GameStop Corp (GME) 2004 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Gamestop Incorporated first-quarter 2004 earnings results conference call.

Today's call is being recorded.

At the conclusion of the announcements, a question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

I would like to remind you that this call is covered by the Safe Harbor disclosure contained in Gamestop's public documents and is the property of Gamestop.

It is not for rebroadcast or use by any other party without the prior written consent of Gamestop.

At this time, I would like to turn the call over to Dick Fontaine, Chairman Chief Executive Officer of Gamestop Corporation.

Thank you and welcome to our Gamestop's first conference call of the year.

I'm Dick Fontaine, Chairman and CEO.

With me, as is our usual (indiscernible) is Dan DeMatteo, our President and Chief Operating Officer, and David Carlson, our Chief Financial Officer.

The first quarter is always a relatively unusual time for our conference call in that usually we just have returned from E3 and in fact, that is the case again this quarter.

There's such a tendency to be pulled forward with all of the excitement that is usually generated at this year's E3.

In fact, that is the case, but for the call today and my portion of the call, we're going to try to focus a little bit more on the more immediate, certain of the first quarter, talk a little bit about the second quarter.

But let me just say, leading into this, that the expectations that we have for the excitement of this business throughout the year, given what we saw at the E3, is truly energizing.

Dan is going to take quite some time to take you through that today.

I'm extremely happy with the performance in the first quarter of the year for Gamestop.

Not only did our earnings increase by 27 percent, which is at the high end of our forecast range, but for the first quarter, we set quarterly records for both sales, operating earnings and in fact for net profit, the best we have ever done as a public company.

Perhaps even more important than that is that the strongest sales were in our most favorable gross margin categories.

Really what this says is we think we worked our business model better than we ever have in the past.

We didn't focus blanketly on aggregate sales in total, but we focused on segments of our business that we really felt we can drive and indeed, we had a tremendous amount of success in that area.

Software sales, as a result of some of these efforts, grew by 21 percent in the quarter.

A number that is absolutely outstanding is that our gross margins in the quarter increased by 1.9 percent, this on top of already healthy margin growth in the past.

I think you would all agree that is a major area of focus and outstanding performance.

As you drill down, our operating margin for the quarter increased from 3.3 percent last year to 3.6 percent this year.

At the end of the day, the operating margin growth, particularly in the face of a relatively large immature store count, is truly outstanding.

During the quarter, we again gained market share.

In fact, according to NPD, this marks the 25th consecutive quarter that Gamestop has gained share.

As you noticed in our press release, we opened 103 stores in the quarter, compared to 86 stores last year.

We continue to take great pride in the work we do in spotting incremental opportunities for growth and continue to refine our business model, the size of our stores and the markets that we serve.

Therefore, the 103 stores that we opened this year and the immature stores from late last year have continued to perform extremely well.

To that extent, we now feel very confident that we will end the year towards the high end of our 300 to 330-store range.

The last thing I want to do today is to talk a little bit about the negative comes, because in retail comps appropriately get a great deal of attention.

But I do want to make the point that, in our business, comps have some variability that perhaps are unusual relative to other businesses.

As you all know, one of the big drivers to topline sales and yet has little impact on bottom-line earnings is the hardware segment of our business.

As you can see by the detail that we released today, our hardware sales for the quarter dropped by just a little over 1 percent.

While this would seem to be cause for alarm, we are not alarmed by it, in fact, for a number of reasons.

Number one, the Xbox price cut, which happened at the end of March and was favorably received in the marketplace, was to some degree offset by the anticipation that PlayStation 2 would follow very quickly with a price cut.

In fact, if you check the Internet and the chat rooms, it was ripe for the fact that another price cut was coming from Sony to match Xbox.

Therefore, consumers should be holding off.

In fact, we did see a significant decline because of that reason during the last month of the year in PlayStation 2 sales.

The other thing that didn't get as much publicity as perhaps the Xbox and PlayStation 2 price issues was the fact that we had a very strong fourth quarter last year with Nintendo's Cube.

Unfortunately, due to manufacturing problems at Nintendo, we were virtually starved for product coming out of the fourth quarter and into the first quarter.

In fact, for a period of six to eight weeks, we were almost totally out of stock on a hardware unit that perhaps, in absolute terms, had the most momentum coming into our new year.

Towards the end of this quarter, we did get back in stock and indeed that Cube comp sale has started to grow but we took a significant hit during the month of February and the first week of March.

So, in total, I don't want you to think we don't watch comps closely but again, comps in our business just don't have the same traction perhaps as they do in others.

Again, I would bring you back to the key drivers of our business, our growth, our earnings, our gross margin growth and of course, our operating earnings, which is really what defines who we are as a growth company.

With that, I want to turn you over to David Carlson, who will really give you more details on our financial quarter.

Good morning.

Before the market opened today, we released our first-quarter sales and earnings results for fiscal 2004.

For the first quarter, we reported net earnings before a one-time charge of 8.4 million, or 14 cents per diluted share, growing 27 percent over the prior-year quarter and coming in at the high end of our previously released guidance.

During the quarter, we took an after-tax charge of 1.7 million, or 3 cents per diluted share, for a provision for a proposed California labor litigation settlement and related legal costs.

Including this one-time charge, net earnings were 6.7 million, or 11 cents per diluted share.

Gamestop sales were 371.7 million for the first quarter, an increase of 16 percent over the prior year.

Video game software sales increased an impressive 21 percent on top of a 29 percent increase in the prior year.

This impressive increase was led by exceptionally strong performance by used video games and coupled with strong, new video game performance on titles such as Ninja Gaiden, Fight Night 2004 and MVP Baseball 2004.

Comparable-store sales decreased 1.8 percent for the quarter, as sales of video game hardware did not meet our expectations.

However, the recent price reductions in both the PS2 and Microsoft's Xbox have spurred sales and appear to have improved the outlook for hardware sell-through for the remainder of the year.

In addition, new store sales exceeded our expectations and contributed to the 16 percent increase in overall sales for the quarter.

Gross margin rates improved by 190 basis points from the prior-year quarter, primarily due to the strong performance from used video games and, to a lesser extent, to the shift in sales mix from video game hardware to video game software.

Video game software increased to 65 percent of total sales in the first quarter, as compared to 62 percent last year.

Excluding the one-times charge, SG&A expenses increased 130 basis points from the prior year due to the continued rollout of our new stores and the effect that these immature stores have on the leveraging of SG&A.

Operating margins increased by 30 basis points to 3.6 percent, as compared to 3.3 percent in the prior year.

Our balance sheet remains very strong with 167 million in cash, no debt and inventories on a store-by-store basis decreasing 2.7 percent from prior-year levels.

We also issued guidance for the second quarter and reiterated our earnings guidance for the full year.

Based on current hardware sell-through expectations and video game software growth of 20 percent or more, second-quarter diluted earnings per share are expected to range from 12 to 13 cents with corresponding comparable-store sales in the minus 1 to minus 3 percent range.

This represents EPS growth of between 9 and 18 percent.

The title lineup for the back half of the year is shaping up to be extremely strong, and Dan will review those with you in a moment.

This lineup reinforces our outlook for the remainder of the fiscal year that allows us to reiterate our full-year guidance of $1.20 to $1.24 per diluted share, excluding the one-time charge.

Now, I'll turn it over to Dan for his comments.

Good morning.

The first quarter set yet another milestone for Gamestop as we once again gained market share due to the strength of our used and new business model and our expansion with our neighborhood-friendly Trip Center (ph) stores.

This model, coupled with our intense customer service, superior distribution systems and store growth, will allow Gamestop to continuously grow market share for the foreseeable future.

Now, I'd like to discuss some of the significant announcements and observations from last week's E3 show.

As we expected, Sony cut the price of the pS2 to 149 following what Microsoft did to the Xbox several weeks ago.

These price cuts should drive traffic this summer, as the consoles now are in the price range of the more value-conscious consumer.

Both Nintendo and Sony announced new handheld systems that, given the reaction of the gamers at E3, should create a real battle for the dominance of the handheld category.

Nintendo's new GS system may be ready for launch late this year and it looks like Sony is planning for a first-quarter next year launch of their new PST system.

On the game side, the titles that we expected have been confirmed.

While the second quarter is light, the titles in the third and fourth quarters support our financial plan.

Some of the best-selling games anticipated in third quarter are Grand Theft Auto San Andreas for PS2, Sable for the Xbox, Doom III for the Xbox, Madden all format, and Def Jam New York for PS2.

Some of the most anticipated games for the fourth quarter are Halo II for the Xbox (and we really expect this to be a driver of Xbox hardware), Grand Tourismo 4 for PS2, again a driver title, Metroid Prime 2 for the GameCube (again one of Nintendo's prime franchises), Resident Evil 4 for the GameCube, Metal Gear Solid 3 for the PS2, and Devil May Cry 3 for the PS2.

I'd like to highlight that we're also seeing a strong lineup of PC titles in the back half of the year.

This category has been under-published the last several years and it's good to see developers spending in this category.

We expect to see great sales from Doom III, a highly anticipated game for the last couple of years, EverQuest II, the online game from Sony that has been spectacular sales, Half Life II and Sims II form Electronic Arts.

So, this will be a great year for game sales and the recent hardware price cuts will keep the installed base growing.

Our value proposition, which allows customers to trade in credit for the games they are no longer playing will keep our new game market share growing.

The games they trade in will be sold to a value-conscious consumer that otherwise might not be in this consumer group.

So, here we are gaining market share four years after the PS2 launch and three years after the Xbox and GameCube launch and we will do it again next year.

We are excited about this industry.

We enjoy our leading position as the largest specialty retailer of video games in the United States and are continuing to refine our business model and invest in infrastructure so we can continue this high-growth initiative.

Now, I'd like to turn it over to the moderator for a question-and-answer period.

Thank you.

Our questions will be conducted electronically. (OPERATOR INSTRUCTIONS).

Edward Williams with Harris Nesbitt Gerard.

A couple of questions for you guys -- first of all, can you elaborate a little more about the charge that you took, the California labor litigation settlement, as to what's behind that charge?

Well, this is basically a class-action suit that was brought in the State of California pertaining to overtime and the definition of a manager's status in the specialty-store environment; it generally does affect a specialty-store environment.

We are of the opinion that it's a poorly drawn law and indeed was drawn predominantly for the benefit of attorneys.

If you look at a number of other specialty retailers, I almost want to say all specialty retailers of our size but I can't say that, they have been drawn into the same thing and numerous other retailers have settled.

While I won't go into the details of our settlement, I think, as you look at this, you will find it is not unique to Gamestop and in fact, has affected pretty much every specialty retailer doing business in California.

Okay.

Then switching gears for a moment, looking at your second quarter, can you just highlight what the key software releases are that you see in the second quarter and just remind us as to what was driving the July quarter a year ago?

Yes.

As I said before, most of the titles are third and fourth-quarter bound this year but we do have Spider Man coming that we expect we could have very good sales.

NCAA from Electronic Arts, we expect to do very well also.

Those are a couple of the bigger titles.

Potentially, Doom III for PC may make the second quarter.

We're not sure about that; it looks like it could be right on the bubble right now.

So, those are probably the biggest three titles.

Dave, do you have some other -- (Multiple Speakers)?

In the titles from last year you had asked about -- the Matrix cam out in May last year -- was a very, very strong title.

NCAA again last year came out in July, and then Star Wars (indiscernible) Republic for Xbox was a very large title last year as well.

So, we have a somewhat similar release scheduled in the second quarter this year as we did last year.

I'm curious as to what you're seeing as far as software pricing trends are concerned.

Also, if you can elaborate on the relevant strength of the Xbox and PS2 consoles, especially when you see a game launching simultaneously with the PS2 SKU and an Xbox SKU?

I think there's a couple of question there.

The first one was one the hardware pricing.

We actually are seeing less hardware price average retail price reduction than what we had planned in software.

Of course, hardware we have a $30 price decline, and that is what's driving, of course, the negative comp in the second quarter.

We are selling everything for $30 less.

The second question was what do we see what games launch simultaneously on both Xbox and PS2?

I don't know that I have the answer right.

It depends on the type of game.

The edgier games, the Xbox will have a higher proportion of the total than it will on the non-edgy games.

I would expect, on sports games, though, this year, with the recent announcement that Electronic Arts is going to publish games under Xbox live, that we will the Xbox games gain somewhat in the sports category, as many consumers have both the PS2 and Xbox and they chose to buy the PS2 version because they could play it online.

Now, they will be able to do it, play online ,with the Xbox Version 2.

I would only add to that that we think that this is very healthy.

I think that the sum total of that is Xbox is definitely getting stronger; the lives, certainly in the sports titles, are a great addition to that.

PlayStation 2 continues to be a behemoth but having Xbox close the ground and also become strong -- while in a different matter -- Nintendo somewhat plays a different game.

We think it's healthy for us all the way around and particularly healthy as we go into the gift-giving quarter not wanting to jump to far ahead to the fourth quarter but we think we're going to have a lot to offer a lot of different customers at different price points with different expectations.

Actually, on the pricing side, I was more curious as to what you have seen with software pricing and if you're seeing a decline that is consistent with what we get out of NPT data or if it's a little bit different with what you've experienced?

We're seeing a similar decline, although the decline has been less I think than most people anticipated for the first quarter.

I think it was in the mid-single digits versus probably an expectation of a 10 percent average price decline on software.

So, that's good news; it seems like the pricing is holding up much better than maybe was originally anticipated.

As a matter-of-fact, I would say, of all of the key releases that we saw at E3 -- and Dan, correct me if I'm wrong -- none of those were at a price point that was lower than historically we would've expected.

The best titles, the price points are holding up very well.

Exactly, they are.

I think all of the big titles will be $49.99 this year.

(OPERATOR INSTRUCTIONS).

David Magee with SunTrust Robinson Humphrey.

This is actually Jennifer Neal (ph) calling in for David Magee.

Congratulations on a good quarter.

My question is actually somewhat answered.

I was going to ask about the negative comp expectation for the second quarter and find out -- get any color on what's driving that.

It sounds like, to a large extent, it's being driven by the hardware price cut.

That is correct.

The hardware price cut, at $30, is the primary driver, absolutely of negative comp expectation in the second quarter.

Great, that was it.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Mike Wallace with UBS.

A couple of questions.

First, as far as the year goes for planning purposes, are you assuming any DS revenue in the January quarter?

Then are you assuming that price points stay at 149 for the rest of the year?

Yes.

Originally, if you recall, we had assumed that the PSP was going to be in our fourth quarter.

What we've done is basically replace the DS with that, very modestly though.

We are assuming there will be a tight supply and the earnings on that piece of the business won't be significant, we don't believe.

Again, not wanting to jump ahead, one of the highlights of this E3 is that both pieces of hardware generated phenomenal excitement and we joined that.

We think we've got two great pieces of portable hardware coming down the road fourth quarter, or first quarter of next year.

It really goes to the heart of the fact that we probably need to be looking at this business a little bit differently than we have in the past.

We've tended to focus on the cycles of the business and where we are and think about those as cycles driven by one or two pieces of hardware.

In fact, what is happening is we have cycles within cycles, and these two units certainly would be on the cycle map and would be at a point where it's a very, very favorable point of entry for the business.

On the console side, you're assuming everything stays as is at 149?

That's our assumption for the year.

The prices that we have now are the prices that we think we will have.

Okay.

On the used games business, the $50 price point on current line staying longer, does that have any impact on the used games business, positive or negative?

Yes.

Used games follow new games, of course, and so yes, there would be less of a price decline therefore on the used games as long as the new games stay at the $50 level.

That's correct.

Okay, so no shift in the mix then, used games staying around 20 percent of the total?

Well, we don't give that out, as you well know, but no, our expectation is a similar mix, depending on the store format, of course.

The strip center stores have a stronger used mix than a mall store.

To that point, while we don't break it out, it is fair to say that our used is growing predominantly because our mix of stores is shifting.

The 103 stores that we opened during the quarter, 100 of those, maybe 101 come to think of it, are strip stores.

That has a more favorable gross margin model.

As a matter of fact, we right now I believe are approaching the 70 percent of our total stores are in the strips, so that alone is a favorable impact to our mix and therefore our margin.

Just one more question for the current quarter, the games -- you didn't mention driver three.

Is it too early for pre-orders or you have -- (multiple speakers).

No.

As matter of fact, driver three is reserving very well and we are expecting -- I guess I should've mentioned that that will be a driver title also for the second quarter, yes.

Thanks.

It may be an indication that there's so many exciting titles that we forget a lot of them.

I'm sure you'll get some angry phone calls from the public.

We will direct those to Dan! (LAUGHTER).

Jill Krutick with Citigroup.

Thanks very much.

Good morning.

If Electronic Arts decides to more aggressively support PS2 after the launch of their next generation product, would that have any implications for your used games business?

That's the first question.

Secondly, I'm assuming that your industry forecasts are unchanged for 2004, since those weren't updated.

Are you incorporating the Nintendo Dual Screen in your earnings forecast for the full year?

Thank you.

Jill, the first question related to if Electronic Arts supported the PS2 model more?

Right.

I mean, instead of allowing the used game business to really sort of pick up the slack of the demand of PS2 after the PS3 is launched and they have a broader range of new product still coinciding with the PS2, would that affect your used game business?

Would that have a negative impact on your used game business?

I don't think so.

I mean, our used game business -- really, the model is built around it being less expensive than a new game.

That will continue no matter what, so yes, if they continue publishing new games longer and publish them at a value price point, I don't think that will impact our used game business.

I just don't think it will.

Your second question -- go ahead, Dave.

The second question -- our industry forecast has not changed for the year.

There has been one replacement, as we mentioned earlier.

We had originally assumed the PSP would be launching.

We replaced that with the DS from Nintendo, so we're still looking at a 5 percent growth for the industry and a 10 to 12 percent software growth number.

Great.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Bill Armstrong with C.L.

King & Associates.

With the negative comps for the second quarter, you are basically -- the lower dollars per unit on hardware will more than offset the higher number of units?.

Are you expecting positive comps for software?

Yes, we are definitely expecting positive comps for software.

As you saw in the press release, total growth we're looking at 20 percent-plus for software, which translates into mid to upper single-digit comps for the software category.

With the price cut now in effect for both Xbox and PS2 and no more supply constraints for Nintendo, would you expect the mix of hardware to software to be higher for the second quarter versus the second quarter of last year?

No, because the prices are coming down, so the actual percentage of business will come down.

Okay.

Your full-year guidance for earnings is unchanged.

Implicit in that original guidance I believe was 4 to 6 percent comps for the full year.

Are you still comfortable with that range?

Yes, we're still comfortable with that range.

With hardware, it's always hard to tell exactly what the sell-through is going to be, so we're not as comfortable with that as we are our earnings range but at this point, we're still going with the 4 to 6 percent on comps, yes.

Okay.

Do you think you're seeing any cannibalization?

I know your new stores are doing very well.

Any cannibalization against the more mature stores?

We continue to look at that pretty closely and the answer to that, Bill, is yes; we definitely are seeing some cannibalization.

It's somewhat difficult to pin down to the exact number but the estimate is that it probably is hitting us about 1.5 to maybe at the high side it could be 2 percent.

As I've said in some previous calls, we are okay with that.

Again, it's another reason why comps with us perhaps are not the litmus test as much as they are with other retailers.

We look at where we have some cannibalization from two perspectives.

Number one, the total return on our investment, even when we get that cannibalization, still returns a superior number that we're very happy with.

Secondly, as we've been able to put more and more stores into markets concentrated where we would get some cannibalization, we get far more efficient in our marketing and our advertising and in fact, there's some efficiencies well in our field operations as we put more stores in the same market.

But yes, you would have to assume that that's about the range.

Just a couple of housekeeping questions -- can you give us how many stores were closed during the quarter?

Then, at the end of the quarter, how many stores were open and what is the break-out between strip and mall?

I don't have the last one;

David has got it, but we closed 14 stores during the quarter; nine of those were in the malls.

That compares to eight last year.

We decided that we were going to be very aggressive on marginal performers and not carry them, drag them into the second quarter.

So while we closed more, I look at it as a very positive thing.

Again, as a percentage of our total stores, it's an insignificant number.

David -- (Multiple Speakers).

We ended the quarter with 1086 strip center stores and 517 mall stores.

(OPERATOR INSTRUCTIONS).

Arvind Bhatia with Southwest Securities.

Good morning, guys.

A few questions here -- the first one is on your mall-based storage versus your strip center stores.

Can you speak to any differences you might have seen in the performance of those stores, either from a comp perspective, traffic perspective and margin direction perspective?

That's the first question.

Then the second question is on the used games category.

I know you said the percentage over all is increasing because you are opening more strip centers, but if you were to look at, on a comp basis or look at existing stores, is the percentage of used games within those stores also increasing as well?

Then another question is just a housekeeping.

The tax rate this quarter -- if I'm looking at it correctly, it was a little bit below what we were looking for.

Is there anything underlying that we should be modeling, going forward?

Let me try to take on the first couple.

There was a slight difference in the performance for the quarter between the mall and the strips.

The strips were somewhat stronger, the malls somewhat weaker.

Again, dramatic I would not say it is but on a comp basis, the strips were somewhat better.

Secondly, in terms of the baseline of stores and our used, the truth of the matter is that it goes up and in some quarters, it does not go up as a percentage of our sales.

Predominantly, given what we have to work worth during a quarter where we feel we've got average titles or average releases, we put more effort, time and to some degree some space behind used games to continue our performance.

Other times, where we've got a preponderance of great, hot, new releases and new platforms releasing, as a percent, you will see that decline.

So to some degree, the best news about that is that it is a model we can work to some degree.

So during the first quarter, as I think our numbers would reveal, yes, we had a good first quarter in our base stores with used.

The third question, David?

Just to elaborate one more thing on the comp difference between the strips and the malls, of course, the malls are very mature, you know, they are all mature stores and the strips are immature, so we would expect there always to be a better mix of comps in the strips over the malls.

On the tax rate, you should probably expect somewhere between 38.5 and 39 percent for the year.

The reason that's lower than some other prior years are a couple of reasons.

One, we have an international piece, albeit small but it does have some effect on the tax rate; two, we've done some strategic planning with state taxes to lower our tax rate -- so like I said, somewhere between 38.5 and 39 percent for the year.

I got it.

Are you still expecting a new piece of hardware to hit your console, at least one of them to come out next year?

Are you surprised that none of the hardware companies talked about new hardware for next year at E3?

I'm not surprised that they didn't talk about new hardware for E3.

I think most people would believe we are in a prime earnings cycle where games are selling very strongly, so people don't want to do anything to stop the sales of games.

I have no knowledge of anything coming out in 2005.

I read the same Internet chat and everything probably that you do -- the rumors -- but we have no first-hand knowledge of any new consoles in 2005.

Great.

Thanks, guys.

(OPERATOR INSTRUCTIONS).

Gary Cooper with Banc of America Securities.

A couple of questions, back to that mall issue, KB Stores -- I think KB Toys closed down 400 stores.

Is that part of the reason why the malls were weak or is that something that will just continue throughout the year?

It's a little bit hard to get a fix on that.

As they've been closing down their video game categories and slashing prices to move out inventory, we would have thought that we may have seen some direct negative correlation to that but if it was there, it was difficult to measure.

Conversely, as they've moved out of that, one might assume that we would see, in those centers, a definable ratchet-up on our sales.

The same thing is true there.

It may be there but it's not clearly definable.

So net/net so far, I would say, while honestly we are happy they are moving out of the category, we can't look right now to having a big effect on it.

I think we will see an effect on that this holiday season but to date, it's kind of a nonevent.

Okay Half Life II sounds like to me like you are pretty well convinced that it gets in this year.

Do you have an idea of whether it's a Q3 or Q4 event?

Similar to that, all these big games and I won't name them but is it your opinion they're all going to get out this year without any slipping?

I never would expect that -- I mean that they all would get out and not slip.

I will believe, though, that a couple of the really big games "slipped already last year", so they will make it into this year.

I mean, I really do expect Halo and I really do expect Doom and really do expect Grand Tourismo IV and Grand Theft Auto San Andreas, so I think they are far enough along that everybody's pretty confident that they're coming out.

But will they all make it?

No, I won't say that but we never expect them to all make it, either.

To some degree, we always keep that I guess hedge in our future but I think there are enough bona fide hot titles coming out, particularly if you look at Halo 2 maybe the biggest single launch title that should one or two slip, it's not a disaster by any means.

Okay.

I also wanted to ask about -- every publisher that we've visited talked at length about increasing and improving their in-store advertising.

I just wondered -- maybe you could discuss how they are approaching you or what kind of plans they have in place and also discuss whether you think some of that's going to get a little cluttered in your smaller stores and how you handle that?

We've been doing a tremendous volume of in-store advertising forever.

I mean, that's been our cornerstone with the publishers, primarily built around pre-sell campaigns.

The publishers like to advertising prior to release in our stores to see if they are generating the kind of buzz they need to generate in order to get the kind of sales that they need to get.

So they use our measurement, which are our reservations, as a yardstick to the success of their pre-release marketing campaign.

So, I've not seen a change in that.

There is probably the same number of titles coming out roughly this year as last year and so our stores will be as cluttered this year as they were last year, or as uncluttered, wherever you take that.

But nobody has talked to me about a problem they see forthcoming because of the promotional activities.

I think what Dan says is 100 percent true.

Our stores, relative to the promotions that we may like to do and indeed the promotions we do, are very tight.

Going from tight to cluttered I think is a challenge.

I think the things that the publishers are working with us better on -- and frankly, it is smarter -- is to tie in what they do in the stores at point-of-purchase to our people working in the store.

That's the best combination by far.

Our stores are filled with video game specialists who love the games, so when we tie our promotions into something that gets our sales associates pumped up about the titles, that's the best win we can possibly have.

I think certain publishers have been working that duality for our better.

It's our job -- and we haven't always succeeded -- to try to get the promotions to be forceful and yet not busy and overly cluttered.

You've identified, I think, a positive challenge for us.

Thanks.

Bill Lennan with WR Hambrecht.

I want to talk about the pre-owned business as well.

Specifically, could you talk about the gross margin trends in that business?

Up, down, sideways?

Then could you talk about the impact, if any, competition will have on that, going forward?

Then secondly, could you also talk about your expectations for the next Harry Potter and Shrek games vis-a-vis their predecessors, particularly in view of the $149 price point?

Thank you.

Well, the (indiscernible) margins, although we don't give out the exact details for them, have pretty much held consistently for the last five or six years.

We have not seen any deterioration in those gross margins and we don't expect to see any for the rest of this year.

I would say the reason for that is we've continuously refined our model, our model how we buy the games, how we price the games, how we re-distribute the games, etc.

This continuous refinement is something we believe we have a tremendous head start over other competitors who are just getting into the business and have a lot of lessons to learn as it relates to how we buy, price, move, etc., these video games.

I would also add to that that, while our margins, as David said, have held, it's far from that simple.

In fact, if you look at our business and realize that when we talk about the used, we're talking about everything from 8 and 16-bit product in some of our stores all the way up to the latest product.

Within that broad range of products, there has been variability in terms of the margin but as we've said, net/net, more complex than it appears our margins have held.

But if you break all of those down individually, there's some dynamic movements within them, as there should be.

The second question, pertaining to competition, is that in once sense, yes, we see the competition.

As we've been saying before, we continue to believe that, as this business grows, there's going to be no lack of competition.

You may specifically be referring to new entrants or more recent entrants into the used category.

Yes, we certainly have seen that with Hollywood Video and they're game crazy.

We have an eye certainly on what Blockbuster is doing with Game Rush.

As Dan indicated, this is a more complex business than it appears, and I think some of those retailers are realizing that.

Having said that, it's also a testimony to the fact that retailers of this size and this magnitude would give it the time and effort to get into a business that, in many ways, we and the predecessor company that we bought pioneered.

So, in one sense, it is testimony to how strong the business model is and in another sense, it is far more complex than traditional retail would have you to believe, so I think we will see all of the above.

Your second question related to Harry Potter, the Harry Potter the Prisoner of Azkaban coming out.

I don't know that I have a read on that, nor on Shrek, but I can tell you that younger titles like that, titles targeted to younger kids, generally don't reserve as well, so we don't get as good a read on the demand as we could.

Now, Shrek at the movies looks like it's going to be spectacular, so you know, I would expect good things out of the game.

Thank you.

Thank you for joining us today.

We appreciate it and onto a good second quarter!

That does conclude today's Gamestop conference call.

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