GameStop Corp (GME) 2006 Q1 法說會逐字稿

Welcome to GameStop Corporation first-quarter 2006 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 disclosures 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.

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

Please go ahead.

Thank you, and welcome to GameStop's first-quarter conference call.

I'm Dick Fontaine, the Chairman and CEO of GameStop.

With me today are Dan DeMatteo, our Vice Chairman and Chief Operating Officer;

Steve Morgan, our President; and David Carlson, GameStop's Executive VP and Chief Financial Officer.

This morning, we released our first-quarter numbers, which were outstanding.

Entering the first quarter -- the first quarter, by the way, ever as a combined company, we had some very real goals that were underlying the forecasts that we shared with you last March.

And I'm happy to say that all of those goals have been achieved.

Number one, we continue to bring the two companies together, utilizing the best practices to drive sales, realize the synergies that we forecast, and improve our overall profitability.

Two, we made the necessary systems conversions to supply all stores from a single system with a single buying staff shipping from two distribution points, a very critical step in making this Company as efficient as we know it can be.

Three, we reorganized our field organizations.

Steve will be talking about this in just a minute.

We have got a closer partnership between our district and regional managers in the stores, and we are achieving economies of scale by doing so.

Four, we had a goal of keeping the merger integration plans on schedule.

We still have work to do, but we are on schedule.

We will keep it on schedule, and we'll be in a position where again, the synergies that we forecast are going to be achieved.

Five, even in the midst of this very heavy workload with a great many people accomplishing and doing a great many things, we continue to open new stores.

We have defined ourselves as a rapid growth company, and we're not taking this year off, even though we have got a tremendous amount to do in the integration.

During the first quarter, we opened 102 stores worldwide, and are well on our way to reaching our goal of adding 400 stores for the year.

In addition to that, we will continue to work off the overlapping or the poorer-performing stores in the portfolio and during the first quarter, we did close 27 stores, and we'll probably close very close to the same amount in the second quarter.

Again, while these are closings, these are good news, and they're really shedding of assets that are less than productive.

I'm going to keep my comments today relatively short, because I want to leave ample time for David, Steve, and Dan.

Particularly, I'm sure you all want to hear in more detail our observations from E3, which Dan will be taking you through.

David is going to briefly go over the numbers in the forecast.

Steve will highlight the key elements of our integration.

And then as I said, Dan will have quite a bit to share with you in terms of our observations at E3.

And with that, I'll turn it over to you, David.

Good morning.

Before the market opened today, we released our sales and earnings results for the first quarter of 2006.

GameStop's sales for the first quarter increased 119% over the prior year quarter to $1,040,000,000.

Comparable store sales decreased 3.3% for the quarter, due to difficult comparisons with the launch of the Sony PSP hardware system in the prior year, but were dramatically better than the expected 7 to 9% decline due to improved flow of Xbox 360 hardware and much higher-than-anticipated sellthrough of new videogame software.

Square Enix's Kingdom Hearts II topped the best-seller list for the quarter, with two Xbox 360 titles, Elder Scrolls IV -- Oblivion, and Ghost Recon -- Advanced War Fighter, showing the acceptance of the 59.99 price point with our Xbox 360 customers.

Although U.S. industry software sales as tracked by NPD decreased 3.5% during our fiscal quarter, GameStop increased software sales by 3.1% in the quarter, again gaining market share and proving that are used trade-in model drives new videogame software sales.

Net earnings for the quarter were 11.7 million, including merger-related expenses of 0.8 million and stock-based compensation expenses of 3.3 million.

Diluted earnings per share for the quarter were $0.15, significantly exceeding previous guidance of $0.04 to $0.05 per diluted share.

The better-than-expected earnings were driven by higher sales, better gross margins, and other synergies related to the combination of GameStop and EB Games.

We also issued updated guidance for both the second quarter of 2006 and the full year.

As is typical for the industry, our second quarter is the slowest of the year.

And this year is no exception.

Few new software titles are scheduled for release from May to June.

But as Dan will discuss in a few minutes, the fall and holiday periods looked very robust for both current-generation software titles and next-generation software titles.

Based on this, we're now expecting second quarter comps to range from minus 2% to plus 1%, with diluted earnings per share between $0.04 and $0.05.

For the full fiscal year 2006, we're now expecting sales to grow 15 to 17% on a pro forma basis, with comparable store sales increasing between 7 and 9%.

Diluted earnings per share are now expected to range from $1.93 to $2.03, including projected stock-based compensation expense of $0.17 per share.

Excluding this projected stock-based compensation expense, diluted earnings per share are expected to range from $2.10 to $2.20.

Under a separate press release, we also announced the exchange offer for our senior floating-rate notes and senior notes.

In addition, our Board of Directors has approved a $100 million note repurchase program to be used from time to time as market conditions warrant.

With that, I'll turn it over to Steve to discuss our integration efforts.

Thanks, David, and good morning, everyone.

In regards to our integration update, all stores are planned to complete new merchandise layouts by 7/1/06 in preparation to accommodate our current initiatives and the addition of two new platforms in time for the fourth quarter. 2,700 of our 3,600 stores have already completed these, and have shown increased sales as a result.

The field integration was completed the first week of February.

It was a smooth transition, and no integration-related layoffs were suffered.

During this, much attention was paid to creating geographic efficiencies, thereby allowing all our multiunit managers more productive time spent in stores and less on the road.

In March, all EB stores were connected to the GameStop inventory management replenishment system, and by August 14, all GameStop stores should be converted to be EB POS systems.

As a result, these two points alone will allow the entire company as Dick had mentioned earlier to operate on a single replenishment system from a single buying office from two very well positioned distribution centers.

Our new benefit plan was rolled out the week of May 29.

It will become effective 7/1 to all 25,000 combined GameStop and EB associates.

This plan is intended to reduce the cost of payments of total employee participation while providing GameStop a substantial savings over the next five years.

The entire payroll system conversion took place the week of 4/6, putting all employees on one payroll system -- substantial cost saving realized here as well.

In regards to the real estate, the sale of EB's Westchester offices and Coatesville distribution center has been agreed upon by both partners, and expected to be completed by 6/15 of this year.

Our rebranding efforts should begin in August, and include 200 stores this year, all in the Miami, New York, and Dallas-Fort Worth market.

The balance of all rebranding will be planned to continue into 2008.

On Monday, 5/16, the last truck of any merchandise left the Coatesville distribution center, and our Louisville distribution center has now been refitted, and is now testing its upgrade, and should be online and functional by June 16.

All in all, the integration continues to be on schedule.

Now, I'd like to turn over to Dan DeMatteo.

Good morning.

This morning, I would like to give you a brief update on our observations from E3, and then discuss several issues relating to the GameStop business model.

First, E3 -- Nintendo.

Quite simply, they had a fantastic show, as this was their first major unveiling of the Wii, their new console system, and its over 25 anticipated games.

Due to the innovative controllers and the stable of Nintendo properties, the Wii will certainly be desired by the core gamers, but it has the potential to expand well beyond this group into nontraditional game players.

We view the release of a new Legend of Zelda at the Wii launch and an anticipated lower console price most significant and the most pleasant surprise of E3.

Some of the most highly anticipated titles for the Wii are -- Red Steel from Ubisoft, the Legend of Zelda that I just mentioned, Dragon Ball Z from Atari, and Tony Hawk's Downhill Jam from Activision.

In addition, Nintendo will be shipping a new model of its successful handheld system, the DS, in June, dubbed the DS Lite because it is smaller and the screen much brighter.

We expect this and a new group of franchise titles to fuel sales in this handheld category.

And some of the most anticipated titles for the DS are -- Final Fantasy III from Square Enix, Zelda -- Phantom Hourglass, Super Mario Bros., and Big Brain Academy, all from Nintendo; and Mega Man ZX from Capcom.

Now, let's discuss the Microsoft Xbox 360.

As we previously stated, the supply of 360s have been much better, and Microsoft seems confident that that supply will not be an issue.

At the show, they announced several new innovative accessories for the 360 that should really enhance gameplay, such as the wireless headset used in on-line gaming, and a new wireless steering well for racing games.

Our editors of Game Informer rated Gears of War the game of the show.

And that is due out this fall.

Other bestsellers for this year for the 360 look to be Call of Duty III from Activision;

Madden -- and it just simply looks quite fantastic graphically on the 360;

Splinter Cell and Brothers in Arms from Ubisoft;

Saints Row from THQ, and Ninety-Nine Nights from Microsoft.

And now, to Sony -- as you know, they announced the release date and the price for the PS3.

While there seems to be some concern about the price, we feel that given all that it delivers, it is very acceptable to the consumers that will be in the market at this time.

The quantities they expect are at an all-time high range for a console launch -- 2 million day one, another 2 million by the end of the year, and 2 million by the end of their fiscal year, March 2007.

These are worldwide numbers, and it will be reasonable to estimate that the U.S. portion would be in the 35 to 40% range.

As always, we will take a conservative approach to new launch forecasting.

As we have stated before, the PS3 launch numbers will not have a significant impact on our earnings this year.

In addition, they expect to sell another 5 million PS2s and 5 million PSPs.

The recent price reductions on the PSP and PS2 have increased sales about 20 to 25%.

And we feel that Sony will drive further cuts if necessary to keep the momentum in these two platforms.

Some of the most anticipated games for Sony platform PS3 this year are -- Metal Gear Solid from Konami, Tekken 6 from Namco, and Resistance -- Fall of Man from Sony.

And some of the bestsellers for the PSP -- Grand Theft Auto -- Liberty City Stories from Take-Two, SOCOM US Navy Seals from Sony, and WWE Smackdown vs.

Raw from THQ.

And lastly, for the PS2, Final Fantasy 12 from Square Enix, Scarface from Vivendi, and both NCAA and Madden football from Electronic Arts.

And lastly on the E3 product front, we have what we expect to be the best-selling PC titles.

And hopefully this -- the World of Warcraft, this expansion pack will probably be the best-selling title of the year;

Neverwinter Nights 2 from Atari, and Battlefield 2142 from Electronic Arts.

So as you can see, we have a lot going on, with an all-time high number of active platforms.

In the handheld, we have the PSP, the Nintendo DS and Nintendo GameBoy Advance.

On the console side, we have the Xbox 360, the PS3, the Wii, the PS2, and the GameCube -- and growth in the PC platform.

Yes, this is a transition year, and therefore, one where our focus and experience will allow us to continue to succeed and gain market share as we just have.

In fact, our market share for this past quarter on a pro forma basis hit an all-time high.

This performance is driven by our model, which consists of conveniently located stores, the best assortment, knowledgeable sales help, and our unique trade-in used games sales program.

We have continuously improved this trade-in model over the years, and the consumer has embraced it in all markets that we serve.

We know that it helps drive sales of new videogames, as it gives currency to enable these purchases.

In fact, we gave over $0.5 billion in credit last year that were applied to the purchase of new videogames.

The used games are then sold to a budget-oriented consumer who struggles to afford new games.

The data proves that this program enhances and works in concert with the new game business, much like the auto industry.

Our major partners understand the benefits to all of us provided by the trade-in model.

And to quell a rumor from last week, we asked Sony, and have been told that the technology plan for the PS3 will not impact this category.

Now I'd like to turn over to the moderator for a Q&A session.

(OPERATOR INSTRUCTIONS).

Arvind Bhatia, Sterne Agee.

Fabulous numbers.

Just trying to address, I guess, another rumor, if you want to do that, from last week -- maybe not so much a rumor, but EA talked about all of their PC titles being available for digital downloads by the end of the year.

Can you shed some light on overall PC -- what that represents as a percentage of your sales, and what your take is on that business?

And second, if you could talk about the performance of your new stores as you're opening them -- is it in line with your historical model?

Is it doing better?

Just any color on that would be helpful.

Sure, Arvind.

Thank you.

Yes, digital downloads -- we have analyzed the issues relating to this digital distribution of product, and have some opinions.

First, let's discuss the PC games, as you mentioned, which last year was 7% of our business.

Digital distribution of add-on content has been here in that category, and it's continuing to grow.

It could be viewed as a plus for the business, because it adds new gameplay into games soon after release.

Digital distribution of full games on the PC, it's in its infancy, considered to be a matter of customer choice rather than pulling customers from retail.

As the core PC gamers, a [techy], capable of dealing with this complexity, we expect that full game digital distribution will grow.

But its impact on us will be minimal over time.

On the console side -- I don't know if you asked that, but I might as well talk about it.

Microsoft has developed the capability, as we all know, in Xbox Live, to distribute add-on content.

These microtransactions would be handled for the third-party publishers by Microsoft.

We understand the publishers are excited about it -- of generating incremental income for their games.

Sony has announced their intent to do the same thing, with little detail at this point.

We think that these add-ons delivered this way makes sense for some genres, and will probably generate some revenues incrementally for the publishers, but given overall game growth anticipated, we don't see any impact on GameStop.

And I'll turn it over to Dick -- who will talk about the new store opportunities.

Just an additional comment on the DV -- or excuse me, the digital downloading is that -- just to reinforce what Dan says, I think right now, it's extremely exciting.

It's another element of the business.

We, as a Company, I think have some time, but have been paying attention to it.

One of the things that we need to do is develop our own strategic plans to see how as a retailer we can further benefit by it, get in on it, if you will.

It certainly is a trend.

I don't think it's going to be a trend that is going to be anything more than an added feature.

But I certainly believe that there is some value added that, as the world's largest retailer, we can bring to the vendors that are heading in this direction.

I think it's up to us to find that.

Secondly, Arvind, pertaining to the new stores, we've always taken pride that our new store performance was extremely solid, and that we were achieving our goals.

That has not changed with the new stores that we have opened in the first quarter of this year.

And I will tell you that my expectations internally, and expectations that we've shared with our real estate people, is that the quality of our real estate and the return should be better than it has been in the past, due to the fact quite honestly that we are not out there moving faster than in some cases we would like to keep other competitors from getting these specialty sites.

There are very few competitors, as you know, that are expanding.

And it just gives us more opportunity with better projects to look at.

So we feel very good about the direction we are heading there.

Got it.

Just one last question, if I may -- do you have any feedback from your European operators -- what they're seeing in that marketplace from the standpoint of the transition that's going on there, as well?

The transition continues to go well there.

From a real estate standpoint, the truth of the matter is we are fine-tuning some of our criteria in certain of the countries as we go forward with our real estate.

A number of the countries I think really are absolutely on top of all of their possibilities, and they've really fine-tuned their criteria.

A couple of the countries are still in the process of doing that, particularly Spain, which for us is a very new business and a new operation, but we're heading towards criteria that I think will serve us very well.

I think in general, you could say we're a little bit behind where we are in the U.S.

But you would probably expect that, given how many stores we've opened in the U.S. over the years.

Great.

Congratulations, and great numbers.

Elizabeth Osur, Citigroup.

Great numbers.

This is actually [Patrick Gaffney] for Liz.

I just had a question -- a follow-on to that store additions.

It looks like the U.S. store additions were a little bit higher.

Do you think you'll still be able to reach your 50-50 target for the rest of the year in terms of the stores (multiple speakers)

Well, the 50-50 targets is a relatively general target.

The 400 stores to be opened in the year is not.

We'll consider that the hard target.

As I look at the first quarter, I would say that we will likely surpass the 200 range in the U.S. and probably be in the 175 to 200 range in Europe.

But again, I want to reinforce what I think many of you have heard before -- we're not going after new stores for aggregate numbers.

Every store has got to achieve its goals.

We've got to believe in the stores before we'll sign leases.

So I spend not as much time or concern in terms of that aggregate number as I do the quality of each deal.

So if we shift somewhat, it will only be because the opportunities made sense to shift.

Great.

And another question just in terms of used game margin, it looks like you had above 50% this quarter.

Do you think that's sustainable, and how do you see that going for the rest of the year?

Yes, we obviously had about 51% margins in the used game business.

I think we're probably at a peak in the used game margins with the 51%.

I would say it may even come down slightly from that as we go through the year as we kind of test the elasticity of the used game business.

So that being said, I wouldn't expect it to be quite that high going forward.

I think -- what Dave said -- I think you could see us getting more promotional in the used game business that may drive margins down a little bit.

But would drive sales.

It drives sales up, Right.

Great.

Thanks, guys.

But our goal there is to maximize gross margin dollars -- not necessarily the right –-

Percentage.

Right.

(OPERATOR INSTRUCTIONS).

Edward Williams, Harris Nesbitt.

Just a couple quick questions for you.

First of all, with regards to the European market, can you just comment on what your current store base is?

And how are the used games performing in that market relative to the U.S. market?

Sure.

I can give you our store count as of the end of April.

We had 443 stores in Europe.

We had 187 stores in Australia and New Zealand.

We had 260 stores in Canada, and the rest in the U.S. for a total of 4,565 stores.

And generally speaking, the European markets are embracing really the same formula as we have in the U.S.

It's a combination of mixing new and used.

The only real difference I think really would probably be that certain countries still have a much higher percentage of their business in PC, which are not part of the trade.

Germany, as a case in point, is still in the 40% range.

But the goal is as you look at the international stores, in some cases unique to market, the GameStop formula, if you want to call it that, should be applicable in virtually every country that we do business.

Okay.

How are the Spanish stores performing?

How's that conversion going for the jump stores?

The early jump stores, the early conversions where we're fully into the video game business, the early sales have been quite good.

As you intimated, we're still working our way out, as we had planned, out of the original jump store inventory, moving out of the jump store small electronics business in the marketplace.

It's going well.

There's a lot of work still to be done, but we're heading in the right directions, and the stores as we've converted them really are looking spectacular.

Okay.

And then going back to the downloadable content for a moment, are you guys -- have you given much thought to using the GameStop.com website as a downloadable portal for PC games or for mobile phone games and the like?

Definitely.

Yes, we have.

This is Dan.

And I think you'll see in a relatively short period of time on the PC games that we will have that option.

Mobile phone games -- we are investigating that.

And we're not as clear on that right now.

But definitely we are on the PC side.

Tony Gikas, Piper Jaffray.

Congratulations on a great quarter.

This is [Steph] for Tony.

Three questions.

First, if you could speak primarily to the trade model -- and just given concerns around the U.S. consumer specifically, have you seen any change over the last 12 months given the increase in gas, home heating costs, maybe talking last year's summer versus looking at this year's summer, any shift in the kind of consumer that's going to use the trade profile or the amount of trade activity that's actually happening?

The trade activity is relatively consistent over the years and it goes up with the volume of new games that come out.

And it is directly relational to new video game releases.

As consumers need currency, they trade in games to buy the new games.

And so, it's relational with that.

As a percentage of our business, it's been relatively constant and the same.

So I can't say that we have seen based on economic conditions, anything in our used game business -- at the macrolevel it's driven by the new game business.

And I would add that we had really such a robust first quarter that any downward pressure that may have been felt as a result of rising gas prices was certainly nothing that we could clearly identify.

I certainly am aware, as are all of you, that Wal-Mart has indicated that they're concerned that rising gas prices may have some effect in the second quarter.

I think we would be foolish to say that we're not aware of that and don't heed that.

But really, about the only place I would expect that we would get some minimal downward pressure would be in our true tertiary stores -- very small-market stores, where the consumer has to drive a considerable distance to get to the shopping area.

And while those stores have real growth potential for us, the fact of the matter is that they represent really less than 4% of our portfolio.

So I would think that in those markets, we may see consumers cutting down their traditional twice-a-week shopping in some cases.

But overall, I think the impact given the total amount of stores we have is going to be relatively negligible.

Okay, great.

And then my second question, just on the four-wall economics of the stores -- speaking to those that you have converted or are in the process of converting, maybe just speak to that run rate and how that is compared to historical GameStop stand-alone?

I'm not sure -- are you stating in this -- referring this to the Spanish stores?

Yes, any international or even those in the U.S. -- any changes to the economic profile of the new stores.

Right.

The EB and GameStop models were basically the same, so there's really no conversion per se that we're talking about in the U.S.

And Dick, maybe you want to talk about the Spanish --

Yes, in broad strokes, there's no radical change to the Spanish groups.

There's some difference in the formula relative to the margin, the occupancy costs, and in a smaller sense some personnel costs.

But we have not adjusted our return on investment model because of that.

They tend to be a balancing.

We will as we get these stores fully converted and obviously get more empirical evidence of these stores, we will try to update everybody on Spain specifically, because it is such a -- probably the newest of our international ventures.

Great.

Just last two housekeeping -- at what level on a comp do you start to leverage your occupancy?

And then secondly, in relation to that, on your average transaction values, any changes there?

On occupancy leverage, we tend to leverage it at about a 3% comp -- that's approximately the number.

And then what was the second question?

Average transaction value -- have we seen much change there?

Not really, no.

The average price point on the software has actually stayed fairly consistent because the Xbox 360 titles at 59.99 has skewed that up, even though the PS2 average transaction or ASP is down slightly.

So no, our average transaction has been about the same.

It hasn't really deteriorated.

(OPERATOR INSTRUCTIONS).

Bill Armstrong, C.L.

King & Associates.

I'll also add my congratulations to really great numbers.

Dan, just getting back to that rumor about games being encoded so people can't use them on a different machine -- what exactly did Sony tell you about that?

Well, they told us that there's no feature in the PS3 that will prevent consumers from having portable games -- or not portable, but transferable games.

There's nothing that the publisher can encode into the DVD itself or the CD itself to prevent that?

That's exactly right.

That's what they told us.

I see.

So it's a hardware thing.

Okay.

Is Microsoft taking a similar stance, or have they not commented?

Well, Microsoft 360 is out.

So there's nothing built into the 360 that locks the game into a particular machine.

We're trading 360 games as we speak.

Got it.

Okay.

Moving on, with the inventory management system rollout to the EB stores, does that include the used game inventory management, or just the new product?

It includes both.

It is both, yes.

Okay.

Second-quarter comps looking at -- down 2 to up 1, could you remind us -- I know you had about a 6% a year ago.

Was there still some lingering positive impact last year from the PSP launch, or was there something else making comparisons difficult?

There's definitely that.

The PSP was still very strong into the May/June timeframe.

But in addition to that, there -- the title release schedule is very strong.

The Star Wars -- Episode III title did very, very well.

The Pokemon Emerald was a very large seller.

And then Grand Theft Auto -- San Andreas came out on the Xbox and sold very, very well, in addition to some others.

This year, there isn't quite the line-up that we had last year.

You still have NCAA in July in both years, but the May and June timeframes are a little bit less robust.

Okay.

You mentioned you may do some promotional pricing for used games to drive sales.

Do you think the demand is peaking for used games?

I certainly don't see anything.

As a matter of fact, from my perspective, I think we probably have been perhaps less promotional than we could have.

I think we have somewhat let the momentum of the business pretty much drive us instead of us trying to drive that.

The quality of the games that are out there -- and I must put this into perspective, the quality of all of the games that are out there, going all the way back to the PS1, going back to the Cube games -- the quality of the entertainment at the right price is outstanding.

And as long as you're delivering a hell of an entertainment value at a very good price, the demand is really, really there.

So no, I don't think we have reached a peak.

I think if we get better at what we do well, I think we can continue to drive demand.

And again, I want to pick up on what Dan was saying.

We may be driving the interest in used games, but that will definitely downstream to increasing the amount of new title sales, as well.

I might add -- traditionally in the second quarter, we are promotional in the used game category for some of the reasons Dave just mentioned.

There's not as much excitement in the new.

So we did it last year, and we will probably do it again this year.

Got it.

And finally, the hardware gross margins again were up substantially year-over-year.

I think you may have addressed this in the past, but what's driving that, and is that sustainable?

Actually, the main reason for the increase in the hardware margins is the warranty program that EB had.

And we actually adopted it at both EB and GameStop.

So that allowed our hardware margins to increase quite substantially from the prior year.

I think this is another instance of a best practice being applied as we looked at the practices of both companies, and defined what we're going to do going forward.

You're talking about selling manufacturers' warranties?

Yes.

To the hardware -- okay.

Well, GameStop warranty.

GameStop warranty, right -- okay.

And that's something that GameStop really hadn't done before this merger?

Very minimally.

Okay.

What sort of penetration rates are you getting with that?

I don't know that I have those off the top of my head.

Our point, I think, would be -- we could get that for you.

I don't think any of us at the table know that.

But I think all of us at the table believe that there's tremendous upside potential in that.

And I would state -- reinforce, because this has come into play so many times, this is a classic case of best practices.

While we both had this program, it was undermarketed on the GameStop side and appropriately marketed on the EB side.

And now that we see that there's upside potential, we think particularly as we get into the fourth quarter that this will be an important added feature to the Company.

Right.

Okay.

Great -- good luck.

Mike Hickey, Janco.

Great quarter.

If you would, could you compare and contrast what you're seeing in presales software activity for the PS3 and Wii right now versus what you saw last year for the 360?

And then the second question -- $60 price point for Nintendo Wii software -- a bit of a surprise there.

Obviously, there's a lot of buzz.

Are you seeing a pretty warm reception in the channel to that -- or from gamers from that sort of price point, and do you think that will stick at launch?

And then the third -- obviously you guys are psyched for Nintendo's Wii coming out post E3.

How do you integrate that sort of increase in buzz for that hardware into your holiday strategy and financial assumptions?

Well, let me take a couple of them.

First of all, on the Wii software, we're not expecting, nor have I heard, it would be 59.99.

As a matter of fact, I'm pretty sure Nintendo has said it would be 49.99, at least the first-party titles, and I've not heard of 59.99 titles from third party.

I wouldn't expect that.

The Wii is going to be a lower-priced machine.

I would expect more traditional pricing.

At the 59 level, we're not seeing any resistance from the core consumer on the 360.

I don't expect we would see it -- any resistance on the PS3 for a period of time, that -- whatever that period of time is, I'm not sure -- the first year or so -- anyway, on both of those machines, I think the 59 is sustainable.

On marketing of the Wii this year, we have been in discussions with Nintendo about demonstration systems in our stores prior to the launch to get consumers excited, as they will actually be able to see the machine, see the unique controller, etc.

So that will go on prior to holiday.

And then, I think I lost the third question --

Well, the third question may have had to do with reservations and how they are ramping up.

And the truth of the matter is that we will -- we're very confident we will sell every copy that we get of both the PS3 and the Wii.

We've come out of this conference being very excited about the technical wow factor of the PS3.

Given Sony's stated worldwide launch, we can say that we will continue to push for the best allocation we can get.

But having said that, we will blow through these machines, and therefore beyond that, it's going to be a tight allocation.

So we are not too concerned about reservations.

In terms of the Wii, where we expect there will be more allocation, hopefully a very good allocation, the excitement on the part of our buyers -- and more importantly, the excitement on the part of our store managers who got a hands on that -- we're now of the opinion that the same thing is going to hold for Wii.

We're going to blow through every copy we have.

So in a wonderful sense, these reservations are going to take care of themselves.

Edward Yruma, JPMorgan.

Thank you very much for taking my question.

Most of them have already been answered.

But just a quick update on your Xbox 360 availability.

I know you mentioned that the flow-through has been improved significantly.

Does supply meet demand now, or are you still out of stock in stores?

That's a good question.

I'm not quite sure.

We're running still a wee bit leaner than what we would choose to.

And so we're selling -- we're running still out of stock, but much, much better.

And with the anticipated flow over the next two or three weeks, I think we will be there.

We will be fully in stock, no out-of-stocks, and then we will see what real run rate is.

Great.

And then a follow-up to another question asked previously -- to this experimentation you might take with the used business to drive demand, to your comments [earlier], I had always thought that the problem with the used business was really a lack of inventory.

So help me understand -- are you more comfortable now with your used inventory position or your ability to acquire used games, and that is allowing you to experiment with the price?

Thank you.

Well, I wouldn't put it that way, and particularly the experimenting with the price -- but you're 100% right -- our inventory now is somewhat better.

It certainly has been improving.

As you stated, this has been a category where, since we have been in the business, we had been chasing added supply.

So I would still say that that is still true to a degree.

But we have found through our promotions depending on exactly how we do promote this, that as long as we can generate excitement in the store, every promotion that we run focusing on new seems to bring new customers in that, prior to that promotion, had not realized what the new and used model was.

So it's an investment not only in driving the current sales, but as I stated, every time, depending on the promotion, we do get new people through the door that are amazed that they can trade their old goods in and that they can get credit on new.

So we don't look at it as a step back.

And if it is, it's a very temporary one.

So we feel very good that ultimately these promotions get the word out to an ever wider audience.

And that just downstream is very good for us.

Congratulations on a great quarter.

And with that, this does conclude today's question-and-answer session.

I'd like to turn the conference back to Dick Fontaine for closing remarks.

Thank you, and thank you all for joining us today.

I hope you can tell not only by the items that we discussed, but the tone of our voice, that we are extremely positive about our business.

We're very enthused about this stage that we're at in the growth of the business, and we're feeling better every month about our ability to maximize all of the opportunities that are out there.

So we're off to a great start.

We feel we're going to have an outstanding year.

And we appreciate everyone following us.

Thanks for joining us today.