GameStop Corp (GME) 2004 Q2 法說會逐字稿

Good day and welcome to the GameStop Incorporated second-quarter 2004 earnings results conference call.

Today's call is being recorded.

At the conclusion of the announcement, 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 prior written consent of GameStop.

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

Please go ahead, sir.

Thank you and welcome to GameStop's second-quarter conference call and thanks for joining us.

As mentioned, I am Dick Fontaine, the chairman and CEO of GameStop.

As is our usual plan, with me today are Dan DeMatteo, our President and Chief Operating Officer, and David Carlson, our Executive Vice President and Chief Financial Officer.

We have a lot to cover today in what was a very positive second quarter and we think a very exciting third and fourth quarter as well.

So without undue delay, I'm going to turn it over to David to give you some of the financial highlights.

David?

Thanks, Dick.

Good morning.

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

For the second quarter, we reported net earnings of 7.7 million, or 13 cents per diluted share, which grew 18 percent over the prior-year quarter and came in at the high end of our previously released guidance.

GameStop sales were 345.8 million for the second quarter, an increase of 13 percent over the prior-year quarter.

Video game software sales increased 17 percent, which was strong considering the difficult comparison to the prior year when "Enter The Matrix" and "Star Wars Knights of the Old Republic" released.

New video game software titles have performed well, including "NCAA Football 2005", "Spider-Man 2" and "ESPN NFL 2K5".

Video game software increased to 65 percent of total sales in the second quarter, as compared to 61 percent last year.

Comparable store sales declined 2.4 percent for the quarter as shortages of Sony's PS2 and Microsoft Xboxes in the latter part of the quarter put pressure on sales volumes.

However, earnings were minimally affected, as video game hardware carried very low margin rate.

Gross margin rates improved by 190 basis points from the prior-year quarter primarily due to the strong performance from high margin used video games as our store mix shifts more heavily to subscript (ph) center locations.

In addition, investments in our distribution network over the last year allowed for efficiencies in our freight expenses, also improving the gross margin rate.

SG&A expenses increased 160 basis points from the prior year due primarily to the continued rollout of new stores and the effect these immature stores have on the leveraging of SG&A.

In addition, investments during the quarter in our international infrastructure also contributed to the SG&A increase.

These investments caused operating margins to remain flat, as expected, at 3.6 percent.

Our balance sheet remains very strong with 160 million in cash, no debt and inventories on a store-by-store basis decreasing 2.2 percent from prior-year levels, in line with comparable store sales.

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

Based on current hardware sell-through expectation and video game software growth of 25 percent or more, third-quarter diluted earnings per share are expected to range from 20 cents to 21 cents with corresponding comparable store sales in the positive 4 to 6 percent range.

This represents EPS growth of between 11 and 17 percent.

The title lineup for the back half of the year is shaping up to be exceptionally strong, which reinforces our outlook for the remainder of the fiscal year and allows us to reiterate our full-year guidance of $1.20 to $1.24 per diluted share, excluding the one-time legal charge recorded in the first quarter.

Now, I will turn it back over to Dick for his comments.

Thanks, David.

Not only did we have another solid quarter but equally important, there was some significant improvements that we have been making through the year that really put us in a much better operating position on a go-forward basis.

I am particularly happy that our store operations, coverage and support has improved significantly.

We have made some reason improvements in our distribution responsiveness that has not only lowered our freight cost but has done so in a very competitive manner.

We have made some changes to improve our point-of-sale speed, which of course is going to have more impact as the lines pile up in the third and fourth quarter.

In short, the second quarter was strong and we think a sound springboard to a stronger third and fourth quarter.

As David alluded to, we ran into some hardware shortages that were totally unexpected with both PS2 and the Xbox.

The price cuts, combined with some very aggressive trade-up programs that we launched during the quarter, were really so successful that we ran into a shortage of product.

While the reasons for the hardware constraint are not totally clear and we believe there could be some continued concerns coming into September, most likely with the PS2, the good news is that there continues to be a strong demand for hardware product.

I guess the other good news is that our vendors have seen that GameStop's marketing focus can produce outstanding results if the product is there to keep that momentum going.

We proved, during the quarter, that GameStop can create demand.

When we focus on our in-store attention and promotional marketing on used goods for upgrading to new systems, we get outstanding results.

In this case, unfortunately, our success was stronger than our supply lines could support.

Yet, even given these supply issues, GameStop gained hardware market share in the quarter while our total market share increased a full point.

Yesterday, NPD reported that July software sales grew by 27 percent over the prior year and Game exceeded that rate.

It is an extremely encouraging sign heading into the second half and seems to indicate that the ever-increasing installed base is in part being driven by excellent titles and in turn driving added hardware demand.

Our gross margin growth also continued into the quarter, following strong gross margin growth in the first.

Our new and used business model continues to be refined to drive both segments of the business.

During the quarter, we were working particularly hard on refining our buy, sell, promote pricing to drive new title sales while significantly improving the value of our used product.

In addition and as Dave had briefly touched on, our freight costs continue to come down as many people throughout the Company have worked very hard to make our shipping more efficient yet still very competitive and timely.

While our SG&A expenses did increase during the quarter, I want to say that I am comparable with our total expense structure.

You have to keep in mind that 330 of our stores are immature.

In short, 20 percent of our total store base have yet to reach their first full-year sales, so they've been open less than a year.

As such, they are not generating the same level of revenue-to-expense but they certainly will as they get older.

In addition, because we are a rapid growth company, we will continue to make investments in the infrastructure of the business in advance of our growth.

We are running very fast and we need to make sure that our growth in our future plans -- (technical difficulty) -- compromised by any internal constraints or a decreasing level of control.

We are not going to be running beyond our headlights.

We opened 77 new GameStop stores during the quarter, bringing our total for the first half to 180 new stores for the year and we are well on track and indeed somewhat ahead of our plan to finish the year at the high end of the 300 to 330 new stores we forecast we would open this year.

As has been the trend, the overwhelming number of these stores are in strip centers and strip centers now constitute almost 70 percent of GameStop's total real estate.

This becomes increasingly as important, as we have said on many occasions, the risk reward of investing in strip versus mall sites is far, far better.

We now, in fact, of over 2.5 million square feet of selling space, which undoubtedly makes us by far and away the largest U.S. retailer in space devoted to the video game category.

As you know the title lineup for the third and fourth quarters presents the possibility of being one of the strongest in many years.

As such, we're going to leave a bit more time during our comments for Dan to discuss the title lineup and our plans in some greater detail.

As I turn it over to Dan, I want to hit you with a quick and exciting factoid.

After the first week sales, "Madden 2005" at GameStop is already in the top ten all-time game sales for the Company -- very exciting and I'm sure Dan will tell you much more that will get your interest.

Dan?

Thanks, Dick.

We're very pleased with our second-quarter results, as both Dick and Dave have mentioned.

In spite of being up against last year's strength with "Enter The Matrix", we grew earnings 18 percent and once again grew market share.

Our performance is being driven by consumer acceptance of our value proposition, which includes the trading of games they are no longer playing, great deals on used games, conveniently located stores and great customer service.

Game Informer Magazine, our wholly-owned magazine and cornerstone of our customer loyalty program, is now up to 1.8 million subscribers.

We're refurbishing over 125 of our older stores this fall to give them a current look and feel.

We have continuously improved our proprietary systems to give us the edge in inventory management and in-stock position.

So GameStop is extremely well positioned to take advantage of the tremendous growth in video gaming and in particular exploit the potential of this third and fourth quarter.

Now, I would like to talk about some of the product driving this quarter.

As Dick mentioned, the hardware price prep this spring and the success of some of our hardware promotions led to shortages this summer.

While we do not expect shortages this severe in the third quarter, we do expect to see some constrained supply, especially of PS2s.

We think this will get better as the quarter progresses and we should be well supplied for the all-important fourth quarter.

The back half of this year has some of the most anticipated sequels that we've ever seen.

Of course, some of what we expect to come out in the third will likely flip to the fourth and maybe even some of the fourth may move out but the overall conclusion is that this will be a very big back half for new games.

Of course, with lots of new games, we have got lots of used games traded in, thus fueling our used game sales to the budget-oriented consumer.

A partial list of expected third-quarter releases are "Madden All Formats", which released last week, and when we add all formats together, it will be the biggest game of the quarter; "Grand Theft Auto San Andreas" PS2 is expected to release some time in the last couple of weeks of the quarter; " Doom III PC" which launched two weeks ago, is on track to meet sales expectations; "Pokemon Fire Red and Leaf Green" -- yes, Pokemon is still alive and doing well and this will be huge on GameBoy Advance in September; "NBA Live" all formats in October; "Half Life II", another PC title -- it's been a long time coming since we've had two great PC titles in one quarter and that is expected to debut in September; "Mortal Combat Deception", both PS2 and Xbox in October; "Tony Hawk Underground II" for all formats in October; and "The Sims II", another PC title, in September, and many many more.

So you can see, we have great product coming for gamers of all ages, all platforms and all tastes.

We're well positioned to capitalize on each and every one of them and continue to grow our market share.

Remember, games are our only business, not a sideline, and we have the focus and resolve to get better and bigger.

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

(Operator Instructions).

Mike Wallace with UBS.

Hi, a couple of questions.

First, the PS2 hardware issue -- has Sony given you any indications to what the issues have been?

Do you expect any issues to pop up at Christmas or are they going to have a full supply, going forward?

The same thing for Xbox, assuming they have got reasons for (indiscernible) getting the channel dry, but do you anticipate hardware supply being an issue going into Christmas?

Mike, no.

I do not expect it to be an issue going into Christmas.

I think we have a little bit of a bumpy transition here in the third quarter.

Sony has not given us the ultimate reason why -- and there's a lot of speculation as to the whys.

We do expect, at their words, constrained supply in the third quarter improving as we get laid into the quarter and being in stock in the fourth.

Xbox is a different story.

I really believe that they did get the caught-by-surprise with demand coming after the price cut and also because of the shortage of PS2s, so they really did have a manufacturing problem just keeping up with it.

They have been, the last week or two, have been back in stock and we have a very predictable flow now on Xboxes that we can foresee for the next month or so.

What sort of expectations do you have for the end Nintendo DS?

We don't have anything in the third quarter, first of all.

We believe that we will launch in November.

We do not have a title lineup yet though; we don't have a price either.

However, Nintendo seems to be very confident of a November sometime launch but no details.

Just one more question regarding the football market -- with ESPN doing so much better than last year and then having just gone out, do you think the lower price point is expanding the market?

Do you see any cannibalization between the two products?

Clearly, it has been an additive market with ESPN debuting at 1999, clearly.

As far as cannibalization, I cannot tell you;

I cannot answer that.

When we add all of the Madden SKUs together, we are certain, because we have a special version SKU, as you know, etc. this year, we are certainly ahead of last year, led by a significant increase in the Xbox version because it is the first time it has been online enabled.

Whether Madden is meeting expectations is a question really for Electronic Arts.

I would guess, from my standpoint, that because ESPN has been such a really a surprise, even at a very low price point, logic would say that there almost has to be some shifting but as Dan indicated, it is not dramatically noticeable.

In the long run, it may very well be very, very good because Electronic Arts certainly is a very competitive company and now if we indeed have two sports franchises, they're going to put their best foot forward and I think we're going to be the beneficiaries of them putting more emphasis on their future sports titles.

Anything concerning (indiscernible) Christmas regarding major game delays?

We've heard a lot about Grand Tourismo, for example.

Our current information is still in our quarter and that is fairly recent, so we do have it in our quarter.

In January?

No, no, no, in November.

I'm sorry, Grand Tourismo.

I thought you said Grand Theft;

I was thinking Grand Theft.

Yes, we still have it in our fourth quarter, not in our third quarter right now.

Just one more question regarding the used games business.

It seems to be doing extremely well.

On the competitive front, do you see any other retailers trying to get into this business?

I'd think the retailers that, in one form or another, that have been in the business are still there.

Certainly, the announcements that have been recently made by Blockbuster and they're pushing a little harder on the game rush front.

Game Crazy seems to be in a bit of a suspended state at the moment, so it is somewhat difficult to tell.

Clearly, obviously, Electronic Boutique continues to move forward on that.

I would say the player that will probably open the most incremental new doors that might be considered somewhat a new player would probably be Blockbuster and Game Rush.

Frankly, what we are seeing on that is, as new entries come into the used market, they generally will focus on an attack, levels like one and two of the used game proposition.

Part of that is actually I think could be beneficial to us.

We have long believed that while we are out promoting very aggressively and growing very rapidly, the whole proposition of trading product, in short, turning your closet into cash, is still not fully understood by a great many of the potential buying public out there, particularly the moms and dads.

As the promotional effects of Blockbuster get behind that, we think that is going to open up a bit of a wider audience and we intend to capitalize on that.

So, we see some more competition coming, of course.

Like always, we're focusing on it but we do not think it is going to compromise our profitability or our growth.

Okay, thank you.

Gary Cooper of Banc of America Securities.

Hey guys.

A couple of questions.

Dan, I think you mentioned some of the rumors or speculation about the hardware.

Can you comment on this supposed new version of Sony's PS2, a strip-down version, and whether you think that might be what is causing some of these supply issues?

Then, Dick, let me ask perhaps a larger question philosophically.

If you were repurchasing your shares of this point, it looks like a better return than opening up new stores.

I'm wondering, first of all, have you guys considered slowing down your store openings and rather increasing your share repurchases?

Then secondly, no announcement today on an increase in share repurchases.

What are your thoughts on that?

Thanks.

Dan, do you want to --?

I will take the first one.

I can only pass along a rumor because I have nothing factual from Sony other than the reason they were in short supply is they did try to make a new version of the PS2 like they did the PS1 after the PSX.

They had some problem with it and it caught them by surprise and they had to go back and retool and put out the same one and they're going to go through that process again sometime here in the third quarter of changing over to a new production.

So, I'm just passing on a rumor because that is all;

I just heard it from them -- other people, not from Sony.

Relative to the use of cash and the potential share buyback, first and foremost know there is absolutely no plan, no intention to slow down the growth.

As I've said before, the growth, however, continues to be incumbent upon the performance of the new stores that we are opening and they continue to perform extremely well, giving us an outstanding return on investment.

So no, that is not going to happen.

As a matter-of-fact, I would like to put us in a position that we can accelerate that growth through other means, which really leads us to the discussions we might have with the Board in terms of where we want to go as a company.

Certainly, a share buyback is one use of proceeds but there are others as well.

We think this business model that we're working on and refining has really ample room to expand beyond simply the businesses that we are in right now and I really don't want to get too far into that.

Secondly I'm very comparable to have cash in a rapid growth, highly dynamic business.

Cash is not only comfortable but it gives us a lot of future options.

I would include in that potential for dramatically accelerating as we are better positioned with infrastructure our international operations and I would not rule out, although we have absolutely nothing teed up at the time, the possibility of a future acquisition.

So, I think that cash, at this point in time, positions us extremely well to move in a number of directions but we would not totally disregard the possibility of a share buyback at this point that is not before the Board.

Okay, thanks.

One final question -- could you guys comment on ballpark how many points of your comp was impacted in Q2 and how much you to expect to be impacted in Q3 from the hardware shortages?

Probably somewhere in the vicinity of 1 percentage point in the second quarter and potentially .5 percent in the third quarter.

I might just also add to that.

If you just look at the price reduction that occurred at the beginning of the second quarter and based on our hardware mix percent, that had the effect of roughly a 2.5 percent negative comp.

You know, you're at 18 percent price reduction times 16 percent of sales.

David's numbers -- I think, David, correct me if I'm wrong -- deal with the hardware only and as you know, there is an attachment rate for selling software with much of the new hardware that we sell.

As we lose that hardware sale, particularly if it is deferred or go somewhere else, we also don't get the benefit of the software with it.

Okay, thank you.

(Operator Instructions).

Edward Williams of Harris Nesbitt.

Good morning.

A couple of questions -- first of all, can you give us some color on your expectations for San Andreas relative to Vice City, what the pre-order campaign is like?

Are you assuming that it will be available in the European market in your October quarter?

I can't answer on the European market.

To be honest with you, I do not have the data right in front of me of where we were reservations unless David does.

David, do you?

Yes, the San Andreas reservations are definitely ahead of last year.

We do not give out the exact amount but -- or of two years ago, when Vice City came out.

We are pretty sure that the reservations upon launch will be significantly higher than they were for Vice City.

Okay, and then can you provide some color on software pricing?

This quarter, with the launch of ESPN at $20 and it doing a lot better than I think people had originally thought, and Doom III launching at $55 and selling very well, What are you seeing?

If you can blend it all together, what are you seeing with regards to pricing, going forward?

Could we see games, something like San Andreas, hold the 55 or $60 price point when they launch later on this year?

I think the $50 price point for the best titles is still clearly the way to go and I think that is where we have most things teed up here in the third and fourth quarter is we do expect them to sell 50.

As a matter-of-fact, as you know, Doom was 55.

Electronic Arts sold -- as a matter-of-fact, we sold through all of our special edition Maddens at 59, so we don't see much of an erosion other than what happened with ESPN at 20 but as far as other frontline titles, we definitely expect the $50 price point to hold up throughout the year.

Now, we had anticipated an average retail price decline from the beginning of the year to the end of the year of somewhere in the 8 to 10 percent range, right David?

But that is primarily mix as we mix in the value software and the greatest hits rather with the frontline and that percentage becomes a bigger piece as time goes on because there are more of them.

That is why we have the average pricepoint decline but it is not because of new games coming out at less than 50.

If you were to think about it conceptually though, how do you think something like San Andreas could do at a price point above $50 relative to (indiscernible) at 50?

I cannot comment on that.

I don't know the numbers on what they did.

I know it performed very well at the $50 price point and I would expect San Andreas to also.

Okay.

Can you provide any color on how the used business perform during the quarter and whether or not the mix of used software versus new software was dramatically different than in prior quarters?

I wouldn't say it was dramatically different.

The used business, typically in the second quarter, is very, very strong because of the kids out of school syndrome that we have.

However, it was even stronger the second quarter particularly because of the number of strips center stores that we opened where used games are much stronger.

Final question -- looking at comps, how would you characterize comps for the quarter if we look at hardware units and software dollars?

Software dollars, as we said, are up 17 percent quarter-to-quarter and hardware dollars as a percentage of our total revenue were flat for the quarter.

So I don't know if that answers your question exactly but --.

What we previously said the price decline on hardware at the beginning of the quarter had roughly 2.5 percent impacted in the quarter on Company comps.

Just to be more direct about it, looking at hardware on a unit basis, did it grow on a per-store basis if we looked at comps or have you not looked at it that way, or is it --?

Yes, it did it grow as on a per store basis, yes.

Thank you.

David Magee of SunTrust Robinson Humphrey.

Good morning, guys.

My question has to do with the fourth quarter.

Last year, you all did a nice job going into the fourth quarter at taking steps to preserve and gain market share during a period of the year which sometimes can be challenging for the specialty players.

Do you feel as confident this year that you've got a strategy in place to keep the high-profile and the brand name out there this year in the fourth quarter, or can you give some color on that, please?

Without getting into specifics, we believe we do.

It isn't just that we have rebranded the Company really over the last 18 months but we realized when we did that we were going to have to put some promotional and marketing dollars behind it as well to really begin to define what GameStop was in the market.

We will have a continued aggressive branding campaign that will continue in the third and the fourth quarter, and I am anticipating that we will roughly do proportionately about the same amount of advertising in the fourth quarter as we did last year, although you may see some shifting in the media.

Okay.

Just to clarify what you had said earlier regarding the hand-helds coming out, at this point, you don't know of specific titles per se and there is really not much in the numbers to reflect that at this point?

Yes, we do not know the specifics of the titles and yes, they're not in the numbers at this point, Dave, or we don't have everything in the third quarter.

Not in the third quarter.

The DS launch is factored into the fourth quarter but at a very minimal number because we are really -- we really don't have a lot of information on what the launch quantities are going to be or the price.

But it stands to reason that there will be titles out in the fourth quarter for that?

There should be if it launches, yes.

I think Nintendo has stated have they not been -- that the key factor -- one of the key factors in this releasing during the fourth quarter is that they would have sufficient software to support it.

I think that they even had a number of 8 to 10 titles when we were out there.

They would not launch without 8 to 10.

Thanks a lot.

(Operator Instructions).

Bill Lennan of WR Hambrecht.

Good morning.

Could you give us your comp outlook for the year?

Secondly, could you also give us a target retail sales mix for the year?

Then I have a follow-up after that.

Our comp guidance for the year has not changed.

As we had said last quarter, we're looking at a 4 to 6 percent comp for the year.

Without the launch of PSP, I believe, last quarter, we had mentioned that we were looking potentially of the lower end of that versus the higher end.

We are still about in the same place.

With the retail sales mix, I will have to get back to you on that.

I don't have a forecast for the year in front of me.

Okay.

Then just on the fourth quarter, I don't know if I'm missing something here.

I just kind of go through the numbers.

Your guidance for the year implies in the low 70 cents, about 74, 75 cents EPS for the fourth quarter.

When I go through the numbers, if I assume like a 29 percent gross margin, it is probably going to be higher but to be conservative, let's assume 29 percent.

I can easily get to a number much higher than the mid '70s.

I am just wondering if you could shed a little more light on the SG&A expanse in the fourth quarter (inaudible) upgrading stores later in the year?

I guess the short version of the question is do you consider your full-year outlook to the conservative at this point or is there some SG&A item that I should be thinking about a little more?

First of all, you have to be a little careful with your margin estimate.

The fourth quarter typically has much more hardware in it because of the gift giving potential for hardware and typically, the fourth-quarter margins are lower.

So even though we had 31 percent margins in the second, that does not mean we will have anywhere near those margins in the fourth quarter.

That is one issue.

Also, the fourth quarter, the used as a percentage of our total business for ops, the gift market is not highly attuned to the used or as highly attuned to the used, so you have to factor that in as well.

Actually, in going through the numbers, I think I kind of have factored it in.

I'm just wondering then if I could ask the question in a different way.

Is there -- just purely on the G&A line then, should we be thinking of a little more expenditure on a percentage basis because of refurbishment or because of more aggressive -- you said advertising would be about the same as last year so I guess maybe if we can focus in on the G&A line.

I will clarify that to some degree -- is that when we break down our advertising versus our marketing brand building, there's two different things.

We will commit somewhat more to active brand building of the GameStop brand and approximately the same amount of dollars to advertising.

In net, there will be an increase in the marketing advertising brand promotion in the fourth quarter.

Okay.

Finally, this may be just -- you may be hearing the same things we are.

What is your confidence level that San Andreas makes its expected ship date in the U.S.?

I guess our current information, which is only a week or two old with Take Two has in our third quarter here (indiscernible).

So as I mentioned at the get-go in my comments, it is not unusual to have a title slip a week or two in this business and you know, and to think that something won't slip from the third into the fourth would probably be foolish because something will but right now, we have it planned in our third quarter.

Okay, thanks.

Bill Armstrong with C.L.

King and Associates.

Good morning.

A couple of questions -- first is, I think I heard you say that your software sales increased greater than the NPD number in July, which is 28 percent.

Was that correct?

Yes.

I know you don't break out the used versus new but if we just look at new, are you gaining share in new games because NPD data doesn't capture the used component.

That is correct, Bill.

We only compare the new games to the NPD data when we're talking about our market share.

We do not include used.

Okay, so we're talking apples-to-apples here?

That is correct.

Next, software price deflation, so far this year, would you say it is in line with your expectations, a little above, a little below?

Actually, it is a little better than we had anticipated.

I believe the NPD data yesterday showed that prices had decreased 1 percent on average in the first six months of the year.

We had anticipated an 8 to 10 percent decrease in the average price point for the full year.

Now, we are expecting some price deflation in the second half but truthfully, I don't think we will probably get to the 8 to 10 percent price inflation.

It will be less than that.

That 1 percent number that NPD came out with would -- does that tie-in with your observations in the market?

Yes, I would say so.

I would say probably the only price deflater that I guess we could say surprised us -- guys, correct me if I'm wrong -- would have been the ESPN.

That price was ratcheted down somewhat at the last moment and obviously, we did not have that totally factored in, but beyond that, I don't think there were any noticeable titles that deflated.

Then just two housekeeping questions -- could you tell us how many stores you closed in the second quarter and what was the strip versus mall store mix at the end of the second quarter?

We closed four stores during the quarter and David, you have it right in front of you on the second part.

We have 1159 strip center stores and 517 mall stores for a total of 1676.

That strip number includes international, right?

That is correct.

One final question, I think you mentioned international infrastructure as a component of your SG&A.

Could you quantify that or maybe just sort of discuss what kind of issues we are talking about and will that be impacting the third and fourth quarters?

To some degree, it will and specifically, what we were talking about is we have now owned this controlling interest for just over one year, I guess maybe 14 months or so.

During that time, we have doubled the size of the Company and yet, we realize that to truly spring forward, we had to make some investments in the infrastructure.

Over the course of the last quarter, we have -- and it has been going on literally the whole first half -- we have installed a completely new point-of-sale and a new system, a push versus a pull system, have relocated them into a new general office with much, much better distribution capabilities.

As you know, we are going to ratchet up our expansion, which we fully intend to do, although the majority of it I expect will be in 2005.

As I said before, we're not going to run in front of our headlights.

So the infrastructure had to be in place as we rapidly increase the store count and also, frankly, as we enter different countries.

So yes, the SG&A is taking some of that hit but it will be a great investment.

Will we continue to see some of that hidden in the back half of the year as well?

Yes.

Could you quantify that in any way -- (Multiple Speakers) -- points or dollars?

I don't think I really want break it out at this point but perhaps you and David can talk about it in a little bit more detail off-line.

Great, thank you.

(Operator Instructions) Jill Krutick with Citigroup.

Thank you very much.

Good morning.

Given the Toys R Us restructuring announcement last week, obviously it's still a lot of information not clear on that but they did announce their $150 million write down on merchandise and the prospect of some significant store closures here in the short run, obviously up to the holidays.

I'm curious how you see that potentially affecting your business, both positively most likely versus negatively?

Secondly, could you perhaps talk about the margin outlook for the second half of the year?

If you could also reaffirm your market forecast that you have for both hardware and software this year, that would be great.

Thank you.

Let me take the first question, Jill.

It is a little bit hard to tell, at this point in time.

Certainly Toys R Us in the category in the videogame area has been losing market share for quite some time.

I think that we and others have benefited to some degree from that.

Having said that, that does not mean they are insignificant in the category and in some platforms, particularly with Nintendo, that they still do a very, very nice piece of business.

Should they be taking wide scale markdowns on a broadbase of their titles?

I would guess it could have some effect in that they would probably back those up with promotions but I didn't expect them to do, not on the A+ and the most desired titles, which among and other things could be in short supply.

I think the markdowns that we could see would be in the second, third-tier type titles and much like the KB markdowns of a year ago, just a negligible to non measurable impact.

On a go-forward basis, there's not enough information in tell what they are going to mean to the market.

Thank you.

That is fair.

On the gross margin outlook Jill, although we had 190 basis points increase both in the first and second quarters, we're looking at lesser increases in the third and fourth mostly due to mix.

Particularly in the third quarter, with the amount of new software titles that are coming out, the mix will skew more heavily to new versus used software, so we're looking for more of a 25 to 50 basis points increase in the third quarter and something similar in the fourth.

I'm sorry, how much, Dave?

25 to 50 basis points.

Okay, thank you.

Then our market forecast has not changed.

We still are looking at approximately a 10 percent increase in software for the full market and a 5 percent total video game increase for the entire industry, including the hardware and the accessories.

Arvind Bhatia with Southwest Securities.

Good morning, guys.

One quick question is on the hardware margin.

It used to be that you guys got about $10 per console what is the hardware margin these days?

That is my first question.

Then I have some follow-ups.

Hardware margin is still right around 5 percent or 8 to $10 per unit.

I got it.

Conceptually, one thing I'm sure you hear a lot from investors is, you know, you talked about you guys are running very fast and you're opening a lot of stores.

Again, you talked about the competition as the well.

Are you seeing anything that would suggest that opening at the rate that you are opening 330 stores a year -- I guess how long can you continue to do that in your mind before you reach some kind of saturation in the United States?

We could ask that -- that question has been asked more or less constantly every year and truthfully, it is a moving target.

The good news is, as we learn more about this business and the install base gets larger and larger, we continue to believe that potential is greater and greater.

I would say that I am quite comparable, albeit with a lot of work and some different models, that the range that we are expanding in now, we will be able to expand in for the five-year period pretty comfortably.

Beyond that, I just do not have the vision.

What I would point out is that the key to that expansion is to continue to test different markets, different store size and somewhat different concepts.

The overwhelming majority of those that we have tested have been proven to be successful.

Again, I will reinforce the fact that if the stores do not continue to perform as well as we have anticipated, in one sense, you will be the first to know because you will see the amount of stores that we're opening cut back until we get it righter.

We're not in the business just to open stores and we're not in the business purely as a market share play.

Our stores -- we demand that each one of them stand on their on and generate a return on investment.

Our batting average is extremely high and if it slows and if we feel we cannot get that return, we will deploy our assets somewhere else.

So if I understand it correctly, if you look at the 330 stores, you know, 20 percent of your store base, if you will, you mentioned that it is less than a year old.

Then you compare a similar number of stores that you opened that, you know, (indiscernible) prior to that and you look at the returns on those two groups of stores.

Can you quantify the returns?

Are they similar, better, slightly worse but getting better?

I mean, anything that provides us more color on and we can track the new store openings and the returns on those?

I would say, in a broad stroke, without giving away specifics, on a run-rate basis, they're very similar and may be a freckle better due to some factors but probably more fair to say that they're similar.

In your plans for the next five years, as you mentioned, what sort of aggressiveness does that account for from people like Blockbuster in the next two to four years?

We would assume that a number of our competitors are also going to continue to grow.

Electronic Boutique you guys have a pretty good fix on.

Blockbuster is a bit more of a question mark.

I think it is entirely possible we could see pretty aggressive growth for two years followed by a bit of a question mark as they do perhaps a better job of analyzing return on investment.

Right now, I think it is early enough that there are questions to be answered with that model and so I just would not forecast too far down the road.

But we do expect competitors to stay in here and continue to be as aggressive as at least they have been to this point.

I got it.

You have mentioned that Madden was already in the top 10 of all times.

Can you elaborate a little bit more?

In other words, are you looking at one week data on all platforms?

Yes, one week data on all platforms added together, yes.

You're comparing it to any game that has come out in the history of video games and you are saying that is in the top 10?

Right, the history of GameStop's experience.

I got you.

Okay, let's see, inventory situation -- obviously, with hardware, you have had some shortages.

What about software?

Can you comment on are there any pockets where there might be any concerns?

Not really.

Ever since we've gotten to the CD model or the DVD model for video games, shortage has not been as severe.

Now, they're always some shortages when people underestimate demand but the react time is much quicker.

So we do not foresee major shortages.

One last question, if I can?

The impact of San Andreas on others titles -- you know, you saw that a couple of years ago, right?

I mean the impact was that the other titles probably lost some share because of the number of hours it took people to play San Andreas.

How do you think about that impacting other titles and how are you planning on --?

In our forecasting, we assumed that some of the other titles coming out in the third and fourth quarters would be affected by both San Andreas and by Halo II.

So, if the effect that we saw with Vice City is not there, there is some potential outside I suppose, but we do believe there will be some effect on other titles.

There's a lot of good titles coming out in the October/November timeframe and some of them won't do as well because of the launch of those two titles.

Again, this is another question that I'm sure you get asked quite a bit.

The lineup is exceptionally strong but is there a (indiscernible) maybe this year?

Good question.

I do not think there is.

I think that the issue, if there is an issue, and you hate to complain about plenty, but it may very well be a minor key concern of the one we were just talking about, that some of the powerhouse games may have a playability that overshadows the need to buy another game quite as quickly but I really don't see, of the A-plus titles that are on the horizon, that they're going to the knocked out of the box.

I think each in their own right have tremendous visibility and fan followings, so I don't think so.

Our reservation data, which is a very good indicator of consumer demand, doesn't show a diminishment on any of the franchise titles that we expected.

So we are seeing great reservations on San Andreas, on Halo, on Pokemon, you name it.

Tony Gikas of Piper Jaffray.

Most of my questions have been asked but a couple of quick follow-ups here.

Could you give us a feel for the performance of the new stores that you have opened during the last 6 to 12 months?

Have they been exceeding your sales expectations or have they been in line?

A follow-up on the inventory position question -- maybe you could just give us a feel for any changes.

With the trade-in trends, are you seeing, on a per customer basis, those number of trade-ins increasing, decreasing?

Maybe more specifically, are there any pockets where you might be heavy with any used inventory?

Some of those investors have had concerns with these names and have been bringing that up recently -- that, at some point, used inventory could get a little heavy and be a concern.

I doubt that is the case at this juncture but maybe you could comment on that?

Then do you know what the same-store market share change has been on a year-to-date basis?

What do you project it to be for the year?

Is it 50 basis points or greater?

Let me take one of the questions, and that is the used inventory.

Yes, our used inventory is growing.

Our used inventory is growing because consumers are more familiar with the value proposition.

We keep opening more strip stores and they sell more used, etc.

We do not have pockets of inventory where we have any problems with the used because of the sophistication of the systems we're developed and their ability to redeploy that inventory into stores that aren't selling it into stores that are selling it.

We feel very good that we have the most sophisticated systems in the industry and our ability to balance that used inventory, therefore maintaining our margin.

Let me add to that and it is relative to what I stated about competition and again that we certainly respect the talents of our competitors but Dan touches on one of the many of the drill-downs of sophistication of the used models.

We are there very early on.

We did face that problem and had to solve it through a combination of systems and other factors we believe we have.

That is a very real problem and the appropriate valuation of used inventories on a store-by-store basis is a real sensitive subject in the used areas.

As you can tell by Dan's comments, I believe we do it better than anyone in the business simply because we've been at it longer than anybody in the business.

I will try to answer to the extent that we can recap all of the questions.

The question about the new stores -- they absolutely are continuing to have a run rate in aggregate above our expectation.

As such, we will continue to move forward with the expansion.

If there is any area where we are watching very closely that is pretty delicate it is as we test some new concepts in I guess what we would call nature tertiary markets but beyond that, we feel very good about our earnings (inaudible) performance.

On the same store market share question, if you recall, in the last two years, our same-store market share has gone faster than the market for the last two years.

At the beginning of the year, we thought that the same-store growth may not be quite up to the market but what we found again is our comparable stores are growing faster than the market, at least through the first half of this year.

Could you characterize that in basis points, what it might be for the year?

We don't give that out, no.

Any change in trade-in trends that you are seeing?

Anything -- (Multiple Speakers) -- aware of there?

Yes, they are higher.

I mean, they just are.

The trade-in trends are higher each week over where we have been in the past.

Would you say you're paying less for those used games that you're taking in than you have historically?

Depending on the age of the platform, that determines the price of the game, so yes, as games have been out longer because PS2 is older, then by definition, we would pay somewhat less.

But on balance, similar?

On weighted balance, it would be very similar.

In reality, because you have market-by-market issues, it is pretty dynamic.

Some markets, it could very well be less, some markets somewhat more, but the balance at the buy-side trade is pretty consistent.

Thank you, guys.

Thank you for joining us today.

We appreciate your interest in GameStop and we are excited about moving on into the third quarter.

That will conclude today's conference call.

Again, thank you, everyone, for your participation.

You may now disconnect.