GameStop Corp (GME) 2007 Q4 法說會逐字稿

Good morning, everyone.

Welcome to GameStop Corporation's fourth quarter and 2007 full-year earnings conference call.

Today's call is being recorded.

At the conclusion -- see where that music is coming from.

Do the speakers have something -- are we on hold somewhere?

That music might be from your source.

Anyway, today's call is being recorded.

(OPERATOR INSTRUCTIONS)

I would also 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 call over to Mr.

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

Please go ahead, sir.

Thank you.

Welcome to GameStop's 2007 year-end conference call.

I am Dick Fontaine, Gamestop's Chairman and CEO.

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

This morning, we released our 2007 numbers, and gave the market the first look at 2008.

Obviously, 2007 was outstanding for GameStop, and we believe 2008 is shaping up to be even better.

While David's going to take you into much more detail, I do want to stress the highlights of our financial year.

Total sales increased 33%, comps an amazing 24.7%.

Our SG&A leverage improved by 2.5% and our total operating earnings increased by just over 50%, with net income increasing to $288 million, an 82% increase over fiscal 2006.

By any barometer, another outstanding year for GameStop.

During the year, we opened 586 new stores worldwide, and all stores were funded with operating cash flow.

In spite of this aggressive store growth, we ended the year with a cash balance of over $857 million.

We opened 328 new stores in the U.S.

and 258 in our international markets.

During the year, we opened new stores in every one of the 16 countries where we are doing business, and we finished the year with 5,264 stores.

In 2008, we're forecasting that we will open between 575 and 600 additional stores, approximately half in the U.S.

and half internationally, with roughly between 175 and 200 of these openings internationally slated for Europe.

Clearly, we see many growth opportunities into a robust video game market in the U.S.

and abroad, and while our new store ROI has always been strong, in 2007 our new store performance rates were the highest ever.

The results in 2007 reinforce what we were sure was the case; GameStop is gaining more brand traction every year.

The value proposition of customers being able to trade product as a form of price reduction is a concept that all customers value, regardless of country or culture, and are more than ever coming to associate the benefits of value with shopping at GameStop.

In 2007, the business reached a transformative stage, and a lot of our plans are driven by the belief that the video game business has broken through the still very important core customer, but is rapidly expanding on a broadening demographic.

In short, we believe the business is set up for the worldwide mass specialist; set up for GameStop.

This transformation is made up of many pieces, all of which have a profound impact on our business and even the traditional model of the cycle.

We see at least five significant transformations that are changing the very dynamics of the business.

One, clearly innovative technology.

The Wii effect has ushered not only new ways to play, but I believe will lead the creative forces in the industry to see the market potential of games through a far wider lens, leading to many more diverse products.

Two, emerging genres.

One could ask the question is Guitar Hero, Rock Band, SingStar, and the upcoming Wii Fit really a video game?

Genre-busting titles create new customers.

Three, expanding demographics.

More girls and women are playing video games than ever before.

Industry figures indicate 38% of game players are female.

Furthermore, gaming is emerging as a family activity.

In 2007, the Family Entertainment category grew an amazing 141%.

Number four, platform proliferation.

Quite simply, there has never been more console choices, and they are all doing well.

Indeed, the six platforms were all represented in our Top-20 sales last week, and it's not just the WII and DS, the Xbox 360, the PS3, the PS2, the PSP, and even the PC, but there are a multiplicity of buying choices to be made within each platform.

With the Microsoft unit, would you like the Pro or Elite?

The 40 gig or 80 gig?

Which portable best suits your needs?

Is it WiFi ready?

Do you want a nunchuck or a zapper with your Wii?

And what color are you looking for?

Oh, and by the way, will you need a time card for online play?

Clearly with more consoles and more choices, the knowledge of the game specialist, the GameStop associates, is becoming more important than ever to true customer satisfaction.

Number five, converging trends.

The game experience has become richer than ever.

The power of the new consoles coupled with the wow factor of HD gameplay has taken gaming to another level.

And with Blu-Ray clearly being the winner in the DVD race, the PS3 sales are already accelerating and will be an even better buy in 2008 and into the future.

And while these are some of the transformative trends that we see driving the business, I want to get more specifics as to what we see driving our 2008 forecast; the record 2007 increase installed base, where 31 million units were sold, more than ever before, and we are forecasting more in 2008.

In short, we see a double peak that is unprecedented in this business.

A great title lineup; both Dan and David will give you some highlights in just a moment.

The 575 and 600 new stores that I mentioned, more stores reaching more customers with the great GameStop brand.

Hardware price reductions.

Again, Dan is going to give you some more insights in just a minute.

An increased emphasis on value.

We're going to stress the value aspect of our new and used model more than ever before.

Increased productivity from our refurb department.

Last year, we refurbished over ten million software units and one million pieces of hardware.

This year, we intend to do more.

Increase capital investments.

We're going to commit over $175 million to CapEx in 2008, not only to open new stores but to remodel selected higher-performance stores, upgrade our POS systems, add refinements to our distribution around the world, and of course upgrade our refurb centers, and there will be more.

And finally, a stronger brand more aggressively promoted.

It's clear that the GameStop brand is becoming more widely known and our model better understood every year; and this year, we're going to promote the brand more than ever before.

This combination of consistent history of performance, the continued development of our unique business mode,l and the diversity of our real estate - malls, strip centers, inner cities, suburbs, primary, secondary and tertiary population centers, in established and immature countries around the world, they all position GameStop to maximize the huge potential of the business.

We're extremely bullish on the business, very excited about our year, and now David and Dan will give you more insights.

David?

Good morning.

Before the market opened today, we released our sales and earnings results for the fourth quarter and full-year of fiscal 2007.

GameStop sales for the fourth quarter increased 24% to $2.9 billion, as compared to $2.3 billion in the prior fiscal year.

Comparable store sales for the fourth quarter increased an amazing 17.4%, considering the 26.5% comp achieved in the prior year.

These results were driven by exceptional results across all categories.

New hardware sales grew 19%, with sellouts of Nintendo's WII and DS systems, Microsoft's X-Box 360 and Sony's PSP handheld.

New software sales grew 38%, driven by strong sales for Call of Duty 4, Guitar Hero 3, Rock Band and Super Mario Galaxy.

Finally, used sales grew 25% during the holiday quarter, with value-conscious customers purchasing these products at astounding rates.

You should note that all the quarterly growth rates are comparing the 13 weeks of 2007 to the 14 weeks of 2006, and would be even higher if the extra week in the prior year were to be eliminated.

Net earnings for the quarter were $189.8 million, increasing 46% over prior-year quarter net earnings of $129.8 million.

Diluted earnings per share for the quarter were $1.14.

These results were $0.02 per share higher than the high end of our guidance issued on February 15, due primarily to lower-than-expected foreign tax expense during the fourth quarter, resulting from profitability in many European countries, much, much earlier than expected.

Gross margins were fairly flat year-over-year for the fourth quarter; however, SG&A leverage improved by 50 basis points due to strong sales comps, cost controls and international growth leverage.

This allowed operating margins to increase by 40 basis points to 10.2% in comparison to the prior-year quarter.

GameStop sales for the full fiscal year 2007 increased 33% to over $7.1 billion, with full-year comparable store sales growing 24.7%.

Operating margins expanded from 6.3% to 7.1% with 50% growth in operating earnings.

Net earnings for the year grew 82% to $288.3 million, including $7.9 million of debt retirement costs.

Diluted earnings per share for fiscal 2007 was $1.75, including $0.05 per share of debt retirement costs, representing 75% EPS growth for fiscal 2007.

Our balance sheet remains exceptionally strong, with over $850 million in cash at the end of the year, and inventories growing only 19% on a 33% sales growth rate.

In 2007, we also retired approximately $280 million of debt, and in early February, our Board approved an additional $130 million note repurchase program.

As of today, we have repurchased notes of $23 million related to that new buyback program.

This morning, we also issued initial guidance for the both the first quarter and full-year of fiscal 2008.

Based on a strong game lineup, historical tie ratios and continuing growth of the hardware-installed base, we expect full-year 2008 sales to increase between 19% and 21%, with comparable store sales increasing between 10% and 12%.

We believe that the U.S.

video game industry will continue to grow at a rapid pace, with more hardware units sold in 2008 than in 2007, and a software growth rate of somewhere between 15% and 20%.

February MPD results showed a strong start for our fiscal year.

At the midpoint of our guidance, operating margins are expected to improve by 40 basis points to 7.5%, with approximately ten to 20 basis points coming from gross margin improvements and approximately ten basis points coming from SG&A leverage.

Depreciation should range from $138 million to $140 million, with net interest expense in the 25 to $27 million range.

Finally, our effective tax rate for fiscal 2008 is expected to be between 35% and 36%, with the first three quarters closer to 37% and the fourth quarter closer to 35%.

Based on these assumptions, we currently expect diluted earnings per share for fiscal 2008 to range from $2.25 to $2.34, representing strong EPS growth of between 25% and 30%.

For the first quarter of 2008, we're expecting comparable store sales of between 24% and 25%, with diluted earnings per share ranging from $0.32 to $0.33, over double that of the prior-year quarter.

For those of you building quarterly models, please consider that the third quarter of 2007 had the extraordinary launch of Halo 3, and thus the third quarter of fiscal 2008 will have the least aggressive growth rates during the year.

Finally, based on the strong industry trends, our expanding worldwide footprint and our excellent cash generation, we currently expect that GameStop will achieve at least 25% EPS growth in fiscal 2009.

With that, I will turn it over to Dan.

Thanks, Dave.

As everyone mentioned, 2007 was a fantastic year and we think the business only gets better from here.

A record number of consoles, as Dave mentioned, and handheld systems were sold last year, which will set up 2008 for another strong software growth year in video games.

As a matter of fact, the 31 million hardware units sold are 35% higher than the previous record in 2006; proving, once again, that the video game market has reached the mass market.

This growth in installed bas, a very strong title lineup, and historical tie ratios, implies that 2008 will set another record for video game software, and we see year-over-year growth in the 15% to 20% range.

Some of the best-selling titles for the year are expected to be Super Smash Bros.

Brawl from Nintendo for the Wii, Grand Theft Auto IV from Take 2 for the PS3 and Xbox 360; Gears of War 2 from Microsoft for the X-Box 360 in the fourth quarter - we expect this to be very, very strong, especially at GameStop, as we performed very well with it a couple of years ago; Wii Fit from Nintendo for the Wii, another breakthrough use of a video game console, an incredible new way for any member of the family to get into exercising; Metal Gear Solid 4 from Konami for the PS3; Army of Two from EA, just recently released for the PS3 and the 360; and World of Warcraft from Vivendi for the PC.

In addition, there are many other great franchise titles releasing or under development, as well as a lot of new original IP like Prototype and Ghostbusters.

While it would be impossible to quantify the investment and worldwide development of games, it's likely to be at an all-time high as some of the best talent in the entertainment business are developing games.

We, like most in the industry, expect strong hardware sales to continue, with total units sold exceeding last year's peak due to continued demand and selective price cuts.

While some shortages still exist, supplies have continuously improved but we still don't know when supply will meet demand for the Nintendo Wii, as they continue to sell as soon as they hit the shelves.

As we analyze our sales deployment, we can't find evidence of the economy affecting our business.

In fact, like we did after 9/11, we're seeing comp store growth as consumers travel less and stay at home more, as well as trade in more games on new game purchases.

In addition, our refurbishment department is pumping out record numbers of refurbished consoles and games.

Indeed, we have the largest facility of its kind, and this is a significant barrier for competitors to enter the used game business.

This increased volume of trades and higher volume of refurbished goods will drive our used business, and we expect it to grow similar to new games over the year.

Last year, a new branding and marketing campaign, anchored by Power to the Players resonated well with gamers of all levels, as well as gift givers, and established GameStop as the place to go for games.

This year, we will increase our marketing initiatives to further establish the brand, as our 4,000 U.S.

stores will be conveniently located to most consumers, and we continuously are striving to improve the customer experience in our stores through a host of initiatives such as reducing store level personnel turnover; providing a more focused training program for our store associate; generating faster transaction speed at the cash rep; conducting, as Dick mentioned, more story models; and operating our in-store audio-visual equipment to provide an exciting entertaining environment.

Lastly, we believe that the cycles of the past, whereby video game sales increased in the introductory years of new platforms, and then level off, are no longer going to continue.

Gaming has now reached mass appeal, and the industry is investing like never before in game development.

Therefore, the data suggests that video game sales will continue to grow at double-digit rates well into the future.

That is why we are investing in new stores, new infrastructure, and our people, to capitalize on this worldwide demand, as our business model, as Dick has mentioned, has been accepted by consumers around the world.

Thank you.

And now I'll turn it over to the moderator for a question-and-answer period.

Thank you very much.

(OPERATOR INSTRUCTIONS)

Our first question of the day goes to Ben Schachter at UBS.

Please go ahead.

Hey, guys, congratulations on a fantastic year.

Thank you.

A few questions.

I was wondering if we could walk through how you think internally of same-store growth, and how would you advise the street to look at it, because a lot of people do look at it in the similar sense that they look at other retailers, and maybe that might not be so appropriate.

Another question on used growth, I was wondering if you could say what would be the drivers to get that used growth to grow faster than new over time, or should we not expect that?

And then finally, I noticed you have some stores with the tournament play and trying to expand the stores there.

Is that something that we should look to continue into 2008?

Thank you.

Yes.

Sorry.

This is Dave on the same-store growth.

You know, we have always tried to talk about how people really need to focus more on software growth than same-store growth, because if you recall how the industry works is the hardware prices come down over time and it pressure on the same-store comp number.

But as the comp number comes down, typically software grows even faster, and used software as well grows faster.

So your EPS growth will be somewhat inverse to your comp growth.

So when you have really, really high same-store sales numbers, you may have a nice EPS growth number; but as those come down, you can have higher EPS growth numbers.

So it is a little unusual, it's not typical retail why where you say, you know, the same store sales and EPS kind of match each other.

So it is something everyone has to be very aware of here, and something to really look at is to look at software growth rather than so - being so focused on comp store growth.

But I think inherent in your question as well, at least I'm assuming you were referring to the fact that the growth in our business and the growth of this industry to some degree is running countercyclical to a lot of things.

24% comp growth in retail is astronomical, almost never seen, and while it's true this year, for many of the reasons that David indicated, that our comps are looking to be in the 10 to 12% range, again, by traditional retail, double-digit comp increase, particularly in an economy that is at best worrisome, is really outstandingly strong.

And again, just to add additional reference points to what David said, when we build these comps, we build these comps on the things that Dan and David have referred to, the titles that we see coming and the installed base, and the third one is, obviously, the changes in prices, predominantly in the hardware.

But net-net, while 24% is outstanding, in my mind 10 to 12% comp growth is another form of outstanding.

Dan, do you want to handle the used?

This is Dan.

I will talk about the used and why and how it grows.

As new software sales go up, trades go up as people trade in games and use it as you currency to buy new video games, especially what we have been seeing the first couple of months of this year, given the economy, our trade as a percentage of cash used on new video game sales has actually gone up.

So we're actually building inventory.

So what will happen is, over time the used software sales will approximately match new software sales, not in any one quarter because of quarters like this, for example, where we have a Grand Theft Auto and a Super Smash Bros, new game sales will be extremely strong, but over time those trade-ins will sell and the used game sales will grow like the new game sales do.

So we're expecting for this year approximately used video game sales will grow like new over a period of the year.

And how the tournament store -

The tournament store, I'm sorry, the tournament store, we got into tournaments in our store.

We realized there is an opportunity to do that better and in a bigger way.

We have built a prototype store in the San Jose market, and it's going very well.

We have several others slated for this year in other markets, and we will continue to refine it as we see how it goes.

One quick follow-up, if I may.

Super Smash Bros, I was wondering if you could rank that in terms of how it could compare to other big titles of the year like Grand Theft Auto or Gears.

I know this title has not received that much attention on the streets.

Thanks.

I think it should be getting a lot of attention.

I would say it will most likely be in the Top 5 for the year, if not towards the top of the Top 5.

So it's a very, very significant title and it's selling through very, very well.

I believe Nintendo announced the first-week sales in the U.S.

of $1.4 million, something like.

that.

So a very, very strong start for one week for Super Smash Bros.

One thing about a title like Super Smash Bros, too, it'll have a very broad audience, because it won't be as narrow as something like a Grand Theft Auto potentially, which means it will have a long tail on sales.

Thanks and good luck in '08.

Our next question goes to David Magee at Suntrust Robinson Humphrey.

Yeah, good morning, and great quarter.

Thank you, David.

A couple of questions.

One is -- what have you assumed, Dave, with the price cuts on the hardware side this year, as far as anything significant on that side?

We haven't assumed huge amounts of price cuts, but we have assumed a couple.

The PS2 is still selling very, very well at $129.

When we did our budget, we assumed there will be a cut to $99.

We have no knowledge of that but we're making an assumption there.

We're also making an assumption that both the Xbox and the PS3 have about a $50 price cut sometime during the year.

But again, we have no knowledge or verification of any of those, but that's just kind of the assumptions we've use when we've put those into our models.

But those - we're not assuming any price cut on the Wii or the PSP at this point.

So that's kind of the things we're looking at price-cut-wise.

Would that mean then that the dollars would up for the year on the hardware side?

Definitely that is - that is definitely the case.

We're looking at kind of a different -- a different dichotomy here.

The amount of hardware that we're going to sell, we believe, in 2008, or the industry is going to sell, is going to be more than 2007.

Significant growth; significantly more, I guess a couple million more.

So, we're pretty excited about that, and we haven't seen that always in the past.

Typically you have a year where you have a peak amount of hardware units sold and then it starts to come down, and we believe that it is going to continue to grow.

Thus, our hardware percentage of sales or our sales mix is not going to come down as it has historically.

You're going to find that it may come down 1.5 or 2% for the year from 2007 only.

And thus, our gross margins probably won't grow as much as they - some people might have expected.

But that being said, our comps, obviously, are much higher than I think what a lot of people expected.

In addition to that, while it puts some pressure on the gross margin, the fact that it's a phenomena that I believe we have never experienced in this business, to have a 2-year cumulative install base grow as we did in 2007 and as we're forecasting in 2008, really forms the backbone for why we really believe this business has moved into the mass market, and why we also believe that business is going have a much, much longer growth and earnings tail than some models might indicate.

So then with the good hardware sell-through this year, maybe above what we thought a few months ago, it's setting up a pretty good year potentially for software next year, pretty strong?

That is certainly the case.

Again, as I mentioned, David, I think the models of the trends of the past are a thing of the past, and with the now - the broadening of the audience, et cetera, I can't envision any year into the futures where we're not going have double-digit software growth.

Is there -- thank you.

Is there anything different as far as the sector distribution model that you see coming down the pike, that would give you pause in the next several years as far as, you know, the stability of your retail model?

I am sorry, I didn't understand the question, David, could you pose it again?

Yeah, is there anything with digital downloads or anything else that is different than we've talked about in the past that would give you pause about the retail models the next several years?

No, I think the trends of digital downloading are pretty much all in front of us right now.

There is going to be some application in terms of levels, and there is going to be some downloading ever very old, albeit very good, games that use far less memory.

As we have said before, we see it at this stage, insofar as we see it in down the future, as being additive not dilutive to the game experience and therefore the GameStop model.

Just as a case in point is that I heard a statistic the other day that indicated why full-fledged downloading of very large files, coincidentally to major releases, at best is way into the future; is that the amount of content being pushed out by Youtube today equals the total amount of content being pushed out on the internet in all of 2000, the year 2000.

So we have got massive, massive uses of digital downloading, the peer-to-peer video sharing just being one of them.

We see small files, we see small purchases, micropurchases and, again, we're looking at that as being additive to the experience and in no way threatening to us.

Great, thanks a lot.

Our next question goes to Tony Wible at Citi, please go ahead.

Congratulations again on the quarter.

Thanks.

I was hoping you could maybe update your view on how penetrated you feel can you be with the U.S.

store base?

I guess a few quarters ago you guys had talked about some targets.

Have those targets changed at all, with the gaming trend expanding as you described?

Yes, they absolutely have.

If you go back even a number of years ago, we were looking at metrics that assumed a much larger population base for stores that we're currently looking at, and that has pretty much changed every year.

To some degree, it has changed in direction proportion to the overall growth of the business, and frankly right now, the tremendous change in the demographics.

We have done numerous tests to determine from a demographic standpoint what, and this is -- I'm now talking about the U.S -- what our future potential is.

We just had an updated version based upon some new metrics that we're using, and our real estate people working with the brokers around the U.S.

have come back and feel very comfortable, using the current metric, that there are an additional 1,685 potential locations available yet for the GameStop model.

So you can see even if we're approaching half of those, 200 to 300 store-a-year growth for the long-term future is well win our possibilities, and keep in mind this demographic growth, the broadening of the market that we're referring to, we actually think that that is going to continue.

The most important thing here is not just the technology of the Wii, but it's the size of the market.

There are so many people looking at making significant investments with this growing demographic because, obviously, the returns can be huge if they have a winning product, that we're going to see more and more products that are going to drive more and more applications, that are going to drive more and more consumers.

So we're going to keep ahead of that with our new store growth and we continue to see opportunities.

Great, and I was hoping that you could provide a little bit more clarity on your inventory expectations.

Clearly, I think inventory of the Wii is going to be tight, but have the 360 inventory issues from the beginning of the year cleared up?

And are you seeing any other inventory issues?

As I mentioned, most of our supplies have improved.

Right now, we're not seeing any problems with the PS3, and we should have a good stock of PS3s in place when Grand Theft Auto IV launches.

PS2, the same.

PSP, we're still anticipating shortages the next several months.

The Wii, we have been seeing increased flow, but we still anticipate it's not going to meet demand, potentially for the next two quarters.

The Nintendo DS, we have received better flow and increasing allocations, so that has improved.

And the Xbox 360, we have had increased allocations, so that has improved.

So we are experiencing record hardware sales as we speak.

I think, November - or February's MPD data showed huge growth in hardware.

What was the percentage?

20% growth, and I can tell you there were a lot of shortages so that could have been a lot higher.

So, it's - summarized, it's getting better.

I think most everything will be caught up soon, with the possible exception of the Wii.

Great.

Thank you.

We'll go next to Arvind Bhatia at Sterne, Agee.

Thank you, and my congratulations as well.

Thank you, Arvind.

A couple of questions.

First on Europe, I was wondering relative to the U.S.

market, where you're guiding 15 to 20%, help us understand relatively, you're expecting more growth there this year?

And then I want to understand the refurbishment, the economics there, and you know so $175 million in CapEx, how much are you going to spend on that business and when you are refurbishing, the margins from that, how much do they vary?

I mean, just help us understand the economics there a little bit.

Well, Arvind, let me take on the first one.

I think Dan can take on the second.

Yes, we're seeing growth internationally that either exceed or keep pace with the overall growth that we referred to.

It's obviously different in various countries, but the truth of the matter is is that these significant transformative changes that we talked about are also happening in our three major markets that we referred to - Europe, Asia and Canada.

Indeed, in Europe particularly, we could say that the growth is somewhat behind in lagging at least the U.S.

market, which means their comps could very well be somewhat stronger.

There is variance, obviously, between the countries in Europe, but the market itself looks very, very robust.

The same is true in our Australian/New Zealand market, particularly Australia, and the same is absolutely true in Canada.

So we certainly anticipate that from a gross standpoint, we will probably get a higher growth percentage coming from Europe and we see Australia and Canada definitely keeping pace with the U.S.

And Arvind, on the refurbishment, CapEx on the refurbishment will be - not large this year, I think actually last year we put in a new warehouse management system and also a new mezzanine that allowed us to expand the number of workstations.

Last year was larger in the United States.

International, though, is behind the United States, and we will be spending money to establish facilities, more modern facilities, through refurbishment there.

On the economics, the refurbishment slightly reduces the margin on used video games, because we have to fix things that are broken; but, as I motioned, it is an absolute necessity to be into the refurbishment business if you're into the used video game business, because you will buy back products that need to be refurbished, and if you don't have this type of facility and you destroy that product, you will drastically reduce your gross margin.

So, it's a absolute necessity to get into the business.

But we look at it as a good thing, because the more things we refurbish and not destroy, the more things we have for sale.

And it is a competitive advantage, clearly.

My question is on the - I guess is that the reason why within the used play, preplay category, gross margins were slightly downward since last year?

I assume that has something to do with it, or is it just the mix within that?

Because that is one of the questions I had gotten this morning.

It's two things.

The largest portion was the increase in refurbishment, which drove the sales.

The second reason was that immaturity in our used video game business -

One moment please, we have a technical difficulty here.

Please stand by.

The speaker's line dropped, so we're going to re-establish with the speakers.

We'll let you know as soon as the speakers get back.

Mr.

Bhatia, your line will still be open, so you'll still be on, and Mr.

Sebastian, you'll be next.

Again, please stand by until we get their line back in.

We do appreciate your patience.

I think the operator has the speakers.

Moderator?

Yes, you're back.

Good.

And Mr.

Bhatia's line is still open.

Thank you.

I apologize, we're having a thunderstorm here and we just had a power outage.

The good news is our backup generator kicked in.

We have everyone still on line, so we're fine.

Okay, great.

I was answering the question on refurbishment and getting to the second point.

The second point, it is mix, but it's mix of used gain sales U.S.

and international, and the international is less developed than what we are here in the U.S.; so as you are developing your business in the country, your margins will be slightly less.

And Arvind, I would really point to the fact that there is part of that that is very good news.

As I mentioned, is that every country and every culture has really taken to the new and used model, but the truth of the matter is that it's far from promoted in a lot of the European countries, so as we are pushing the GameStop model harder, we think there is tremendous upside.

We're starting from the lower base but we're showing great growth every year, so as Dan says, when you take the worldwide mix there is some impact, but there is far more opportunity in the future.

Great, thank you, guys.

Our next question will go to Colin Sebastian at Lazard Capital Markets.

Please go ahead.

Good morning, and thanks for taking my questions.

I wanted to ask about the margin expectations for 2008 in a little more detail.

You mentioned, obviously, a few of the things impacting the gross margin line, and I was wondering if there was anything incremental on the operating cost side that we should be considering during the year as we model leverage potential in the model?

And then secondly, I know it's a little bit early to ask the question, but you mentioned the double peak in industry sales, the cycle, so in terms of the longer-term expectations, when are you assuming the next generation of consoles that might hit the market?

Thanks.

Let me take a fearless shot at the last question and first be willing to say I have no idea, but what I do believe is that, particularly when you look at some of the new platforms that are out and the huge investment that has been made, we can start with the PlayStation 3 for one, to some degree, a little less with the Xbox 360.

The horsepower in those units, I think, is going to really point to a much longer cycle with those; also the size of the investment is gigantic.

Therefore, I think if you look at what has happened to the PS2, I don't think it's unreasonable to believe that the PS3, and to some degree maybe even the 360, could still be generating growth when we get out 3, 4, 5, 6 years into the cycle.

Honestly, the Wii is such revolutionary technology, and I think it has so stimulated the R&D, at least on the Nintendo side, but the other side is, I really don't know.

My guess would be that it wouldn't be so much that we're going to see as much a new unit as we're going to see new applications and new accessories for the unit, and that could change the real fundamentals of who the customers are.

Okay, so 2010 is probably too early to expect a new batch of hardware?

You know, if you're talking in the macro sense, I would say later rather than earlier would be my guess.

And your question on the gross margin and SG&A guidance for 2008, on the gross margin, as I said, we are looking for fairly significant hardware growth in 2008, and that is really the only thing that is really affecting the gross margin guidance.

And then on the SG&A guidance, we are looking to add some costs in branding and advertising.

Our new Power to the Players brand has been very successful, and we are going to be adding some television and radio-type advertising during the year.

So that probably will take about a 10th off of the SG&A - off of the SG&A leverage.

But other than that, there are not any unusual items in SG&A, no.

Okay, thanks, and congratulations on the year.

Thanks.

Our next question goes to Ed Williams at BMO Capital Markets.

Good morning.

Just a couple of questions.

First of all, taking another look at at Arvind's question on the international market, c Can you give us an idea as to what the percentage revenues were that came from outside of, say, North America and the profitability of the European store base as you look at them by country?

And then to follow on on your comments that the used business and European market or international market, how does the revenue mix per store look on the average, say, European store versus the average North American store, and used versus new and hardware versus software?

Let me start off with the European and store base, and what we're looking at, profitability.

If you recall last year in 2006 when our 10-K came out, we had about $1 million of operating profit in Europe.

I will say, although we haven't disclosed that number yet and it will come out with the 10-K in a couple of weeks, we have improved that profitability significantly in 2007, and you looking at many, many times that net income - or operating income number for 2007.

Nearly all the countries in Europe are profitable at this point other than one, Spain.

We are profitability all over the Scandinavian countries, which had not been profitable; we are looking at profitability in Ireland, which has not been profitable.

And Germany and Italy continue to be profitable.

So we had significant growth there in operating earnings, which we're very happy with.

The number of storms we added helped that number significantly.

Was that growth driven on the SG&A side or on just a revenue scale?

I would say a little bit of both.

The revenues obviously went up.

We had a lot of general office and warehouse facilities built when we purchased the operations in Europe, and the number of stores we've added obviously has helped that profitability significantly.

Relative to the run rate on the stores, particularly dealing with Europe, if - we were look at full maturity to full maturity ranges on the U.S.

and Europe, actually the European stores, and predominantly because they're in malls, would actually have somewhat of a higher rate of sale, and that is offset generally by somewhat higher rents, so the return on investment should be very, very much like the U.S..

Europe, as you know, and as we have mentioned, is much more immature than either our Canadian or our Australian markets, or certainly our U.S.

market.

But on a full mature basis, we fully expect that because of the stores and where they are, we're anticipating somewhat higher sales per square meter.

Okay, and if you look at the additional stores you're going to add in 2008, I think you said about half would be international.

How many of those are going to be going into the European market versus the Canadian and Australian et

We'll put about - roughly between 170 to 200 of those roughly 325, 350 stores will be in Europe.

Both Canada and Australia will continue rapid growth, but the majority of them, almost 2/3 of the international stores, will be in Europe.

Okay.

And are you seeing anything on the competitive landscape, and staying in Australia, where I believe that is where The Game Group is competing with you?

Game has entered the Australian market.

They've been there about a year.

There has been some impact on a few of our stores where they have gone in as the second player in a mall, but by and large there has been almost minimal affect.

Our share is huge in Australia, our comp stores actually exceeded the U.S.

last year.

Our growth is far more accelerated, actually, in Australia than it has been in the past, and while I think that we will continue to have competition there, the team and the results we have certainly put us in an excellent position.

Game is a major player in Spain and Portugal; a reason for being slow out of the gate there is that an acquisition that we made shortly before completing the merger with EB, really put us into what I called old Spain, with more neighborhood stores, as opposed to new Spain, which is the malls.

Since that time, we have closed about 28 of the neighborhood stores and have ramped up our growth in the mall and the major grocery store centers and, again, the growth from those in Spain has been outstanding.

There is no question in my mind that Spain is going to be a very profitable country for us, but we're very immature there.

Okay, great.

And last question, can you comment a little about what you're seeing with your market share in the family-oriented software?

The Guitar Hero, the Rock Band and include with that the hardware with Nintendo, and how that has performed over say the last 24 months or so?

I think that one of the misconceptions that people used to have about GameStop is we performed really well with the hardcore and not as well with the general and more family-oriented games, and that couldn't be further than - from the truth.

As a matter of fact, because of our new stores and where we have located them and co-tenancy with many of the mass merchants, et cetera, we have performed very well on all types of titles, including the G-rated and the family-oriented times.

I will tell you that our market share on Super Smash Bros, which I think could be considered a family-oriented title was - I don't want to say an all-time high for a Nintendo title, but it might have been.

I think it was - the first-week market share for a Nintendo title was at an all-time high.

So we're performing very, very well with those, with the Rock Bands, with the Guitar Heros, and with the family-oriented titles, just as we perform with the more mature and edgier titles.

Another point to keep in mind is as we have been able to put more stores in more markets, more and more of our stores are becoming increasingly convenient, and convenient to neighborhoods, which has made it far easier to drop into a GameStop store and complete your transaction.

That coupled with the fact that, as I mentioned, the GameStop brand has been gaining traction, and more and more people are beginning to understand that trading a product in is really just another form of currency and a way of lowering their cost of video gaming.

So I think a combination of all of those, as Dan has indicated, is at the very least kind of changed the definition of a specialty store versus a mass merchant and we're drawing much, much closer to that given our models and our locations.

I would add that if you could go into our stores and you see the number of Moms who are bringing in kids who can't drive yet, obviously, in tow, purchasing games and trading games, Moms love our model; and they love our model because they can trade in those games, as Dick mentioned, and reduce the cost of a new game with the games that they no longer playing.

Okay, great.

Thank you.

And we have time for one further question, and that question this morning will come from Bill Armstrong at CL King & Associates.

Please go ahead.

Thanks.

Most of mine have been answered, but new software gross margins were up a little bit in the fourth quarter; how did that come about?

The gross margins on certain very popular games during the fourth quarter were a little bit higher than typical.

Some of those include Halo and Guitar Hero - so it's a very small increase, actually, so it's more of a mix of product than anything else.

So it wasn't anything with pricing trends or anything like that?

No, had nothing to do with pricing trends.

And some of it has stayed - some of the special editions, they're a little higher margins, too.

Okay.

And it sounds like you're seeing - it looks like you're seeing pricing holding up pretty well on software?

Yes.

We're seeing new game prices absolutely holding up on all platforms, as they did last year.

So, the customer acceptance of the $59.99 price point on the PS3 and 360, and the $49.99 on the Wii have held.

Okay, just to clarify something I think I heard earlier.

You expect both hardware units and dollars to grow in '08?

That is correct, yes.

For Q1, looking at very big comps, obviously have big times, are you also looking for software, too -- sorry, hardware, too, increases as a percentage of the mix, or will that start to come down?

For the entire year, we're looking at it to come down slightly as a percentage of sales.

But just slightly; as I said, maybe 1.5 to 2 points on the mix - on the total mix.

But in the first quarter, you know, as you saw from the MPD numbers in February, the hardware dollars are growing very, very strong.

Anything else from Mr.

Armstrong?

Yeah, yeah, one more question.

You're going to open close to 600 new stores; how many closings should we model, just to get a net number?

We will close 100 -- we will have closed in 2007, 100 stores, and about and about 66 of those were U.S.

and the rest international.

The majority of the international were, as I mentioned, the Spain.

I think in the 2008 number, it's 60 to 70 stores, something like that.

60 to 70.

Which, on the portfolio size that we have, you should keep in mind, is very, very small, which speaks to the profitability of the stores\.

And just also to put another point on it, generally speaking, when we close the store, it's actually financially advantageous.

And -- in what way?

Well, often what ends up happening is we're in a position where the least of the performers are the ones that we choose not to renew the leases and/or we're in a position where we have got a more profitable store that we feel we can transfer the sales to.

One of the elements that we look at very, very closely in any given market is if we decide to close a store, what percentage of the business do we feel we can transfer to another store?

And our performance on the part of our store personnel in transferring the sales have been very, very good.

So, it makes it easier for us if we feel we can become more profitable by closing certain overlapped stores to do so.

Okay.

And then finally, you mentioned you're getting more advantageous lease terms.

Are we talking about lower rents or some other aspects of the deal?

You know, it can be just about anything.

It can be lower rents, it can be more flexible rents, in can be buildouts; any number of things.

Again, I don't want to overstress that.

Our return on investment on the new stores is so strong that we don't need those, but clearly what happened is that GameStop has become almost especially anchored in many of these projects.

This is particularly true in the U.S.

So, developers more and more are trying to get us to sign up earlier and earlier and obviously, that shifts the negotiating leverage to us, and our real estate people are very, very good at that and they're really delivering quality to these projects.

So yeah, we look at improving on our metrics every year and we think 2008 will be probably be one of the best at that.

Okay, great.

Thanks.

Thank you for joining us today.

Obviously we're ecstatic about the 2007 year.

I certainly hope you can tell, not only in our answers to the questions, but our comments.

We're extremely enthused about 2008, and we absolutely do believe that the fundamental transformative stages of this business, the metrics that we referred to, this business is changing very rapidly, it's changing for the good and we think that GameStop is in the ideal position to continue to take advantage of this absolutely outstanding industry.

Thanks for supporting us and thanks for being with us today.

Thank you.

That does conclude the call.

We do appreciate your participation.

At this time, you may disconnect.

Thank you.