GameStop Corp (GME) 2009 Q2 法說會逐字稿

Good morning and welcome to GameStop Corporation's second quarter 2009 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 Mr.

Dan DeMatteo, Chief Executive Officer of GameStop Corporation.

Please go ahead, sir.

Thank you, moderator, and welcome to GameStop's second quarter conference call.

With me today are Paul Raines, our COO; David Carlson, our EVP and CFO; and Tony Bartel, our EVP of Merchandising and Marketing.

This morning we released our second quarter results and a reforecast for the back half of the year.

As our release indicates a lack of compelling new releases, a slowdown in the sale of new consoles, and a general lack of traffic diminished sales compared to last year's record results for us and the industry.

But as you can see from our results, we greatly exceeded the industry growth in the United States and picked up market share gains in all categories.

In order to drive sales of used games in this environment, we were very promotional and increased used sales 19% over last year, albeit at a lower margin rate.

Also the cash strapped consumer used trades as currency at a record pace, so our used inventory going into the back half is excellent.

Lastly, we opened 110 stores worldwide, towards our goal of approximately 400 for the year that as a group are performing well above expectations.

We reforecast our third and fourth quarter sales and earnings.

While we expect to grow earnings over last year, uncertainty over the economy and the timing of its recovery and some key title slippages, such as BioShock 2 and StarCraft II have affected our outlook.

Paul will give you more color on the back half later.

While we are not in a position to give guidance for 2010, it is shaping up to be a growth year for us and the industry.

Hopefully the economy will rebound and given our market share gains we will be well positioned to capitalize on that.

Historically at this point in the cycle we feel sales growth in both new and used games which translate to higher earnings.

Also, the recently announced Sony price cuts and most likely others should get the installed base growing again.

And we now know of about 10 major titles that are scheduled for 2010.

Lastly, new initiatives to drive sales to our stores, like our interactive gaming guide will begin to roll out in the quarter, thus allowing consumers to view content before they buy, which should translate to increased sales.

With that I will turn it over to David for a more in-depth financial review, and then Paul will discuss in more detail product that will drive sales the rest of the year.

David.

Thanks, Dan.

And good morning.

Before the market opened today we released our sales and earnings results for the second quarter of fiscal 2009.

GameStop sales for the second quarter decreased 4% to $1.74 billion as compared to $1.8 billion in the prior fiscal quarter.

Comparable store sales for the second quarter declined 14.1% due to weak consumer traffic worldwide, a slowdown in hardware unit sell-through, and a lack of new game titles for the summer quarter.

New hardware sales declined 21% during the second quarter, with some sell-through strength coming from the $199 Xbox 360 systems and the new Nintendo DSi handheld.

New software sales declined only 11% indicating GameStop picked up a significant amount of market share as compared to NPD reported declines.

Top titles for the quarter included UFC 2009, Prototype, Fight Night Round 4, NCAA Football 2010, and Ghostbusters.

Used product sales increased a strong 19% as lack of new game releases and significant promotions converted budget conscious customers to our buy-sell-trade model.

Net earnings for the quarter were $38.7 million decreasing 32% from the prior year quarter's net earnings of $57.2 million.

Diluted earnings per share for the quarter were $0.23.

Gross margins increased by 170 basis points as product mix shifted from low margin hardware sales to higher margin software sales.

This positive mix shift was augmented by exceptional control of inventory shrinkage.

Category margins were fairly consistent with the prior year other than the used product category, which decreased to 45.8% as we were highly promotional during the quarter in an effort to drive traffic to our stores.

SG&A expenses on a per-store basis decreased 3% as we reined in costs in response to slower than anticipated traffic.

Our balance sheet remains strong with over $190 million in cash at the end of the quarter.

We were also able to maintain tight control over our inventories during the second quarter with average store inventories declining 1% on a 4% sales decrease.

This morning we also issued initial guidance for the second half of fiscal 2009 and lower EPS guidance for the full fiscal year.

For the third quarter of fiscal 2009, we are now projecting comparable store sales to decline between 6% and 11%.

We continue to see weakness in hardware unit sell-through and expect that total hardware dollars will decrease in both the third and fourth quarters compared to the prior year due to weakness in consumer spending and later than anticipated hardware price cuts.

These negative hardware dollars are the main contributor to the negative comparable store sales we are projecting.

Despite continued slow consumer traffic in the first two weeks of August we are projecting positive new software growth for the third quarter with a strong lineup of new titles, while used product sales are projected to grow similar to what we saw in the second quarter.

Based upon these assumptions, we are projecting earnings per share to range from $0.27 to $0.33 in the third quarter as compared to $0.28 per share in the prior year quarter.

For the fourth quarter of fiscal 2009 we are projecting comparable store sales to decline between 1 and 7%.

Consumer weakness related to the recession and new title slippage into 2010 has caused us to be more cautious in our outlook for the holiday period.

We project earnings per share to range from $1.47 to $1.65 as compared to $1.39 in the prior year fiscal quarter.

Full-year 2009 comparable store sales are now projected to decline between 4 and 8% with earnings per share for the full year ranging from $2.40 to $2.64, representing EPS growth of flat to plus 10%.

With that I will turn it over to Paul for his comments.

Thanks, David.

I would now like to discuss the drivers of sales for the second half.

Although we have seen some title slippage, we still see a strong fall lineup led by Call of Duty--Modern Warfare 2, Assassin's Creed 2 and Halo 3: ODST.

And expect that Modern Warfare 2 could be the best selling title of all time.

We also see a better title lineup for Wii over last year, including a new Super Mario Brothers title.

In addition, the anticipated price reductions for consoles will drive demand and expect -- and expand the installed base for our core audience.

In terms of our marketing efforts we have expanded our successful go big strategy to maximize these title launches with integrated customer exclusives, in-store launch events, public relations and media buys.

We have also planned compelling offers to drive the use of trade currency and increase our day one market share on these new title launches.

As David mentioned, our decline in used margins last quarter related directly to promotional activity.

It is not the new norm.

In fact, our used margin is back to the historical range of 48 to 50% quarter to date.

In terms of other merchandising investments, we will launch e-commerce websites in Canada, Australia, New Zealand, and Italy in the back half to add to our domestic GameStop.com web business.

As Dan mentioned he have also begun the rollout of interactive game guides, an interactive digital kiosk that is driving reservation and customer excitement in our test stores.

Our goal is to roll out the interactives to over 1,750 stores by early 2010.

In terms of operations, we continue to be better prepared than ever for our holiday season.

Our reductions in turnover have given us the most tenured store managers in our history allowing us to execute at a high level and provide great customer service.

In addition, we continue to invest in upgrades for our stores to reduce tasking and add customer facing hours.

Our real estate process is yielding great results with our first and second year store portfolio performing well above our pro forma targets.

We are also seeing efficiencies in our lease renewal process through a structured approach to negotiation which is yielding lower rents.

Lastly, our market share gains throughout this year position us well as the seasonal traffic increase occurs.

We look forward to a great back half of 2009.

With that I would like to turn it over to the moderator for questions and answers.

(Operator Instructions) And we'll take our first question from [Matt] Hickey with Janco Partners.

Thanks for taking my questions.

You guys have started a digital initiative and you've hired Chris Petrovic.

I was curious if you could give some more color on what you guys are doing there?

Then on the used side, Paul, I think you said that the used margin quarter to date is back up to the 48 to 50% range.

And I'm curious, on the low end of your guidance for Q3 if you're assuming a sub 48% gross margin from used?

Two questions here.

Tony Bartel will take the first one.

Tony.

Chris is obviously a seasoned veteran in terms of the digital media space, and we understand that the gaming arena is growing in new areas, and much of that growth is being driven on the West Coast, so we opened an office with Chris leading that office.

We wanted to be close to the growth and innovation and investment that is happening in this digital space.

Our primary focus, and Chris' primary focus, is going to be on using our vast distribution and education channel that we have in brick and mortar to become the world's largest digital aggregator.

Okay, thanks, Tony.

And then Dave, do you want to take the question on the margin rate.

Sure.

Our third quarter guidance actually has our used margins at the [40] to 50% at the high end, and it does assume that we use some promotional activities to drive the used business at the low end.

So as always, our used business runs in the 48 to 50%, but if we decide that we need to drive traffic, it's a very good traffic driver, and so we could use it in the third quarter, but we haven't made that decision yet.

Thanks, guys.

And we'll take our next question from David Magee with SunTrust Robinson Humphrey.

Good morning.

Good morning.

Could you talk a little bit about the international performance?

That's question one.

And then the second question I have is just what are your thoughts about the impact of other digital downloads for smartphones, whether games or apps, whether that's having some kind of a quiet impact on the second that we haven't really measured yet?

Then just thirdly, your assumption as far as additional hardware price cuts over the balance of the year -- numbers.

Thanks, David.

Give Dave the first question on international performance.

Yes, for the second quarter our comps were very, very consistent across all of our segments from the US to Australia to Canada to Europe.

They all comp'ed very, very similarly.

I'll take the second one on the smartphones.

I don't know that I would have any way of really measuring impact on our business by people gaming on their smartphones.

I just don't know that we would.

I think if it had any impact it might be on the handheld category, but again, I have no way of being able to measure that.

On the price cuts, historically what has happened is that the other manufacturers follow the others with a price reduction.

We assume in our forecast, sometime in Q3, that that will occur.

But, we don't have any data on that, though.

But we have an assumption it will.

Great, thank you, Dan.

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

Good morning.

Couple questions.

First of all, just to follow up on Matt's question, with regard to used gross margins, can you give us some color as to the balance of the year what you're looking for from there?

Secondly, can you clarify how much of the hardware impact is weighing on comps in the balance of the year?

And then thirdly, if you can just give us an idea as to what your thoughts are with regards to the use of cash flow and the free cash flow that you're producing this year?

Then the last question is, if you look at the visibility for calendar 2010, relative to what you typically know at this point in time, how is calendar 2010 shaping up in that regard?

Sure.

Those are a lot of good questions.

David, if would you take the first one -- first two, if you would, on the used gross margin and the use of cash.

The used gross margin, as I said a little bit earlier, we're looking at our used gross margins to be in the 48 to 50 range, and both in the third and fourth quarters, if we decide to use the used business as a promotional tool to drive traffic, it would be lower than that.

But again, we have not made the decision either way whether we will or will not.

Use of cash, as we said in the press release, we're looking for free cash flow this year between 400 million and $425 million.

We've already committed $100 million of that to debt buyback, and at the end of the year, when we actually generate most of that cash flow, obviously, our Board will be making a decision of what we will do with that cash.

But at this point, we do have $100 million of debt buyback authorized.

And then on your other two questions, the effect on the back half on hardware price reductions on comps, a quick back of the envelope I just did, it's somewhere in the 5 to 7% range it would be.

We've got 25% declines roughly, and the back half of the year has hardware as a higher percentage.

So I'd say it's in the minus 5 to minus 7% range.

Then lastly, on 2010, I never remember a time when we had as much knowledge this far in advance of titles that are going to be releasing into the following year.

Many of these titles have moved either because of -- they just weren't complete, and not ready, which I believe probably are the majority, or some of them may have moved just because of the competition in the back half of the year, and maybe the economy.

So, Tony, do you want to add to that?

Sure, I'll just articulate some of the titles for you that we think are going to be very strong in 2010.

You have Halo Reach coming out, Final Fantasy XIII, Gran Turismo 5, God of War III, Metal Gear Solid, Super Mario Galaxy 2, BioShock 2, Splinter Cell: Conviction, StarCraft II.

They're great titles, close to a dozen great titles that we have that will impact us favorably and impact the entire industry favorably in 2010.

I would expect that given this title lineup that the software industry will grow.

I've been thinking about it without, again, without defining it a lot, grow similar in 2010 like it did in 2008.

Okay, great, thank you.

And we'll take our next question from Colin Sebastian with Lazard.

Thanks very much for taking my questions.

I have a couple.

I guess first of all, could you comment on preorder levels for some of this year's key second half titles?

And I guess put it in some context the visibility you have thus far on at least the three or four that you mentioned.

Yes, Tony, I'll pass that to you.

Yes, we see very robust reservations on the titles that we talked about, particularly as Dan shared with you earlier.

We believe that Modern Warfare 2 has a chance to be the largest title of all times, and obviously we're basing that on the reservation activity that we are seeing in our stores.

So we continue to see strong reservation activity.

We did on Madden.

We continue to see it on Modern Warfare 2, Assassin's Creed 2.

Our reservation history is actually reflecting the optimism that we feel in the back half of the year.

Also in the software side, in the music genre, given the significant contribution of that segment over the past couple of years at high as ASPs, I wonder what your perspective is there on that genre this year on a year-over-year basis?

Tony.

I think the ASPs will most likely be down because there's going to be -- there will probably be a lot of activity both -- just in the game space, and obviously, as you know, we have some very high dollar accessories coming out that will also impact us favorably, but we do believe that with four very strong titles that are coming out, we do think there's going to be activity, but we do not believe that there are going to be the boxes that -- the amount of boxes that were in our stores last year, so we think that a lot of unit sales will be driven, but the ASPs will definitely be down as there's less plastic going out and more games.

Then on the hardware side, Sony's plans for the PSP Go, it looks like you're carrying it, but given the software distribution model, I'm curious, are you able to get higher margins there on the hardware unit sales?

Actually, on the PSP Go, we are excited to be carrying that for a couple of reasons.

We do participate in the downstream revenue via both POS cards and through points cards.

The good news about that is that we hold a very dominant market position in both of those categories as it relates to digital downloaded games.

So we're very excited about selling the PSP Go.

We're very excited to be reserving it.

Reserves are picking up on the game.

We have a very clear roadmap as to how we can drive profitability on the sale of games.

It will also be a strong contributor to our trade-in process where you have people that will have UMD games that will no longer work on that platform that will fuel additional currency for GameStop.

Okay.

Then just lastly, if I may, Dave, following up on the margin questions, I guess on the used, I think you've been pretty clear on that.

On the SG&A on the operating expenses, I wonder if you could talk about how much of that is fixed versus variable and how much of getting to your full-year profit number is with respect to any leverage on those numbers?

As I had said in my comments, we actually did reduce our per store SG&A by about 3%.

That being said, as you point out correctly, we do have a fairly hefty fixed cost structure from our occupancy to our store manager salaries to our telephone and utilities.

We need to pay those whether we have sales or not.

So that's why you will never see that kind of leverage if you have a negative 14% comp you can't bring your SG&A down that much on a per store basis.

So going forward, no, I don't believe that we'll have a lot of SG&A leverage during the second half.

It will probably be flat to slightly negative.

Okay, thanks very much.

And we'll take our next question from Ben Schachter with Broadpoint AmTech.

Just a quick follow up on the music genre question, I was wondering if you could help quantify what you think that category as a whole will do year over year in terms of dollars?

And then any qualitative discussion around how pricing of those boxes is impacting sales and anything specifically you might want to add on the Beatles game which comes out very soon?

Thanks.

In terms of quantifying, we have not quantified that from a dollar perspective.

Obviously the Beatles is testing a new price point that we've seen, and we are ordering according to our reservations, but clearly you are going to sell less at the $250 price point than you are at the $189 price point.

And so you see that, and there's obviously been a lot of discounting in category on the old plastic that is there as well.

So I guess that's what I would say to answer that question.

And any comments on the other games that are coming out this year that are at $100 plus price point?

The non music stuff?

We have historically had a very -- done very well on the -- I'm assuming you're talking about the collector's editions.

Collector editions and also the Ride, Tony Hawk game.

Absolutely.

We've historically done very well on the collector's edition.

Obviously it depends on ensuring that we have great product in there that's a great value to the customer, and we have seen that in the past, and we continue to see that here, so we feel like the market will support those price points provided that the value is there for the consumer, and so far we've been working very closely with the publishers and do believe that the value is there.

So we anticipate we will have a comparable sell and a comparable market share on those higher dollar SKUs that we have in the past.

You might want to comment on what you're seeing on the Call of Duty, really premium edition Call of Duty reservations.

Absolutely.

We have very strong reservations on the Call of Duty premium edition, and that's obviously a price point.

There's a lot of excitement around the goggles on that.

So we have a very strong demand that we are seeing in our reservations.

Once that was announced we had a lot of reservations move from the base version to the premium version which is a very good sign.

Thanks and good luck with the back half.

It appears that we have time for one more question.

We'll take that from Anthony Chukumba with FTN Equity Capital Markets.

Just one question and one follow up.

As you think about the reduction in your guidance, the full-year guidance, is there any way you can sort of break that down, even just sort of directionally between sort of the weak macro environment as opposed to the later than expected console price cuts as opposed to some of the slippage with the different titles as you mentioned?

Dave, would you like to take that, please?

It definitely is a piece of both.

The weak consumer trends that we've seen, as well as some of the title slippages, and in addition to that what we've seen with hardware sell through, I think it's hard to say, is it 50/50, or is it 25/75%, but it's definitely all three pieces of it.

Okay, that's a fair answer.

And then the only other question that I had, you've indicated that the reduction in your used video game gross margin is due to increased promotional activity.

That certainly makes sense.

But have you seen any impact, either from a profitability perspective, used game trading perspective or a used game sale perspective from some of the new entrants into the used game business, such as Amazon and Best Buy and Wal-Mart testing used game trade-ins?

That's a good question, Anthony.

I'll have Paul answer that.

Anthony, as you can imagine, we follow very closely every single location where competitors are involved in trades.

As we said before, it's a fairly complex business from the pricing point of view, from the immediacy point of view.

As well as from pawn shop and clients.

So on all of these latest competitor tests we have not really seen any meaningful impact from those.

Certainly we will continue to watch that and we just continue to try to get better and better at using that currency but have not seen any impact yet competitively from those.

Thanks, guys.

Good luck on the back half of this year.

Thank you.

And at this time I would like to turn the conference back over to Mr.

DeMatteo for any additional comments.

Okay, thank you for attending today, and we look very forward to a better back half, and hopefully a recovering economy, and all of you that follow this industry, I would like you to begin thinking in perspective of 2010 how it's going to look like, what it's going to look like, and I think if you look at the model of 2008, you are going to find a very similar set of circumstances in 2010 that will drive the business bigger for both us and the entire industry.

Thank you for attending.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.