GameStop Corp (GME) 2006 Q4 法說會逐字稿

Good morning.

Welcome to GameStop Corporation's fourth-quarter and year-end sales and 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.

At this time, I would like to turn the conference over to Mr.

Dick Fontaine, Chairman and Chief Executive Officer of GameStop Corporation.

Please go ahead, sir.

Thank you.

Good morning and thank you for joining us to review GameStop's 2006 fiscal year and an even more promising forecast for 2007.

As mentioned, I'm Dick Fontaine, GameStop's Chairman and CEO.

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

This morning as you all know, we released our 2006 fourth-quarter and full-year results and our forecast for the first quarter and full year's outlook for 2007.

Obviously, I could not be more positive about both.

We have built a unique business model that continues to drive growing market share and positions us to take full advantage of the opportunities that are developing in this explosive business worldwide.

And we intend to stay aggressive.

While the release contains the essentials, a number of performance indicators for 2006 certainly bear repeating.

GameStop total sales exceeded $5 billion and grew by 72%.

Net earnings exceeded $158 million for the year and grew by 57%.

Our fourth-quarter earnings per share exceeded guidance and represented the best fourth quarter for GameStop ever.

Comps stores for the year increased by 12%.

In 2006, we completed the integration of the EB and GameStop business and thanks to more people than we have time to recognize on this call, the integration and the resultant synergies were almost flawlessly on time and as forecast.

This integration is not only [proof in] talent of our management team, but testimony to the breadth of our committed leaders.

To say this integration was amazingly seamless is truly not an exaggeration.

During the year, we also invested and continued to invest in our infrastructure improvement; began an aggressive rebranding in many of our stores; initiated the next generation system upgrade for our European division; opened 421 stores worldwide; paid down $121 million in debt and still ended the year with a strong balance sheet and over $650 million in cash.

The only thing better than a great year is the expectation of a better year in 2007.

For those of you who have followed the videogame business for many years and correctly point to the industry being in the very early stages of a new cycle, I want to point out that this is shaping up not to be a replay of previous cycles.

It's almost as if it is a cycle on steroids.

Not only will the cycle be technologically more multifaceted, but much broader from a demographic perspective.

In short, this cycle will be deeper, wider, and I believe, longer.

Dan is going to put this into some title context in just a minute.

But I want to point to an element of our recent bestseller list that is unprecedented.

For most of the last six weeks, our top 25 best selling software titles have come from eight different platforms.

Represented on the list are titles from Microsoft's Xbox 360, Sony's PS3, PS2, and PSP, Nintendo's Wii, DS Lite and Cube, and I admit that Cube is a last shot with the sales of Zelda: Twilight Princess and will soon be a trailing platform.

In addition to those seven platforms, the PC performed remarkably well with the amazing sales of World of Warcraft: Burning Crusade.

The fragmentation of the console market has already served us well and will serve GameStop even better in the future.

A broad platform marketplace with all the manufacturers financially healthy and competitive is another benchmark for a great future.

And when you look at the used side of our business, it gets better.

The best selling used hardware week after week has been the original Xbox.

While the Xbox has been replaced by the 360 as a used value product, the Xbox is still very much alive as will other trailing platforms stay alive through 2007.

We love our position at GameStop.

We have high-tech options for the core and avid gamers with the 360 and the PS3; unique more customer-friendly technology at mid price points with the Wii and great value with exceptional gameplay in between with the PS2.

In addition, with two solid portable platforms in DS Lite and PSP, we have something for both the younger entry-level gamer and the 30-something more sophisticated customer.

We are at the launch stage of more than just another cycle.

We have a cycle with unique characteristics and a very diverse set of dynamics, a cycle that deepens the experience for the avid and core gamer with the 360 and PS3 leading the way; expands the market by attracting new gamers, predominantly through the Wii and the DS Lite; has shown support for the $59 software price points predominantly on the 360 and PS3 games; offers customers a wide range of hardware price point options from $129 all the way to $599; and is really beginning to take advantage of technological convergence with HDTVs and Wi-Fi optimized units.

To fully take advantage of the strong trendlines, we [contend] to continue our aggressive growth.

In 2007, we will add new stores in every one of the 15 countries where we currently are doing business and in total we will be adding between 500 and 550 new stores, approximately 325 of this in the U.S.

and 200 internationally.

That compares with 421 stores that we opened worldwide in 2006.

And I want to remind everyone that we deliberately slowed down our U.S.

expansion not because there wasn't ample room for additional growth opportunities, but to give our field managers more time to focus on fully integrating the EB Games and GameStop field team after our merger and they did an outstanding job in that area.

In 2006, we continued to refine our market site criteria and in fact, last year's new store's internal rate of return was the highest ever for GameStop and significantly exceeded our plan.

We also as forecast moved to close duplicate or underperforming stores primarily from the overlapping store portfolio resulting from the GameStop and EB merger.

In 2006, we close 99 U.S.

stores, either due to negative or marginal contributions to operating earnings, or a result of being able to transfer a sufficient amount of volume to another approximate store thereby increasing total profitability.

Internationally, we closed 32 stores, the majority in isolated or marginal commercial neighborhoods that were part of the EB Games acquisition of 115 stores Spanish concern in 2005.

We have since repositioned our real estate to better traffic neighborhoods that are entering malls and hypermarket strips and believe Spain will be a strong future growth market for us.

Before I turn the call over to David, I want to reiterate what I stated in our release this morning.

The videogame business is increasingly becoming more complex with more choices that are going to be favoring the videogame specialists.

Our 22,000 managers and game advisers are in this business because they love games, they know games and they are prepared to discuss the variable aspects in each of the platforms with our customers.

This intense knowledge and passion for the business is only going to serve us better in the future.

With that, I will turn you over to David.

Good morning.

Before the market opened today we released our sales and earnings results for the fourth quarter and full year fiscal 2006.

GameStop sales for the fourth quarter increased 38% to $2.3 billion as compared to $1.7 billion in the prior fiscal year.

Comparable store sales for the fourth quarter increased an astonishing 26.5% driven by the successful launches of Sony's PlayStation 3 and Nintendo's Wii consoles.

In addition, new videogame software grew 24% during the quarter with Gears of War, Final Fantasy XII, and Guitar Hero II topping the bestseller list.

World of Warcraft: Burning Crusade launched in January and was the best selling PC game in GameStop's history, selling over 650,000 units in the U.S.

and 200,000 units internationally in the last few weeks of the month.

Used videogames followed these strong trends growing 25% during the quarter.

Net earnings for the quarter were $129.8 million, including debt retirement costs of $1.6 million.

Diluted earnings per share for the quarter were $0.81 including $0.01 per share of debt retirement cost.

These results were $0.02 per share higher than the high-end of our guidance issued in early January and was the result of extremely strong sales of new videogame and PC software during January.

Gross margins declined year-over-year in the quarter due primarily to a higher mix of lower margin hardware related to the launches of PlayStation 3 and Wii.

Both new hardware and new software gross margins declined slightly from the prior year, due in large part to higher freight costs associated with the continuously expedited shipping of scarce products such as next generation hardware consoles, Nintendo DS's and best-selling games during the holiday quarter.

SG&A leverage improved from the prior year quarter by nearly 300 basis points.

This leverage came primarily from strong sales comps, tight payroll scheduling, and the closing of the EB Games Pennsylvania general office and distribution center as part of our synergistic plan identified when we merged the two companies in October 2005.

Based on these strong results, operating earnings and diluted earnings per share grew over 47% for the fourth quarter.

GameStop sales for the full fiscal year 2006 increased 72% to over $5.3 billion reasonably establishing GameStop as a Fortune 500 company for the first time.

Comparable store sales increased 11.9% on the strength of new videogame software and the phenomenal sellthrough of next generation hardware consoles during the year.

Net earnings for the year grew 57% to $158.3 million including $4.3 million of merger-related expenses and $3.8 million of debt retirement costs.

Diluted earnings per share for fiscal 2006 were $1 including $0.05 per share of merger-related expenses and debt retirement costs.

We also issued initial guidance for both the first quarter of fiscal 2007 and the full year.

Based on a strong game lineup which is expected to include Halo 3 and Grand Theft Auto IV, we expect full-year 2007 sales to increase between 19% and 21% with comparable store sales increasing between 15% and 17%.

We expect U.S.

industry hardware sales to increase over 30% which will decrease our gross margin rate between 75 and 100 basis points but increase the overall installed base of gamers.

This should generate strong game sales over the next two years including a 15% to 18% software growth rate in 2007.

Based on these assumptions, we currently expect diluted earnings per share for fiscal 2007 to range from $1.37 to $1.40 representing strong EPS growth of between 30% and 33%.

In addition, based on these strong industry trends, our expanding worldwide footprint and our excellent cash generation, we currently expect that GameStop will achieve at least 25% EPS growth for each of the two following years in fiscals 2008 and 2009.

For the first quarter of 2007, we are expecting comparable store sales of between 12% and 14%, with diluted earnings per share ranging from $0.15 to $0.16 over double that of the prior year quarter.

Our balance sheet remains exceptionally strong with over $650 million in cash at the end of the year with inventories growing only 12% in relation to a much stronger sales growth rate.

In 2006, as Dick mentioned, we retired $121 million of debt including $100 million of notes related to the buyback program announced in May 2006.

In February of 2007, our Board approved an additional 150 million note repurchase program.

As of today, we have repurchased notes for $80 million related to this new buyback program.

It is management's intention to recommend to our Board that we repurchase at least 250 million of notes in the aggregate during fiscal 2007.

Subsequent to year end, our Class B shareholders approved a plan to convert the Class B shares to Class A shares on a one-for-one basis and this conversion was completed on February 7, 2007.

In addition, a two-for-one stock split was approved by the Board on February 9, 2007, and was completed on March 16.

With that, I will turn it over to Dan.

Thanks, David, and good morning.

2007 is shaping up to be a great year for GameStop in the videogame industry.

As Dick mentioned, never before have we had as many vibrant platforms to satisfy the gaming needs of all gamers from novices to casual to hard core.

And GameStop as the premier specialist in the business plans to use our years of experience, dedicated staff, and superior systems in distribution to capitalize on the growth in this industry.

Now I would like to talk about the sales drivers that we see for 2007.

First, the Xbox 360.

This console has the largest installed base of the next gen consoles at over 5 million and we enjoy a very large share of the game market here.

We expect U.S.

sales growth of another 4 to 5 million hardware units this year and software to grow a phenomenal 50% to 60% led by totals titles like Halo 3, Mass Effect from Microsoft, Grand Theft Auto IV from Take-Two and Guitar Hero and Spider-Man 3 from Activision.

We believe that the $59 price point for new games will hold as we have seen no resistance thus bar.

We are very excited about the prospects for the 360 and our leading market share of this platform.

Next, the Wii console.

What hasn't been said about this market expanding new entry from Nintendo?

While true demand can't be determined due to never-ending out of stocks, the acceptance by both our traditional customers and never before seen customers has been fantastic.

While the market has been pretty dry in March, we are being told that April flow looks pretty good.

Since the Wii just launched, we expect game sales to increase seven times last year in 2007 led by titles like Super Mario Galaxy, Super Smash brothers and Mario Party 8, all from Nintendo and Spider-Man 3 from Activision.

Tremendous growth to an ever-widening audience.

PS 3 after a total holiday sellout, stores are now stocked with PS3s and sales are holding steady.

While we had fewer hit titles at launch, recently released MotorStorm has done very well and we expect soon-to-be released titles like Heavenly Sword and Liar to help fuel PS3 console sales.

Again, the $59 price point for new games is holding here like it is for the 360.

Next, the PS2.

Hard to believe that after six years it is selling like it is.

Sales in January and February were higher than last year as Sony has done a good job keeping sales going by introducing the new silver model.

And a price reduction to $99 could happen if sales slowed beyond where they wanted.

This system is a great value and is really appealing to the budget oriented consumer who is frequently our customer for used games.

Also PS2 new titles can be best sellers beating out the next gen games due to the huge installed base like Gods of War II which released mid-March will likely be our best selling game of the quarter.

Now I will discuss the handheld business, the Nintendo DS Lite.

Since introducing the DS Lite last summer, sales have been phenomenal; over 5 million sold last year making it the best selling system of the year and we expect sales to hold at that level again this year.

And while supplies have been very short at holiday and in the month of March, we have been told to expect shortages to improve beginning in April.

And in late April, two new Pokemon titles for the DS were released, POKEMON DIAMOND and PEARL, which will probably be in the top 10 titles for the year.

The PSP, Sony sold over 3 million units last year and we expect somewhat the same this year.

Just to note, sales in the month of February exceeded last year.

This could be accelerated as Sony would choose to make a price move on either the hardware, software or both.

Also, Grand Turismo from Sony which we expect to release this fall is a type of title that can greatly accelerate system sales.

So we have a great year shaping up on the new side of the business which bodes well for used trade-ins.

As you know, trades drive our used sales to our budget oriented customers.

In summary, as Dave mentioned, we expect U.S.

videogame sales to increase 15% to 18% this year and used game growth slightly behind it.

Now I would like to turn it over to the moderator for a Q&A session.

(OPERATOR INSTRUCTIONS) Colin Sebastian, Lazard Capital Markets.

Thanks and congratulations on the quarter.

One housekeeping question.

Could you tell us what CapEx was for '06 and where you expect that to be in '07?

And then also, you mentioned possibly a price cut in the PS2 to $99.

What would you believe the timing could be on that?

And is that in your forecast for the year?

And then also, how should we think about the linearity of comp store sales over the course of the year?

Thank you.

The CapEx in 2006 was somewhere around $135 million and we expect it to be between 135 and $145 million in 2007.

The linearity of comps, we believe that comps will be strongest in the first three quarters, the first, second and third quarters and then in the fourth quarter when we are up against the launch of the PS3 and the Wii from last year, we expect comps to be a little more difficult, but still most likely in the double digits.

On the PS2 price cut, we have no knowledge from Sony that there will be a price cut.

I think I mentioned that if sales slowed, they probably have enough profit in that unit that they could reduce it to $99.

We have no knowledge that indeed they are.

And as a matter-of-fact, given the way they are selling right now, I would expect they would not at this point.

Okay, I appreciate that.

And then lastly, any first impressions of the PS3 launch in Europe?

Thanks a lot?

Yes, I've been talking to all of our European managing directors since the launch, and I think the summary of that was a very good launch falling somewhat short of what they would determine to be a great launch.

We are probably more happy with how well we did, selling through as a percentage of our reservations then perhaps some of the mass merchants.

But I think we'd tab it exactly that way, a very good launch falling just short of a great one.

Thank you.

Gary Balter, Credit Suisse.

Hi, thanks.

First of all, congratulations on a great quarter and a great year.

Just a couple of simple questions.

One is, could you talk about the gross margin at the used game side?

It was down a little bit and just wondering why?

I think we have always said that what we're trying to do is optimize our gross margin dollars, not gross margin rate, and that there is a mix within used games like there is within our total mix that is ever-changing.

We have said that the gross margin rate would probably have about a 2% variability in any quarter, and this was well within our range.

Yes, so here is nothing else other than that --?

There is nothing there.

Okay, and while not putting you guys on the spot, while 30% to 33% in a cycle that looks like -- given your mix will be even stronger in '08, does it sound conservative to say 25%?

For 2008 and 2009?

Yes.

No, I don't think at this point.

I think we are comfortable with at least 25% EPS growth in those two years, and I think we're going to be sticking with that.

And then, what are you planning to do with the cash?

At this point, we are looking at paying down debt, particularly here in 2007.

As I said in the script, we are looking to pay down $250 million of bonds during 2007, and we will probably evaluate that after 2007.

Okay, but you seem to be much stronger than that in the cash line?

Well, that is a year-end cash balance and there is, obviously, year-end payables that get paid off.

So at this point, we are comfortable saying we would like to pay off $250 million this year.

Okay.

I will also repeat what one of our Board members has stated and given the dynamic business and how we have found so many ways to grow in the future, cash is comfortable.

So it is not necessarily burning a hole in our pocket and as I indicated on a broad scale, we intend to stay aggressive and continue to look for additional opportunities.

So you know, the cash, I think you can be assured will be well applied and well used.

Congratulations and good luck next year.

Bill Armstrong, C.L.

King and Associates.

Good morning.

Can you hear me?

Okay.

I guess for Dave, just a clarification.

Are you going to be paying -- is your goal to pay down $250 million just in '07 or is that cumulative since you -- and including the pay downs from last year?

No, that is just in 2007.

We paid down $100 million in 2006 and our expectation is to pay $250 million in 2007.

Got it.

Okay.

For Dan, you made a couple of comments on Wii supplies and I didn't catch all of them.

Could you just maybe give us a little color on supplies of the Nintendo Wii right now and the like?

Well, we have none.

Right now, so the outlook is though is good.

I believe next week we get our first allocations, shots in of Wii and DS's and we are quite pleased with those numbers.

So we were concerned about the dryness here in March, but it looks like April is going to be good.

Okay.

Do you think this will be a recurring problem in terms of Nintendo not being able to get enough supply or do you think -- you are still just seeing the big initial surge in demand?

I don't think it's going to be an issue going forward.

This is just my opinion.

I think they intentionally dried up supply because they made their numbers for the year.

Their new year starts April 1 and I think we're going to see supply flowing.

Okay, okay.

I think we would see more units, certainly, but I think given the history of this business, we could probably expect some lumpiness in terms of how products flow.

Right, right.

You had a 14th week during the quarter.

Could you maybe give us a little color on what that contributed to sales and earnings per share?

Sure.

The sales here was about $99 million of sales in the 14th week.

And it was about, I would say, a penny of EPS earnings.

Okay, great.

Well, great quarter and great year, and that's all I had.

Thanks.

(OPERATOR INSTRUCTIONS) David Magee, SunTrust Robinson Humphrey.

Yes, hi.

Good morning.

Terrific quarter.

Just a couple of questions.

One is, Dave, could you comment on what your expectations are for the year with regards to the gross margin direction?

And are you still being impacted by the same freight issue in the first half of the year, do you think?

Yes, the gross margin, we are looking at going down 75 to 100 basis points during 2007 mostly due to the mix of hardware.

And no, we don't see the freight issue continuing.

That was really a launch issue and the sales were so strong during the fourth quarter, there was a lot of replenishment of titles and hardware that usually doesn't take place in other times of the year.

It was more a four-week phenomenon.

I see.

With regards to your new stores this year, is there a meaningful change in the size of the store as you go forward?

I wouldn't say, David, meaningful.

I think in general terms, we are probably with the expansive nature of the consoles, we probably would be more open to slightly larger stores, but again, I would not jump to a significant conclusion.

Still in the neighborhood of about 1500 square feet would still probably serve as the general guideline.

And lastly, how did the online business do I guess relative to expectations and is that becoming more or less vibrant relative to plans?

The online business met our expectations last year.

And yes, it is continuing to grow.

As a matter-of-fact, this year, we will be making significant investment in improving our online site and the interaction between our online site and stores.

For example, you will be able to order online, pick up in store, reserve online, pick up in store, etc.

So we are making significant investments in the continuous development of our online business.

And incidentally, David, you have kind of opened it up when you talk about some of the divisions that we haven't mentioned ourselves.

I would also like to point out that it was another really phenomenal growth year for Game Informer, our magazine, which exceeded the 2.7 million subscriber level.

So we probably should have come forward and talked about not only dotcom but also Game Informer.

There is an awful lot of good things going on, pretty much in all areas of the company at the moment.

Great.

Thank you and good luck this year.

Edward Williams, BMO Capital Markets.

Good morning.

First of all, congratulations on the synergies.

You guys did a fantastic job.

But I wanted to talk about Europe if we could.

What was the percentage of revenues from Europe in '06?

And if we were to look at the relative profitability of that geographic segment, how does it compare to the company average?

And then I got a couple of follow-ups.

The revenue -- we will be releasing that in our 10-K, but it was approximately 20% of revenue -- of our total revenue came from Europe.

Excuse me -- international.

International.

Which includes Australia --.

And Europe as a piece of the international, is it half of it or two-thirds of it?

It's about half of the international.

Okay, and if we were look at the margin contribution from the international segment of the business, how does that compare to the company average?

Well the international on the new side, the margins are slightly higher to be offset just to put in perspective with slightly higher rents.

The big variable in the international business is that we have been in this and the international, while we have seen so far really no resistance whatsoever in any country to the used business model that we have developed, the fact of the matter is it is more immature in Europe and running maybe about half of what we have in the U.S., but growing.

So we don't have the margin contribution coming from the used that we have in the U.S.

although we're heading in that direction.

So net net, slightly less but on a forecast basis, we are expecting it has more potential to increase.

Okay, any idea as to how long you think it might take?

Is it a two-year or a three-year type of time frame to get the international towards the company average margin?

So will it take two or three years to get the [pre side] business to really build out substantially?

Well if you look at this year as really being the year when true best practices again throughout our international operation, we really got renewed focus and some systems customization supporting the used business model as kind of year one, where we made noticeable strides in every country.

My feeling is that we are at least two years away from continuing to put in the refinements that we have developed in the U.S.

So I would expect that you will see at the very least, 2007, 2008 time frame before they are approaching the U.S.

And I don't want to mislead you, is that the mix of stores, mall versus outside the mall stores, throw off different percentages of used sales as well.

So given the mix that we have got across our international division, which generally are more mall based, I don't anticipate we will fully reach the amount of contribution from the used that we get domestically, but we will be closing on it.

Okay, but nonetheless, over an extended time period, should be a fairly substantial source of margin?

Yes, we absolutely intend to drive it that way.

Okay, and if we're looking specifically at the PlayStation 3 launch, you characterized it -- to Collins question I think -- as being very good, but not great.

Could you comment and a little bit about the tie ratio?

The tie ratios were okay.

Again, the situation was different in different countries.

In a number of situations, the amount of accessories that we got in support of the launch was very, very light.

As you know, the PS3 has launched with not the greatest lineup of software.

I don't have the exact tie ratios at this time, it just really released last Thursday, but again, I'm thinking that the tie ratios will probably fall somewhat into the general assumption of good, not great.

Okay, and just the last question, Dave, just to clarify the point, the $250 million debt repurchase plan, you have already done $80 million of that?

Of the 150 million approved by the Board, we have done $80 million, yes.

Okay, and your goal is to basically get the Board to approve another $100 million?

That is correct.

Okay, great.

Thank you very much.

(OPERATOR INSTRUCTIONS) Arvind Bhatia, Sterne, Agee.

Good morning, guys.

I would like to add my congratulations.

First question on the returns on new stores, I think you mentioned they were the highest in your history.

Could you give us some more color?

I know first-year stores typically you've indicated have about 25% ROI.

Can you tell us where these stores are running and the new ones that you opened in '06?

And then if you could talk about a little bit further out in '08, given 25% EPS growth guidance, you know, can you give us some color on topline, what kind of comps, especially as you go up against the two big titles this year that you should be looking at in '08?

Let me take on the real estate portion of that.

The truth of the matter is that as we went into 2006, and consciously slowed down somewhat our domestic expansion, again as I stated to give our field more wiggle room to do a better job of integrating these two concerns, I fully expected that what would happen is that with our real estate team being able to focus more on gold versus silver that our expectations would end up being fulfilled and being higher and that is the case.

A number of things really came into play.

Number one, being somewhat more selective clearly paid off.

There is no question about it.

That ties into the second major dynamic change and the fact of the matter is is that we have had more negotiating latitude and have been not forced into committing as early in some projects as we did, frankly, when we were competing with Electronic Boutique.

Now that we have come together and we are recognized as the main source of expansion in this area, we find that we not only have more latitude in terms of our negotiations, but we don't have to move so fast until we can get a clearer picture of how these projects are developing.

So that really is a combination of the driving factors for this internal rate of return being at an all-time high.

The truth of the matter is is that as we begin to step up our new store expansion next year, at least on an internal basis, I would be very much surprised if we didn't, again, significantly surpass our own hurdle rates, although I am not predicting that we will surpass the rates in 2006, the return on investment, the use of capital is going to be very, very high.

A couple of other things that are going on in the real estate area, just to kind of put everybody in perspective, and maybe getting ahead of a question that may be on a number of minds is what is the expansion possibility that we see?

In 2005, actually about the middle of 2005, we engaged a demographic firm, the Buxton Company, to do an independent assessment of how many strip stores were potential for us in the U.S.

We fed into them an inordinate amount of data from our databases, gave them some significant criteria, let them look at the performance of our existing stores.

They came back in late 2005 and forecast that going forward there was potential for 2000 to 2500 additional stores.

In early 2006, our internal team mainly driven by our real estate people, wanted to break that down even tighter and began to look at the expansion possibilities on a state-by-state area, on an SMSA area on a secondary and tertiary areas by state.

So using some of the same criteria but focusing a little bit more on population and the store overlap and to some degree other competitors, they came out with their own assessment and their forecast, again, keep in mind this was done about six months, seven months later, was at least 2050 stores were capable of supporting a GameStop in the U.S.

So whether you take the 2000 to 2500, we are very comfortable that there is significant expansion opportunity available for us in the U.S.

One of the things that you will see happening as we are moving forward is that the mix of new projects to existing projects will be variable.

And the truth of the matter is is that while we ramp up these stores, the more new projects coming out of the dirt as it will, the harder it is to predict exactly how long it will take for them to reach fruition.

Whereas those that we can go in and negotiate from existing real estate are far more predictable.

So you may see in any given quarter and as it rolls out over the year some variations from these numbers.

These numbers could be somewhat higher, they likely will not be lower.

But as we get more and more new projects, it is going to be somewhat more difficult to predict them exactly to the quarter.

And I am not sure, Arvind, if that has touched all of the real estate issues, but --.

That's very helpful, very helpful.

And with that, your second question, I think is in David's bailiwick.

In regard to the 25% EPS guidance that we gave for 2008 and 2009, as you are very well aware, the industry can be difficult to forecast.

But that being said, we are very confident in one, the growth of the industry; two, as you can see, our platform, our retail platform is growing rapidly and our cash generation is very strong.

So based on those three things, we are fairly confident in the 25% EPS growth rate over the 2008, 2009 timeframe.

Other than that, we are not comfortable giving comp guidance or anything else related to those years at this time.

Dave, if I could ask one last question on the debt side, you're talking about a $250 million pay down.

Is that incorporated in the guidance going forward for I guess for '07 primarily?

And how much of that is incorporated if at all?

Yes, it is incorporated in the 2007 guidance.

Got it.

Thank you guys.

We have time for one last question.

Evan Wilson, Pacific Crest Securities.

Hi there.

Thanks for taking the questions.

First, David, did you say on the call 15% to 17% comps same stores for this year?

I think it says 14% to 16% in the release.

Yes, [Matt] said I had misspoke there.

You are right, it is 14% to 16%.

I apologize.

And when you guys are speaking about the store opening guidance, am I correct to assume you're talking about a net number for this year?

No, that is a gross number.

We will also probably this year close something in the neighborhood of 75 stores around the world, something like that.

And again, I would reinforce what I am sure all of you know, that in a portfolio the size of GameStop's, an active closing program is a very profitable thing to do.

So anything in the neighborhood as far as I am concerned of 75 to 100 well chosen and with transfer sale possibilities, and leased variabilities actually is generally a very healthy sign.

And to follow on the back of one of Arvind's questions, you said that the bond buyback is in the guidance.

What amount of interest expense does the guidance assume for the full fiscal year?

We're looking at somewhere between 50 and $55 million of interest expense net.

Got you.

Thanks very much.

Thank you for joining us today.

Again, I just want to repeat what everyone around this table feels that not only are we tremendously proud of all of the people who have delivered this year for GameStop and our shareholders, but we really believe that under Steve Morgan's guidance, the field is in better position than they have been in the past.

We feel ready to take on the new challenges that we have established for ourselves.

Clearly, we see this being a growth story into a growth industry and we really like the way the platforms are shaping up, as you can tell.

So we will be seeing you at the end of the first quarter and thanks for joining us today.

That does conclude today's conference.

You may disconnect at this time.

We do appreciate your participation.