GameStop Corp (GME) 2003 Q3 法說會逐字稿

Good afternoon, and welcome to the Electronics Boutique holdings Corp's third quarter fiscal 2004 conference call.

The Q3 earnings press release was issued after the close of the market today.

You can obtain the copy--copyright now on the investor section of your web site at WWW.EBholdings.com.

Hosting the call today from Electronics Boutique is 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 nonGAAP financial results.

These nonGAAP results exclude charges associated with the closing of our EB kids business and sale of our BC sports collectible business as well as the cumulative effect of charges associated with or adoption of a new method of an accounting or vendor analysis.

As a supplemental schedule to our earnings release we have provided a tabular reconciliation of nonGAAP measures to correspond with GAAP measures.

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

Some of the material presented today may become outdated and Electronics Boutique undertakes no obligation to revise or update the information provided during the conference call.

A telephone playback of today's conference call will be available from 8:00 p.m. today through midnight November 27, 2003.

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

I would now like to turn the call over to Mr. Griffiths.

Please go ahead, sir.

Good afternoon, and thank you for joining us.

This afternoon we issued our third-quarter financial results posting a 15% increase in revenue over last year, and outpacing the growth of the industry.

We remain on target to report record earnings for the full fiscal year 2004.

Since we've already discussed most of the specifics in our November 3rd call, I'll briefly recap our highlights for the quarter.

Electronics Boutique achieved positive comparable store sales figures in early August.

This momentum didn't carry through the third quarter as evidenced by our comp store sales decline of negative 6.5%.

But even so we continued to deliver solid performance that exceeded that of the industry.

According to NPD group industry wide sales declined 13% while our domestic video game sales were up 10% and we continued to grow our market share.

Looking forward, we remain highly confident in our business strategy and our ability to perform.

EB continues to deliver positive sales growth that is outperforming the industry.

We continue to open more strip center stores, and we are accelerating the growth of our preowned business.

Our preowned strategy makes our business model more stable while helping us to generate higher margins, build customer loyalty, extend our brand and increase our market share.

Now let me review the third quarter specifics we normally provide.

Our sales by category for the quarter were as follows: software was flat at 61% versus last year.

Hardware was 16% compared with 14% last year.

PC games were flat at 11%.

Accessories were 9% for the year versus 11% in last year's third quarter and other categories were flat at 3%.

Our tie ratios for the major platforms for the quarter were 31 to 1 for PS2, 20 to 1 for X-Box, 14 to 1 for GameCube, and 4 to 1 for Game Boy advance.

Our top selling titles for the quarter included Madden from Electronics Arts for multiple platforms, Soul Caliber from Namco for multiple platforms.

WWE here comes the pain from THQ for the PS-2, NBA live from Electronic Arts for multiple platforms.

Tiger Woods golf from Electronics Arts for multiple platforms.

Our anticipated top titles for the fourth quarter include Final Fantasy 12 from Square Enix for the PS2.

Madden football, Lord of the Rings from Electronics Arts for multiple platforms.

Socum 2 from Sony for the PS2 and Mario Cart, double dash, from Nintendo for the GameCube.

As noted in today's press release, we opened a net of 133 new stores during the quarter increasing our total store count to 1,436, as of November 1.

Our continued confidence in our business along with the better-than-expected performance of our new stores has prompted us to continue to accelerate our store opening program.

We now estimate that our total store openings for fiscal 2004 will be approximately 375, up from 350 we previously announced.

We continue to focus on strip center locations in the U.S., where we expect a higher return on our investment.

These returns are partially attributable to a large portion--a larger portion of higher margin preowned businesses in these stores.

Our international expansion is on target for the year and we continue to have strong revenues in those markets.

We continue to gain market share in Canada and Australia and are pleased with our progress in establishing our business model in the European markets.

Before I turn the call over to Jim, I'd like to reiterate some expected highlights for the fourth quarter.

We are on track to deliver record earnings for the full fiscal year.

We're looking at a solid new release schedule for the holiday season, and we're selling to an installed base of hardware that is 50% larger than last year.

We continue to post positive sales growth that outpaces the industry's performance a fact that demonstrates the strength of our brand and business model and bodes well for our future.

In addition, our industry continues to offer us exciting, long-term growth prospects.

The videogame market has repeatedly proved to be highly resilient to economic conditions and we think this is still the case.

When hardware prices do decrease as anticipated in fiscal year 2005, we expect to generate both increased hardware and software sales and higher profits.

Now Jim will review our financial performance for the third quarter.

After Jim's section, we will open the session for a brief Q&A period.

Thank you, Jeff.

During the quarter we continued to drive initiatives to enhance our operations, improve our inventory and allocation processes and increase margins.

Our total revenues for the fiscal quarter rose to $324.7 million up from $283 million in the prior-year period.

Representing an increase of 15%.

Net income for the third quarter declined to $1.5 million or 6 cents per diluted share compared with net income of $3.7 million or 14 cents per diluted share for the same quarter last year.

Our nonGAAP adjusted revenues for the third quarter fiscal 2003 were $279.2 million and our adjusted net income was $2.7 million or 10 cents per diluted share.

Comparable store sales decreased 6.5% for the quarter versus a 38% increase last year.

Gross margin on sales improved by 100 basis points over the prior year quarter.

This was the result of an increase in sales of higher margin preowned products, higher margins in the PC software category, and the beneficial impact of VITF0216 which deals with the accounting for vendor allowances.

SG&A expense as percentage of revenues increased to 24.7%.

This is a result of our negative comp-store sales as well as by the fact that a large percentage of our store base is less than 1-year-old and most of these are the strip center format.

We expect to achieve improved leverage as these stores mature.

For the 39-week period of fiscal 2004, ended November 1st, total revenues increased 19% to $930.3 million from $783.2 million in the prior year.

Fiscal 2004 net income for the same period was $6.3 million or 25 cents per diluted share compares to $5.8 million or 22 cents per diluted share in the first 39 weeks of fiscal 2003, before the cumulative effect of the change in accounting priciple, relating to the recognition of vendor allowances.

For the comparable 39-week period of fiscal 2003, our nonGAAP adjusted revenues were $769.8 million and our adjusted net income before the cumulative effect of the change in accounting principal was $6.1 million or 23 cents per diluted share.

At the end of the quarter our merchandise inventories were $258.6 million or $12.4 million less than last year's third quarter.

On a per store basis this is an average of $180,000 per store or more than a 28% reduction compared to last years same period.

This decline is a result of improved inventory management and the decrease in average selling prices on both hardware and software compared with last year.

At this time our overall inventory is in great shape heading into the fourth quarter holiday season.

Earlier this week our Board of Directors approved a program to repurchase up to 2 million shares of the company's outstanding common stock.

This decision was based on our continuing strong cash position as well as a belief that our stock is under valued.

As you recall, we completed a repurchase program of 1.5 million shares in the second quarter.

Based on our assumption that current industry trends will continue to be soft, we are reaffirming our recently revised outlook for the fourth quarter.

We expect fiscal 2004 fourth-quarter earnings to be in the range of $1.32 to $1.42 per diluted share.

Comparable store sales are expected to decline in the range of 4% to 7% in the quarter.

As previously announced we expect full year fiscal 2004 earnings to be within the range of $1.56 to $1.66 per diluted share based on an average diluted share base of 25.4 million shares.

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

Thanks Jim.

Before we move on to Q&A I'd just like to add that we're in excellent shape for the holiday selling season.

Our stores look great, our staff is enthusiastic and well trained.

Our inventory levels are solid.

We are well stocked with all the top products and we have a strong assortment of preowned titles.

We have a smart marketing plan and an excellent distribution network, and we're aggressively focused on leveraging this holiday selling season to drive strong fourth quarter performance and continued market share growth.

Operator, we'd now like to open the call for a brief Q&A.

At this time I'd like to remind everyone that In order to ask a question please press star and the No. 1 on your telephone keypad.

Just a moment to compile our Q&A roster.

And your first question comes from Bill Armstrong.

Good afternoon.

Couple questions.

Software sales, were both new and used software sales up during the quarter?

Yes, they were.

Okay.

So you gain share and you feel you gained share in both areas.

Yes, absolutely.

Inventory per store being down 28%, that that's a mighty big decrease.

Do you feel that you have any shortages anywhere?

No.

Last year we were buying new releases much more aggressively in September and October.

We also were buying hardware a lot earlier last year because we felt that there was possibly going to be a shortage if the hardware sales were strong in the fourth quarter.

This year we didn't feel that way going through the quarter so we actually have brought in a significant amount of hardware and accessories the first three weeks of November.

So no, there's absolutely no concern about inventory shortages.

Okay.

And then the third question, could you just break out the store base at the end of the quarter by international and then within U.S. mall versus strip and then also give us that same breakout for the stores that were open during the quarter?

At the end of the quarter, we had in the U.S., we had 1,088 stores, 659 malls, 429 strips.

And we had 348 international stores.

In terms of what opened in the quarter, we opened 103 stores in the U.S., 100 strips in three malls and we opened 33 international.

Okay.

Great.

All right, thanks.

Your next question comes from Arvind Bhatia.

Jeff, can you talk in terms of maybe as you've had another chance to look at maybe the fourth quarter and especially in November, titles that have come out and as you compare that to your plan for the fourth quarter can you talk in terms of how conservative your plan is.

Obviously the third-quarter results made you look at everything that was going on in the fourth quarter and now you've had the benefit of one month or most of the important titles have come out for November.

So maybe talk in terms of your expectations now versus what's going on in the marketplace.

Sure.

The -- we're 2 1/2 weeks into the quarter and during that 2 1/2 week -- or 3 1/2 weeks I'm sorry, during that time period, we had the bulk of new releases, so you know, the new release business looks strong so far in this quarter.

And it's about where we expected it to be.

I think that as we look at how the business develops between now and the end of the holidays, really the two things to look at are the trend in the business for the last six months and it has been negative.

Hardware sales have been negative the last six months.

If those sales continue, then it's possible that they might drag down software sales.

Now on the other hand, if you look at the hardware installed base which will be even at the lower sales will be 50% greater than it was last year, that could be strong enough to drive very strong software sales.

We also believe that the line up of software titles that we have this year is better than what we had last year so, you know, I think that there's a good chance that the business could be driven by software as opposed to possibly weak hardware sales.

Now, you know, the increase in hardware, that's been the case throughout the last six months as well and it hasn't translated into stronger sales.

Maybe can you tell us in terms of if you identified why that is, in your opinion, we didn't get the kind of bump that we would have expected given the high install base?

Why, we haven't gotten an increase in software sales consistent with the installed base?

Right.

A lot of it might have to do with the timing of the new releases.

It might have to do with the fact that the games that are coming out now, I think have more play value so people tend to play them longer.

It could be that the software business will become more seasonal as we get later into the cycle.

Certainly if you look at the release schedule that certainly has become more seasonal with a lot fewer titles coming out in the third quarter and many more titles coming out in the fourth quarter.

Got it.

And if you were to guess on the hardware price cuts, would you say it's more likely to be in your fiscal first quarter or in the second fiscal quarter of next year?

Based upon the historical timing, my guess is it would probably be in the second quarter.

Second quarter.

Okay.

And then could you touch on maybe the competitive environment?

We know Hollywood's been expanding it's game crazy concept, obviously Wal-Mart gets very competitive at this time of year.

Blockbuster is now getting into that business and obviously there's GameStop.

Talk in terms of maybe GameStop.

What sort of overlap there is when you're opening your strip center stores?

Do their stores and maybe to a Hollywood or Blockbuster if you can talk maybe, conceptually along those lines?

Well there, certainly--this is a great business model.

And I think because of that, it's attracted a lot of companies interested in expanding it, I feel that there's plenty of room for all of us.

If you look at most of the markets that we're in, they're under serviced by this type of store.

So I think that as we continue to open them, we will continue to gain market share.

We'll continue to take it from the existing retail base.

So I don't see us really clashing with eachother too much.

Got you.

Final question on margin improvement and this might be for Jim.

With more strip center stores with used business going up and ,you know just, mix of software continuing to rise versus hardware, what sort of margin improvement opportunity there is that you think you'll get next year, you know, maybe on a growth basis, offset then by the new store openings.

Talk in terms of what you think will be the opportunities in total for the company, in terms of operating margins?

This year, I think we picked up maybe about 60 basis points would be a range, for improvement over last year.

I think that we could see at least a half point if not more next year.

It really depends on how the new release schedule pans out next year.

We'll pick up a lot of growth from preowned business with the strip stores maturing, but I'm not sure how the new business will do next year.

The new stores that you opened, like for example like the 133 stores, can you quantify what sort of drag they are if any on the earnings, obviously takes some time to ramp-up these stores.

Is there a way to sort of look at maybe on the numbers basis what that drag is?

It's something I don't have with me right now but we could -- certainly would not be expected to be profitable in the third quarter and would be for the fourth.

I'll ask maybe one more if you'll allow me.

Jeff, you talked in terms of gaining market share.

Can you maybe talk in terms of how many points you think you've gained?

In the third quarter, it was probably about two points, 2 1/2 points.

That's pretty good.

Great.

Thanks, guys.

Thank you, thank you.

Your next question comes from Tony Gikas with Piper Jaffray.

Hi.

Good afternoon, guys, couple questions.

Could you talk just a little bit about sales trends you're seeing over in Europe.

I know that in Europe and the UK in general retail trends have been below expectations.

Are they trending significantly better than the U.S. in terms of videogame sales, and then how are mall traffic patterns here in the U.S.?

Are they stabilized and do you have any projected outlook here for the holidays and I have a couple quick follow-ups?

In terms of Europe, we have a very small store base there, and it's been two years now since we first got into the market.

We've seen significant improvement in our existing store business just because the stores that we took over, we put in our business model, our information system, our distribution system, our training the staff, our merchandise presentation.

So we got a significant benefit from improved sales and margins over what those stores had before.

And the small number of stores that we've opened again have performed extremely well.

So I think that it's such a small footprint for us that we're not really experiencing or we're not noticing if there is a weakness in the overall market.

You know, our benefits are far out weighing that.

In terms of mall traffic, mall traffic was very soft in the third quarter as evidenced by our comps in the malls.

We were up against very difficult comp comparisons in the malls.

They did very well in the third quarter last year and they did not perform as well in the third quarter this year.

Our expectation for the fourth quarter is that the malls will comp negative again.

Traffic tends to be up on days of big new releases but down every other day.

Now, on the flip side of that, it's possible that sometimes in the past, in the fourth quarter the malls have really come through as people get more pressed for time.

Malls tend to do better in the fourth quarter.

The other thing is too that with the decline in average selling prices, you know, that's another hurdle or another challenge for the malls going up against the numbers from last year.

Okay.

And then I want to go back to Arvin's question real quick because, you know, there's a disconnect between the increase in the installed base this year of the hardware systems of about 50% while software sales year to date, have only been up about 1 1/2%.

On the heels of what was a pretty strong year for hardware last year, do you think, I mean can you quantify it any more?

Your tie ratios looked pretty healthy in the quarter but is this an overall market wide tie ratios issue, is it a quality of the content issue, is there lack of innovative product in the market.

The holiday selling season this year looks a lot like last year in terms of the same brands that are coming into the market?

If I could answer that question, I could predict better probably.

It's tough.

We've been wrestling with that as well.

We don't quite understand why software sales haven't increased to the degree that the installed base has.

Again, a couple theories in that, maybe the game plays better and they're playing the games longer, maybe there are more casual gamers coming into the market, who are buying fewer games.

In terms of the tie ratio, you know, I think, one of the reasons why the tie ratios look good is because the hardware sales weren't that strong.

Right.

And then of the roughly 538 games that are slated to come out over the holidays, do you anticipate carrying the majority of that or do you know how many new skewes you're going to add in the December quarter?

My guess is we'll carry all of them or close to all of them.

Many of them are a one-time buy.

I still think that the vast majority of the business will be in a small number of titles.

Thanks, guys.

Thank you.

Your next question is from Edward Williams with Harris Nesbitt Gerard.

Good afternoon.

Couple questions for you.

Can you elaborate a little about your inventory and how the mix has changed year-over-year when we're looking at new versus old.

New versus used and hardware versus software?

Well, we don't break out new and used.

I understand that but can you just, can you give us an idea if the mix is constant or if the mix has fluctuated at all?

We probably have a little bit less hardware inventory at this point than we had last year and more software just cause we think that software will be a bigger percentage of the mix in the fourth quarter.

Okay.

And you don't want to comment about the new versus used?

The used inventory is higher than it was a year ago.

Okay.

And when looking at comps, you know, how were they basically speaking on a relative basis if we're looking at international comps, if we're looking at strip, if we're looking at mall?

International comps were positive, U.S. strip comps were double-digit positive.

Mall comps were negative.

And Jim, was there any currency impact of significance in the quarter?

We had a positive impact.

The--a little over 3% of the total increase in revenue was driven by favorable exchange rates.

Okay.

And then how about cash flow from operations for the quarter?

Just a second.

I have that .

I don't have the quarter.

Year-to-date, we are about slightly positive year-to-date cash from operations.

We spent about $29 million on Cap Ex year-to-date.

We also spent the $32 million on the stock buyback in the second quarter.

Okay.

And then looking into your fourth quarter, what are you thinking with regards to a revenue breakdown on hardware, software, videogame, PC games?

Hardware is going to be in the mid-teens, software will be in the low 60%.

PC games is probably going to be mid-single digits.

Okay.

Thank you.

Uh-huh.

Your last question comes from Bill Linnen with WR Hambrick.

Good afternoon.

I wonder, could you--do you have an account of the new games that were released in the October quarter of this year versus last year and the same question for the January, your anticipation for the January quarter?

I don't have that exact number here.

We could get that for you but I don't have it here.

Ball park though, do you think it was comparable?

It was the third quarter numbers -- yeah, October quarter number was 238.

We believe that was lower than last year.

We think fourth quarter number will be higher than last year.

Okay.

And what do you think of the relative positioning of video games, the value proposition versus other gift categories this, Christmas.

For example, Wal-Mart is getting very aggressive on pricing on toys.

How do you think -- let's assume games kind of come down 10% year-over-year each quarter and they will be cheaper this year on the average.

How do you think they stack up video games versus other gift categories that you compete with at Christmas?

We have seen some surveys that indicate the video games are the most popular thing on the survey.

Particularly the hardware system so that could bode well.

Okay.

And so we can get an actual count on the skewes offline, is that possible?

Yes, we can get that for you.

Thanks, a lot.

Thank you, we appreciate your time this evening as well as your support of and confidence in Electronics Boutique.

We look forward to speaking with you again soon.

Thank you.

That concludes today's conference call.

You may disconnect at this time.