GameStop Corp (GME) 2008 Q1 法說會逐字稿

Welcome to the GameStop Corporation's Q1 2008 earnings conference call.

Today's call is being recorded.

At the conclusion of this 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 the property of GameStop.

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

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

Mr.

Fontaine, please go ahead.

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

I am Dick Fontaine, Chairman and CEO.

With me today are David Carlson, our CFO; and Dan DeMatteo, our Vice Chairman and COO.

This morning we released our numbers for the first quarter which were again outstanding and by any traditional retail growth metrics almost unprecedented.

With total sales increasing 42%, comps increasing by 27%, and net income increasing by 151%, while first quarter earnings per share doubling over last year.

I'd make the point that the unique GameStop new and used model coupled with the continued growth of GameStop stores in both existing and emerging markets and a business with a record console and portable growth, expanding demographic reach, new applications and emerging genre, combined make GameStop a truly distinctive retail specialist and a preeminent growth investment.

In previous quarters we've made the case that many of the metrics tied to the analysis of the business on a predictive cycle model have changed and we're backing that belief with our CapEx investments and our investments in the future.

We stated in the past that we believe that this business will be deeper, wider and longer than at any time in the past, any cycle in the past, and the evidence keeps growing that that's the case.

Deeper in that the power and the pull of the games has continued to attract an increasing number of core and avid gamers purchasing games like Super Smash Bros.

Brawl, GTA 4, Army of Two and purchasing these titles in record numbers.

As the average age of the gamer has surpassed 30, it's very obvious that great games continue to attract long-time gamers.

Cycle is also going to be much, much longer.

Last week three of our top 20 titles were for PlayStation 2, a console now in its eighth year.

And I fully expect, given the computing power of the PlayStation 3 and the 360 we'll be seeing longer life as developers use the horsepower of these systems in more creative applications into the future.

Wider in that we're seeing expanding demographics, particularly with more females and families discovering the entertainment value of gaming; emerging genres, as we've discussed, Guitar Hero, Rock Band; and releasing yesterday, by the way, Wii Fit which is blowing off the shelves, and a wide variety of systems from which to choose.

In short, more products, more customer choices, and the need for more informed sales associates, all play into GameStop's model and GameStop's strength.

In fact, given the innumerable product choices with an ever-increasing number of add-on and accessory items, GameStop currently stocks over 4500 SKUs.

There's no doubt in my mind that the role of a specialist with the largest selection of products in the industry, staffed by knowledgeable video game specialists, located in very convenient locations with the unique value proposition turning used products into a form of cash is a winning long-term strategy and a very difficult strategy to copy.

We continue to improve our operating metrics as our stores are becoming more productive than ever.

Sales per square foot increased by over 27%, SG&A has been reduced by 200 basis points, and our inventory productivity in both new and used products has never been better.

We're very focused on not only the growth of the Company, but making our existing portfolio of stores more efficient and we continue to invest in system enhancements, distribution improvements, merchandising refinements and more customer-centered scheduling for our store personnel.

We have a long history of consistent performance and we also have an underlying drive to improve all areas of our business, with a special focus on the continued development of this very unique used model.

We're well-aware that the macroeconomics are making this a very challenging time for many retailers and, while GameStop is dramatically running counter to that trend, I want to assure you that we don't have our head in the sand and don't take our strong sales and profits for granted.

We continue to evaluate our business at the micro level to determine if there is any underlying weakness affecting GameStop and we do so in a number of ways.

Evaluating key title sales, are any of the key titles not quite living up to expectations?

All are achieving or surpassing our expectations.

The tertiary store impact.

Are the smaller stores generally with a wider trade area being hammered by $4 gas, resulting in a cutback on driving to these generally Target, Super Wal-Mart or major grocery store anchored shopping centers?

Not that we can see.

In fact, our tertiaries are some of the best-performers year to date.

How about average transaction?

Our average transaction size has increased and our customer count is up as well for the quarter.

Trades and used while strong, they grew by 27%, are relatively in balance with this tremendous growth and are achieving and slightly exceeding our expectations, yet there's no current evidence of any massive trading down.

Significant market variations.

We review our store performance at the market as well as the macro level.

And our comps in every market are strong.

There -- we're focusing somewhat on Southern California and South Florida as two regions where we may be seeing some slight effect, though it's very minor at this time.

And finally, our new stores are opening strong and staying strong.

Speaking of new stores, during the quarter we opened 210 stores, a record number of openings with the previous first quarter record being 103.

We opened 87 stores in Europe, 86 in the U.S.

And yes, this is the first time Europe has turned in the largest amount of new stores in a quarter, slightly exceeding the U.S., which I would say does not in any manner, shape or form believe that there's any slowdown in the U.S.

We opened 25 in Canada and 12 in Australia.

The new stores continue to perform exceptionally well.

In fact, the first quarter performance over our hurdle rate has never been higher.

Last quarter we forecasted we would open between 550 or 600 stores worldwide and with these first quarter openings, we're now much more confident that it will be closer to 600.

Finally, I want to address one element of our -- of the somewhat dated cycle model that still does hold water, namely that software sales follow hardware growth.

The razor and razor blade effect, if you will.

In 2005 and '06, the industry -- and this is according to NPD data and U.S.

data only -- added almost 44 million consoles to the total installed base.

At that time, a combined two-year record.

Yet in 2007 alone that number was over 31 million and we are forecasting 2008 console and handheld numbers to be over 32 million industry-wide.

In short, we are in the middle of an explosive growth cycle where console and portable game units will exceed 63 million new units over the two-year period.

That's a 44% increase over the prior two-year high watermark.

And again, I would stress that we fully believe that these platforms will have extended life, extended application and extended development of great new games.

In short, over the four-year period, 106 million hardware units have been sold and that's in the U.S.

only.

What a great springboard for continued GameStop success, filled with additional opportunities.

We're very excited about our business, very bullish on the future, and backing that confidence with tremendous growth of building the GameStop business.

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

Good morning.

Before the market opened today, we released our sales and earnings results for the first quarter of 2008.

GameStop sales for the first quarter increased 42% to $1.8 billion, as compared to $1.3 billion in the prior fiscal year.

Comparable store sales for the first quarter increased 27%, with North American comps exceeding 30% and Australia and European comps in the low double digits as they comped against the launch of PS3 in the prior year quarter.

These results were driven by exceptional results across all categories.

New hardware sales grew 21% with all platforms meeting or exceeding our expectations.

New video game software grew 72%, driven by such blockbuster titles as Grand Theft Auto IV with only five days of sales in the quarter, Super Smash Bros.

Brawl and Rainbow Six Vegas 2.

This compares to NPD released software growth of 59%, showing we gained significant market share during the quarter.

This astounding growth in new video game software was the primary driver in our exceeding previously-released guidance.

Used video game sales also grew by over 27%, accelerating from the 25% growth experienced last quarter.

The current economic environment and great new titles stimulated trade-ins and budget conscious customers continue to discover the value pricing of our used mix.

Net earnings for the quarter were $62.1 million, increasing 151% over the prior year quarter's net earnings of $24.7 million.

Diluted earnings per share for the quarter were $0.37 including debt retirement costs of $0.01 per share.

These results were $0.05 per share higher than the high end of previously-released guidance.

Gross margins decreased about 120 basis points, due primarily to product mix.

SG&A expenses were leveraged by 200 basis points, due to strong sales comps, cost controls and international growth leverage.

This allowed operating margins to increase 140 basis points to 6.1% in comparison to the prior year quarter.

Our balance sheet remains exceptionally strong with over $625 million in cash at the end of the quarter.

And inventories grew only 25% on a 42% sales growth rate.

In the first quarter, we retired $30 million of debt in accordance with the debt buyback program approved by the Board of Directors in early February.

This left $100 million in the buyback program.

This morning we also issued initial guidance for the second quarter of 2008, and updated guidance for the full fiscal year.

For the second quarter of 2008, we are expecting comparable store sales of between 12% and 14% with diluted earnings per share ranging from 26% -- excuse me, $0.26 to $0.28, over double that of the prior year.

Based on the stronger than expected first quarter results, we are raising our diluted EPS guidance for the full year of 2008 to range from $2.30 to $2.39.

We continue to expect full year comparable store sales to increase between 10 and 12% and that U.S.

industry video game software sales will increase between 15 and 20%.

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

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

Thanks, Dave, and good morning.

The first quarter was even better than expected and the growth can be attributed to a great new title lineup, used sales driven by used trades, and record setting hardware sales.

As a matter of fact, in the U.S., next gen hardware sales grew 25% year-over-year in the quarter.

This growth includes handhelds which are becoming an important segment of the business and expanding the video game audience.

As we predicted and as Dick mentioned, hardware sales in 2008 will beat 2007's record-setting levels and this should create unprecedented demand for games in 2008, 2009, and beyond.

As we saw in the first quarter, game sales for the rest of the year will be propelled by a broad genre of titles for an ever-expanding gamer group.

As a case in point, when I reviewed last week's top selling 25 games, they were across seven platforms and included everything from a PC title to four titles for the seven-year-old PS2.

And we expect game sales to continue to grow for the year across many platforms, such as Guitar Hero Aerosmith for all platforms, as Dick mentioned; Wii Fit for the Wii, again, an application for the Wii that is expanding video gaming; Metal Gear Solid for the PS3; Gears of War 2 for the X-Box 360 and our reservations are running exceedingly well in that title; Madden for all platforms; Guitar Hero on Tour, for the Nintendo DS handheld, the first version of Guitar Hero on a handheld; Saints Row 2 for the X-Box 360 and PS3; Ghostbusters, all platforms; A World of Warcraft expansion pack coming in the fall for the PC; Guitar Hero IV for all platforms and many, many more.

Based on the insight we now have, it appears that titles releasing in the back half of the year will be much more numerous than last year, as publishers avoided the Halo 3 launch.

When you factor in the fact that publishers now have better development techniques for these new platforms, as well as they now are developing more games for the third party Wii, this places GameStop in an exceptional position.

As we stated in the end of the year conference call, we believe, and Dick just mentioned it again, that the cycles of the past are not applicable and this cycle will be longer due to the new genres and easier to use systems that are attracting a much larger audience than in the past.

And again, as Dick mentioned, we are aggressively opening new stores as our model has been accepted across the U.S.

and all countries that we have expanded into.

And as expected, the new stores are performing extremely well.

We are investing in our people and existing stores, as we continuously strive to improve the customer experience.

Our investments in proprietary systems and refurbishment operations are significant, as we increase the used video game business and its profitability.

In the quarter, we converted to a new Internet eCommerce site that had been in development for several years that is easier to use, provides more game content, and will soon allow customers to reserve online and pick up in-store.

Our Game Informer magazine is the largest of its kind in the world with now over 3.4 million subscribers and we just launched an Italian version two months ago.

So in summary, we are well-positioned with our stores and our investments to continue to grow and gain market share in this fastest growing entertainment business.

Thank you and with that I'll turn it over to the moderator for a question-and-answer session.

(OPERATOR INSTRUCTIONS) Colin Sebastian with Lazard Capital Markets.

Good morning.

Thanks for taking my questions.

Congratulations on the quarter.

First off I'd like to drill down a little bit into the mix between hardware, software and used specifically in the 2Q guidance, and hopefully for the full year, if you can provide some additional color there.

And related to that, it doesn't sound like there's been any change to your forecast for Q2 or the linearity of the year, but just wanted to clarify that given you didn't increase the full year comp store growth outlook.

Thanks.

On the second quarter margin mix, I guess what we're looking at is having a fairly flat margin for the second quarter over the prior year.

It will increase some from the first quarter as the hardware mix was very, very strong in the first quarter and typically is very strong in the first quarter.

So that's the second quarter.

Full year, we haven't really changed our guidance.

I believe we said we were looking at 20 basis points of increase in gross margins for the full year.

And that really hasn't changed since the guidance we gave in March.

Okay.

And related to the comp store growth outlook and not increasing that, given the upside in Q1?

Right.

The first quarter upside of about 2 points only marginally changed the full year number, so we still believe we're looking at about a 10 to 12% comp for the year.

Thanks.

That's helpful.

Then secondly in your hardware unit assumptions are you still expecting $50 price cuts on the PS3 and the 360 by the end of the year?

Well, one of the things that you may have noticed is that (inaudible) about two weeks ago indicated that at this time they were not planning any price cuts on the PS3.

But that certainly doesn't mean that as market conditions evolve that they may not change that.

And the truth of the matter is that we have been sufficiently happy with the rate of sale on the PS3 at its current price points, that assuming it continues at that rate, I think we'd be just fine with holding the price.

If it shows any sign of weakening or if they make a move to decide they want more market share I still think that option is open.

But right now we're okay with that announcement.

Thank you very much.

Gary Balter with Credit Suisse.

First, I just wanted to know if with the Wii Fit out there, we should expect that you're all going to be a bit lighter the next time we see you?

It's quite possible, Gary.

We'll adjust for that in the room size.

One of the comments we got from people, and we talked about it in the past, but just as you're starting to see the Wii grow and you're starting to get the used games, is the argument that -- the used business in that environment won't be as strong because it's a different type of game.

What are you seeing as you're a few more, another quarter now into the Wii?

We're very happy with the growth of our used video games in the Wii category and in the first quarter we put together several promotions to attract the new Wii customer and convince them to trade in their games and they worked extremely well.

We're very pleased with the growth in our used video games in the Wii category.

We don't have a concern there.

This is actually Seth here too.

Just a quick question on some of your category margins.

Can you just provide a little bit of additional color on some of the fluctuations we saw this quarter and maybe what are your expectations going forward?

Sure.

The hardware margin was down slightly from the prior year.

That was mostly due to our exit from the Microsoft ZUNE category and to some extent our deemphasis of warranties related to Microsoft's manufacturing issue they had with the X-Box 360 which really began in the second quarter of last year.

We think these manufacturing issues are behind Microsoft and with that we're confident we can start to reemphasize the warranties in our store probably in the second half of this year.

So we're looking at probably this to be the bottom of the hardware margin and it should go up from here.

The new software margins were pretty much flat with the prior year.

Used product margins decreased slightly from the prior year, but improved from the last three sequential quarters as refurbishment costs really increased with the surge in production.

And that is maximizing gross margin dollars and keeping to our target of used product margins between 48 and 50%.

And the other category was up slightly, that had to do with a lot of video game accessories that went out the door during the first quarter.

Great.

Thanks.

Thank you.

Tony Gikas with Piper Jaffray.

Good morning, guys.

A few questions.

Want to go back to the used business a little bit and is it picking up to your expectations or do you think that it's maybe a little bit behind the curve and when does that business start to hit the sweet spot?

And do you get some gross margin improvement as you move through that sweet spot?

Is this a better late cycle business or is it performing as well today as you expect it to be performing two years from today?

This is Dan.

Our used video game business exceeded our plan in the first quarter.

So it is performing as we expected.

As we always have said, is that it will trail new video games but over a long period of time, five or six quarters, it will grow like new video games grow.

So we expect that to continue to happen and when you have a quarter of course where used video games grew, what, 60, 70%--.

New video games.

New video games, I'm sorry, used will not keep up with that.

But our trades are doing extremely well this year.

As a matter of fact, as the economy has weakened our trades have actually strengthened as consumers need more currency to buy the video games that they want to buy, buy the new video games that they want to buy.

On the margin rate, we are optimizing for margin dollars, not necessarily margin rate, and the range will probably stay in that 48 to 50% range and some quarters will have more refurbishment cost as we attract back games that need to be fixed before we sell them.

And some quarters may be a little bit less and that's one of the biggest variables that changes the margin rate in the used category.

I would also point out, Tony, that if you're looking further out, and your question began to address 2009 and at what point we have the sweet spot.

There's a very important factor that is emerging here in terms of the mix of our stores.

We now have about 25% of our stores internationally and generally speaking, the -- and this is general -- the growth of used has, as many of these markets, particularly in Europe have been more immature, have lagged the U.S.

number.

But the growth that we can see in our international used sales is growing very, very rapidly.

As a matter of fact, the growth in used on the comp store basis was higher internationally than it was in the U.S.

last quarter.

So as we continue to grow and diversify our business around the world, we're going to get a lagging growth effect off of this used model, which has been relatively new compared to the U.S.

in Europe and to some degree in Australia and New Zealand as well.

Again, with 25% of the business in that growing, that's going to have a very positive long-term impact.

Okay.

Couple other quick ones.

Could you share your preliminary comp expectations for Q3 and Q4?

And then you said you're taking share domestically at least.

Who do you think you're taking share from?

And then last question on fiscal '09, you're pointing towards 25% EPS growth.

What's the driver of that?

Is it sales growth or op margin expansion?

On the third and fourth quarter comps, the only thing we've said thus far, and we said it on the last conference call, is in third quarter we do believe they will be positive comps, albeit they will not be enormous comps because we are up against a very, very difficult Halo 3 launch in the third quarter of last year.

That being said, we're seeing an amazing amount of titles that are going to be launched in September and October this year, when we think last year publishers really stayed away from Halo 3.

And although our initial expectations are to have pretty single digit -- low single digit comps, the lineup is really starting to strengthen.

We're not ready to give guidance on that, but that being said, there is definitely some positive developments there.

And the last part of your question on our market share gains, who are we taking it from, I wouldn't know who we're taking it from.

The only thing I guess we do know is that the consumer acceptance of our model, which is convenient location, large assortment, knowledgeable sales help and of course the buy/sell trade model has been accepted in every market that we go into.

Then the last part was just fiscal '09, any primary drivers there on that 25% EPS growth?

Well, the first thing I would say is that it clearly is an effect of this incredible installed base growing over this four-year period, let alone this two-year period that I discussed in my opening remarks.

The developers that clearly are seeing those numbers and the investments that they're making in the products, let alone the break-through products that we fully expect to see, and Wii is just an early indication of that, while we don't have the specifics, basically what we're banking on and feel very confident about is that the hardware numbers will tell a very strong story about the software numbers in 2009.

So it's unusual perhaps, particularly in this economic condition that the country finds itself in, that anybody would go out and begin to try to forecast 2009.

But it comes from that very strong confidence in software following hardware that we have and believe that that 25% is very doable.

Thank you, guys, good luck.

David Magee with SunTrust Robinson Humphrey.

Hi, this is Chris Rapalje on the call for David.

I just had -- wanted to clarify what you said about the margin on the used business.

You mentioned some increased refurbishment costs and I was just wondering if that was within the realm of regular variation or if there's any systematic change in the type of games you're refurbishing or that process?

No, I think it's business as usual and it's variable.

We encourage our stores to buy back damaged games from consumers because we know it's a good source of product and we can repair them at the 99% level and we need those refurbished games to open our new stores with.

So it will vary, depending upon the quarter, what we get back.

But again, we're trying to optimize for gross margin dollars and this supply that comes to our refurbishment department is very important for us in our new store opening supply.

What may be outside the realm of normal business is that we made significant investments now going into the second year in technology, techniques, staffing, space.

We have put a great deal of emphasis on the sophistication, there's really no other term for it, on this giant manufacturing process in the middle of our business.

And indeed, it is becoming more and more efficient literally every quarter.

A major factor in terms of margin, price, maximizing dollars is not only to be able to take in used products but to move that used products through a refurb factory and get it back and get it out on sale very, very quickly.

And this has been important for many, many reasons but not the least of which is, as I've mentioned in the past, given the tremendous amount of new stores that we are opening, when we open a new store we can't go out and order the opening inventory from a third party.

We've got to provide it ourselves.

And given the amount of new stores that we're putting on, that refurb facility gives us an opportunity to open these stores with an unprecedented amount of soft software.

So we're going to continue to invest in pushing that aspect of our business.

The downstream benefits for our customers are absolutely fantastic.

So that I would say over the two-year period is probably definitely moving a little bit outside the norm, but we think of it as an absolutely outstanding investment.

Just one thing to add there.

We really started ramping up our refurbishment almost a year ago in the second quarter of 2007.

And if you look at the margin rates on the used product for the second, third and fourth quarters of last year, they were around between 48 and 48.5 and you can really see the effect of doing that on the growth rates in the used category over the last three quarters as well.

So just an extra point there for you.

One of the other things that we should take some time to talk about this on is the fact of the matter is that we tend to give ranges, 48 to 50% in terms of our gross margins, and we do that on purpose, because one of the really great things about the sophistication of this model is the price elasticity across different product and platform lines.

And we stay in a very flexible position to deliver more value, if indeed a certain market or a certain segment or indeed a certain area of the country wants to or needs to get very, very promotional, either because of competition or because of marketing softening conditions.

The elasticity within the used area properly managed with everything working is a tremendous, tremendous advantage and a tremendous advantage for the consumer as well.

Okay.

And secondly, just with regard to your European stores, I was wondering if you could give just a little more color on performance there.

It sounds like the used business is starting to gain traction and just the number of stores you opened was significant, wondering if there's any new thoughts on the opportunity there or accelerating it.

Well, we continue to believe in growth in every one of the countries, and indeed, with one exception.

We didn't add any stores in the quarter in Portugal, but every other country of the 16 countries we do business added stores.

The overall performance for the quarter of our international operation was very, very strong.

As I indicated, on a comp basis, the used comp was actually higher than the U.S.

And in fact, on a software growth basis it was somewhat higher than the U.S., if you take the international contingent as a whole.

So those divisions are performing very, very well.

As we mentioned on our year-end conference call, we fully expect that in the 550, now approaching the 600 store range, that we fully expect about half of those will end up being international.

So our management there, our field teams continue to find additional areas to grow and we're very bullish on all of the markets.

Thanks very much.

Tony Wible with Citigroup.

I wanted to start off on the PC side.

Doesn't get a lot of attention but you have a great lineup between World of Warcraft, Spoor, Starcraft 2 and I just wanted to get your thoughts on how meaningful will the ramp on the PC side be?

And similarly, accessories as the music genre grows and you see the different Wii products rolling out.

How big could accessories in the PC side be for you?

Well, yes, this will be a very good PC year with those three titles that you mentioned in the back half of the year.

And we do have that into our forecast.

And PC sales run anywhere on a year basis from 5 to 7% of total sales and this year it will probably be at the high end because of those three titles that you mentioned.

In terms of accessories, I think one of the things about the expansion of the video game systems and their uses, like with the Wii Fit, et cetera, I think that accessories will continue to grow as the use for these systems continue to grow into different things like fitness, et cetera, et cetera.

So right now we have some accessories for the Wii Fit, like a pad that goes under it so if you're on a hardwood floor it won't slip, there's something else -- a carrying case with it as well as a rechargeable pack for it.

So there's three new accessories that just came out this week for the Wii Fit alone.

So while I don't have a number right in front of me that says what we expect accessories to grow to, clearly it is a growth category.

The other thing I'd mention, and you're 100% right, PC to some degree because of the blinding growth of the consoles and handheld, tends to get a little bit overlooked.

But again, putting GameStop in the perspective of beginning to analyze it much more on a worldwide basis, we've got a number of countries where these strong PC titles that you referred to are going to have disproportionate importance.

Our German, Austrian, Switzerland operations still have PC sales as a whole that are definitely double plus, over the average that we're running in the U.S.

and the Nordic countries in general are much, much stronger in PC.

So you're right, PC's got some great titles coming and we will benefit disproportionately in a number of these worldwide countries.

Last question here is with the cash that you have on the balance sheet, I guess you could use it to either pay down debt or pursue M&A or do other things with it.

What are your thoughts and how do you weigh those in the light of the current interest rate environment and also with the potential for depreciation in the euro?

Well, let me address the first one, and as we've said before, there's certainly no problem with cash in macroeconomic times that are dicey.

Having said that, we are a very aggressive growth oriented Company.

And if you look at the history of our use of cash, not only investing in infrastructure, but making acquisitions where they make sense, pushing the continued growth of our new stores, continuing to upgrade our stores with remodels, all of those continue to be on the table.

Buying back shares, buying back debt, all of those are on the table to be discussed with the Board.

My personal preference is that we spend the majority of our time, however, trying to employ that cash with opportunities to grow this business.

As we've said in our introduction, we think this is a long-term, strong growth business.

We want to continue our position, open new countries where this makes sense and I'm much more favorable to, at this point in time, challenging management to look for additional areas to grow, other than necessarily buying down our debt or even buying back shares.

But that's subject to change and Board's input.

With that said, looking to reinvest for growth, would that be more domestic or international and does the potential for I guess decline in the euro change your views on allocating more to Europe?

No, I don't think so.

I think our approach -- we've been very, very good to date, our hedging position vis-a-vis particularly the euro, has tried to keep that hedge at a neutral.

So what we end up doing is taking a look at what we believe the growth opportunities are within the countries and try to get ahead of that.

So we try not to let currency fluctuations in a short term unduly drive what we believe are good long-term investments.

Great.

Thank you.

Arvind Bhatia with Sterne Agee.

Good morning.

My congratulations as well.

Thank you.

Couple questions.

The first quarter you opened more stores than we had expected and I wonder if there was any extra cost built into the first quarter as a result of that.

My second question is on CapEx, if you can refresh us on what you're modeling there?

I think your previous guidance was 175, if I'm thinking correctly.

And the last question is on tie ratios.

As you're looking at 2009, and you're looking at tie ratios, et cetera, what's your thinking there?

Are you building kind of historical tie ratios?

Looks like tie ratios have been stronger but just would like to get your thinking there.

Well, the first thing I would point out in terms of the 210 stores, that included, which we're very happy about, an acquisition of 49 stores from Free Record Shop in Norway.

So that added significantly to that first quarter growth rate and obviously the European growth rate.

But even that aside, we still would have grown at a record amount of stores over the first quarter, something like 160 without that acquisition on the top of 103.

And there were some costs related to that acquisition of running the stores and converting them to video game stores.

So yes, there was a little bit of a drag on SG&A because of that.

And that's part of our go-forward business model, particularly as we look at opportunities to grow.

Our predominant growth has been over the years a lot of de novo growth but we've also been very, very successful making both small acquisitions and helping them grow and some very large mergers and acquisitions with EV.

So we'll continue to be very opportunistic and look at which markets we feel need to be better served or how we can pick up real estate to continue the growth and obviously when we look at euro, and particularly the EU with something like 450 million people, we do want to continue to evaluate the opportunities to move into new countries that we're not in.

And on your CapEx question, we are still looking at approximately 175 million of CapEx for the fiscal year.

Okay.

And then the tie ratio question?

Could you repeat that, Arvind?

Sorry.

I was just wondering what you're thinking for tie ratios in 2009, and I wonder because tie ratios have been stronger than they have been in the same time in the last cycle.

So are you thinking that tie ratios hold up really well going forward?

Just how you're thinking about it.

I think in our thought process, that when we say that we think we'll have double-digit software growth in 2009, we are not looking at overly aggressive tie ratios.

We're looking at more historical tie ratios.

And you're right, tie ratios are running ahead of historical rates and yet, even with the more conservative historical rates we're looking at some very, very strong software growth in 2009.

Great.

Thank you, guys.

Mike Hickey with Janco Partners.

Hey, guys, congrats on the quarter.

Thank you for taking my call.

Curious on the -- obviously we've been struggling with the impact of a weak domestic economy for a while now.

We have some near term stimulus with this tax refund program.

Are you seeing any impact on your business today from that refund process or --?

Well, the truth of the matter is -- I would answer is I can't point to a specific impact.

I don't have any metrics that indicate that that is the reason for the purchases.

I would assume that as more of these rebates come into the market, that a certain percentage of them will be spent on entertainment and I would guess that we will get probably more than our fair share.

But I can't point to anything specifically identifying that or at least not so far in the first quarter.

Okay.

And then it looks like, anecdotally at least, the release of GTA4 was moving hardware, although in the most recent NPD numbers that didn't really show up.

Are you guys seeing increased sales of PS3 and 360 because of GTA4 or is it just kind of business as normal?

No, in the week of Grand Theft Auto launch we saw a significant increase week to week in the sell-through of both X-Box 360 and PS3, somewhere near doubling week to week.

So there was a significant increase.

Now, people have to realize, there's been a lot of talk of the April numbers weren't as good as the March.

People forget, there were five weeks in March, and four weeks in April, so there's a lot of extenuating circumstances.

Also last time Grand Theft Auto came out we were in October, going into the largest selling season in the industry and so you saw holiday type of numbers.

We were actually very happy with the number of X-Box 360s and PS3s that tied along with the Grand Theft Auto and we continue to see some strength in May.

So we actually saw some upside and we're happy with it.

Okay.

And then what products are you guys currently out of?

I'm guessing the Wii Fit is in short supply, do you have GTA?

Is there any kind of general sell-outs on the product side?

Most products are in stock.

We're in a good position, as Wii Fit of course as a sell out as we expected.

The Wii hardware continues to be a sell-out, as things come in.

And Mario Kart is somewhat in short supply.

We're getting resupplied.

But for the most part, early in the first quarter, we had a lot of hardware shortages with the DS and the 360 and the PS3, those have abated.

The Wii remains the singular largest hardware shortage thing that we have.

Speaking of software driving hardware or new units driving hardware, I feel pretty (expletive) strongly that the Wii Fit itself is probably going to be the most significant addition that will drive new hardware sales.

I think as more and more people begin to see this, and they obviously need the Wii machine to play the Wii Fit, I think it's going to drive even more demand for the Wii.

And while we've been selling out everything that we get, I think this is going to add even more stimulus for demand of that product that's going to run throughout the year.

So in one sense, again, I give credit to Nintendo.

It's kind of a brilliant time to add on another accessory that really attracts a large number of new users that I believe are going to be motivated because of this unit to get the hardware unit.

So this looks like it's win-win all the way around as long as we can begin to get the supply we need.

And it looks like supply has been somewhat elevated over the last couple months.

Is that accurate?

And do you see that higher level of supply continuing?

Yes, I think it went up, what, about 15%?

It went up about 15% a month ago, the production numbers went up.

And yes, we have seen that supply go up.

But as I mentioned, still, supply has not caught up with demand as they can sell through in roughly two days when we get them into our stores.

I might mention, again, and it's kind of been a recurring theme, as you begin to look at GameStop and begin to think of it more as a worldwide company, X-Box 360 had a price break throughout Europe and that price break significantly -- it was in March.

So we didn't get the full quarter.

But it significantly accelerated sales in all of the European markets.

And assuming again they keep up with supply, it may very well be a harbinger of what they may want to do in other markets downstream from Europe.

Thanks, guys.

Bill Armstrong with CL King and Associates.

Hi, good morning.

Great quarter.

Two questions.

Are you seeing any competitive impact on your business from Blockbuster's more move into video games or any other competitors out there?

We looked at that.

Blockbuster made an announcement that they were getting back into video games.

We have not seen any impact based on their efforts to date.

And we've not gotten any feedback from our field personnel that they're having competitive issues due to whatever efforts they are now putting forward.

Okay.

And then is there any way for GameStop to capture some of these downloadable micro transactions that we're seeing the publishers putting more emphasis on?

Let's put -- we do do downloads on our website to the PC games with PC games.

In addition, we sell the time cards for the X-Box Live and Nintendo so that we do share, because we sell the time cards and oftentimes these consumers would rather use the time cards than a credit card to make their purchases with.

So we do share in the revenue that way.

So we do share in it and we expect that to grow and continue as publishers find ways to add on content, as they will do, to make the games more exciting for their customers.

But we don't see it as a negative for our business.

Does it make sense for the publishers to bring in retailers to help broaden the distribution of this downloadable content?

Absolutely.

Absolutely.

I would think as this continues to grow they would want us to begin to market that with them and help promote their downloadable content and I would see that we would be in a position to do that.

I might add that if you talk to most analysts about downloadable add-on content for this year on a, whatever $10 billion game industry, it's expected to be no more than $100 million.

Very good.

Thank you.

Thank you for joining us today.

I frankly say we have never been more confident of our business and we're in a position where all segments of our business seem to be running extremely well.

But if you've been following GameStop for quite some time, you know we're not resting on our laurels.

We look to improve and we think the opportunities that we have are not only worldwide but also within all of our divisions, the dot-com division as well as Game Informer.

Thanks for your support.

Another great quarter.

We're looking forward to even more in the second.

This does conclude today's conference call.

We do thank everyone for your participation.