GameStop Corp (GME) 2004 Q3 法說會逐字稿

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  • Operator

  • Good afternoon.

  • Welcome to GameStop, Inc. third-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 the prior written consent of GameStop.

  • Now, at this time, I would like to turn the conference ever to Dick Fontaine, Chairman and Chief Executive Officer of GameStop.

  • Mr. Fontaine, please go ahead.

  • Dick Fontaine - Chairman and CEO

  • Thank you.

  • This is Dick Fontaine.

  • I am the Chairman and CEO.

  • With me today are Dan DeMatteo, our President and Chief Operating Officer; and David Carlson, our Executive Vice President and Chief Financial Officer.

  • As our release this morning indicated, this was an absolutely superb quarter for our Company.

  • Not only did we perform very well in maximizing the sales potential inherent in our new and our used business model, but we positioned our Company for the future by accomplishing a number of things.

  • Number 1, in early October we purchased 6.1 million shares for $112 million of Barnes & Noble's Class B stock which was followed by Barnes & Noble's spinoff of their Class B shares to shareholders which was completed on the 12th.

  • The third quarter was particularly gratifying in that virtually all of the key titles sold up to or far exceeded our expectations at release.

  • Dan will be giving you more detailed insights in just a minute.

  • We were somewhat surprised at the increasing strength of hardware throughout the quarter.

  • Due to the strong new titles that we had to work with, we clearly had forecast that as a percentage of total sales our hardware would be off much more than it was.

  • Hardware sales did decline compared to last year as a percentage of sales but not as much as we had anticipated.

  • In fact, if you look at our remarkable inventory levels, it bears some testimony to the fact that we could have sold greater quantities of both the Xbox and a new version PlayStation 2 if supply lines had been able to keep pace with our demand.

  • We were constantly in and out of stock for much of the quarter, yet still exceeded what we forecast.

  • In my experience this is remarkable for one console going into its fifth Christmas season and this case, the PlayStation 2, although it's new size which has definitely accelerated demand puts it in a new category.

  • And it's the fourth season we will have for the Xbox and yet we were chasing growing sales on both of the consoles.

  • This is a very good sign that demand for videogame products is still building and is a long ways from the peak.

  • While Dan will have more to say about the sales of the 2 huge titles, Grand Theft Auto;

  • San Andreas which hit right at the end of the quarter, and Halo 2 which opened before it, I want to take a minute to focus a little bit beyond the headlights of the record-setting sales numbers and really point to the amazing job of execution on the part of all our store personnel in handling the midnight openings, managing the lines and making the experience an all-around excitement for our customers.

  • We often say that execution is the key to retailing.

  • The events of the last few weeks have shown it to be even more massively important when you realize that our store has not only handled record sales, but huge incremental trade-ins and did so efficiently.

  • Not only did the gamers' enthusiasm of our people really project, the systems we put in place to make the trade inside of our business more effective was never more important or efficient.

  • And on that point a great fringe benefit to our strong new title and hardware sales is the fact that we will be in the best inventory position ever with used goods going into the Christmas season.

  • When you can't buy your inventory from a third party, as you know, you've got to grow your own.

  • And we've done so better than ever before.

  • So as the fourth quarter kicks off, GameStop clearly has momentum.

  • We have great products yet to be released.

  • The macroeconomic indicators seem to be tilting toward optimism, and I feel we've never been better ready for a fourth quarter than we are today.

  • And with that, I'd like to turn it over to David, who will hit some of the details of our financial performance for the quarter.

  • David Carlson - CFO

  • Good afternoon.

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

  • For the third quarter we reported net earnings of 12.1 million, or 21 cents per diluted share, which included an after-tax charge of 1.7 million, or 3 cents per diluted share attributable to the professional fees related to the spinoff of our Class B common shares previously owned by Barnes & Noble, Inc.

  • Excluding this one-time charge, net earnings grew 29 percent to 13.8 million, or 24 cents per diluted share exceeding the upper limit of our previously released guidance by 2 cents.

  • GameStop sales were 416.7 million for the third quarter, an increase of 28 percent over the prior year.

  • Video game software sales increased a strong 36 percent, led by new tiles such as Madden NFL 2005, Grand Theft Auto;

  • San Andreas and Fable and represented 70 percent of total sales.

  • Comparable store sales increased 11.8 percent for the quarter, as the strong lineup of newly released titles coupled with the launch of the newly redesigned Sony PSTwo and the Xbox holiday bundle produced robust sales which were much stronger than our expectations.

  • Gross margin rates declined by 130 basis points from the prior year due to the strong sales of new videogame titles and unexpectedly strong sales of videogame hardware.

  • Pro forma SG&A expenses decreased 110 basis points from the prior year due primarily to leverage created from the strong sales volume.

  • We also continued to invest in our international infrastructure during the quarter putting some pressure on the SG&A line resulting in pro forma operating margins which were essentially flat with last year, showing that our inventory store base is beginning to ramp toward maturity.

  • Our balance sheet remains very strong with 101 million in cash even after buying back approximately 127 million of stock in the last 12 months.

  • Inventory on a store-by-store basis decreased by over 25 percent from the prior year, primarily due to increased inventory turns and decreased videogame hardware levels.

  • We also initiated fourth-quarter guidance and raised our guidance for the full year of 2004 based on the strong lineup of titles releasing in the fourth quarter, and offset to some extent by uncertainty as to shipments of videogame hardware.

  • We are expecting fourth-quarter comparable store sales to increase between 6 percent and 9 percent, with the all-important videogame software category increasing between 25 and 30 percent.

  • Earnings for the fourth quarter are expected to be in the range of 81 to 84 cents per share.

  • Full-year earnings per share guidance is being raised to a range of $1.28 to $1.31, in comparison to previously released guidance of $1.24 to $1.28.

  • With that, I will turn it over to Dan for his comments.

  • Dan DeMatteo - President and COO

  • Good afternoon.

  • One would have to have been asleep the past few weeks to miss all the noise about video games.

  • On October 26, GameStop set an all-time day one sales record with Grand Theft Auto;

  • San Andreas.

  • Then just last week on November 9, we broke that record with first day sales of Halo, surpassing 525,000 units.

  • As the New York Times said, Hollywood would kill for these kinds of numbers with Halo 2 estimated first day sales in excess of $125 million.

  • As both Dick and Dave discussed, we were very pleased with GameStop's performance in the third quarter and excited about prospects for the fourth quarter and beyond.

  • Our market share on new videogames increased significantly in the quarter and reached an all-time high, once again proving that our trade-in model has been truly accepted by the customer.

  • Hardware sales exceeded expectations thus continuing to drive an ever larger installed base.

  • Given all the new releases in the quarter, our trade-ins hit an all-time record and our used inventory will fuel record sales of used games in the fourth quarter.

  • We have continuously refined our store and distribution systems and our in-stock and redistribution capabilities have never been better in spite of our growth.

  • Our store managers are extremely knowledgeable about the products and have never been better trained.

  • We have the largest assortment of games anywhere.

  • We don't just cherry pick the best sellers and our customers know us for the best assortment and in-stock positions.

  • Given these competitive advantages and the strong kind of lineup, we are poised to have a great holiday season.

  • Now for some of the titles.

  • Of course Grand Theft Auto;

  • San Andreas for the PSTwo, and Halo 2 for the Xbox will be at the top of the list.

  • But there are other great titles for all gamer pace.

  • Both Madden and Fable which released in the third quarter will be at the top of the list.

  • Some of our other best seller picks are the Nintendo DS handheld system;

  • Metal Gear Solid for PSTwo from Konami;

  • WWE Smackdown for PSTwo from THQ;

  • Half-Life 2 for the PC from Vivendi;

  • Metroid Prime for Game Cube from Nintendo; and Pokemon Fire Red and Leaf Green for Game Boy Advance from Nintendo.

  • Yes, Pokemon is still at the top of the list.

  • As you can see, we have hot product for gamers of all ages and all platforms.

  • You can be assured that we are ready to serve the needs of all of our customers as games are our business, our only business.

  • Lastly the visibility for the first and second quarters have never been better.

  • Publishers are doing a much better job of bearing the new release schedule so we don't have all of it simultaneously.

  • Therefore, we expect several key franchise titles to release in the first half of the year and drive our business such as Splinter Cell Chaos Theory, all platforms from UBI Soft;

  • Doomed 3 for Xbox from Activision;

  • Devil May Cry 3 for PSTwo from Capcom;

  • Second Sight for PSTwo from Namco; and the Getaway Black Monday for PSTwo from Sony.

  • Now we will turn it over to the moderator for a Q&A session.

  • Operator

  • (OPERATOR INSTRUCTIONS) Edward Williams with Harris Nesbitt.

  • Edward Williams - Analyst

  • Good afternoon.

  • First of all just a couple of housekeeping questions.

  • What share base should we be using for the January quarter and going into next year?

  • And how did your store count change mall verses strip throughout the -- at the end of the quarter?

  • David Carlson - CFO

  • The share count in the fourth-quarter should be somewhere between 54 and 55 million.

  • And the full year share count should be somewhere between 57 and 58 million.

  • Dick Fontaine - Chairman and CEO

  • Relative to the mix between the strips and the malls, Ed, we opened 72 stores as we said during the quarter, really only 1 of those was a mall store.

  • We will end this quarter roughly rounding with about 70 percent of the total inventory will be strip stores.

  • Dick Fontaine - Chairman and CEO

  • And the actual counts were -- we had 518 mall stores and 1228 strip center stores at the end of the third quarter for a total of 1746 stores.

  • Edward Williams - Analyst

  • Great.

  • Looking into next year, obviously there are a lot of variables that will affect your sales in calendar 2005.

  • What are you thinking as far as the software/hardware mix going into next year?

  • Dan DeMatteo - President and COO

  • I don't think we've gotten that far in our planning yet to actually give precise mix percentages.

  • We are assuming that PSTwo is going to launch in the first quarter.

  • And as you know, it's rumored that there will be in Xbox 3 in the fall, but we're not sure.

  • And then we have to put price points to these things too to determine where they will be.

  • Most certainly we believe we will see a price decline, probably sometime around E3 again next year.

  • But we haven't put all that together into our plans yet.

  • Dick Fontaine - Chairman and CEO

  • Dan said that we've gotten probably more visibility on the software in the first half.

  • I dare say that it probably doesn't go beyond software.

  • There are still are a lot of questions.

  • I think we're very optimistic about the hardware but even in the near-term we can look at the fourth quarter, it's very unclear if we are going to be able to get as much of the hardware as we desire.

  • Somewhat difficult to tabulate the percentage of software to hardware when the flow of hardware is very unpredictable at the moment, let alone next year.

  • Hopefully that will not be a problem and supply will catch up with demand.

  • It's a little early for us to forecast that.

  • Edward Williams - Analyst

  • Okay, and then just look at next year at least on a conceptual level, would you expect the first half of next fiscal year to have a higher growth rate at least as far as the industry is concerned than the second half of next fiscal year?

  • Dick Fontaine - Chairman and CEO

  • I think given what we know now, the answer to that would be, yes.

  • Edward Williams - Analyst

  • Probably flowing through similarly within your model?

  • Dan DeMatteo - President and COO

  • (multiple speakers) Yes.

  • Again, as we've said, we've over in the 6.5 years gained in market share.

  • We would assume we would continue to do that too.

  • Edward Williams - Analyst

  • Your international expansion plans as you look at CapEx on a going forward basis, will we see an increased allocation of the CapEx in the international markets or is it still going to be focusing on U.S. strip?

  • Dick Fontaine - Chairman and CEO

  • We will again by pure historic -- we will clearly continue to focus on U.S. strip.

  • We continue to believe that there is significant growth opportunities there.

  • I would say that if we were just looking at international capital, the capital we will be investing more internationally next year.

  • We will probably give you a better indication of that as we get towards the end of the quarter.

  • Edward Williams - Analyst

  • Care to provide us with the number of stores that are actually in Ireland at this point?

  • Dick Fontaine: Right now we have opened or signed about 21.

  • Edward Williams - Analyst

  • Thank you.

  • Operator

  • (OPERATOR INSTRUCTIONS) Bill Armstrong with C.L.

  • King and Associates.

  • Bill Armstrong - Analyst

  • Good afternoon.

  • Couple of questions.

  • Gross margins were down year-to-year despite hardware being lower than it was a year ago.

  • I know it was higher than you expected but it was still down year-over-year.

  • So I was wondering how gross margins were also down year-over-year?

  • Dave Carlson: There are 2 reasons for gross margins being down from last year.

  • The first reason is partly the hardware, hardware was much higher than we anticipated.

  • But secondly, new videogame software titles were a very, very large piece of the mix.

  • Because of the releases that came out such as Grand Theft Auto and Madden and Fable and all of the other titles that came out.

  • The new videogame mix was much stronger in the third quarter thus putting some pressure on margins, but that's to be expected.

  • Bill Armstrong - Analyst

  • You mean new verses used?

  • David Carlson - CFO

  • Exactly.

  • Bill Armstrong - Analyst

  • Were sales of used games still positive?

  • David Carlson - CFO

  • Definitely.

  • We had very good strength in the used business but the new business was so exceptionally strong with the amount of new released titles that it weighed down the margins.

  • Bill Armstrong - Analyst

  • Right.

  • Were your gains positive on a same-store basis?

  • Dick Fontaine - Chairman and CEO

  • Yes.

  • Definitely.

  • Bill Armstrong - Analyst

  • As far as Q4, you raised your comps guidance to 6 to 9 percent.

  • What are you assuming in terms of hardware availability to come to that number?

  • In other words, is there risk to that number if you don't have -- if you don't get enough hardware or how are you factoring that into those numbers?

  • How should we look at that?

  • Dan DeMatteo - President and COO

  • We think we've been appropriately conservative in our estimate of hardware for the quarter given the shortages we have seen and what we believe to be the flow of hardware for the next couple of months.

  • I can't say there's a lot of risk to the numbers but I don't know that there's a lot of upside either because we've not seen any increased flow.

  • Bill Armstrong - Analyst

  • If by some Christmas miracle you were able to get all the hardware you wanted, would you beat that 6 to 9 percent number?

  • Dan DeMatteo - President and COO

  • First hardware has little margin in it.

  • Bill Armstrong - Analyst

  • I understand.

  • Dan DeMatteo - President and COO

  • It would have an influence on the comp numbers but I don't know how influenced it would have on the earnings.

  • Bill Armstrong - Analyst

  • I understand.

  • Dick Fontaine - Chairman and CEO

  • If we put a tantalizing thing out there is if we could have all we want, would we?

  • I guess I would go out on a limb and say yes, almost certainly.

  • Bill Armstrong - Analyst

  • But that's a big if of course?

  • Dick Fontaine - Chairman and CEO

  • Yes Britt.

  • Bill Armstrong - Analyst

  • Are the supply issues concentrated on Sony or is that also -- are you also continuing to see spotty supplies of Xbox?

  • Dan DeMatteo - President and COO

  • It's really both, it's both.

  • One seems to be fueling the other.

  • The Xbox, Sony was short in the fall and that put pressure on Xbox supplies as people bought an Xbox and they didn't have the manufacturing capacity to ramp up.

  • Bill Armstrong - Analyst

  • How about Nintendo?

  • Dan DeMatteo - President and COO

  • We would expect shortages on the DS as usual within any new launch, but not on the Cube.

  • Bill Armstrong - Analyst

  • In your view is it because they're having problems with manufacturing or is demand just really stronger than people anticipated and maybe stronger than the manufacturers anticipated?

  • Dick Fontaine - Chairman and CEO

  • I think from our standpoint, I would jump in here and say that we can see the demand and tie it to two things in our stores and through our people; one, it's clear and we've known for some time I guess Microsoft has as well that great software will often sell hardware.

  • The long pull of Halo has had a tremendous additive effect and it started long before the title release.

  • Secondly, there is no question whatsoever that the reduced size of the new PlayStation 2 has really revitalized that platform and indeed we could see that from the enthusiasm of our store managers when they first got a look at it.

  • So I think from our standpoint, there clearly has been demand there that has been unfilled and untapped.

  • From the manufacturer's sides, I just can't tell you because I don't know why they are not able to fill the pipelines.

  • I suspect its different reasons from each one of them.

  • I do believe that we get our full allocation and maybe more than our fair share and we keep looking for more.

  • I believe they are working with us as well as they can but there is real momentum in this business now.

  • A combination of a lot of things going on.

  • For what ever reasons, we find ourselves in an unusual position of basically being able to sell all of the hardware we can get of the two we talked about and anticipating the DS will join that group.

  • Bill Armstrong - Analyst

  • I guess that's a good problem to have.

  • Just one final question, how many store should be looking at in terms of new openings for the fourth quarter?

  • Dick Fontaine - Chairman and CEO

  • About 78.

  • We will make the revised number that we've given the market of about 330 stores.

  • Bill Armstrong - Analyst

  • Great.

  • Thanks a lot.

  • Operator

  • (OPERATOR INSTRUCTIONS) David Magee with SunTrust Robinson Humphrey.

  • Jennifer Neal - Analyst

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

  • Congratulations on a good quarter.

  • I just wanted to ask 2 quick questions about the Nintendo DS.

  • First of all I know you all had stopped taking pre orders for that, is that indeed the case?

  • Just as a rumor?

  • And then secondly, what are you looking at in terms of launch software for the DS?

  • Dan DeMatteo - President and COO

  • Jennifer, this is Dan.

  • Yes, we quit taking reservations as our initial allocation was sold out.

  • So we did, yes.

  • And I think on the title front I think it's 5 titles, Dave is that right?

  • David Carlson - CFO

  • There is Super Mario, Spiderman, Madden, Urbz, and Rainman, I believe, are the titles that are coming out for the launch, and then Tiger Woods is expected a few weeks after launch.

  • Jennifer Neal - Analyst

  • Then there won't be a further allocation, I'm assuming, this holiday season then of more DS.

  • It will be after the first of the year?

  • David Carlson - CFO

  • Oh no, no, Jennifer, there will be.

  • This was just our initial allocation, and we generally only take reservations on initial allocations, or sometimes we take it on futures.

  • But in any case, this is just the initial.

  • We do expect multiple replenishments after the initial allocation and before Christmas.

  • Jennifer Neal - Analyst

  • Okay, great.

  • Thank you very much.

  • Operator

  • Gary Cooper with Bank of America Securities.

  • Gary Cooper - Analyst

  • A couple questions here, guys.

  • First, can you talk about the breadth of sell-through on software?

  • I can remember a couple years when DTA came out, it seemed to consume a tremendous amount of dollars and some other games suffered.

  • So that is one.

  • Two, speaking of breadth, I'm wondering if you're doing a greater business on children's properties.

  • Some of your competitors I think are struggling that have a skew towards that, and you've opened up more strip mall stores?

  • And then finally, the next Delta title, do you think that shows in the first half of '06?

  • Thanks.

  • Dan DeMatteo - President and COO

  • First on the breadth and sales since Halo or since Grand Theft Auto came out, as you probably know there weren't a lot of new releases in between Grand Theft Auto and Halo 2 intentionally.

  • So I don't know that I can quantitatively answer that except Dave just remind me, there was one, WWE and that has met our expectations.

  • I can't answer the question.

  • There are a lot of titles that come out this week and we will be keeping a close eye on that.

  • But I can't answer that quantitatively except that WWE did perform well.

  • And the second part of the question was children's titles?

  • I don't know that I'm focused on it, to be honest with you, to give you a really truthful answer.

  • Dave, or does anybody else have an opinion?

  • Dick Fontaine - Chairman and CEO

  • I think the fact that I guess we don't have an opinion is a pretty good indication that it hasn't jumped up on the radar.

  • We are certainly not seeing any significant strengthening in the demand and we always see a pre-holiday kick up in a broader base of titles.

  • But I haven't seen anything out of the ordinary.

  • I suppose it's conceivable there is something we haven't seen, but --.

  • Gary Cooper - Analyst

  • Okay.

  • Zelda, first-half?

  • Dan DeMatteo - President and COO

  • Rumored Zelda, first half, that's right.

  • We don't have confirmation on it.

  • I didn't mention it if we had had confirmation on it.

  • Yes the rumor is sometime in early part of the first half.

  • Gary Cooper - Analyst

  • Lastly, first-half '06 release schedule very strong.

  • As you look at it, probably your strongest ever.

  • Do you think it turns out to be slightly too crowded or as you analyze it do you think this is just about right in terms of number of big skews released in the first 5 or 6 months?

  • Dan DeMatteo - President and COO

  • I don't know that we've gotten into analyzing it that closely.

  • These things I don't know exactly when they'll come out other than the first half so they'll probably be some natural spreading of the titles throughout the half.

  • Without having exact release dates, I don't know that I could answer that other than to say we have visibility on product sitting here at this time that we normally wouldn't have for the first half of the year.

  • That makes us very excited about that prospect for it.

  • Gary Cooper - Analyst

  • Thanks.

  • Operator

  • Elizabeth Usher (ph) with Smith Barney.

  • Elizabeth Usher - Analyst

  • I had 2 questions.

  • One is a follow-up on that strong software slate for the first half of next year.

  • I'm wondering what we should think about that doing to gross margin given that gross margin went down in this quarter and whether or not that's a concern we need to be thinking about?

  • David Carlson - CFO

  • Well, I think the mix will be a little different probably in the first half.

  • The used business is always very, very strong in the first and second quarter.

  • So I would expect that we will see some gross margin improvement probably in the first and second quarters of next year.

  • It's a strong title lineup, but not as strong as say the third and fourth quarters were of this year.

  • Elizabeth Usher - Analyst

  • Okay, thanks.

  • The second question just sort of on a bigger picture basis, I was hoping someone could speak to the competitive challenges you are facing as Blockbuster gets more involved in the business and other retailers continue to expand, if there is any impact this will have on your own store expansion plans for next year beyond your marketing strategies; just how you're thinking about the business in the context of a more crowded space.

  • Thanks.

  • Dick Fontaine - Chairman and CEO

  • Well, one of the things we have addressed this at previous calls is that I guess fortunately or unfortunately as retailers, and retailers in a very good business segment, we always seem to be at attracting more and more competitors.

  • So, first and foremost, we're very much used to it.

  • And in truth over the years, it's helped us refine our business model and get better and better at what we're doing.

  • Having said that, it would be Pollyannaish to suggest that we welcome more competition.

  • We don't and we constantly go back, however, to making our own strengths stronger in competition with them.

  • I think that as more doors open, particularly as the movie companies seek to, I guess the term would be diversify a bit away from rentals, clearly it presents another level of competition.

  • So far, that has happened with -- I think there's over 500 Game Crazys now and a growing number of Game Rushes.

  • Certainly on the macro level, we have competed extremely well with them.

  • And even on the micro level, we've been able to work our model better than ever.

  • As I indicated before, there are 2 things just within the last quarter that you can point to, and there was clearly growing competition during the quarter.

  • Number 1, our total sales were exceptional, our market share grew, and then perhaps more important, our efficiency in our store operations and the amount of buyback product that we took in was at record highs.

  • Those all give me a great deal of confidence that pretty much whatever the competition throws at us, particularly as they try to enter the used market, we're going to do quite well against them and, in fact, they'll make us do better.

  • Elizabeth Usher - Analyst

  • Okay, thank you.

  • Operator

  • We do have time for 2 additional questions.

  • Our next will be from Arvind Bhatia with Southwest Securities.

  • Arvind Bhatia - Analyst

  • Congratulations on a good quarter.

  • The trend that we saw in gross margins and SG&A this quarter, given what we've seen with Halo 2, would it be fair to say that gross margins would be slightly down in the fourth quarter versus the same quarter last year, and SG&A that you would get some leverage like you did in the third quarter?

  • That's my first question.

  • David Carlson - CFO

  • You are correct, Arvind, the gross margin rates I would say are going to decrease somewhere between 50 basis points and 100 basis points in the fourth quarter, due to the significant amount of new releases, particularly Halo 2.

  • And then the SG&A line with the comp rising 6 to 9 percent, we will experience -- or it looks as if we should experience some SG&A leverage.

  • So yes, you're correct.

  • Arvind Bhatia - Analyst

  • So you guys are like 110 basis points leverage.

  • Would you care to provide some more color for the fourth quarter maybe around that kind of leverage or less than that?

  • David Carlson - CFO

  • Probably a little bit less than that, depending on the range of the guidance.

  • A little bit less than that to a little bit more than that.

  • Arvind Bhatia - Analyst

  • Got it.

  • New stores also seem to be performing extremely well and above expectations, etc.

  • Is there any particular part of the country that's doing better?

  • Is there any concentration of these new stores, or what would you attribute the new stores doing so much better than your model?

  • Is it just software?

  • Dick Fontaine - Chairman and CEO

  • Well, I think a number of things.

  • Let me try to answer those and drill down.

  • No, I'd say the business has been strong throughout the country.

  • As a matter-of-fact, very seldom in this business do you see a huge amount of regionalization.

  • Generally what is strong is strong across the country, and that's been the case now.

  • Our stores continue to be very diversified.

  • We will finally, after a long time, open the store in the 50th state in Wyoming.

  • We continue to be spread out across the country.

  • And your last question was?

  • I think I missed one.

  • Arvind Bhatia - Analyst

  • I guess I was just saying do you attribute this to any particular reason?

  • Dick Fontaine - Chairman and CEO

  • Well, I think one of the things is that you certainly have to ride the momentum of the business.

  • There's some of this that is rising tide picking up all ships; there's no doubt about it.

  • As I said, we have momentum as a company, there's momentum in the industry, some great titles.

  • So there is no question that that's helping.

  • But there is also absolutely no question is that we continue to work harder and harder at site location and negotiating the leases and continue to test new stores and new sizes, and as they prove themselves, we're able to roll out into markets that we otherwise thought perhaps would not have supported a store.

  • So really kind of all of those.

  • Arvind Bhatia - Analyst

  • One question on the product margin side.

  • As you open new strip centers and you get more competition from people like Blockbuster, are product margins on used software changing at all?

  • In other words, have you had to offer more competitive prices, either as Blockbuster across the street is offering something at a lower -- at a better price?

  • Dick Fontaine - Chairman and CEO

  • No, the only place we have done that is very selectively on a store-by-store basis.

  • But across the board, margins have held on the used side very, very well.

  • I would say that we certainly stand ready to respond if we think we have to.

  • But it really doesn't appear that that's the case.

  • A couple of things that you have to realize when you're competing at least on the used side is that you never know at any point in time what inventory you're going to have in the store, conversely not have in the store.

  • Your inventory is coming in from your customers.

  • Consequently, you've got a constantly changing inventory position.

  • Secondly, because our buy side prices often can change daily and can change by markets, the prices that you find are highly dynamic.

  • The combination of those two things I think sets up in the minds of the consumer that it isn't a prize comparison model.

  • In fact, if it's anything, it's probably a selection price model.

  • And we think the selection on the used side in the GameStop stores is the best in the nation.

  • Arvind Bhatia - Analyst

  • Final question is, you mentioned there's a lot of momentum in the business right now.

  • If you were to point to the biggest risk in the fourth quarter, what would that be?

  • Dick Fontaine - Chairman and CEO

  • Well, anytime we go into the fourth quarter, we move out of dealing almost exclusively with the gamers, the core gamers as we say, and the growing cadre of serious gamers, and we move into the one-time-a-year gift giver, and that really to some degree is a driver of what's happening in the broader economy, and as we say the macroeconomics.

  • There have been seasons that it has looked like it was not going to be terribly robust.

  • So if there's not a lot of traffic in the malls if people are cutting back because of macro issues, probably we would feel some of that.

  • While I have no statistics to point to that direction, it just seems that at least now it looks to be we're on a macro optimistic road and people are feeling pretty good post-election.

  • Jobs are starting to escalate again.

  • I think we're seeing some sectors that are really maybe early indicators that this could be a good retail season.

  • Certainly you are seeing that at the higher-end pricier product points, not necessarily in video games but in retail as a whole.

  • Arvind Bhatia - Analyst

  • Thanks, guys.

  • Operator

  • Tony Gikas with Piper Jaffray.

  • Tony Gikas - Analyst

  • A couple questions.

  • Could you maybe just give us a little bit of visibility on square footage growth next year?

  • If you add 300 to 350 stores, is that about 15 percent?

  • Second question, what do you expect in terms of bundling over the holidays, in terms of software and hardware bundles, if any?

  • Are there going to need to be any bundles if there's a little bit of a hardware shortage?

  • And if there are some bundling going on, is it driven from you or the hardware manufacturers or the software manufacturers?

  • Third question, has there been any change recently to the margins of your used software?

  • Business has been very strong; has there been an opportunity to actually take the pricing up on some of the more popular used products recently?

  • Dan DeMatteo - President and COO

  • Tony, this is Dan.

  • Dave, do you want to give guidance on the first-part question of square footage?

  • David Carlson - CFO

  • Sure, the square footage growth, we look at it as store growth, but on a square footage growth somewhere between 17 and 20 percent.

  • And that probably contributes somewhere between 13 and 15 percent to revenue.

  • Dan DeMatteo - President and COO

  • On the second question on bundling, as you probably know, Microsoft has a bundle with the free game or two in it; not really current games.

  • So that is out on the market, the Xbox holiday bundle.

  • That will be limited edition in short supply, and somewhere in December will switch back to just the core unit.

  • Sony does not have one nor do we expect one.

  • Of course, we would know by now and it's not here.

  • Nintendo does have a bundle with -- what is it -- Metroid Prime, yes, bundled in it.

  • Or Mario Kart, I'm sorry.

  • One bundle has Metroid Prime, one has Mario Kart.

  • So there are bundles out.

  • We don't see any more coming, and I don't see a whole lot of retailers focusing on putting things together or focusing on the hardware, because quite honestly, the manufacturers have told us they cannot guarantee supply.

  • So most people are not going to be advertising.

  • Now, margins on the used, our margins on the used have held for each of the last 4 or 5 years due to our systems, etc., so we haven't been affected, therefore, by competition.

  • Do I see an opportunity for raising them?

  • I don't know that I see an opportunity for raising them.

  • We're pretty confident that the range that we have them at is the range which is the range that's accepted by the consumer.

  • Dick Fontaine - Chairman and CEO

  • And I agree with Dan.

  • I would just point out again some of the idiosyncrasies of the used business is that as some of the new generation machines come in and the existing used product gets generationally older, that does give us down the road some opportunity for longer margins on those titles.

  • There's next gen systems and then there's real old systems.

  • And if you look back into the history of this company, I suppose you could say when we were selling 8 bit product, that had the longest margin of all.

  • So I think with some new gen systems coming down the road, there will be an opportunity there with the oldest of the old, which we will undoubtedly still be representing to pick up some additional margin on that.

  • Tony Gikas - Analyst

  • Last question, on the strip center stores that you are opening now, is there -- have the format or the size of those stores changed at all with just the sheer number of video games that come out each year?

  • Are the stores -- they appear to be getting a little crowded, quite frankly.

  • Is there enough room to accommodate every game that's released, or are some of the smaller games getting squeezed out?

  • Are there any plans to open slightly larger stores or change the formats at all?

  • Dick Fontaine - Chairman and CEO

  • I think the honest answer is we have been to some degree a victim of our success.

  • We've had to practice triage and in some cases perhaps a little bit earlier than we would have liked to, where some of the titles that could still sell have had to move out and be replaced by better or more necessary new titles.

  • To that end, yes, you can say that generally our strip models are getting larger, but I wouldn't jump to the conclusion that we're doubling the size or anything like that.

  • Frequently what happens is that you pretty much have to be flexible in terms of the size store you take.

  • The right store in the right strip serving the right community, if it's 1200 square feet you're going to take it as opposed to saying, no, no, no; our ideal is 1800 square feet, but that may never materialize.

  • So we feel pretty comfortable that we can run successfully stores within a relatively wide range of square footage, but there's absolutely no question that if we had our druthers, we would like our stores to be a little bit larger.

  • Tony Gikas - Analyst

  • Terrific, thanks.

  • Good job, guys.

  • Operator

  • If there are no further questions at this time, again, we're concluding today's question-and-answer session.

  • I'd like to turn the call back to the speakers.

  • Dick Fontaine - Chairman and CEO

  • Thank you much for joining us for this third quarter, and I think the fourth is going to be one of the most exciting ever, and thank you for following GameStop.

  • Operator

  • Again, this does conclude today's conference call.

  • We'd like to thank everyone for your participation and wish you a good day.