GameStop Corp (GME) 2003 Q2 法說會逐字稿

Good afternoon and welcome to Electronic Boutique Holdings Corp corporation second quarter fiscal 2004 conference call.

The Q2 earnings press release was issued today after the close of the market today.

You can obtain a copy right now at the investor section on our website, www.ebholdings.com.

Hosting the call today from Electronics Boutique is Jeffrey Griffiths, President and Chief Executive Officer, and Jim Smith, Chief Financial Officer.

Before we begin the call, I would 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'd 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 cumulative effect charge associated with our 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.

We encourage all investors to consider all measures before investing in Electronics Boutique.

Some of the material presented today may become outdated and Electronic Boutique Holdings Corporation undertakes no obligation to revise or update the information provided during the conference call..

A telephone play back of the conference call will be available from 8 P.M. today throughout midnight August 28th, 2003.

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

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

Good afternoon and thank you for joining us today.

I am pleased to report strong second quarter results that reflect not only growing software sales, but also operational efficiencies that we've implemented over the course of the quarter.

This quarter was marked by the release of stronger than expected new releases as well as an increase in pre-owned promotions.

The combination of these factors has delivered an exceptional performance despite the challenging environment in the industry.

Of special note, our consistent results have been recognized by Standard & Poors with our recent listing in S&P Small Cap 600 index.

We posted a 15% increase in revenue over last year, totaling a record $302.1 million for the second quarter.

As expected, comparable store sales were down 5.7 percent, reflecting a lower volume of hardware sales compared with last year.

Software sales were the driver of revenue growth, increasing 31.5% over last year.

At the end of the quarter, we saw a significant benefit from the release of NCAA Football 2004 from Electronic Arts on multiple platforms, and Star Wars Knights of the Old Republic from Lucas Arts for the XBOX, which have carried over into the first few weeks of Q3.

As expected, hardware unit sales were below last year's second quarter, but exceeded our modest expectations.

Looking ahead to the remainder of the year, we continued to be optimistic.

We are confident in our ability to hit our unit projections without any further price reductions.

As I've mentioned previously, our software business continues to perform well.

We met our projections for the quarter, and we've made some important strides in our business model that have allowed us to take advantage of the overall market shift to higher margin software.

We believe that software will drive our business in the back half of the year.

During the next two quarters, we see a solid lineup of new releases on all platforms, which we believe will generate strong sales.

The growth of our pre-owned software sales continues to outpace that of our new software sales.

This trend makes our business model less reliant on new releases and industry fluctuations, and sets us apart from our mass-market competitors.

These moves have enabled us to generate higher margins, built customer loyalty, extend our brand, and further increase our market share in the industry.

Looking at year-over-year domestic sales by category.

Video game software was 58% of revenue versus 53% last year.

Video game hardware declined to 17 percent, compared with 19 per cent last year.

PC software trended down to 11% from 14% last year.

Accessories were flat at 11% for this and last year's second quarter, and other, which includes toys and trading cards (?) was 3% versus 4%.

We should note that our hardware sales were positively impacted by the outstanding performance of the Game Boy Advance SP.

For the quarter, our software to hardware tie ratios for the major platforms were 26 to 1 for PS2, 20 to 1 for XBOX, 13 to 1 for GameCube, and 4 to 1for Game Boy Advance.

Top titles for the quarter included Enter the Matrix from Atari for multiple platforms, Star Wars Knights of the Old Republic from Lucas Arts for XBOX, NBA Street Volume 2 from Electronic Arts for multiple platforms, and NCAA Football 2004 from Electronic Arts for multiple platforms.

And our anticipated top titles for Q3 include Madden 2004 from Electronic Arts for multiple platforms, Soul Caliber Two from Namco for multiple platforms, Man Hunt from Take Two Interactive for PS2, and WWE from THQ for multiple platforms.

Madden 2004 has performed exceptionally well in the first two weeks since its release.

Early indications suggest that Madden will be one of the top new releases for 2003.

In fact, in the first week after release, our unit sales of Madden on multiple platforms have surpassed those of Grand Theft Auto Vice City over its first week of sales last year.

There were 87 new store openings in the new quarter, bringing our total store count to 1,303 as of August 2, 2003, compared with 994 stores at the end of Q2 last year.

As a result of our confidence in our business, the refinement of our site selection process, and the soundness of our existing infrastructure, we are instituting a more aggressive store opening strategy.

We have now revised our estimated openings for fiscal 2004 to 350, up from the original plan of 275, focusing on strip center locations in the U.S.

Our re-branding initiative to EBGames is on schedule, with over 40% of the chain completed by the end of Q2.

We expect more than three quarters of our locations will be re-branded by yearend.

We had substantial revenue growth in all of our international markets during the quarter.

We expect all of our international operations to make positive contribution to total company results in the back half of the year.

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

After Jim's section, we'll open up the session for Q&A.

Thanks, Jeff.

As Jeff cited earlier, our performance for the second quarter reflects solid sales and bottom line results, driven by a number of initiatives undertaken to enhance our operations.

We've continued to fine-tune our inventory analysis and allocation processes, which have enabled us to make better initial and reorder purchase decisions.

This has led to reduced inventory levels and improved margins.

Total revenues for the fiscal 2004 second quarter rose to $302.1 million from $262.6 million in the prior year period.

Net income for the second quarter was $1.7 million or 7 cents per diluted share, compared with net income of $ .6 million, or 2 cents per diluted share for the same quarter last year.

For the 26-week period of fiscal 2004 ended August 2, total revenues increased 21% to$ 605.5 million from $500.3 million in the prior year period.

We reported that income for the same period of $4.8 million, or 19 cents per diluted share, compared with a net income before the accumulative effect of a change in accounting principle relating to the recognition of vendor allowances, of $ 2.1 million or 8 cents per diluted share reported a year ago.

On non-GAAP information in fiscal 2003, we exited 2 business lines, EBKids and BC Sports Collectibles.

Accordingly, our non-GAAP adjusted revenues were $259.1 million in the second quarter of fiscal 2003.

Our current quarter net income of $1.7 million represents a 59 percent increase over last year's adjusted net income of $1.0 million, or 4 cents per diluted share.

For the 26-week period or fiscal 2003, our non-GAAP adjusted revenues were $490.6 million.

Our 26-week current year's net income of $4.8 million compares to last year's adjusted net income before the accumulative effect of accounting change principal of $3.5 million or 13 cents per diluted share.

As we reported, comparable store sales for the quarter decreased 5.7%, in line with our expectations.

This was a difficult comparison, as Q2 hardware sales last year were unusually strong due to substantial price cuts.

However, our hardware sales in Q2 this year were better than expected.

As you know, in the first quarter, the board of directors authorized the repurchase of up to 1.5 million shares of our common stock.

During the second quarter, we completed the purchase of the 1.5 million dollar shares at an average price of $21.15 per share.

Current generation software sales continue to experience solid growth.

The quality of titles is better than ever.

The hardware install base continues to expand as well as broaden in its demographics.

Our store expansion plan is ahead of target.

And most importantly, as Jeff mentioned, we are effectively executing our core strategies, focusing on pre-owned software sales which drive margin growth.

With solid momentum entering the third quarter, we anticipate earnings in the fiscal 2004 third quarter in the range of 14 to 18 cents per diluted share for the 13-week period ended November 1st. 2003.

This estimate is based on comparable store sales in the range of flat to positive 4% for this period, and a diluted share base of 25 million shares.

As a result of our favorable year-to-date performance, our outlook for the third fiscal quarter, and the completed share repurchase, we now expect full year fiscal 2004 earnings to be in the range of $1.77 to $1.85 per diluted share, based on average diluted share base 25.3 million shares.

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

Thanks Jim.

Operator, we would now like to open the call to Q&A.

Thank you, sir.

At this time I would like to remind everyone, in order to ask a question, press star then number one on your telephone keypad.

We'll pause just a moment to compile the Q&A roster.

Your first question comes from Arvin Latea of Southwest Securities.

Good afternoon, guys.

Great quarter.

Thank you.

Just a couple of questions here.

One, Jeff, are you assuming a specific type of price cuts in your Q3 estimates?

I know that you mentioned you don't need one necessarily.

But tell me what's your thinking, whether there is likelihood of one happening in this quarter near mind or maybe in the fourth quarter?

Second, what are you doing specifically in the fourth quarter to sort of counter the challenges that we saw last year's fourth quarter from the mass merchants?

And then the third question relates to international business.

You said it was pretty strong.

Can you talk maybe in terms of same-store sales internationally or margins or what is driving your international business?

First of all, we did not assume any kind of price move in the third quarter.

All of our internal projections are based upon the current prices, including the bundle that Sony announced earlier this week.

You know, what I -- I think the thing I would like to point out, or have everyone keep in mind concerning the hardware business, is that, especially with PS2 we're entering the fourth holiday season with PS2.

We're going to have an install base of 22 to 25 million units by the holiday season.

Hardware is not what is going to drive the business in the back half of this year.

Software is what's going to drive the business.

We're in the fourth year of software for this platform.

That's why we feel so confident about our prospects is because, you know -- I don't think EB in particular is going to have to rely on Sony or Microsoft making any additional moves on hardware pricing.

Okay.

The second part of your question, in the fourth quarter, we actually, you know, we gained market share in the fourth quarter last year.

We expect to gain market share again in the fourth quarter this year.

We will have a number of what we feel will be very exciting promotions to support hardware, new release software and pre-owned business.

You'll probably see some increased promotional activity from us, you know, newspaper print, radio, TV, that type of thing, to help support our re-branding and the additional strip stores that we have.

So, you know, we feel very confident that we're be able to more than hold our own against the mass merchants in the fourth quarter.

As far as international goes, our international comps were all very positive.

We don't break it out by country, but they had a -- they'll have a positive impact on the back half of the year

Were they better than minus --

One other thing on that, though, is to keep in mind that, particularly in Europe, it's a very small store base and these stores are not mature.

So although the percentages look good, the dollars that they contribute is relatively small at this point.

How many stores do you have now internationally?

The exact international number is 316 at the end of the quarter.

Okay.

So about less than a fourth.

But the contribution would be significantly less, given that these are newer stores.

You want to take a guess what sort of contribution?

Maybe the 10- 15% kind of range in terms of operating income contribution?

No.

We're not going to break that out.

Okay.

Then just a couple of more here, if I could.

The new stores that you're opening, you're saying those are ahead of plan.

You're finding real estate opportunities that are better than expected.

Can you maybe elaborate a little bit on that?

Are you finding, you know, which markets are these?

Are you using sort of the cluster strategy that you talked about earlier?

Are you finding real estate opportunities, even next to Game Stop, if you will.

Elaborate on what you're finding on the new store side.

First of all, in terms of performance, these stores are ramping up a little faster than expected.

That's been a real positive.

As far as selecting where we're going to go with them, we really started this strategy two years ago and we put the infrastructure in place to support it.

And now that's paying off with regional real estate people, with the experience that we've gained and the relationships that we've created.

We've just found that , in this real estate environment, we've been able to get quality locations at a faster pace than we thought we were.

Our mall stores, were in 46 states, we were in all the metropolitan areas.

So it's kind of difficult to not- you know, to open up strip in markets where we where we don't already have a presence.

So what we're finding is that these stores are mutually supportive of our existing mall stores and that we are really attracting a different customer.

We believe we are attracting a customer who previously was going to a mass merchant or big box retailer or toy retailer who happened to be in a strip center.

Could you break down the strip center versus mall store rate?

Yes.

That number is, currently malls are 658 and strips are 329, U.S.

Great.

Thanks again.

Great quarter.

Thank you.

Your next questions comes from Tony Gikas.

Good afternoon, guys.

Great job as well.

Couple of questions for you.

Talk maybe a little bit about the gross margin potential as we move through the second half of this year.

And I guess, more importantly, what the potential is in '04?

Not going to give specifics, but I think it's safe to assume that we will continue to see margin improvement over the prior year.

Not as dramatic as it was in this quarter, but certainly better.

And that is -- that will be a result of the continued shift from hard to software and also an expanding pre-owned business.

How about in 2004, at least, directionally?

Expect to see more of the same, a modest increase in all quarters.

Okay.

Do you expect, just to clarify the hardware comment you had made, do you expect a hardware price cut or some sort of bundling initiative in the fourth quarter?

You know, Sony has given no indication that they expect to do anything else, so we're not going to assume that they will.

Like I said, we -- you know, our plans are assuming that the prices are what they are today, the bundles are what they are today.

And again, being in the fourth year of the PS2, as far as we're concerned, the business is driven by software at this point.

Do you think that they can hit their hardware sell- through goals without a price cut or some sort of additional bundling?

I would say, based upon the current trends, it will be a challenge for them to hit the upper range of their goal.

But, again, as far as we're concerned, we're not focusing on that for our internal projections

Okay.

Two other real quick ones.

What's the same-store sales comp you're assuming to the fourth quarter of this year?

And then, should we be looking at a material change or increase in the marketing spend in the second half of this year relative to the prior year?

As far as comps in the fourth quarter, we're assuming it's probably going to be around 5%.

Could be 4, could be 6, but that's where we are today.

And I'm sorry?

What was the second half of your question?

The second part was change in marketing spending the second half of this year or around the holidays relative to last year?

It will be higher.

I don't have any further information than that at this point.

Okay.

Last question.

Any preview on the store count for 2005 at this point?

No.

We haven't given any guidance on that yet.

Could it be a similar number as this year?

Could be.

Okay.

But that's not a commitment that it will be.

All right, great job.

Thanks, guys.

Thank you.

Again, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your next question comes from Edward Williams of Harris Nesbitt Gerard.

Afternoon.

First of all, could you elaborate about what you meant by operational efficiencies that helped out in the quarter?

Well, a lot of it had to do with controlling expenses, particularly in the pay roll area, freight.

We had less inventory per store, So there was some benefits there.

We also made some adjustments in our advertising numbers.

We know it's going to be a difficult quarter.

The comps were a challenge.

And we looked at our original plan and went at it pretty aggressive, just tried to pick up pennies everywhere in all of the categories.

The biggest items were coming from payroll and from distribution savings.

Okay.

And then do you expect to continue to employ those tactics going forward, given your current outlook in the environment, or are you going to step up some of those expenditures?

I think that we found some of those things worked and we expect them to continue.

What do you expect for inventory levels, kind of looking at the end of this quarter going in to the holidaying and coming toward the end of the year?

Our goal that average store inventories will be lower than last year.

Okay.

And then looking at the international markets, am I correct to assume that you're expecting them to be profitable as we get to the holiday season?

Yes.

Okay.

And then also your new stores that you're looking to add the balance to get you up to 350 for this year, how many in the third quarter, how many in the fourth quarter?

We're looking for 135 to 145 stores in the third quarter, and about between 40 to 50 in the fourth quarter.

Some of the third quarter stores could slip to the fourth.

How would those break out between international, strip and mall?

For international and strip?

The rest of the year split is about 145 U.S. and the balance will be international.

And out of the U.S, probably all strip.

I don't I don't think we have any mall stores left planned for this year.

And then, Jim, any plans to plans to step up the buy-back program this year

Not this year.

Not at this time.

We completed it in the quarter.

I think we, you know, did a good job getting the price we did.

We'll take a look at next year.

I think based on the buy-back, the current forecasted income, capital expenditures, we might finish the year at bout the same cash level as last year.

Give or take a million or two here and there.

I'm sure the board will look at opportunities and consider options next year.

There's nothing to even discuss or consider at this point

What are you expecting for CAPEX to be as the year progresses?

At this time with the increased stores, probably 38 to $40 million, at this time

And cash flow from operations?

Probably about 67, -- 65 to 67.

Okay.

Thanks a lot.

Your next question comes from Paul Kaump of Dougherty and Company.

Good afternoon and congratulations.

Quick question here.

I think you mentioned on the call something about better allocation and reorder decisions being made during the quarter.

Can you elaborate on that?

Well, you know, if you recall, we ended the year with inventories heavier than we would have liked them to be.

I think we just, as a company, made a commitment that we were going to improve on that.

And with the number of titles being released in the back half of the year, about the same amount as what we had last year, I think that the industry is going to again be faced with the challenge of determining which titles are going to be the winners and which titles are going to be challenged.

And so we just felt that we needed to do a better job at managing that.

Okay.

How much, if any, of the increased guidance for the full year can be related to the faster store build out?

About a penny at most.

Okay.

All the extra stores are in strip centers and they contribute very little in their first full year.

And certainly, they won't all open in the first six months.

They're not going to contribute much.

How healthy is the overall inventory?

Are there any titles you need to get rid, are you guys running a few million heavy in any place?

We feel real good about the inventory right now.

As I said earlier, average inventory per store is lower than it was last year.

Good enough.

Thanks.

Your next question comes from Bill Armstrong of C.L.

King and Associates.

Good afternoon.

I'll offer my congratulations also.

As you undoubtedly know, Game Stop is projecting negative comps, or flat to negative 5% comps for the third quarter, and they cited weak hardware sales as a result because hardware sales were strong a year ago.

Are you expecting similar trends?

We have pretty modest projections for hardware sales in the third quarter.

Although, what we're seeing in August is that the difference between this year and last year is much less dramatic than May, June, and July.

We do think that virtually all of our comp store growth, though, is going to come out of software, not hardware.

As a follow up to the inventory questions.

Looks like inventory per store is down 12.5 % year-over-year, which is a pretty big drop.

Is there any concern that you might be a little too light?

No.

No.

Is the reason that it's down so much that strip centers have a lower inventory commitment on a per-store basis versus mall stores?

A little bit of it.

I think a big chunk is hardware.

We have a lot less hardware than we had a year ago.

Again, we're in the fourth year of the PS2 and the business is going to be driven by software.

Got it.

Do you feel that you're going to have any infrastructure issues, whether it's distribution, information systems, management, et cetera, to handle this pretty substantial boost in store growth that you're talking about?

We wouldn't have done that if we thought there was any chance of that happening.

Like I said before, we put -- we started to put the plans in place two years ago to be able to support additional store growth.

We found that, you know, when we went to one number, we were able to handle it, and then we could go to a bit higher number and were able to handle it.

And just were gradually increasing the number stores that we can handle.

So we're totally confident that we have the infrastructure in place to fully support that.

I seem to recall in the past that you guys have talked about a potential of about 2,000 strip center stores in this country when you're completely built up.

Do you still feel that that's a viable target?

Yes.

Okay.

One final question.

I noticed management fees were down year-over-year for, I think, the first time since I can remember.

Any comments on that?

Actually, it would be a little offensive talking about the U.K. information, since they only release their information twice a year.

But I think they had talked publicly about having a challenging year.

And they had negative comps in the month of June going up against, I think, a price cut in hardware systems in the U.K. last year, so that probably carried over into the July period.

They were talking about very difficult comps in their industry.

We don't have access to monthly sales until they remit the funds to do it, so it's hard to get an outlook on their specific plans for the rest of the year.

At this point, though, we're looking for about flat with last year at this point, given what they've had the last two months and their public comments about the rest of their year being a challenge.

Okay.

Thanks a lot.

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

Are there any closing remarks?

Yes.

We appreciate your time this afternoon, as well as your support of and confidence in Electronics Boutique.

We look forward to speaking with you again in November.

That concludes the Electronics Boutique Holdings Corporation second quarter fiscal 2004 conference call.

You may now disconnect.