GameStop Corp (GME) 2008 Q4 法說會逐字稿

Good morning.

Welcome to GameStop Corporations' GameStop's fourth quarter and full year earnings conference call.

Today's call is being recorded.

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

(Operator Instructions).

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

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

At this time, I would like to turn the call over to Dan Dematteo, Chief Executive Officer of GameStop Corporation.

Please go ahead, sir.

Thank you, moderator.

I thank off of you for attending GameStop's conference call this morning.

With me are Dick Fontaine, Executive Chairman, Paul Raines, COO, Dave Carlson, Executive VP and CFO, and Tony Bartel our EVP of Merchandising and Marketing.

This morning, we will discuss our 2008 performance and the results of our fourth quarter and also give more information on what we see in 2009.

As our release indicated, our sales and earnings for the fourth quarter hit the high end of the range we previously gave you and therefore, our earnings for the year were also at the high end.

And according to US mpd data, we gained significant game market share in our Q4.

I wish to thank the thousands of GameStop associates around the world that executed a brilliant fourth quarter plan and developer publisher partners for the continued creation of exciting and diverse content.

And we are predicting record sales and earnings growth in 2009.

David will give you more information on 2008 sales and earnings as well as 2009 forecast.

Now, I will discuss what is driving them.

As most of you know, 2008 set a record for increasing the install base of new console and hand-held system owners with over 34 million new units being sold.

These new video game players, who are as varied as the overall population, coupled with the growth over the past two years will drive software sales this year to an all time high.

Again, creativity by software developer and publisher partners who create new games and genres for the ever expanding game player base contribute to this success.

In spite of the recession, video games are viewed as relatively cheap entertainment and we see software sales growing 5% to 10% in the US, as they already grew about 10% in both January and February.

And we believe international growth will approximate US growth.

As a matter of fact, without this recession, games would probably have grown more this year.

We are predicting growth in hardware units to proximate last year's numbers as potential price reductions and new entrance like the Nintendo DSi will continue to drive demand.

Our new store expansion program is driving our sales and expanding the market around the world.

We see adding 400 plus stores this year, about half domestically and half internationally.

While reduction of last year's 1000 stores, either opened or acquired, it is a large commitment and has warranted given the superior performance of new stores last year and so far this year.

As we expected, we are seeing great deals of new store rents and lease renewals.

Once again, we opened stores to expand share not cannibalize it and help expand the entire gaming market.

We see our number one goal is driving new users to video gaming and to drive sales of new title releases through our prerelease marketing programs.

As a video game specialist, we are in the unique position to do this through conveniently located stores, the largest assortment of games and knowledgeable sales support.

Now, we are forecasting positive comps and earnings growth in Q1 in spite of the tremendous comp last year due to mega hit releases of Grand Theft Auto, Super Smash Brothers and Mario Card.

David will give you more detail on this in his discussion.

Lastly, we have been asked by many of you what impact we are seeing on the used game market trade-in program due to new entrance.

As most of you know, we have seen attempts at mastering the used game model we have developed by others over the past year's many times.

All without success.

The on-line trade model was tested by us.

And we saw very little consumer acceptance, as the consumer needs the immediacy of the used game values to purchase new games.

We do not believe that this will work as the consumer that is willing to wait will sell peer to peer as they always have and get more money.

On the retail door front, other brick and mortar retailers have tried this and failed as they do not have the dedicated sales force, experience with pricing, systems to manage the inventory and refurbishment capabilities we developed over the years.

With that, I will turn it over to David and then we will come back for a q-and-a session.

Thanks Dan and good morning.

Before the market opened today, we released our sales and earnings results for the fourth quarter and full year fiscal 2008.

GameStop sales for the fourth quarter increased 22% to 3.5 billion compared to 2.9 billion in the prior fiscal quarter.

Comparable store sales for the fourth quarter increased a retail leading 9.6%.

Particularly strong considering the worldwide economic recession that is underway.

These results were driven by exceptional results across all merchandise categories.

New hardware sales grew 13% driven by Nintendo's Wii and Microsoft xbox 360.

Software sales grew 23%.

With top titles such as Call of Duty, World at War, Gears of War 2 and Wii Fit leading the way.

Finally, used sales grew 31% during the holiday quarter as customers traded in games and record amounts to buy the newly released titles.

Net earnings for the quarter were 232.3 million, increasing 22% over the prior year net earnings of 189.8 million.

Diluted earnings per share for the quarter were $1.39 and included merchant-related income of $0.05 per share related to currency hedging on the Microsoft acquisition -- excuse me, on the Micro Mania acquisition.

Fourth quarter EPS was at the high end of our previously released guidance.

Gross margins increased by 10 basis points as products mix shifted from low margin hardware sales to higher margin new and used software sales.

This positive mix shift was partially offset by lower margins on new software and used products due primarily to the success of our value messaging and promotions during the holiday period.

In addition, SG&A expenses leveraged by ten basis points allowing operating margins, excluding merger related income, to expand from 10.2% in the prior year quarter to 10.5% this year.

GameStop sales for the full fiscal year 2008 increased 24% to over 8.8 billion.

With full year comparable store sales increasing 12.3%.

Operating margins expanded from 7.1%, to 7.7% with 35% growth in operating earnings.

Net earnings for the year grew 38% to 398.3 million including 4.4 million of debt retirement cost and merger related expenses.

Diluted earnings per share for fiscal 2008 were $2.38, including $0.02 per share of debt retirement cost and merger related expenses, which represented 36% EPS growth for the fiscal year.

Our balance sheet remains strong with over 575 million in cash at the end of the year with total senior debt reduced to 55 million over the course of 2008.

Inventories increased 34% from the prior year with the acquisition of Micro Mania accounting for approximately one-third of the increase and remaining increase consistent with sales growth.

This morning, we also issued initial guidance for the first quarter of fiscal 2009, and reiterated guidance for the full fiscal year.

Based on a strong game line up, historical tie ratios and continuing growth of the hardware installed base, we expect full year 2009 sales to increase between 10% and 12% with comparable store sales increasing between 4% and 6%.

We believe the US video game industry will continue to grow at a rapid pace with similar hardware units sold in 2009 as in 2008.

And a new video game software growth rate of somewhere between 5% and 10% for the year.

Based on these assumptions, we currently expect dilute earnings per share for fiscal 2009 to range from $2.83 to $2.93 representing strong EPS growth of between 18% and 22%.

At the mid point of our guidance, operating margins are expected to improve by 50 basis points to 8.2% with approximately 70 to 80 basis points coming from gross margin improvements, offset by approximately 20 to 30 basis points from increases in SG&A expenses.

Depreciation should range from 153 million to 155 million, with net interest expense in the 47 million to 49 million range.

Finally, our effective tax rate for fiscal 2009 is expected to be between 36%, and 37%.

As Dan mentioned earlier, the first quarter of last year had three blockbuster titles, which resulted in a 27% comp sales increase and EPS growth of 147%.

Despite these tough comparisons for the Q1 2009, we are expecting comparable store sales of between flat and plus 2% with diluted earnings per share ranging from $0.40 to 42% -- $0.42.

And EPS growth rate of 5% to 10%.

In addition to the momentum from the increased hardware installed base, the first quarter is expected to be driven by the launch of Nintendo DSi and several great titles, including Resident Evil 5 Street Fighter 4 from Capcon and Halo Wars from Microsoft.

With that, I will turn it over to the moderator for questions.

Thank you.

(Operator Instructions).

We will take our first question from Bill Armstrong from CL King and Associates.

Good morning.

Last couple of days there has been a lot of buzz about this new online product that provides games on demand or will anyways, as proposed and speculation is that at some point this might eliminate the need for consoles and disks.

I am just wondering if you looked at this at all and what your initial impressions may be.

Hi, Bill.

This is Dan Dematteo.

Yes, we looked at it this week.

First of all, I will say that I'm no technical expert.

But as I understand it, this cloud computing for games has been tried before.

Internet choke points and technical issues caused it to fail.

Also, an unnamed very large company has been working on compression techniques like this for many many years, to no avail.

Again, I'm not a technical expert but building a network that thousands of gamers can play simultaneously through the internet with satisfactory speed will be a need to be proven as technically viable.

I am sure you can get something to work well in a lab.

But getting it out there into reality is a different thing.

While we are not sure.

I just say there is a lot of technical challenges to that working.

Okay.

What are your expectations for the DSi that will soon be launched?

Tony, do you want to answer that?

We expect it to be very strong.

We are very encouraged by our reservations, which are significantly ahead of the reservations for the DS, its predecessor.

We are also very pleased with the level of supply that Nintendo will have for our launch.

So we are very excited for the launch and expected to exceed our expectations that we originally have for it.

Great.

Just one housekeeping.

Could you go through your for Q4 the number of store openings and closings and the final number of acquired stores for Q4?

We opened 577 stores in Q4.

And we closed -- I'm sorry we opened 476 stores and closed three and of those 476 stores that we opened, 328 were Micromania purchases.

328.

Finished with 6207.

That is correct.

Yes.

Thank you.

We will take our next question from Tony Gikas with Piper Jaffray.

Hi.

Good morning, guys.

A couple of questions, as well.

Dave, I think you said that interest expense for the year was expected in the range of -- did you say 47 to 49 million?

If so, could you elaborate what is driving that a little higher than what we expected.

Number two, what is the new store opportunity over the course of the next few years?

Where do you see the business going over the next few years.

And then, the third question I have is, the gross margin during the quarter on used hardware and other, came in a little below, slightly below my expectation, is that -- how do we model that going forward?

I can take the first and the last one.

Interest expense range of 47 to 49 million, as you're well aware we had somewhere I believe it was 39 million in 2008.

However, we had about 11 million of interest income, as you're very well aware interest rates are at zero.

So we are making no money on our interest or on our cash.

So 48 million is basically the interest on our debt to 550 million that's outstanding.

That's the difference in interest expense 2009 versus 2008.

The margins on the used and the new software, in the fourth quarter, as I said in my script, they were slightly lower than the prior year due to promotional activity that we did during the holiday season to drive sales.

As you recall, we are still obviously in a very difficult retail environment.

We use some of those promotions top drive traffic and it worked well.

So those margin rates should -- going forward.

They were a result of promotions during the holiday period.

Tony, this is Dan.

I will take the new store question in the US and then Dick will answer the international part of that.

First of all, our stores here in the US continue to perform exceptionally well.

Exceptionally well.

So that being said, we said we would open 200 this year, that's down from what we did last year.

That's pretty much in line, though, with a lot of centers that we were going to be built that aren't going to be built.

So we see 200 a year possible for the next several years in the United States or other 800 to 1000 stores.

Dick, if you want to talk international.

The same thing is generally internationally.

There has been some slow down in the amount of centers that are being built.

Some of them have been put on hold.

Not a phenomenal amount, but we are seeing the same thing internationally.

That actually gives us an opportunity, however.

We are pretty confident opening a large level of quality stores this year because what is happening is that many of the international malls have a higher occupancy rate than generally in the US.

So projects that we desired to get in to that were not new but existing were very difficult.

What we are finding now is that more and more space is opening up and actually at better rental terms.

So while the new malls that are being built are somewhat pulled back, the existing malls are giving us an incremental opportunity and as I said, generally better rental terms and at term as well.

We feel confident in the amount that we are forecasting.

Probably, a larger question is do we see continued growth in this area.

The answer is yes, absolutely.

This is not a one year growth vision that we have.

We see continued operating growth in this area for a number of years.

Are there many new store -- are there many acquisition opportunities on a international basis and are you interested in doing anything of size?

There are a number of -- of course we don't comment on the specifics but there are a number of acquisition opportunities, they tend to be basically of the real estate variety.

Where a chain with size that fits up well with us is not doing well, is desirous of getting out of the business.

We will look at all of those on a case by case basis.

Of size, that's kind of beauty in the eyes of the beholder.

Let me just say that we retain a very aggressive posture towards growing our business and as you know, we have the capital to grow.

So we are very open to any opportunity.

Okay.

Thank you, guys, Great job.

Thanks.

We will take your next question from Dave Magee with Suntrust Robinson Humphrey.

Hi.

Good morning, everybody.

Quick question.

One, based on titles that have been announced or those that haven't been announced yet, how are you feeling about what you are seeing in the second half release schedule, versus what you knew a month or so ago.

Is it becoming clear at this point in time.

Tony, do you want to take that?

Yes, we definitely see there are strong titles that we are have take a look at.

Some of them have been announced.

Some have not been announced.

We are excited about the second half.

We obviously have a difficult rollover, that we are looking at.

But we clearly see that will are some strong titles that we have seen out there including Halo 3, next installment of that as well.

So we are looking forward to that.

We have seen some titles that are definitely exciting.

What are you seeing with regard to Amazon pricing thus far in terms of solicitation for product.

Are you impressed either way by their pricing thus far?

Not impressed by their pricing.

They seem to be following us, if anything.

As I mentioned earlier, we do not see that being successful.

We tried it ourselves.

If somebody were willing to wait for cash, they might as well sell peer to peer on EBay or Amazon and get more money rather than trade in value.

Thanks.

Last question with regard to the hardware sell through for the sector, that would be another good year, good things for software next year.

What does it take with regards to price cuts this year to make that happen.

Are you being, somewhat conservative in terms of anticipation of hardware price cuts or significant price continues.

What do you think has to happen there.

I think we are being fairly conservative in our assumption on what price cuts will take place.

Although none of this is confirmed in the budgeting process.

We put in a price cut for PS2 to $99, which we to every year.

We will see if it happens this year or not.

We are looking for potentially a price cut for PS3 after we saw the price cut on XBox last year.

That's I think we have been very conservative in putting the price cuts and yet we still are looking at between 35 and 36 million hardware units in the US.

Also, don't forget we did have knowledge prior about the DSi, coming out too and we think that's going to really drive growth in that category.

David I would also point out, this is Dick, that the numbers that we are talking about, this makes, will make the third straight year of numbers in that record category, 34 million which went to the 35 and now we are talking about something in the 36.

Cumulatively over the three years, we never seen so much hardware go out in to the marketplace.

When you're 100% right that bodes extremely well for us downstream.

Thanks a lot.

Next question from Ed Williams with BMO Capital Markets.

Good morning, everyone.

This is Tom Andrews standing in for Edward.

One housekeeping question.

I think you said in you recall prepared remarks that depreciation expense would be was that 153 to 154 for the year.

153 to 155.

Okay.

Of the two hundred or so stores you plan to open in Europe are those weighted towards any particular countries?

Yes.

They will be wherever the opportunities seem to be the most significant.

Of course, we will get the weight and generally speaking that those will be in the larger countries, as you would imagine.

I will correct not just in Europe, internationally 200 stores, that will include Canada and Australia.

Two other questions.

As far as the DSi, are you getting kind of an allocation that is consistent with what you had in the past or you know is there any variance there.

Can you tell us approximately what do you think your share is for each of the major software categories PC consell and hand-held?

I will handle the DSi question first.

We are very excited and comfortable with the allocation we are receiving from Nintendo.

We think they done a very good job of having supply to meet demand for the product.

We are very excited and do not expect to have any shortages in the launch phase of this product.

David, you can comment --

On the market share.

We never given out that much detail on our market share.

As Dan said in his opening remarks, we did gain significant market share on gains in the fourth quarter based on the mpd data.

But other than that, we are reluctant to give out too much detail on that.

Great.

Thank you.

If you have time for two more questions, we will take our next question from Arvind Bhatia with Sterne Agee.

Good morning.

Quickly on the hardware side given your unit assumptions and the pricing assumptions you have, what would that translate in terms of dollar growth.

That's the first question.

Then second, one of the things we hear from investors in terms of concerns is software pricing.

Wonder if you could give your, how you feel about how pricing is going to hold up this year.

What you are seeing out there right now.

Based on the assumed price cuts we talked about earlier our US hardware forecast is down about 2% in dollars over 2008.

Yet we are increasing units slightly.

On the pricing issue, this is Dan, we have not seen any reluctance of the consumer to spend $59 for the Grade A games, which most games rather that come out on the PS3 and the 360.

As a matter of fact, we have seen consumer acceptance of high price points, $10, $20 and $30 higher than that for exclusive versions, collectors additions if you will and seen acceptance of that $10, $20, $30 price point consistently last year and so far this year.

Great, last question, I think Dave you mentioned last conference call, you expecting the music category to be generally flattish this year.

Given all the new information we have on some of the titles.

Wonder if you could update us on your thinking of the category.

I think we are still thinking it could be flattish, particularly with the unknown of DJ Hero.

We heard some things about it.

Not sure we know pricing yet but it sounds pretty exciting.

In addition to that, we are seeing very very strong demand in our pre-sale reservations for both the Guitar Hero Metallica and the Rock Band Beetles.

So there is a lot of new exciting things coming out in the music genera this year.

So I think it is quite possible we could see flat numbers year-over-year.

Thank you, guys.

We will go next to Collin Sebastian with Lazard Capital Markets.

Good morning.

This the Paul Bebar.

Thank you for taking my question.

Do you expect to continue your value messaging, which you mentioned in passive gross margins in the quarter.

Secondly, could you breakout the comp store sales guidance in the US versus international?

On the value messaging, I think you will find we have been very consistent with our value messaging, quarter over quarter, over the last several years.

In other words, we offer -- value on the buy side, several times a quarter, and we offer value on the sell side several times a quarter.

What you saw in Q4, this year, was an extension of what we normally did primarily because of the type of retail environment that we were in.

To answer that for next year in the fourth quarter, I think would be too soon.

Then on the segment comps as we talked about in the third quarter, Europe is having more difficult time with the global recession than some of the other segments are, for the fourth quarter, Europe had a mid single digit comp while most of the other segments were in the double digits.

So that's pretty much it.

Thank you very much.

Okay.

Okay.

This is Dan.

Again, thank you for spending time with us this morning.

We do believe that video games will continue to hold up well, as well as any category in this recession, and that we are very well positioned to continue to grow share in this category in the united states and worldwide.

Thanks again for attending today.

This does conclude today's conference.

We appreciate your participation and have a good day.