GameStop Corp (GME) 2006 Q3 法說會逐字稿

Good day and welcome to GameStop Corporation's third quarter 2006 earnings results conference call.

Today's call is being recorded. [OPERATOR INSTRUCTIONS] I would like to remind you that this call is covered by the Safe Harbor disclosure containing GameStop's public documents and is the property of GameStop.

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

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

Thank you.

Good morning, I am Dick Fontaine, the Chairman and CEO of GameStop.

With me this morning are Dan DeMatteo, our Vice Chairman and Chief Operating Officer; and David Carlson, our Executive VP and Chief Financial Officer.

Thank you all for joining us this morning.

As our release indicated, GameStop had another outstanding quarter.

The strong sales are a reflection both of the strength of the new and used business model and the ever-increasing importance of GameStop as a focused video game specialist.

This is becoming more and more important.

With more game systems to choose from and an ever increasing number of configuration options, both core and casual gamers are being drawn to GameStop in increasing numbers while gift givers will need more help than ever before to make the right choices.

In all the years that I've been in this business, we've never had the breadth and diversity of excellent product that we have going into this holiday season.

Let me assure you, this is not a gross exaggeration.

This absolutely is the case.

We have a phenomenal line-up of both hardware, software, and accessories.

With that diversity comes complexity.

Complexity of choice that makes the specialty retailer even more important.

Our 69% increase in hardware sales highlights the momentum of the business and furthermore positions GameStop to be the most significant launch partner for all the new hardware systems.

I know that much of your intentions and undoubtedly a lot of your questions are going to be focused around the PS3 and Wii launches and the future flow of goods and Dan will give you some insights into that in more detail in a minute.

But the full story for the remainder of the year is the fact that there are five to six hardware units selling well.

Microsoft's 360 has been very strong, DS Lite is picking up momentum heading into the holiday season, and somewhat amazingly heading down into its seventh year, the PS2 is selling well and beginning to look like a real bargain at $129 while their PSP is holding steady.

Not only do we have more successful platforms than ever before, the platforms will appear -- excuse me, appeal to a wider range of holiday shoppers.

And with this amazing hardware diversity comes the add-ons, accessories, upgrades and more, from memory cards to marketplace points, to World of Warcraft online time cards to Wii point cards to an HD DVD addition for the 360 to wireless headsets, dance pads, and air guitars, you can really see that the business is more diverse than ever and plays more into the hands of the specialist, into the hands of our game store store managers and associates.

Never in the relatively short history of this business has the knowledge, advice, and enthusiasm of our store managers and associates been more important to our success and more needed by a growing customer base.

Given the wide range of products available, we've done a complete zero-based assessment of our store layout and merchandising focus for the holidays.

Our inventory levels are more precise than ever before and our allocation of space in the stores has never been more minutely thought out.

We've drilled down to a more precise level in optimizing store scheduling for better customer support.

In short, I believe we are operationally better prepared than ever to serve our customer.

Our President, Steve Morgan and our head of stores operations, Bill Chin have done an absolutely wonderful job operationally getting our stores ready for the season.

Steve would be with us today, but fortunately he's out traveling the stores where this time of the year we would like him to be.

It's now been just over a year since our merger with EB Games.

During that time, we have successfully combined the best practices of the two companies and really have achieved impressive economies of scale.

While our 300 pro forma basis point reduction in SG&A expense is significant, we've also improved our inventory control methodology, developed more streamlined selling cost metrics, improved our merchandising coordination, and have more efficient distribution.

GameStop closed the quarter with 4,633 stores worldwide, 3705 in the U.S., 265 in Canada, 455 in Europe, and 208 in Australia and New Zealand.

We opened 81 stores during the quarter, 40 in the U.S. and 41 internationally.

We closed 40 stores worldwide, 19 in the U.S. and 20 internationally, the majority of those internationally being in Spain and mainly stores that were marginal when EB Games purchased the portfolio of 123 stores last year.

And the best news, we're well on track to achieve our goal of opening 400 stores this year.

GameStop has built our business by being totally devoted to gaming and giving our customers a buy right, trade smart great deal.

In addition, this year we are much more better positioned to serve the gift giver and help them get the right products for the gamers on their list.

We're enthused about our business, our momentum and the lineup to have an outstanding great quarter and a great holiday season.

Now I want to turn the call over to David who will take you through some of the numbers.

Good morning.

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

GameStop sales for the third quarter increased 89% over the prior year quarter to $1,011.6 million.

Comparable store sales increased 8.8% for the quarter with strong sell through of the Nintendo DS Lite handheld system and instock positions of Xbox 360 hardware spurring the growth.

In addition, new video games software increased 14% with Madden NFL 2007 and Saints Row topping the best seller list.

Net earnings for the quarter were 13.6 million, including merger-related expenses of 1.8 million and debt retirement costs of 2.1 million.

Diluted earnings per share for the quarter were $0.17, including $0.05 per diluted share of merger related expenses and debt retirement costs.

These results were at the high end of our previously released guidance and stemmed from strong sell-through of both new video game hardware and software.

Gross margins declined slightly year-over-year in the quarter, due primarily to a higher mix of lower margin hardware than in the prior year quarter.

However, SG&A leverage improved from the prior year quarter by 300 basis points on a pro forma basis.

This leverage came primarily from the closing and sale of the EB Westchester general office and the Coatesville distribution center and improved payroll scheduling during the quarter.

Based on these strong results, operating earnings increased four-fold on a GAAP basis and more than doubled on a pro forma basis.

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

We are expecting fourth quarter comps to range from plus 14% to plus 18%, but these will be highly correlated to the quantity of Sony PS3s that are shipped during the quarter.

However, PS3 shipments will have little affect on earnings for the quarter.

Fourth quarter diluted earnings per share are expected to range from $1.53 to $1.59, representing EPS growth of 40 to 45%.

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

We are now expecting fully diluted earnings per share for the full year to range from $1.98 to $2.04, narrowing our guidance from last quarter by bringing the lower end of the range up by $0.04.

Our balance sheet remains strong with over $180 million in cash at the end of the quarter and inventory levels increasing 13% in line with our sales increase and our buildup for the holiday selling season.

In May, we announced our Board had approved $100 million note repurchase program to be used from time to time as market conditions warrant.

Through the third quarter, we have repurchased approximately 66 million of notes.

As a final reminder, we will be going into our traditional quiet period at the end of the day on Wednesday until we release our holiday sales in early January.

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

Hey, good morning.

As Dick mentioned, we are very pleased with our performance in the third quarter.

Hardware sales increased 69% year-over-year, led by the Nintendo DS Lite, Xbox 360, and the six-year-old PS2.

We are especially pleased to see the momentum in the PS2 hardware as it signifies a growing base of budget oriented gamers that will continue to dry sales of PS2 new and used games.

New software sales increased 14% in the quarter led by Madden, all formats, Saints Row, Dead Rising, and Splinter Cell for the Xbox 360.

Our used game business grew 10% in the quarter, slightly less than the new software as used sales lagged new.

As expected, we were very promotional during the quarter in order to build our used inventory and we are pleased that our per-store used inventory levels are ahead of last year, heading into the holiday season.

The fourth quarter has started out extremely well, with strong software sales of titles for the Xbox 360, such as Gears of War and Call of Duty III.

Gears of War looks like it will be the best-selling title on the 360 platform to date.

Also, PS2 games have done well, led by Final Fantasy XII, WWE Smackdown! 2007, and Guitar Hero II.

We expect the sales momentum of PS2 hardware to continue in the fourth quarter with strong year-over-year growth.

And sales of the Nintendo DS Lite system are expected to remain very strong throughout this holiday season.

I expect many of us will be surprised at how strong it is.

As expected, the Sony PS3 and Nintendo Wii launches were sellouts.

We have been resupplied with both systems already and expect to get more on a weekly basis.

The best-selling titles on the PS3 thus far are Residence--Fall of Man, and Madden Football.

On the Wii it has been Legend of Zelda and Red Steel.

The software tie ratios for the Nintendo Wii have been surprisingly good at 3.0.

The software tie ratio for the PS3 has been low at 1.5, which we believe is due to the large percentage of PS3s that are being resold at a huge premium.

We are forecasting that the historical norms will prevail as the units end up in the hands of real gamers.

So from a product perspective, we have never had more excitement.

New platform launches, great sales from the Xbox 360 and Nintendo DS Lite systems, and a six-year-old platform, the PS2 that has been reenergized at the $129 price point.

Our stores have been remerchandised to maximize every square foot of selling space.

Our distribution network has been performing flawlessly, and with the utilization of the Louisville distribution center for the entire company, our in-stock positions have never been better.

So the interactive video game market is posed to set new record highs and GameStop is well positioned to capitalize on its growth.

Now I'll turn it over to the moderator for a question-and-answer session.

[OPERATOR INSTRUCTIONS] We'll go first to Elizabeth Osur with Citigroup.

Great quarter, guys, I have three separate questions.

First, could you give us an idea of how many visibility you have on the new console follow-through deliveries and whether or not that information changes your forecast for full-year shipments of PS3 and Wii?

This is Dan.

I'll stress it separately, on the Wii, we have anticipated deliveries pretty much through December.

On the PS3, we are getting information on a weekly basis, so we got information last week on our first resupply and we're expecting to get information today on next weeks resupply so it's coming week by week.

And Dave, do you want to take the second part of that question on, does it change our financial?

No, it doesn't change our financial forecast.

It pretty much -- we have had a conservative estimate of the both the PS3 and the Wii all along and the shipments that we're seeing won't affect our earnings guidance at all.

It may affect the comp guidance slightly depending on how many PS3s actually ship, but it will not affect the earnings.

Okay, thanks.

Second question on the store openings, I think the net pace was a little slower than we were looking for.

Can you just comment on the pace you expect in the fourth quarter, where those stores might be weighted, U.S. international, and whether you're still targeting the same 500 for next year?

Liz, as I said, we will hit our 400 number.

As you know, the fourth quarter is a little bit really shorter.

We try not to open so many stores as we get into December, so they'll be more heavily weighted to the earlier month.

Generally speaking, but I wouldn't take too much of this, they will be somewhat more tilted to the U.S. than internationally.

Not because we have in any manner, shape, or form backed off internationally.

In fact, we haven't backed off in any country, but one of the things that I've been discovering is I've been spending more time particularly in Europe is that predominantly due to the explosion of competing phone entities seeking space in malls, the mall space has been at a real premium.

We have therefore not jumped in and not paid ridiculous amounts for space.

Instead, we have stepped up an approach to go into maybe a little bit smaller, a little bit larger locations and their core.

So we could be a little bit light there.

Also, we have reorganized our real estate function completely through Germany and that probably has set us back somewhat.

But again, it's not significant relative to this year's numbers nor what we're forecasting next year.

That's great.

Next year, you asked, Liz, about the number of stores.

We're still looking at 600 new stores next year and 100 closings, where I think you came up with a net 500.

Right.

And last question, just housekeeping, could you guys just -- I apologize if I missed this, but could you run through the year-over-year sales growth on a o=pro forma basis for each of your segments?

Sure, I think we got through most of them.

Let me reiterate them again.

The video game hardware increased 69%, new video game software increased 14%, used video game products increased 10%, and other products decreased 6%.

Thanks so much.

Thank you.

We'll go next to David Magee with SunTrust Robinson Humphrey.

Hi, good morning.

Good morning.

A couple of questions.

First, what do you all anticipate this week and next week with regard to the nonspecialist in the space and their promotions?

Well, David, I think that as you know, there's been some leaks in terms of what the FSIs are like.

I'm assuming that those are relatively accurate and if indeed that's the case it looks to be on a broad base, a little bit business as usual as far as we're concerned.

We anticipated because of the strength of the category, particularly with the new platforms, that the mass merchants would devote somewhat more space to the video game category.

That appears to be the case, but so far of the advanced peaks that we have seen, I don't see anything that is earth shattering.

I would expect, however, that we would see more space devoted to the video game category and possibly even more FSI's, but it's not an order of magnitude different, it's just a reflection that this is a very, very strong category for the holiday season.

Thanks.

And secondly, with regard to the used business, I know you all have been expecting, sounds like seeing an influx of used product in the stores and the supply side which is good.

Do you anticipate the benefit of that to be in the fourth quarter, or is that more of a first quarter benefit?

I think the benefit in sales on the used increase in inventory will come more in the first quarter than the fourth quarter.

That's generally been the case as the gift giver is more focused on the newer product.

So I think it will be a downstream affect and it will affect the first quarter used sales.

So we should see used maybe as a percent of sales, the same relationship maybe in the fourth quarter as we saw in the third quarter?

No, typically used is a lower percentage of sales in the fourth because of -- particularly this year because of the hardware launches.

So your used percentage as a total will go down.

But absolute growth in used will increase, probably more than it did in the third quarter.

So we will see improvement in the used growth rate, it just won't be able to keep up with the spectacular growth in the new hardware and new software.

On a year-to-year basis, then that to be a little bit improved from the third quarter to the fourth quarter?

The growth rate, yes.

Thanks a lot.

Thank you. [OPERATOR INSTRUCTIONS] We'll go next to Tony Gikas with Piper Jaffray.

Good morning, guys.

A couple of questions this morning.

Do you anticipate looking at next year that the growth rate for used software sales will be in-line with new, or is it going to be a lower number?

Could it be flat year to year?

Second question, how did new stores that were open during the last 12 months perform relative to your expectations?

And then I have two quick housekeeping follow-ups.

On the used -- this is Dan.

On the used game business, it will probably grow slower than the new game business because the new game business is expected to explode next year with all of the titles as well as the increased installed base on the 360, PS3, Wii, et cetera.

We haven't put any numbers on that yet, but it will most likely will be slower growth.

It will be good growth, but it will be slower growth than what the new is.

And as to your second question, the new store pro formas have continue to be very, very good.

As a matter of fact, the only thing we may have touched on in our second quarter call is that those stores we have put in tertiary markets that are anchored by a Wal-Mart seem to be somewhat slower.

We have anticipated that that was predominantly due to gas prices and fewer shopping trips per week.

That clearly seems to have been behind us, even though, as we all know Wal-Mart didn't report particularly strong October quarter.

We have seen those tertiary stores begin to come back and we're very positive about the performance of the new stores.

A couple of quick housekeepings.

Tax rate look looking forward and have you been experiencing any shortages of PlayStation 2 hardware sales?

I'm hearing that sales have been very strong, particularly with the Silver edition.

No.

We have not to date experienced any shortages.

Although, the Silver edition is a sellout.

I think it was planned to be that.

It was an item and no we're not.

We've gotten resupplied, but that will be out of stock.

Overall, we are in stock with PS2s.

I can't guarantee that will occur -- or stay that way throughout the quarter, neither can Sony.

But we're in good position right now.

I want to restress the fact that I think something that even surprised us a little bit, this price point on this PS2 given the quality of the game play relative to the price points on the new platforms appears to be really being looked at as a tremendous value and a tremendous bargain.

And I think that driving into the fourth quarter is going to keep this momentum going, although I think both Dan and I would say we sure as hell wished that Sony had just switched over and continued to manufacture the Silver, but that isn't the case.

And then on your question on the tax rates, we're looking at between 37 and 38% on an annual basis.

That fluctuates quarter to quarter depending on the contribution of the various international countries.

But on an annual basis, it's between 37 and 38.

Thanks, guys.

Great job.

Thanks.

Thank you.

We'll go next to Evan Wilson with Pacific Crest Securities.

Thanks for taking the question.

I've got a couple.

First in terms of the inventory, you said that used inventory is higher per store.

We know that there's more inventory this year than last on all three new hardware consoles.

How are you managing the inventory per store, because you're having much less shelf space and specifically, how are you allocating space for the PS3 maybe as a percentage of total square feet?

And then just a follow-up on one of Liz's question, on the PS3 and the Wii, you previously said you were expecting 1 million PS3s and 750,000 Wii's, does that number stand?

I'll take the first, this is Dan, the first question, on how we're managing the used inventory.

First, on a per-store basis, we have a regional stock balance program that stock balances the inventory amongst stores.

So we keep the inventory moving in the stores where it's needed.

We'll start with that.

Secondly, yes, space is a concern.

If you're in our stores now, you see the $9.99 games are in dump bins off the wall where space is more valuable and they're in dump bins where people can browse through the dump bins for them rather than on the wall.

The PS3 section will start out as primarily one wall section and so will the Nintendo Wii.

They always get space ahead of their sales contribution.

It's just the necessary way of doing business.

We're very focused on managing the space, as Dick mentioned in our stores, in our inventory and making sure everything is in alignment.

We've been through this before as platforms will leave, next year the PS1 platform will exit our stores on the used business, as its contribution has become very insignificant.

So will the N64, et cetera.

So we will just continue to manage the space as we always have.

And there was a third question that I don't remember what it was.

On the PS3 and the Wii allocations.

Our forecasts were fairly conservative.

You said it right, we were looking at 1 million PS3s and 750,000 Wii's.

At this point, we haven't changed those numbers but obviously they have changed.

Our assumption is that any shortfall we may see in the number for PS3 will be made up with additional Wii's.

The Wii's obviously are a lesser price point.

So there would have to be more Wii's to make up for those dollars.

At this point, our comp guidance of 14 to 18% should cover whatever happens with the PS3 or Wii's.

Thanks very much.

We'll go next to Arvind Bhatia with Sterne Agee.

Good morning, guys.

My question -- I want to go back to the new store openings for next year.

Wondering how many of the 600 locations you feel good about in terms of maybe leases or locations you've identified, et cetera?

And what kind of mix -- I'm sorry, if you said that earlier, the mix next year, domestic versus international?

And my second question is on gross margins.

Directionally, would it be fair to assume flat to slightly down gross margins next year given more new hardware and more new software next year?

Let me take the first one, Arvind.

I will tell you without having a specific number, our real estate people in terms of their domestic leases that they have already got signed and committed are off to a phenomenal start.

I'm now thinking that our expansion next year, while we will still target the 600, will probably be somewhat more tilted to the U.S., something probably in the 325, maybe the 340 range with the balance being throughout Europe.

One of the things that we have done this year is that in our Canadian and Australian operations where we have huge market share, we've challenged the managing directors in both of those areas to look at a number of different models that might see them expanding beyond their historical locations and particularly in Australia, that has been very, very successful, so we believe there's additional growth there.

I look for Canada to pick up some of that this next year and the recap would be that we will be expanding at literally all of the countries that we're in, but probably somewhat more tilted to the U.S.

And your question on gross margins for next year, we obviously haven't given guidance for next year at this point.

You're right in saying that there'll be a significant amount of hardware sold through next year, but at this point we're not ready to forecast what the gross margins will be for next year.

Let me ask a different question, then.

For this holiday season, maybe coming back to that, in terms of competition and your preparation, what are you guys doing different this year compared to last year as you forecast what competition is going to do?

Well, one thing I think you will see without getting into specifics, we're doing significantly more external advertising this year than what we had done last year.

As far as our preparation for competition, I think as Dick mentioned, it's pretty much as usual from what we have seen thus far is that on indication, mass merchants and/or electronic stores take a shot on a title here or there, but pretty much it has seemed to be pretty much as usual.

I would like to also get in, Arvind, because sometimes this isn't really the part of the sexy part of the business, but execution, execution, execution.

As I indicated, the store people have taken a far more in depth look at how we're scheduling our people into the stores, what hours they're there.

We've broken down how to do a better job of serving the customers.

We're anticipating a broader base of customers drawn into our stores, mainly because of the Wii and the DS Lite.

We have changed our merchandising particularly in our mall stores somewhat more dramatically as a result of that.

Our distribution, which Dan reflected on particularly with the Louisville facility being able to turn around products a lot faster, replenishment should be better.

So net-net, a lot of the basics to get us where we're going is kind of fundamental improving on the basic blocking and tackling as opposed to the sexy elements of advertising or promotions.

Again, as I alluded to in my opening comments, we believe that the customer this year is going to need more help, more direction and more knowledgeable salespeople and it's very clear to us that that's going to be delivered at GameStop.

Great.

Thanks, guys.

Thank you.

We have time for two more questions.

We'll go next to Bill Armstrong with CL King and Associates.

Most of mine have been answered, but I have a couple left.

As far as allocations of the PS3 and the Wii, are you -- did they come in in-line with your expectations in terms of your market share?

And would that also apply to the replenishment shipments you've been getting?

One would have to have empirical data that would know exactly how many we did launch with in order to answer that, but we have been told definitely that we have gotten replenishment and initial allocations in-line with our market share.

How -- what do you estimate your market share in North America to be at this point?

Well, in total, our market share is roughly 25%.

25%.

Is roughly 25%, but that varies dramatically by platform and by -- by platform.

But in total, it's about 25%.

Okay.

If your question maybe heading towards -- and I understand it, did we get that portion of what was laid down particularly from PS3?

And as Dan said, we don't have hard numbers as to what they release, but the answer would be, no, we don't believe we did.

It's also true that in the ten years we've been in this business, I don't think any of us have ever been satisfied with the allocation of any new machine that we have gotten.

This is really no different.

I think the difference will be is to what extent -- and I think, again, particularly from Sony, we're going to have a constant flow of goods.

As you recall last year, one of the real difficult things of the quarter was that we were a little bit more optimistic about a consistent flow of goods from Microsoft, and that became very sporadic.

This year, while the allocation initially was not as robust as we had hoped, if the flow of goods is more consistent, we'll be in much better shape.

But that's yet to be determined.

I think the most important thing as you think about GameStop and you think about the new platforms is that historically we have the highest tie ratio in the country.

So while manufacturers may have to allocate the hardware across a broad base of retailers et cetera, the customer that's buying these systems really wants to shop at GameStop.

They're coming for us for their games and accessories and add-ons, and that's the important part, is where we excel is in the tie ratio of games and accessories to the hardware units.

Got it.

And my second question has to do with -- I've noticed some TV ads from FYE, which is the chain of music stores advertising that they buy and sell used games.

Now I recognize that they have a very small market share, but my question is, have you noticed them impacting the market in any way?

And in particular, have you noticed them impacting pricing for used games, either on the buy or the sell side, in local specific markets?

Absolutely not on the pricing aspect.

I can assure you, if we felt that that was becoming a negative, we'd hear loud and clear from our field and we have not.

They've actually been in that business for, gee, I don't know, Dan, two years, three years?

I think it's three or four years.

So they have been around and you'd have to say, well, they must take some portion of the market, they're still in it, but I think the key is the focus that they have or do not have on it is a very, very difficult business, as we've said before, to execute well if it is a small part of a much larger business.

So we look at them.

We certainly take all of our competition seriously, but I don't think they are a significant impact to our overall used business.

Right.

I knew that they were -- had been in it for a little while and when I started seeing these TV ads on football games with presumably some fairly major viewership, I was just wondering if you'd seen them becoming any more aggressive in the markets?

It's possible they may be.

I really can't answer that.

Again, one of the challenges that we continue to look at is that when you have an entertainment competitor and the base business is under tremendous pressure, whether it be movies in the Blockbuster or the Game Crazy or music in the case of FYE, they will look around and try to determine what else they can ride.

So it isn't surprising to me that there is more focus on the video game category and the only reason for that -- and to some degree, maybe the used, it's just a tremendously hot category heading into the holiday season.

We'll benefit from that a lot more than we'll lose to emerging competition.

Okay.

Well, thanks and good luck for the holidays.

Thank you.

Thank you.

Our next question comes from Edward Williams with BMO Capital Markets.

Good morning.

Just a couple of quick questions.

If we look at the European market, how is same sales performance in the quarter?

And secondly, how is the business performing in Europe in general leading into the launches, especially given the delay of the PlayStation launch there?

Europe is actually doing quite well.

And in general, their comps for the year have been somewhat higher than the U.S.

When we look at our European operations, we really break it down, although we don't break out the numbers individually, we've got rapid growth companies in Germany and Italy are performing extremely well.

We've had repositioned in Nordic, which has done a phenomenal job and is really starting to get momentum.

And we look at Spain as a brand new, out of the box business.

We've just really, as of October this year, moved out a lot of the old PC product that was in the inventory as a result of the acquisition.

Spain is the new kid on the block and we're watching it very closely.

They're completely different places in different countries.

Overall, we're very happy with Europe and as I said before, we'll be expanding in all of these countries.

The one thing I would add to that is when we actually release the segment information in the Q, you'll find that last year, during the third quarter, both Europe and Australia had the PSP launch, so they had a little bit more difficult of a comparison than the U.S. and Canada.

Just a note for when we release those numbers.

That is a good point, David.

As most of you know, as we went into the year, Sony had announced that we were going to do a worldwide launch of PS3.

A couple months ago, they announced that they were going to delay Europe until March.

Again, it probably affected our topline more than our bottom line.

The truth of the matter is, is that our managing directors in Europe heard that announcement and they were very positive about it.

I think that speaks well about how they're looking at their business and what they expect early in the year with maybe, hopefully a better launch with more supply by delaying it in Europe.

If we look at next year and the 300 plus stores you're talking about adding internationally, how many of those are you expecting to put into the European market?

The European market will probably be the majority of those stores.

I don't want to get more specific than that, particularly.

I don't want to get into breaking them down by country, but it will be the majority of the international by store count.

And that will largely be the markets you're already in, or do you anticipate moving into any new markets next year?

Our first focus is the markets that we're in.

Again, we believe that there's growth opportunity in markets that we're already serving, but we'll also do our research on emerging countries and we have done that and that could be possible, but our primary focus is on serving the countries we already do business in better.

Okay.

How has the 360 performed of late leading into this past weekend's launch?

Any changes in the performance of the 360 hardware unit sales and software sales relative to what you anticipated?

Yes, definitely.

The hardware sales have increased each week at each of the last three or four weeks, and especially post Gears of War launch.

We've seen a tremendous uptick in 360 hardware, which the MPD data I'm sure will document in a couple of weeks.

Definitely the 360 has moved tremendously up since Gears of War.

Do you think that's in-line with seasonal patterns, or is that exaggerated because of Gears of War?

Well, I think the driver right now is Gears of War.

I think the seasonality really starts on the hardware this week.

You'll see, that's the seasonality beginning now.

So the last couple of weeks have been driven by Gears of War.

Okay.

Then, David, can you give us an update as to the cash flow from operations in the quarter?

Cash flow from operations?

Yes.

Actually, we will release that with our Q in a couple of weeks.

Okay.

And then the -- if you can give us some color as to where you are with your used inventory levels compared to what your targeted used inventory level is?

Are you still below what you would like to be at?

Well, we had a target and we reached that target.

And we're always below where we want to be, especially heading into the fourth quarter, where we have tremendous sell-through of what we have in stock.

So as we were promotional in the third quarter to buyback inventory, to reach our goal for the beginning of the holiday season, and we met that goal.

Okay.

And then the last question for you is, what are your thoughts with regards to the two class of stocks?

Any possibility of eliminating the B shares?

Actually, Ed, our Board discussed the possibility of combining the A and B shares at its last meeting, as we've had a lot of request from B shareholders.

More work needs to be done, but if and when there is anything to report, we'll release the information to the public.

Okay.

Thank you very much.

Thank you.

Thank you.

That will conclude our question-and-answer session.

At this time, I would like to turn the conference back over to Mr. Fontaine for any additional or closing remarks.

Thank you all for joining us today.

I'm sure as you can tell from our enthusiasm and also from your questions, there's an awful lot going on.

There's a lot of attention focused on this category coming into the holiday season.

It's all good-good from our perspective.

We're ready and we're extremely excited.

Hopefully you are as well.

Thanks for joining us today.

And ladies and gentlemen, that will conclude today's call.

We thank you for your participation and you may disconnect at this time.