GameStop Corp (GME) 2003 Q4 法說會逐字稿

Good afternoon and welcome to Electronics Boutique Holdings Corporation's fourth quarter and year end fiscal 2004 conference call.

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

If did you not, you can obtain a copy right now on the investor section of our website at 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 Provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I refer you to the press release and the company's recent filings with the Securities and Exchange Commission.

Some of the material presented today may become outdated, and Electronics Boutique Holdings Corp. 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 p.m. today through midnight March 18th, 2004.

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.

Good afternoon, and thank you for joining us today.

As we stated in the release we issued this afternoon, Electronics Boutique had a strong quarter and an outstanding year.

We posted record revenues and profits for both periods.

We also outperformed our industry in every quarter of fiscal 2004 according to data posted by NPD, and we gained an additional 2% market share compared with last year.

Of special note, as a result of our record revenue growth and store count, Electronics Boutique is now the world's largest specialty retailer that is exclusively dedicated to video game software, hardware, and accessories.

Clearly, our fiscal 2004 performance gives us a lot to be proud of, and we're very pleased with our results.

We firmly believe that these results demonstrate the continued strength of our industry, the value of our business model, and the skill of our management team.

Our outlook for the coming year is very positive, and we're excited about our potential as we move ahead.

Now let's review the details for the year.

EB's full fiscal year 2004 revenue was $1.6 billion, a 21.6% increase over last year.

This was largely driven by our domestic software sales which increased 22% for the year, surpassing industry growth of 6% for the same period.

Software demand was fueled by a 59% increase in the U.S. installed hardware base, which grew to almost 57 million units.

Looking ahead to fiscal 2005, we expect hardware prices to drop, driving continued growth of the installed base and even stronger software sales.

Our domestic sales mix by category for the year was: video game software was 60% of sales versus 56% last year.

Video game hardware was flat at 18%.

PC software was 9% versus 11%.

Accessories were 11% versus 12%.

And other was 2%, compared with 3% last year.

Comparing the fourth quarter to the same period last year, our domestic sales mix by category was: Video game software with 61% of sales versus 59% last year.

Video game hardware was flat at 19%.

PC software was also flat at 7%.

Accessories were 11% for the quarter compared with 12%, and other was 2% versus 3%.

Our software to hardware tie ratios for the fourth quarter were 25 to 1 for PS2, 17 to 1 for Xbox, 10 to 1 for GameCube, and 4 to 1 for Game Boy advance.

Our top titles for the fourth quarter included Need for Speed Underground from Electronic Arts for multiple platforms;

Final Fantasy X 2 from SQUARE ENIX for the PS2;

Mario Cart Double Dash, Nintendo, for the GameCube;

Grand Theft Auto combo pack, Take 2 Interactive, for the Xbox; and True Crime Streets of L.A. from Activision on multiple platforms.

Moving on to store count, we've continued to open new stores around the world and to rebrand our locations to leverage our growing scale.

During fiscal 2004, we opened a net of 383 stores, increasing our store count to 1,528 as of January 31st, compared with 1,145 stores at the end of fiscal 2003.

A quarter of these locations are in international markets.

Our global locations are not only building the EB Games brand on a global scale, they are also making a significant contribution to our results.

On the domestic front, we continue to focus our efforts on strip centers, which offer attractive economics and typically generate higher margins.

Since our strip center stores position our company to reach a different audience than our mall stores, these stores are accelerating our brand building initiatives.

They are also driving the growth of our pre-played business, which generates higher margins.

As you may recall, in 2002 we launched our real-estate strategy of targeting strip center locations for these very reasons.

This effort has been highly successful, and strip center locations now account for 43% of our domestic store mix.

Our strong strip center presence positions us to compete with mass merchants, build our pre-played business, and establish EB to value conscious consumers as a reliable source for all their video games needs.

For the future we are continuing to focus on opening more locations in the attractive and profitable strip center format.

Another component of the real-estate strategy that we launched two years ago was our commitment to using a structured real-estate site selection process.

Through this process, we utilize market research to identify promising sites, and we apply a range of stringent criteria to each location we consider.

The outcome of this process has been very rewarding, and we will continue to rely on our proven site selection capabilities to identify and select the most promising locations for growth.

In the area of rebranding we made steady progress during the year, with 62% of stores now branded EB Games.

We expect that more than 80% of our stores will be rebranded by the close of fiscal 2005, leaving only those locations that can't be immediately changed due to lease related restrictions.

Our international business continues to thrive and to differentiate EB from its competitors.

In fiscal 2004, our international stores represented 25% of our total store base and generated 25% of our revenue compared with 19% in the previous fiscal year.

We are the largest specialty retailer of video game software, hardware, and accessories in Australia and Canada and a growing player in Europe.

We will continue to add locations in these countries and remain committed to building our international presence to take advantage of rising worldwide demand for video games.

Our success in international markets is the result of several strengths.

First, we have a proven international store model that we apply to insure profitable growth.

Second, when we enter a new country, we assemble a team of local professionals who understand the language and culture as well as the retail business and the gaming market.

These teams have the expertise required to select the best locations and guarantee a strong reception for our new stores.

Third, we used an advanced, fully integrated information system to manage our merchandising, point of sale, distribution, and financial needs on one common worldwide platform.

This gives us control over each of our stores and enables us to track trends in different regions on a daily basis.

Finally, we have a strong brand that sets the stage for EB's entry into new markets.

To support our growth we stepped up our marketing activity throughout the course of the year.

As we noted on our holiday call, our well-timed promotional offers and our increased advertising activity in the fourth quarter of fiscal 2004 helped us to post strong holiday sales that exceeded our projections.

We are continuing to offer incentives that reward the loyalty of our customers, promote consumer traffic, and differentiate EB from competitors.

To support our expanded marketing plan we have introduced new point of sale technology that will -- automatically identifies and tracks all purchases eligible for promotions.

This initiative streamlines our checkout process, increases customer satisfaction, and provides critical daily feedback on the effectiveness of our marketing efforts.

Additionally, we have enhanced an improved our operating processes.

These improvements focus on improving our customer service and merchandising efficiencies as well as reducing our costs to generate greater profitability.

Our store-level technology continues to evolve.

This year we completed a rollout of a new pre-played program that makes traded in products immediately available for resale.

We also upgraded our point-of-sale capabilities to include the use of new signature capture enable card swipe devices.

These allow for expedited credit and debit card purchases providing flexibility for our customers and reducing our costs.

We also upgraded our warehouse management and inventory systems, boosting our productivity and efficiencies.

These systems enable us to minimize freight costs while maintaining optimal allocations of the right products in the right stores.

To support our continued expansion, we've laid the groundwork for consolidation of our two Pennsylvania distribution centers into a new 315,000-square-foot facility in nearby Coatsville later this year.

We expect to realize valuable efficiencies and cost savings from this initiative.

Now I'd like to turn the call over to Jim Smith to review our financial performance in greater detail.

After Jim's finished, I have a few more remarks, and then we'll open the call for your questions.

Thank you, Jeff.

As you read in the release, we had a very solid performance in fiscal 2004.

Our results are based on record sales, particularly in video game software, and a successfully managed growth plan.

Total revenues for the fourth quarter increased 25.9% to $671.5 million from $533.5 million in the same period a year earlier.

Net income was $39.4 million or $1.57 per diluted share, which includes $2.9 million or 12 cents per share of management fees recorded in connection with the termination of the services agreement with Game Group, PLC.

Excluding this item, fourth quarter net income would have been $36.5 million, or $1.45 per diluted share.

This compares to net income of $31.6 million or $1.21 per diluted share for the same quarter last year.

For the full fiscal year, our total revenues increased 21.6% to $1.6 billion from $1.3 billion in fiscal 2003.

Our net income was $45.7 million or $1.80 per diluted share, including the $2.9 million or 12 cents per share related to terminated services agreement.

Excluding this item fourth quarter net income would have been $42.8 million or $1.68 per diluted share.

This compares to net income of $37.4 million or $1.42 per diluted share for fiscal 2003 before the cumulative effect of a change in accounting principal which lowered that by income by $4.8 million or 18 cents per diluted share.

As we've previously announced on January 30th, 2004, we entered into an agreement to terminate our services agreement with Game Group, PLC.

With the termination agreement, we agreed to accept a lump sum payment of $15 million in lieu of the remaining two years or management fees we were entitled to receive under the services agreement.

We are very pleased with the outcome from both a financial and operational perspective.

In addition to the receipt of the $15 million, certain restrictive covenants were eliminated two years early relating to our ability to expand in Europe beyond our existing markets.

The remaining covenants expire over the next two years.

As a result of the termination agreement, the company recorded $4.7 million as management fee revenue in the fourth quarter of fiscal 2004.

The remaining $10.3 million under this agreement was recorded as deferred revenue of which $5.8 million will be recognized in fiscal 2005 as management fee revenue and the remaining $4.5 million balance will be recognized in fiscal 2006.

Getting back to our fiscal 2004 results, our comparable store sales for the full fiscal year were flat with last year.

For the first quarter, comparable store sales increased 2%, outpacing our projections.

While we experienced negative comp store sales in our U.S. mall-based stores in both the quarter and year, these results were more than offset by strong double-digit increases in both our strip center stores and international locations.

As Jeff mentioned, we are continuing to focus on opening more locations in the attractive and profitable strip center format as well as on advancing our successful international expansion.

Moving on to our industry outlook for fiscal 2005, our projections for industry growth in calendar 2004 assume that console prices for both PS2 and Xbox will be reduced sometime prior to E3 in May.

Based on this, we expect video game software sales to grow between 8 and 12% this year.

We expect console hardware unit sales to be flat for the year, resulting in the decline of total dollar sells.

Considering these assumptions, we expect overall industry growth to increase in the low to mid single digit range.

As for EB's plans, we intend to open approximately 400 new stores worldwide in the coming year.

About three-fourths of these will be in the North American strip centers.

The remaining new stores will expand our presence in Australia and increase our foothold in Europe.

We believe that our global growth strategy in combination with our rebranding effort and promotional strategies will enable to us leverage our reach and brand equity to drive performance.

We expect that we will achieve total sales growth for the fiscal 2005 in the range of 17 to 21%.

We expect our comparable store sales to increase in the range of 2 to 4%, which is in line with our expected growth for the overall industry.

Thus we are projecting that our fiscal 2005 earnings will be between $1.85 and $1.95 per diluted share on an average diluted share count of 25.2 million shares.

This forecast includes 5.8 million pretax dollars to be reported evenly throughout the year as management fee revenue resulting from the termination of our services agreement with Game Group, PLC, and represents 14 cents per diluted share.

For comparison purposes, excluding all management fee revenue from both fiscal 2004 and our guidance for fiscal 2005, earnings are expected to grow in the range of 16 to 22% in the coming year.

For the first quarter of fiscal 2005, we expect that our earnings will fall within a range of 8 to 10 cents per diluted share.

This compares with last year's results of 12 cents per diluted share, which included the beneficial impact of approximately 3 cents per share relating to vendor allowances which were capitalized under EITF 02-16 and released into income as our inventory balance significantly declined during last year's first quarter.

This year's forecast expects a benefit of approximately one-half cent per share from this item.

We expect comp store sales for the first quarter of fiscal 2005 to be in the range of 2% decline to flat.

This compares to an increase of 10.1% in the first quarter of fiscal to 2004.

Our strong comp store sales in last year's first quarter were driven by the launch of Game Boy Advance SP and the Legend of Zelda, both of which were exceptionally strong performers.

The software line up for the first quarter of fiscal 2005 is lighter in comparison and our projections reflect that.

However, I want to emphasize that we do expect strong performance from several first quarter titles including Nintendo's Final Fantasy Crystal Chronicles for GameCube, Tech Mode Ninja [INAUDIBLE] for Xbox, Sony's Final Fantasy 11 with a hard drive for PS2.

An early read on Electronic Arts' MVP Baseball 2004 for multiple platforms hitting the stores earlier this week also looks promising.

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

Thanks, Jim.

Before we open up the call to questions, I'd like to sum up a couple of key points.

First, we had a record year for sales and earnings.

When you strip out the management fee income, we grew our sales by 21% and our earnings by 14%.

For the new fiscal year, we expect our soles to grow by another 17 to 21% and our earnings to grow by 16 to 22%.

Second, we are well positioned for the future.

As I said earlier, the installed base in the U.S. stands at 57 million units.

In fiscal 2005 we expect hardware prices to decline, driving the growth of the installed base to between 76 and 78 million units.

The significantly larger install base will spur greater software sales.

In the latter half of this year, software sales will be further accelerated by the release of several major new titles, including Grand Theft Auto, San Andreas, Half-Life 2, Doom 3, Grand Turismo 4, and Halo 2, to name a few.

All of these games have been in development for several years, and each has the potential to be larger than last year's top selling titles, Madden and Need for Speed.

To sum up, our key strategies for achieving continued success are driving the pre-played business to boost margin and traffic, building our profitable position in strip centers, and continuing to expand our international presence to take advantage of our unique strengths.

We have the right business model, infrastructure, team, and drive needed to succeed.

Now we'd like to open the call for questions.

At this time I would like to inform everyone in order to ask a question, press star 1 on your telephone keypad.

If you are on a headset please pick up the receiver before asking your question.

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

Your first question comes from Tony Gikas with Piper Jaffray.

Good afternoon.

This Stephanie [INAUDIBLE] for Tony Gikas.

I have three questions.

The first, can you comment more specifically on your expectations of the degree of the price cut on the hardware systems?

Our assumption is that the hardware at some point in time between early April and E3 will go to $149.

That seems to be the next logical price point.

It was a very successful price point in the last generation, and it logically helps extend the cycle out for two more years beyond that.

Okay.

That being said, are you getting indications from Microsoft and Sony that that's their direction?

Are you starting to prepare for advertising on that?

We're basing all of this just upon our assumptions that historically price changes have happened in that time period.

Okay.

Great.

Thanks.

Secondly, do you foresee the software sales this year being a bit more spread out over multiple quarters versus being real heavily loaded in the back end the year?

Yes, although there's not a lot of strength in the first quarter compared to last year.

The titles that we mentioned, plus an expanded list of titles, it's really the second, third, and fourth quarter, particularly third quarter this year looks very strong.

A lot of the titles mention that stick to the dates that we think they're going to come out.

But, yeah, looks like it should be better than last year.

My third question, can you provide any additional color on the new Nintendo DS system, such as when do you plan to have it in the stores, possible pricing, and any margin comparison to the current Nintendo hand-helds?

We're assuming that it's later this year, but we don't have the exact time on it and we haven't built much into the plans.

We need to get more information on that.

Good quarter, guys.

Thank you.

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

Good evening.

Couple of questions for you.

Could you elaborate a little bit more on the changes in covenants with regard to your Game Group, the expiration of that contract and how it is that you're recognizing the revenue?

I'll take the covenant change and let Jim handle the revenue piece.

The big change with the change is it frees us up in Europe.

In the U.K., we have one year less that we're restricted from going into that market.

We could now go into there anytime after January of '05 -- I'm sorry, '06.

We are free to go into any other part of Europe with the exception of Spain and France.

We're restricted from going into those two markets for one year.

So it gives us a lot more freedom to expand in the markets that we're currently in any other European markets beside those.

As far as the split of the fee, we had an outside evaluation firm do a study and give us a -- their opinion of the value of those covenants to stay out of the U.K. for another two years as well as the value of the Spanish and the French markets.

And the remaining piece that wasn't able to be assigned to those two covenants, those two covenants was taken as income in the fourth quarter so.

We recorded $4.7 million in the current quarter, $5.8 million is the combination of the one-year restrictions in Spain and France, and portion of the two-year value for the U.K. business.

And then the remaining piece going into fiscal 2006 is strictly the value that was assigned to the restrictive covenant for the U.K. alone.

As Jeff said, the strong advantages we can expand freely within the market we're in already through not just organic growth but we can also enter any other European market.

At this point have you actually collected on the cash?

Yes, the money came in within, I think, two weeks of the end of the fiscal year, so we received the full $15 million.

Looking at -- Jeff this is probably more a question for you.

If you look at the difference in buying patterns at mall and strip mall locations, what are you seeing, be it genre or platforms, is there anything characteristic that's different between the mall buyer and the strip buyer?

Well, I guess the most obvious one, first of all, is that we do more used business out of the strips than we do out of the malls.

We do more trades out of the strips.

We tend to sell more of the older platforms out of the strips, and if you look at the current generation, we tend to do more PS2 in strip stores and more Xbox at mall stores.

Jim what are your thoughts at this point with regard to cap ex budget for the current fiscal year?

As Jeff mentioned in our initial part, we are planning a new distribution center to come on line in Coatsville later this year.

We are building that building and intending on making a purchase.

We also have plans to upgrade our distribution facilities in two of the European markets.

As we've expanded in size, we've grown out of the initial small facility that we acquired in the initial transactions, so we will have additional distribution center-related expansion in the capital plan for next year.

This year we spent about $43 million.

Next year we should be in the low 60s.

We're going to open a similar number of stores to this year plus the infrastructure for the distribution centers and a little office overhead and some remodels for stores that are coming in.

We have remodels every year so.

That will put us somewhere in the low 60s.

The last question for you, the percentage of revenues that you got from international markets, could you quantify that at all and maybe give us an idea what sort of impact currency had?

I think we said about 25% of our total revenue was from international, up from 19 last year.

We certainly did have an advantage of the exchange rates this year.

I think overall it contributed about -- low 3 to 3.5% of the increase for the year was attributable to foreign exchange.

Well, actually, all of the current markets we're in had a very favorable exchange rate this year, both the Canadian, Australian, and European markets.

What are your thoughts as far as that mix going forward?

It will start gravitating up to the high 20's.

It could hit 30%.

I'm not sure if it will get to 30% next year.

We're not anticipating any additional significant change in the exchange rates although that's certainly something that's beyond our control.

I'd like to see it stay where it is because we're very happy with our international performance both from a profit and from a sales perspective.

Okay.

Great.

Thank you.

Your next question comes from Bill Armstrong with CL King & Associates.

Question for Jim.

I was wondering if you could walk us through how you get the 16 to 22% EPS growth rate?

If we pull out the deferred revenue payments from both years, looks like your guidance is $1.71 to $1.81 versus $1.68, which would be --.

If you pull out all of the management fee income this year would actually be about $1.47.

Okay.

So that 16 to18 excludes all management fees.

Take it completely out and just deal with the retail business, and that shows that the retail business is going to be growing by 16 to 22%.

Okay.

That was helpful.

You ran a month-long used game promotion in February for both purchases and sales.

I was wondering if you could comment on how that went, what you may have learned or gained out of that exercise.

We were very happy with the results of that sale.

I think what we found is that we can generate some excitement in the stores in a time period when there isn't a lot of exciting new release activity, so I think you can expect to see us running those types of events from time to time in the future.

We've little seen continuing benefit of the store promotion and additional trade-in activity in the March period.

Okay.

Any material impact on margins?

It was all part of the plan.

Okay.

Looks like inventory per store at the end of January was down about 16% year-over-year.

Any concerns about shortages?

No, if you recall, last year we ended the year heavier than we would have liked to have been, and so this year we were in line with plan, so this year's inventory levels are really much more appropriate.

Okay.

And finally, I was wondering if you could just break out your year-end store base by country and by format, as you typically do.

Okay.

Domestic, we had 1150 stores in the states.

There were 657 mall and 493 strips.

And in Canada we had 159 stores.

And that was 43 of those were strip center based.

43?

Yeah.

Australia and New Zealand combined was 120 stores.

One in Korea and 98 throughout the European market.

And the -- looks like you're going to open roughly 100 international stores this year.

Is that going to be mostly Europe or do you still have room for expansion in Canada and Australia?

There will be expansion in Canada and Australia.

The bulk of them will be in Europe.

Thanks.

Your next question comes from David McGee with SunTrust Robinson Humphreys.

Hi, this is actually Jennifer Neal calling in for David McGee.

I just have a couple of questions.

One for you, Jim.

On the management fees, I just want to make sure I'm understanding.

The press release talks about the $2.9 million.

I just want to understand how that $2.9 million plays into that 4.7.

The 2.9 is net of tax.

Oh, okay.

4.7 was the management fee up in revenue and 2.9 after tax.

So the $15 million is after tax.

The $15 million was pretax.

Okay.

It was $4.7 million pretax recorded in the fourth quarter, $5.8 million pretax in fiscal 2005 and the remaining four something in 2006.

Secondly, on the -- I think you all paid a slightly lower tax rate in the fourth quarter and just wanted to, on a housecleaning thing, make sure that, are we going to look at 37.4 growing forward or closer to 37%?

We're going to use 37.

We got -- some advantages of the international tax rate, particularly Australia, as I believe about a 5% lower rate than the U.S.

So a combination of the exchange rate and the lower rate could help pull down our blended tax rate.

Okay.

Great.

And can you just talk a little bit about, is software what's driving gross margin?

And then what's driving SG&A?

Two things that are driving gross margin is software and also the pre owned -- percentage of total.

Okay.

And then SG&A I assume is up mainly on increase in the number of stores?

Yeah.

Great.

Thanks again.

Thank you.

Again, if you would like to ask a question, press star 1 on your telephone keypad.

Your next question comes from John Taylor with Arcadia Investment Corporation.

Couple of questions.

When you were talking about your market share increase for the year, are you stripping out your used game business to compare?

Because I don't think the numbers pick up the used game business.

The second one is on in-store promotions that your vendors are doing with you.

Could you characterize kind of what the Delta was in fiscal '04 versus previous year, and then kind of what your expectations are sizewise or Deltawise looking forward into '04.

First off, all the numbers that we give include the used business.

Everything that we give includes used.

So in other words, are you making an estimate of the used business and adding it to what the numbers are to come up with a denominator?

Yes.

You are.

Okay.

I'm sorry, I didn't remember the rest of your question.

Yeah, the other one was in-store promo, kind of what the Deltas are last year to this year and what your expectations are.

I'm looking -- I guess what I'm looking for is how aggressive do you think the format vendors and the publishers are going to be in '05 versus -- I mean, fiscal '05 versus '04 in store as opposed to using media and other forms of promotion?

Thanks.

I think basically from where we are in the cycle, the entire industry gets much more promotional driven.

Early in the cycle a lot of the business is driven on just allocation, shortages of products, you know, what's available.

Now it's really much more driven by promotional efforts.

So I think you'll see a lot more media from the industry, you'll see more focused in-store promotions, especially centered around the really big titles.

I think if you look at what Activision did last year, they were very successful with the very aggressive multilayered promotional activities they had supporting a couple of their key titles, which drove those titles into the top ten, and I think you'll see more of the publishers do that this year.

In terms of mix you don't expect any real change from the publisher standpoint?

Nothing that we've seen so far.

Let me ask one more if I can.

Coming at a destination of PlayStation and based on what you've heard from Nintendo and Xbox what do you think the SKU release schedule by platform is going to look like?

Same number, or do you think we're going to get some reduction final so we don't get some of the excesses?

When we came back it looked like it was pretty similar to last year's number.

The one thing that I said earlier, though, is it looks like some of the bigger titles are a little bit better spread out than they were last year.

So we don't get everything concentrated in that three-week window?

I certainly hope not.

Thank you.

Thank you.

Your next question comes from Gary Cooper with Banc of America Securities.

High, guys, I want to stay with that spread-out issue.

Can you give us some idea of what quarter you are planning to see Doom 3, Halo 2 and Half-Life 2 released?

Right now, we have Doom 3 and Halo 2 in the third quarter, and Half-Life 2 in the fourth quarter.

We have not gotten any firm dates on those titles.

That's just based upon conversations we've had.

There's been no official notice from those publishers, but just for planning purposes that's where we have them now.

Okay.

I'm -- I might have missed this at first, but, Jeff, can you take a moment, the 400 stores is more than I would have thought.

Can you kind of think through the next couple of years and tell us maybe what you see store growth in the year after this year and maybe even the year beyond that?

Seems like at some point, you know, you're either going to have problems growing that fast or you're just simply going to slow down your store growth.

I think what we're going to see gradually is Europe taking a bigger percentage of the growth.

If you look at Europe in relation to the U.S., or North America, the market is -- it's smaller than the U.S. but it's not that much smaller, and it's growth rates are pretty impressive, and the market we're currently in, Germany, Italy, and Scandinavia have huge growth opportunities for specialty store operation.

The virtually no specialty stores in Germany and Italy other than Independence.

Scandinavia we have one competitor.

Those market are huge, and the growth potential there is significant.

With the restrictions from the U.K. agreement now off of this, we can easily move into some other market there.

So there's just incredible potential.

There's no reason why we couldn't have, you know, 1,000 stores in Germany in the next three or four years.

Okay.

So specifically, you think you would anticipate in fiscal year '06 opening up 400 stores?

Absolutely.

The long range assumption is that we would like to continue this growth rate, and I can't say exactly where those stores will be, but I think that, you know, based upon our global footprint we have a lot of options.

Okay.

Can one of you explain to us, what exactly happens when the hardware price cut gets cut?

How does it impact your margins if it impact you guys at all?

Actually, there's a -- usually there's a negative impact to the margin because the unit sales will accelerate over what they were at the prior year, if it's a significant price cut, or they will at least accelerate over what we had planned them to be because there's usually not a long notice of price drop.

But that's a short-term negative, the more important thing is that those additional units help to drive the increase in the installed base.

Which is a good thing.

That's really what we all want to see.

We do get a -- we normally do get a minor benefit in margin because usually what happens is that as they lower the price we're still able to make $10 per unit.

So actually as you get later in the cycle, margins on hardware will go up slightly.

Okay.

Thank you.

Thank you.

Your next question comes from Bill Lennan with WR Hambrecht.

I actually have three.

I want to go back for this addressable market for used software.

Beyond you guys, Game Stop is an obvious player in used software.

When you size that market who else should we think of as having a material presence, and I guess eBay comes to mind, although I'm not sure they're material.

That's question number one.

Go ahead.

Sure.

Us and Game Stop are certainly the biggest players but then you have Game Crazy and Blockbuster who have a presence in the market. eBay, it's certainly difficult to measure what kind of volume is done off of that because it's not organized the way our business is.

I've got to believe it's a lot lower, but I think that the whole used concept, not just in video games, but in many types of products, is something that's growing in popularity throughout.

It's just part of our consumer market, and I think we're going to continue to see more and more product being sold -- or used categories of product being sold.

I still think the vast majority of gamers in this country probably have not been exposed to the used business and aren't really familiar with it.

Okay.

Question number two.

On your addressable market forecast, if I missed it, did you say what you think PC will be, PC software sales?

No, we didn't, although I think in our internal plans we have it as flat.

Okay.

And last question, last year, or even in more than last year, last couple of years, KB Toys, Toys-R-Us, seem to be losing share.

Could you give us an idea of what your share gain opportunities look like in in FY '05 and FY '06, since some of the weaker competitors, you've picked that fruit?

We don't have the exact percentage that we've identified.

We feel that the trends that we've experienced will continue.

It's a combination of our aggressive store growth, the growth of the used business, and also the demographics continue to work in our favor, and I think you've pointed out and important thing, I think the toy retailers who traditionally have geared their business more towards the younger user, I think are going to continue to be challenged as the average age of gamers increases, and, yes, I think that in itself is an opportunity for to us continue to gain share.

And particularly in the short run, the KB Toys will help our mall-based business where we may be the only other competitor with that product in the mall.

Thanks a lot.

That's all for us.

Thank you.

We have now reached the allotted time for questions.

Are there any closing remarks?

Yes.

Thank you for joining us this afternoon.

We appreciate your support of and confidence in Electronics Boutique.

That concludes today's conference call.

You may now disconnect.