planning purposes, we focused on the next-generation console.

You know, 'cause when you start to factor in the legacy platforms, it pulls the overall growth percentage down.

But since we do such little business in those, for our planning purposes again, we just focus on the three.

And we're looking at -- we believe next-generation software dollar growth this year will be somewhere between 25% and 30% in the U.S., and we think the PS2 will probably be at the lower end of that range.

Thanks a lot.

Sure.

Your next question is from Greg Goldsetter with Gardner Lewis Asset Management.

Yeah, I have a few questions.

One, the difference between the comps in the malls and the strips in the quarter.

Two, your competitor was talking about a 25% to 30% increase in software in the next quarter.

Do you see it the same way?

And, three, should I understand that in your modeling, you're using for at least the PlayStation 2 how many units sold for the year at 10.5m units?

Because that's what I understand the numbers for Sony's to be.

All right.

We don't break out comps between strip and mall.

However, I will say that we've both had strong performance in the quarter.

One faster than the other?

Well, strips were a bit faster than malls, but we have a lot of newer strip stores that aren't mature, so immature stores tend to comp at a higher rate than mature stores.

The 10.5m number from Sony is a North American number, so that includes Canada.

If you figure Canada is somewhere between 8% to 10% of the U.S. market, then figure the U.S. is roughly about 9.5m.

And, I'm sorry, I don't remember what your second--

The software growth for next quarter.

Gamestop, I think is, at 25% to 30%.

I think we're probably in a similar range.

Okay, thanks.

Your next question is from Rodman Moorhead with Borjon Capital.

Yeah, hi.

You guys beat the quarter significantly.

You didn't raise your yearly guidance.

I was wondering what your thoughts were on that.

You know, I think that you've got to take a look at how we plan our business.

You know, we just talked about Sony selling about 9.5m units of hardware in the U.S.

We're looking at between PlayStation, Xbox and GameCube, a 10%-11% increase in units.

We have certain formulas that we use to figure what software sales are going to be based upon that, and if we think that the industry is tracking to hit that number, then, you know, we're going to stick to our guidance.

We're not -- you know, if you follow this business for a long time, there are too many swings from one quarter to the next because of title release schedules, because of price changes on hardware, as we're experiencing now, and so there's -- you know, we're going to focus on the annual target.

So you're not saying that by holding the long-term target, you're not taking away from other quarter.

It's just there's too much variability.

Is that a good way to summarize it?

Yes.

All right.

Thanks.

Your next question is from Tony Gikas with U.S.

Banc Corp.

Hi, guys.

A quick follow-up question.

Do you have any of the Game Boy SP hardware units in stock?

I would assume that it's selling at least in line with your expectations or better.

And how is it driving software sales?

And would you characterize any change in your software sales estimate for that platform for the year?

We are getting regular shipments of Game Boy Advance SP.

We are still, for the most part, selling through that inventory before we get replaced, so the appearance could be that we're out of stock in a lot of stores.

Um-hmm.

Initially, I'd say that there hasn't really been any significant benefit to software business.

I think most of those sales at this point are people who own the Game Boy Advance who are upgrading to the SP, but I do think long-term there will be a software benefit that, you know, hopefully, we'll see by the fourth quarter just because Nintendo has indicated that the flow of product in the second half of the year will be very strong, so we expect that to be a very strong item for us in the fourth quarter, and we do think that'll have positive impact on Game Boy Advance software sales by the holiday season but probably not before that.

Okay.

And then, you know, what's your take on the PSP in terms of going after that demographic?

Do you think there's a real big market there?

And the price point of that product seemed to be on the high side.

We're hearing numbers around the $200 price point.

Yeah, again, I think it's pretty early in the process.

You know, wait and see what all the features are on it compared to the SP and the Nokia.

I think that the handheld business is something that that market or potential market's been underserved the last few years because of a lack of differentiation in product, you know, so I think just Sony with their ability to bring new technology to market and, you know, we have a lot of confidence in their ability to bring a successful product to market.

The product will be successful long term.

So, what the price point is initially is less important as to what's the long term potential of it.

And what do you think of the demographic?

I think it's positive because I think that the handheld demographic has been skewed to a younger consumer for so long that we welcomed seeing a broadened demographic for the handheld market.

Okay, thanks.

Thank you.

Your next question is from Harry Katica with Southwest Securities.

Just a follow-up question.

Can you just help me understand the gross margin impact a little bit and SG&A as a percentage of sales?

What was the impact of simply changing the accounting for vendor allowances?

And then what was the difference between this year and last year?

Because you said it added three cents to earnings, but it seems like it would have a bigger impact on the margin.

It does.

We reclassed about $6m.

We increased SG&A about $6m and decreased cost of goods sold by about $6m.

Okay.

How does that add three cents a share?

Let me finish.

Just help me.

Additionally, because our inventory levels came down, we were able to relieve or roll back into the P&L some of the deferred revenue from the end of last year.

Okay.

If you just wipe all that stuff out on an apples-to-apples basis, how much did gross margin increase?

How much did SG&A go up?

SG&A went up to $6m, and cost of goods sold declined by over $7m.

I understand.

If you take that out, what was an apples-to-apples increase in --

I don't have the number in front of me.

We're now doing our books on the new accounting method, and I don't have comparables or what it would like under the old stuff.

It was a challenging-enough --

Well, what was it if you did everything under the new last year and everything under the new this year, what was the change in gross margin?

That's the numbers in our press release, Harry.

The numbers in our press release reflect the new accounting under both years, okay?

WE restated last year's financial results when we adopted the accounting change, so what you're seeing is comparable percentages year to year --

Okay.

-- under the new method.

So you don't have to try to adjust anything unless you wanted to take everything back to what it was --

Does any of that stuff include the EBKids?

We presented in our press release the pro forma results as a supplemental schedule, so you can -- and the supplemental, also, reflects the 0216 adjustment.

So we gave all the comparable numbers you need to compare apples to apples.

In the comparable numbers, you take out EBKids?

In the adjusted numbers on the supplemental schedule, all we did was take out EBKids.

Yes.

Okay.

I'll try and figure that out.

Thanks.

Thank you.

Ladies and gentlemen, we have reached the end of the time allotted for questions.

Do you have any closing remarks?

Yes.

Thank you for joining us today, and we look forward to speaking to you again in the future.

Thank you.

This concludes today's teleconference.

Thank you for participating.

You may now disconnect.