GameStop Corp (GME) 2008 Q3 法說會逐字稿

Good morning.

Welcome to GameStop Corporation's Q3 2008 earnings conference call.

Today's call is being recorded.

At the conclusion of the announcement a question-and-answer session will be conducted electrically.

(Operator Instructions).

I would like to remind you that this call is covered by the Safe Harbor Disclosure contained in GameStop's public documents and is the property of GameStop.

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

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

Please go ahead, sir.

Thank you and good morning and welcome to GameStop's third quarter conference call.

I'm Dick Fontaine, GameStop's Executive Chairman.

With me this morning are Dan Dematteo, our recently appointed CEO, Paul Raines, our Chief Operating Officer, and David Carlson, our Executive Vice President and Chief Financial Officer.

In my new capacity as an Executive Chairman I'll be focusing on the development of our more immature European operations and future growth as well as concentrating on strategic issues and additional acquisition opportunities.

And before I turn the call over to Dan, I want to say how positive I am about his ascendency to the CEO position.

Dan understands the video game business better than most anyone in retail and has played a huge role in moving our company to where we are today.

Dan and have I worked side by side for all eleven years of GameStop's existence and we couldn't have a more experienced leader with a real passion for the business leading our company.

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

Thanks, Dick, and good morning.

As you know, this morning we released our third quarter financial results and gave guidance for Q4.

In spite of the current economic environment, we grew sales and non-GAAP earnings over last year which was a record setting quarter with the release of Halo 3 and 46% comps.

Once again the consumers accepted the great entertainment value that video games provide.

While sales were off slightly off our previous forecast due to unexpected softness internationally, we offset this through strong expense control and met the high end of our earnings guidance.

Dave will give you more details on the specifics of our financial results.

In the quarter our video game sales grew 10%, driven by new title releases across all console platforms.

In addition, the US installed base of next gen consoles continued to expand with 18% year-over-year growth led by Nintendo's Wii.

This continued growth in the next gen install base gives us confidence that software sales will continue to grow this year and into next and this cycle will be longer and broader than any before and our buy/sell trade model continues to work well in this economic environment as consumers traded in record numbers to buy new video games.

The fourth quarter has started well driven by a strong lineup of titles of new releases such as Call of Duty, World at War, Gears of War 2 and World of Warcraft: Wrath of the Lich King, again reflecting the resilience that video game sales have in tough economic times.

We have reduced our earnings estimates slightly in Q4 to reflect some level of uncertainty when we switch from the primary game player to the gift giver as the sales driver, but we are still forecasting double-digit earnings growth in the quarter and 30% to 33% growth for the full year.

In the quarter we opened 191 stores, 94 in the US and 97 internationally, putting the total number of new store openings for the year so far at 526.

In addition in 2008, we began experimenting with stores and PX compounds on US military bases and these have proven to be home runs, delivering sales and profits well beyond the average store.

To date we have opened 15 of these stores and expect to have 23 by year-end.

As a matter of fact, our new store program continues to deliver results well in excess of our IRR expectations.

As Dick mentioned in the release this morning, we completed our acquisition of Micromania, the largest retailer of video games in France, with 332 stores and now have an extremely well-positioned company in the second largest European market.

We expect the pay off the short term loan we made for this acquisition by the end of the holiday season out of free cash flow.

In summary, we are well positioned both in the US and internationally to continue to capitalize on this growing industry.

This year we will open over 600 stores, acquire Micromania and spend on other capital projects to improve infrastructure all out of free cash flow.

While we share other retailers' concern on the slowing economy, we see that consumers place great value on interactive entertainment and thus far have elected to buy this season's hot new games.

Now I'll turn it over to Dave for a review of the financial data.

Dave?

Thanks, Dan, and good morning.

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

GameStop sales for the third quarter increased 5% to $1.7 billion as compared to $1.6 billion in the prior fiscal year.

Comparable store sales for the third quarter declined by 1.8% due primarily to the difficult comparison to the Halo 3 launch last year which was the largest title launch in GameStop history.

The slight moderation in comparable store sales in comparison to our original expectations was due entirely to weaker results internationally related to the global economic and financial crisis.

New video game software, an important indicator of our success, increased 10% during the quarter even with the difficult Halo 3 comparison, while used video games grew 19% with the current economic environment continuing to stimulate trade-ins.

GAAP diluted earnings per share for the third quarter were $0.28 which included merger-related expenses of $0.06 per share and the impacts of foreign currency fluctuations of $0.04 per share.

Excluding these two items, non-GAAP diluted earnings per share were $0.38, an increase of 19% over the prior year quarter.

Gross margin rate increased by 190 basis points as product mix shifted from low margin hardware sales to higher margin new and used software sales.

The increases in the new hardware and new software category margins were due primarily to strong co-op advertising programs related to fall and holiday titles.

SG&A expenses came in slightly -- or significantly under forecast as costs and expenses were cut in response to the global economic issues and the resulting moderation in sales.

Our balance sheet remains strong with $478 million in cash at the end of the quarter, an increase of over $200 million from the prior year quarter, held in anticipation of closing our acquisition of Micromania last week.

Inventories as well increased 22% over the prior year as many hot titles released in the first weeks of November were shipped to our warehouses during October.

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

We continue to expect a solid fourth quarter, albeit it's obviously tempered by the global economic and financial issues.

With the strong start to the holiday selling season, we continue to believe our results should outperform most retailers due to the great value the consumer places on video game products.

For the fourth quarter of 2008 we are expecting diluted earnings per share to range from $1.29 to $1.34, representing EPS growth of 18% at the high end.

Comparable store sales growth should range from plus 4% to plus 5% for the quarter.

Updated guidance includes accretion of $0.05 per share at the midrange from the acquisition of Micromania offset by the impact of foreign currency fluctuations of $0.04 per share as the US dollar continues to strengthen.

2008 full year EPS is now expected to range from $2.35 to $2.40 with full year comparable store sales growing between 10% and 11%.

Finally always a reminder we are going into our traditional holiday quiet period on Wednesday, November 26th, until our holiday sales release on Thursday, January 8th.

With that, I'll turn it over to Dick for some closing remarks.

Thanks, David.

With the economic conditions like they are, almost a headwind with flying nails, which everybody has been understandably nervous about the future, I want to assure everybody that the entire GameStop organization continues to be better managed and more focused on controlling that which is in our ability to control.

We're both cautious and appropriately aggressive.

Our stores are well positioned.

Our cash flow is strong and our control of the business recognizes the current reality of worldwide uncertainty, but it also recognizes that there are worldwide opportunities given the strong title lineup and the value aspect of our model that continues to attract customers And with that we'll open it up for questions.

Thank you.

(Operator Instructions).

We'll take our first question from Tony Gikas from Piper Jaffray.

Hi, good morning, guys and congratulations on good execution.

A couple of questions.

I guess moving through the next couple of months here how do you plan to execute differently over the holidays than you would relative to a few months ago?

Second question, how's the music genre trending right now and if it's trending below your expectations how soft is that category?

What products are working?

What products aren't working?

And then the third question I think David touched on it briefly, just inventories were up in the quarter and how do you feel about those inventories, both corporate and store level?

Okay.

Thanks, Tony.

This is Dan.

I'll answer the first one.

Some of the things that we're doing differently now given the economic environment that we are in.

We're clearly more cautious in our merchandise ordering due to uncertainty and are ordering smaller amounts more frequently to make sure we aren't overstocked.

We have reevaluated all Q4 expenses.

We've cut out anything that is not absolutely necessary including hiring in the offices.

We're still hiring in the field, but we have put a freeze on hiring in the offices and lastly, we've reevaluated new store openings that were scheduled for '09 and put some on hold due to concerns about co-tenancy in some of these centers.

We clearly opened less stores in '09 than we did in '08.

And, David, I'll turn over to you on the music genre.

Sure.

You know, the overall category of the music genre is very healthy and we expect it to be popular throughout the holiday season, but I think as everyone knows it's not as robust as it was last year.

For example, the Guitar Hero Band Kit is selling extremely well and is out of stock in many cases, particularly in the Xbox and Wii version.

But again, we think it will moderate somewhat for the holiday but it will be still a very popular category for our consumers.

And last question, Dave, was on inventories?

Right.

The inventories were up 22% on a sales increase of 5%.

The difference this year is we had a significant amount of titles that we're releasing in the first week of November that actually hit our warehouses in the last week of October.

So we had nearly $100 million of inventory that went into our warehouses that did not -- we couldn't sell until November.

So that was a little different than last year when that did not happen.

So that is the reason for the increase in the inventory ,and the used inventory we're very happy with.

It's up significantly from last year.

We wanted it to be up significantly from last year and we see used selling very, very well during the holiday season.

In this tough economic environment the used business is likely to start performing perhaps better than we expected.

Do you think you have enough inventory in that category or do you feel like you're still a little on the light side?

Well, we have more -- this is Dan.

We have more this year per store than we've ever had before, so that's the positive.

And our experience has been to date that whatever we start our fourth quarter with we sell a certain percentage of that in the quarter and that percentage hardly ever varies.

So we would expect to have a very good fourth quarter because our used inventory is up.

A point of clarification maybe on the store openings for next year, this year we will have opened between what we acquired and what we opened, Greenfield, over 1,000 stores.

So clearly we're going to be off that pace for next year as we integrate the Micromania acquisition and we re-review the new store openings for next year again given co-tenancies in some of the centers as we see maybe other retailers won't be as aggressive and we don't want to go into centers that aren't full.

Thank you, guys.

And we go next to Ben Schachter with UBS.

Hey, guys, I was wondering if you could talk about the differences you're seeing in the strip mall and the strips versus the mall stores, first of all.

And then aside from the Guitar Hero bundles, any other issues around supply.

And then a final question around the store format changes you've discussed in the past.

Does the softness in the music genre make you rethink any of those store format changes and just remind us how that's rolling out, thanks.

On the first question, differences between the malls and the strip centers, we have not focused on that, to tell you the truth.

But by cursory review, we don't have it summed up, says that there's little differences between the malls and the strip centers.

As new titles have been driving the business in both formats.

So I -- we have not focused on it, but I don't believe there's any differences, significant differences, in either one of them.

On the store format side -- on the size of the store given what we see somewhat in the softness of music is that no, I don't see that driving us to change our strategy with new stores.

I mean, our new stores have been growing slightly in size.

We will reposition some of our new stores or our existing stores, rather, that we know are too small for the kind of volume that they're doing and we believe that we're leaving sales and profits on the table because of their size and we will upgrade those stores.

Now in your last question on product supply I think there were really only three things that are in somewhat short supply and, Dan, you add if I miss anything here, but obviously we talked about the Guitar Hero band kits.

They're in short supply.

Wii Fit is in very, very short supply.

It sells through as quickly as it hits the stores and although the Wii hardware is in very good supply right now, we believe it may as well be out of stock by the holiday season, but those are the three things that come to mind of products that are short supply right now.

Dave, if I could just follow up with one more.

In the past you've talked about EPS growth that you could see in the coming years.

Any comments on what you are planning on for next year in terms of EPS growth?

Thanks.

We think because of the current economic environment we're going to wait until after the holiday season and then we plan to reevaluate our 2009 sales and earnings guidance.

Due to the current economic conditions and the weak retail outlook, we feel it would be prudent for us to see how our customers react over the next few weeks before we make any long range forecasts.

I would just add to that that prior to the economic crisis we were believing that there would be clearly growth in video game software sales given where we're at in the cycles, et cetera in '09, but as David said, we will temper that after the Christmas after we see our sales and earnings through Christmas.

Good luck with the Christmas season.

(Operator Instructions).

we'll go next to Bill Armstrong with C.L.

King & Associates.

Good morning.

You mentioned gift givers before.

I'm reminded of the Christmas season of '02 when gift givers seemed to not show up at the stores.

Are you seeing any early indications that gift givers are pulling back on video game purchases, either anecdotally or anything that you can quantify?

This is Dan and I might ask Tony to comment on that, too, Tony Bartel, our Executive Vice President of Merchandising and Marketing is here, but no.

Given the comps we've had the first couple of weeks, clearly I can't tell you exactly what percent have been gift givers.

Tony, there has been an indicator we have that the gift giver share is picking up.

Is that --

Absolutely.

We do track the percent of people in our stores each week that are gift givers and that percent has actually been rising, and is actually equal to and slightly above what it was last year at this time.

Okay.

Because in your opening comments you did mention talking about your guidedown for Q4 and mentioned some uncertainty about gift givers.

And I think that's still prudent while we don't see an indication of it yet.

We do know when we get to Black Friday that things really move into almost total gift giving mode.

Right now it's a split between the serious gamer and the gift giver and it really moves into almost total gift giving mode, and so I think that prudence has worked well at this point.

And with the 4% to 5% comps guidance you're up 20% in the first couple weeks.

Should we read anything into that in terms of anticipating a slowdown or are the first two weeks not really that material in the context of the entire quarter?

No.

They're fairly material and we are having really good launches of the new games, but again, that really is dominated by the core gamer and the core gamer is definitely coming out and buying these games.

It's doing very, very well.

When it gets to the gift giver we're a little more cautious.

And so yes, the guidance assumes that December and January are low positive single digit comps.

I would mention just for a second that that is a very good potential support that we have.

If the core gamer is coming out and there have been a number of very, very good games and we're selling them fully up to expectations which we are and, in fact, exceeding some of those, if the core gamers and the avid gamers are with us through these very unpredictable times, that's a very, very good sign for us as we shift, as Dan has said very well, into the gift giver and often it's the one time a year gift giver, that's a little bit harder to predict.

One of the other things that we could look at, however, is that our Nintendo product, our Wii product, continues to sell through extremely well and that we can make some assumptions is the newer buyer and probably the advanced gift giver.

So there are reasons to be positive, but there probably are as many reasons not to be overly optimistic, given what we're all facing.

Right.

Okay, thank you.

We go next to David Magee with Suntust Robinson Humphrey.

Hey, good morning.

Just two quick questions.

One is as you contemplate the fourth quarter and a slight reduction in terms of the guidance, what is your feeling about the relative contribution of the international versus the domestic operations towards that?

Is more the cut on the international side or is that too fine a line to draw?

It's probably, David, too fine a line.

When we talk about the international operations as you certainly can understand, we're talking about a number of variables that we really don't face in our domestic operation.

Probably the biggest issue right now is not so much that we have significantly different visions as to sales.

Perhaps the same could be said for margins.

Currency fluctuations, however, which are really out of our control and as you know, we took a hit this quarter, will continue to be something that we'll keep an eye on.

By and large, what we have seen early in this quarter has been reflected internationally with probably a couple of countries feeling the downturn a little bit more than others, and I would point out Spain and Ireland, but overall we're feeling very, very good.

And secondly, with regard to 2009, if it is tough out there economically next year, do you anticipate that the vendors might be more aggressive on price cuts, particularly on the hardware side?

I can't speak for that.

I can't.

Nintendo has recently stated that the sell-through they're getting at $249 they have no intention to cut the prices.

You know, Microsoft has a $199 version of their system, the 360, which is selling extremely well.

So I think that's well positioned in price.

I would think if there was an opportunity, it would probably be from Sony on the PS3 and maybe the PS2 for a price cut, but I don't see price cuts.

And while price cuts should be good for us to accelerate sales on the hardware side, I do not envision price cuts on the software side as the $49 and $59 price points have been accepted by consumers in these tough economic times and all AAA titles are still coming out at $59 and $49.

Do you have any visibility yet in terms of the titles in the first half of next year?

Titles, Dave, from the first half?

We have a little bit of visibility which is typically the case.

We don't have a real good list of what's going to take place but we do have a nice lineup.

I would say the top five titles for the first quarter probably look to be Resident Evil 5, Street Fighter 4, Halo Wars, Fear 2 and Kill Zone 2.

So there is a nice lineup at least at the very beginning of the year.

And typically at this point we don't really see anything very much farther than that.

Great.

Thank you.

Good luck.

We go next to Arvind Bhatia with Sterne, Agge.

Thank you.

Good morning.

Dave, my first question is on margins for the used category.

I noticed that you were offering -- there was a promotion at the stores, extra 10%, I think on two games, and extra 20% on three games, et cetera, which to me is a good sign in the sense that you're still chasing inventory, but is this promotion any different than last year or is this a pretty normal promotion at this time of the year as you continue to build inventory?

I guess what I'm getting to is what should we be expecting as far as margins on the used category in the fourth quarter?

I'll ask Tony to answer that.

Yes.

This is Tony Bartel.

This is a typical promotion that we run at this time of the year, so we are not more promotional on the trade or the used side this year than we have been in years past.

Yet we are, as mentioned earlier, seeing a nice increase and welcomed increase in our used inventory.

This is Dave.

The margin rate actually for the fourth quarter should be very similar to last year's fourth quarter margin rate.

Then a housekeeping question.

What is stock-based comp, if you have that?

Dave?

It was $8.8 million.

$8.8 million.

And then final question, you mentioned the first half, Dave, in term of titles.

What about genre just the first month of the new year or last month of the fiscal year, how does that look like versus last year?

Well, give me just a second and I'll look it up here.

Last year there was very little new.

There was Burn Out Paradise and that was really the only new title that came out in January.

This year, to be honest with you, it's somewhat similar.

It looks like we may have Skate 2 coming out and we may have Lord of the Rings Conquest coming out.

Typically, though, in January you only have one or two titles coming out and the titles during from the holiday season also sell very well in January.

Great.

Thank you, guys, and good luck.

Thanks.

We have time for two more questions.

We go next to Mike Hickey with Janco Partners.

Hey , thanks, guys.

Can you talk about how your market shares trended year-to-date and I have one

I don't know that I have the year-to-date number in front of me.

I do have the Q3 number in front of us and we're very pleased with our growth in Q3.

As we expected,we lost market share in September because of our strength with Halo 3 last year all time high.

In the month of October we have gained market share and we're very pleased with that and what we're really believing is our market share strength in October primarily was driven -- we had a lot of promotions, of course, et cetera like usual, but our buy/sell trade model where consumers needed currency in order to buy the hot new games that they wanted, I think really proved itself to be valuable.

And I would just point out one other element ,while the data is nowhere near as consistent or available for that matter in a lot of our international operations due to the expansion over the course of the year and, in fact, the growth, I'd venture to say that we have picked up market share probably in every one of the major countries that we're doing business in.

So I'd like to have more accurate data, but as I said, in many countries that's just not available.

And as we would point out and remind everyone is that the market share data that we talk about is totally exclusive of any of our used business.

Okay.

And then obviously, the consumers is the biggest factor in this holiday and certainly in '09.

But what we do know is the growth in the installed base this year, we do know that you acquired Micromania which should be accretive in '09.

You have had guidance of 25%.

I'm not asking you to reiterate that, but can we model for growth in '09?

Let me just speak to the install base growth.

We earlier in the year predicted that there would be 32 million next gen console and hand-held units sold in the year, and we believe, given where we're at, and if November and December were flat, we would hit that 32 million.

So we think the industry is on track with the install base which should set up well for hardware -- or software sales in 2009.

But now to answer -- what's the other part of the question?

As far as giving '09 forecasts at this time, we're not going to do that until we see the fourth quarter results.

Okay.

Thanks, guys.

And we'll take our final question from Edward Williams with BMO Capital Markets.

Quick question.

First of all, can you give some granularity on the used business and really how it was trending?

So you alluded to October being good for getting some trades to come in, but can you talk a little bit about how it trended in the October quarter and what you're seeing in this point, what your expectations are going into the holiday quarter and I've got a couple after that.

Well, as we had -- I will say and I don't think we give out the number on the trade side, but we had record trades in the Q3 of this year.

So that sets up very well for sales in Q4.

We had 19% growth in sales in Q3 and we believe we'll see something similar to that in Q4.

Okay.

And then what are your thoughts, I guess, you alluded to it again for November, December, but what are your thoughts for hardware units and the percentage change you may see in those for the January quarter?

I mean we're still looking at more than 32 million units in the US for hardware sell-through.

Maybe I'm not quite understanding your question, but yes, it probably will moderate a little.

I think at one point we said it could be larger than 32 million units of hardware sold through in 2008, but with the economic environment we're in, we may not sell quite as many, but I still think we're going to do very, very well.

And then the last question is just looking at Micromania.

How much has -- what has the new store growth been like for Micromania the last couple years?

So what's that trend line been and has it -- --

Their new store growth over the past couple years has been reasonably aggressive, something in the neighborhood, I believe, of 25 stores a year.

Our expectations being better together, which is the approach that we take with all of our acquisitions and funding what is, I might say, an outstanding management team.

We're looking for to ramp that up.

We'll wait and see as we always do what the fourth quarter is.

We will probably be looking at anywhere from 40 to 45 stores next year in France.

Is there another part of your question that I missed?

I think you got it.

Okay.

All right.

Thanks much for joining us today.

We appreciate you being on the call and as I said, going into the fourth quarter, we're well aware of everything that is making everyone cautious, but at GameStop we are very, very positive about not only our fourth quarter, but our future and thanks for believing in us.

This concludes today's conference.

We thank you for your participation.

Have a nice day.