GameStop Corp (GME) 2009 Q4 法說會逐字稿

Good morning welcome to GameStop Corporation's 2009 quarter four and year-end 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'd like to remind you that this call is covered by the safe harbor disclosure contained in the public documents and is 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 call over to Dan DeMatteo, Chief Executive Officer of GameStop Corporation.

Please go ahead, sir.

Good morning and thank you for attending today's GameStop conference call.

With me today are Paul Raines, our Chief Operating Officer, Tony Bartel, our EVP of Merchandising and Marketing, Mike Mauler, our EVP of International, and Rob Lloyd, our Senior VP of Accounting and Acting CFO.

As we reported today, January finished strong and earnings came in at the high end of the range due to better than anticipated software sales.

As a matter of fact, we gained significant share in both January and February as our new software grew single digits compared to double digit declines for the industry and we had a record month in February when we sold almost 50% of the new title releases.

We attribute this market share increase to the model we have developed which continues to resonate with the value conscious consumer.

Rob will give you more details on the 2009 financial wrap up.

And just as an aside about the industry, in 2009, as reported, video game sales declined 9.7% from the prior year.

But, if you back out the music genre out of both years, sales were flat with 2008, the highest record software year ever.

We expect to see growth in both new and used software in 2010 and use continued gaining market share.

Our first quarter should be positive over last year, with releases like Final Fantasy XIII, Heavy Rain and many others.

Paul will give you more color on this quarter and prognosis for the future.

Based on this release schedule we forecast earnings growth between 14% and 18% for the year, and Rob will go over the financial details of 2010.

Now, I would like to address some concerns that have been raised while we were in our quiet period.

The resignation of our CFO will have no impact on the Company.

She left for another opportunity.

There is nothing wrong with our books, or our future outlook.

Rob Lloyd has been with us 14 years and is well-qualified to act in this role.

Next, Red Box is testing video game rentals in some markets.

Video game rental has always been a channel of distribution in the industry, and I see it as a shift from rental stores to machines, if they are successful, and no impact on our sales.

There seems to be concern over our used model.

The recent promotion we had been giving consumers, an incremental 50% for trades, is in line with other promotions we have done in the past, to drive trades, post-holiday when we are low on inventory.

Used USA inventory was down 2%, on a per store basis before we began this offer and now it is up.

We don't expect it to have a meaningful impact on margin rate in Q1.

As an aside, it has worked extremely well and because of our external marketing of the offer, we are seeing consumers trade with us that never had before.

The competition in this used space has diminished with the removal of the trade machines in Best Buy and Wal-Mart and the closure of many Game Crazy stores, which was -- which is part of Hollywood.

And as we discussed last quarter, our margin rates will be impacted by mix, as less mature companies -- countries ramp up their used game penetration.

Rob will discuss this in more detail.

We have been asked why we are continuing to add more stores.

First, we see many opportunities to add stores in markets where we have no presence.

In all but rare circumstances we opened stores to take share from our competitors and not cannibalize our stores.

This has translated to a continuous market share growth.

Returns on these stores are fantastic and they continue to over achieve our financial model.

Paul will give you more on this model.

Now I would like to switch and discuss some strategies that we unveiled last fall at the BMO conference.

Beginning later this quarter we will be testing the marketing of downloadable add-on content and its acquisition right in the retail store.

This project has been worked on with our internal IT team and Microsoft.

We have great expectations for our ability to drive sales of downloadable add-on content for the industry and see it as a meaningful way to participate in digital sales.

In May, we will be testing a new loyalty program that is designed to increase our share of box product sales, increase our knowledge of our customers purchasing preferences and allow us to better serve and recommend products to our consumers today and in the future.

And last year, we announced the acquisition of a browser game publisher, Jolt.

Beginning this month, you will see marketing in our stores to drive traffic to their game, Legends of Zork.

We see this test as another meaningful way we can participate in the growing browser game category and we'll use key learnings from the test to drive traffic to other publishers' browser games.

With that I will turn it over to Rob for a more detailed financial review.

Thank you, Dan.

Good morning, everyone.

The 40th Day, Darksiders, and MAG.

GameStop's fourth quarter new software market share was 140 basis points higher than Q4 2008.

Used product sales increased 8.8% as budget conscious customers continued to utilize our buy/sell/trade model; new hardware sales declined 9.2% during the fourth quarter, largely due to the hardware price cuts as well as shortages on the Sony PS3 and Nintendo Wii.

Gross margins improved 80 basis points, as our product mix shifted from low margin hardware sales to higher margin new and used software sales.

The used software margin rate was flat as margin improvements in the US, due to one fewer promotion during the quarter, were offset by lower margin European used sales, which were a greater percentage of the Company's total used sales.

Looking at select financials for full year 2009, total sales increased 3.1% to $9.08 billion, while comparable store sales decreased 7.9%.

Net earnings were $377.3 million and diluted earnings per share were $2.25, including debt retirement costs of $0.02 per share.

Gross margins improved 100 basis points, as our product mix shift shifted from low margin hardware sales to higher margin used software sales.

SG&A expenses on a per store basis increased 150 basis points, driven primarily by de-leveraging fixed costs, due to the negative same store sales.

Moving to the balance sheet, we ended 2009 with a strong balance sheet, having over $905 million in cash.

Total Company inventory levels decreased 5.8%, on a per store basis year-over-year, and in the US, our average inventory per store is approximately $20,000 lower than at the start of fiscal 2009.

This change is due to inventory management efforts in the light of lower than expected sales.

We have heard concern about a possible buildup in used inventory; in 2009 Company used sales increased 18%, while used inventory per store increased only 13%.

In addition, there is some concern about the price we pay for our used games.

In 2009 game stop paid average price of $7.61 for a used game, so you can see that they have a very low cost basis.

Now, regarding cash flow.

GameStop delivered net cash flow of $327 million in 2009.

As you may recall, in January we announced our $300 million share repurchase plan as part of our 2010 capital allocation plan.

As of today, GameStop has purchased 12,642,200 shares at an average price of $19.56 or $247 million worth of stock.

GameStop is committed to returning excess cash to shareholders going forward, assuming the Company continues to generate cash at current levels.

2009 capital expenditures totaled $164 million, a year-over-year decrease of 11%, mainly from opening fewer stores worldwide, as we opened 388 stores, compared to 674, in 2008.

Net-net, we ended the year with 98 additional stores in the US and 145 internationally.

2010 financial outlook.

We are confident in our ability to deliver a year of top and bottom line growth.

Full year 2010 revenues are projected to grow between 4% and 6%, with comparable store sales ranging from flat to plus 2%.

As a reminder, hardware price points are significantly lower than at this time last year.

The Wii is priced 20% less and the PS3 is 25% less.

This will put significant pressure on our comparable store sales number until we anniversary these price cuts.

We expect the US software market to be flat to up 2%.

Earnings per share for the full year are projected to range from $2.58 to $2.68, representing an EPS growth rate of 14% to 18%.

Based on 2009's EPS of $2.27, which excludes the debt retirement costs.

Operating margins are expected to improve 10 to 20 basis points as we gain 50 basis points of margin improvements offset by increases in SG&A expenses to support our strategic initiatives in digital and loyalty.

We expect used margin rates for the year to be in a range of 46% to 49%.

As the growing immature European used business continues to contribute a greater share of our overall sales mix the Company used margin rate will be impacted.

Our efforts to roll out best practices internationally in used inventory and margin management will continue through 2010.

The 2010 effective tax rate is expected to be between 36% and 37%, depreciation should range from $171 million to $174 million, and net interest expense should range from $39 million to $41 million.

Our 2010, $217 million capital expenditures budget, calls for 400 new store openings; improvements to existing stores in order to improve the customer experience, information systems support, refurbishment upgrades, distribution expansion, and digital and loyalty program development and enhancements.

We expect to end fiscal 2010 with approximately $900 million in cash and expect to generate approximately $600 million in cash flow from operations.

For the first quarter of fiscal 2010, GameStop expects first quarter comparable store sales to range from negative 3% to flat.

Diluted earnings per share are expected to range from $0.46 to $0.48, a 7% to 12% increase, compared to $0.43 excluding debt retirement costs in the prior year quarter.

This forecasted growth comes on top of last year's record first quarter net earnings of $70 million.

Over the first six weeks of the first quarter of 2010, we have been excited by the strength of new releases including BioShock 2, Dante's Inferno, Heavy Rain, Final Fantasy XIII, and Pokemon Heart Gold and Soul Silver, as well as the performance of our used business.

We are still being challenged by Wii and PlayStation 3 hardware shortages.

Now, I will turn it over to Paul for his comments.

Thanks, Rob.

I would now like to some add color to our progress in 2009 and discuss the drivers of sales for the first half.

On the real estate front, Rob noted we added 388 stores in 2009 in the United States and internationally.

As we have pointed out on prior calls, our new store performance continues to be very favorable with the portfolio well exceeding our internal return targets.

Our US returns approached 45% in the first year and 95% by the third year of store operation.

Based on our continued market share gains, we see that our ability to identify voids in markets allows us to bring the GameStop model to more consumers and gain market share from competitors.

We estimate that our 2009 US store openings added significant new product market share.

We've analyzed the financial contribution of all our stores built during the last three years and have found that those stores contributed $0.66 per share in earnings in 2009, making this the best possible investment for our shareholders.

The return on invested capital in our entire portfolio continues to be well above our cost of capital.

Consumers continue to respond to the GameStop ecosystem, we continue to gain share, and our store investments continue to be a productive strategy.

As Dan mentioned, we continue to gain share on titles released in January and February, thanks to our unique title launch model.

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.

Consumers respond to the unparalleled value offered by the buy/sell/trade ecosystem, and we continue to be the destination of choice for the new game buyer.

We have received some questions on DRM and publisher actions to limit resale value of new titles.

Through our years in the used business, we have learned that the secondhand user is a value-oriented consumer.

The average price of a used Xbox game is $20, so we don't believe that a $10 add-on piece of downloadable content is compelling to a used game buyer.

We are encouraging publishers to offer add-on content for new titles at a higher price and then a lower price option for used games.

In fact, publishers can participate in our used business by offering add-on content for the most popular used titles, creating a win-win situation, for publishers, retailers and consumers.

GameStop will also assist in expanding the sales of DLC, as we can market and execute the sale right in our stores to the millions of customers coming through our doors.

For the rest of the first half, we see a strong title lineup.

We believe we are well-positioned to drive high share on new title launches with solid expectations for God of War III, UFC 2010, Super Mario Galaxy 2, and Lost Planet 2, among other titles.

On the hand-held front, we expect a strong launch of DSi XL.

In hardware, we continue to see tightness of supply, but are working with our console manufacturers to accelerate through our supply chain any inventory that becomes available.

In terms of the Sony Move motion controller and Microsoft Project Natal we are optimistic about the opportunity for these devices to transform the gaming experience on these consoles.

We have seen the game play on both technologies and are working closely with the manufacturers to make sure GameStop will be the destination for both.

Title development and product availability for both accessories will be critical for their success.

Dan mentioned the implementation of strategies outlined at the BMO conference in November.

As a reminder, GameStop began a strategic review close to 18 months ago and the resulting investments of that process are beginning to arrive at market in 2010.

Our customers and associates are excited about a loyalty program that will be unique for video game retailing, browser game promotions, and sale of downloadable add-on content in-store.

The key point for you to understand about the evolution of our strategy is that it will allow consumers to discover digital gaming through the most powerful element in this business, a knowledgeable, passionate GameStop associate with unique knowledge of gaming to provide expert advice to the gaming enthusiast.

We have demonstrated in the past that the assisted sales marketing environment in our stores leads to high attachment rates for accessories, magazine subscriptions, strategy guides, and Xbox Live, PlayStation, and Nintendo network point cards.

In fact, if you look at our network point cards, digital game downloads, Hosa and World of Warcraft timecards, we generated $170 million in digital sales in 2009, representing a 55% growth rate over 2008.

Digital content will become a seamless add-on sale when it is recommended by your game advisor and we will eliminate much of the friction that has existed in the digital world.

You will also see the arrival of digital kiosks, known as the interactive gaming guide, in over 1,700 stores that will assist our customers and associates in driving digital sales.

We will also bring the power of our buy/sell/trade model to these digital sales.

In closing, I would like to thank all our GameStop associates in 17 countries for their passionate commitment to the video game consumer during 2009, and now I will open it up for questions.

Thank you.

(Operator Instructions).

We will pause for a moment to allow everyone a chance to signal.

Our first question of the day comes from Sean McGowan from Needham & Company.

Can you talk about the difference between the store openings and any closings you may have and what do you expect the net number to be both US and outside the US this year?

And a quickie on the buy back, do you expect the current authorization to be completed by the end of the first quarter?

Rob, you want to take the second part of the question?

We do expect the buyback to be completed by the end of the first quarter.

Do you want to take it Paul, on the store closings?

Yes, on the 2008, we had 243 net, 380 --

In 2009 --

I realize that.

I wanted to refresh 145 closed.

On the 2010 plan --

Typically, we have about 100 stores.

Closed about 100 stores.

Okay.

So you were talking about the 2010 plan?

Yes, the 2010 plan will probably be roughly like 2009, where I think we closed 98 stores, it will be in that range.

Around 300 net?

Yes.

Thank you very much.

Next, we hear from Mike Hickey with Janco Partners.

Thanks, guys, for taking my questions.

In your Q4, your SG&A per store seemed a little higher than we were expecting.

Can you just comment on that and how you expect that to trend in 2010?

And then, it seems like March is kind of a critical inflection point for the industry, for the market that is, domestically; and it sounds like it's positive.

Do you think it's strong enough to see a positive number for the month?

Rob, you want to take the first question on SG&A?

Sure.

The SG&A in Q4, as we'd mentioned, was a little higher than we'd hoped as a percentage of sales because of the de-leveraging that comes with negative same store sales.

In 2010, we do expect an increase in SG&A, as I mentioned, to offset the increase that we expect in gross margin, and the reason for that is primarily the investments that we are making in our digital and loyalty strategies.

Tony, do you want to take the question on the industry in the month of March?

Yes, that is only based on the strength of the title.

You obviously know the titles, but we are looking at Battlefield Bad Company, Final Fantasy XIII, Pokemon Heart of Gold, and God of War III, that just launched a couple of day ago.

Very strong titles off to a very strong start from our perspective.

We really do believe there is a very good chance we will see positive growth in March and I do agree it's a great inflection point for the industry.

Thanks, guys.

Next we will hear from Anthony Chukumba with BB&T Capital Markets.

This is Eric Cohen filling in for Anthony.

I just had a question on the -- used side.

Your -- online there's a "buy one get one free" when you trade in used.

And you just said the used inventory was now up year-over-year after you did the 50% extra on trade-ins.

I was just wondering if you could clarify that a little?

It's quite common for us to do promotions continuously on the used and especially at the beginning of the year, when we are coming out of holiday with it being low; we vary the promotions over time.

Sometimes you get an extra 20%, if you bring in two games or 30% if you bring in three, et cetera, et cetera.

These are just variations of different marketing schemes we use to encourage consumers to trade in the games they are no longer playing.

Yes, our inventory is now positive, but we will still continue to work on efforts to build our used inventory; as we say, we can never have enough.

Thank you.

Our next question will come from David Magee with SunTrust Robinson Humphrey.

Hi, good morning, guys.

Just a follow-up on that question.

Used inventory was the driver as to why maybe the used sales were at the low point in the fourth quarter and why you expect that number to pick up here in 2010?

Yes, used sales are a function of our used inventory, clearly.

So yes, we didn't have as much used inventory as we probably wanted going in Q4 and that's why we're -- and we came out very, very low.

That's why we are working on rebuilding the inventory at this point.

How important is the Project Natal to your forecast this year?

Tony?

Currently, Project Natal is not included in our forecast, at this point.

But, after seeing both Project Natal as well as Sony Move, we are very excited about the amount of product that it is going to allow us to sell, not only in terms of the actual peripherals themselves, but also in terms of the software that we anticipate will be launched with that as well as both of them will be hardware sellers.

There is no doubt they will be a major part of our industry by the time that the year is done.

At the point we have not -- we don't have enough information to be able to include them in our forecast.

We have not included them in our forecast.

Thank you.

Lastly, why do you think we are still seeing shortages on our hardware side?

What is driving that?

Tony, do you want to answer that.

I'm not exactly sure that I have a total answer; obviously it's a question we ask the platform holders constantly.

I can tell you that we do anticipate we will be in that situation at least with the PS3 for another couple of months unfortunately, because we could sell a lot more hardware than what we have on both that and the Wii platform.

We do believe that the Wii will come in to stock quicker than the PS3, so we do anticipate that that should -- those shortages should abate sometime before the next couple of months.

I don't have clarity as to why there is a shortage, other than, obviously, we had unprecedented demand for that in December and I think we are still scrambling to catch up from the December surge of hardware that occurred.

Thank you and good luck.

Thank you.

We will move on to Ben Schachter with Broadpoint AmTech.

Hey guys.

Congratulations on a nice start to the year.

I have a few questions.

One, when we talk about the loyalty program and downloadable content in store, how can we gate the success of that from the outside?

Are there metrics we can follow, is there anything you are going to be updating us on those?

Second question is on the IGGs, are those going to be transaction enabled, will people be actually to go up to those guides and transact in any way?

Then just a quick question on the MPD data, is there any change in the accuracy of that data for the industry?

Thanks.

Paul, do you want to take the first questions on the loyalty and downloadable content.

Yes, absolutely, Ben.

As far as, "how can you gauge how they are doing," we will be piloting in four markets on the loyalty program, so you will be able actually go to those markets and watch consumers in action and see how they react to the loyalty program.

We will also be piloting DLC in 30 stores in the very near future; we can update you on which stores those are.

I think what will be an important thing for you to do is to make sure you see how the consumer experience is because it's going to be very unique on both of those for anybody in retail.

As far as updating, we will provide updates as we go forward, as we get more and more information.

But I think the big thing for you to see, Ben, is how consumers react and how unique the experience is going to be.

We see a tremendous opportunity with the downloadable content to encourage software developers and publishers to create DLC because we will be able to market it.

Right now, today, it's very difficult to discover find, et cetera, add-on content with the tools available.

With our interactive guide and with our store associates who will be knowledgeable about "what is the great add-on content for Call of Duty," et cetera, et cetera, when consumers come up to the counter to purchase the full version of the game, they will be doing what they always do, which is trying to add-on to the sale.

We think we can move the needle significantly.

I think some day in the future we will be rolling up all of our digital sales and talking about those in total as they are coming from multiple sources; as we mentioned they come from the cards we sell in the store that get used on digital platform.

They also includes digital downloads that come off of our website, gamestop.com.

It will be the DLC sales that we will have in the store, and it will be income that comes from our Jolt Gaming Company as we promote the browser games in the stores.

We really see digital revenues coming from four to five different sources, and, as a matter of fact, we are working on more.

As to the interactive game guide and our future plans for that, clearly it was designed with a credit card swipe included on it.

We currently do not use that.

We see it as an opportunity to further assist the customer along with the expertise of our associates, but clearly we wouldn't rule that out as a future evolution of that program.

As to MPD I see nothing in their change of methodology or the accuracy, from our perspective, that I see nothing taking place there.

The only thing I think they are working on is, along with the rest of the industry, is to evolve to understand the DLC as we are and how to make sure we capture that.

Thanks.

Next, we will hear from Scott Tilghman with Hudson Square Research.

Thanks, good morning.

Wanted to touch on two things, first on the activation codes, was wondering what the initial publisher reaction has been to the conversations you've had with them?

Secondarily to that, if you know, offhand, what percentage of games actually have an online component that could potentially be affected by the activation codes?

The second subject matter, on hardware, obviously, you've provided some guidance for this year, there's expectations that Nintendo will have a refresh of their hand held, probably have an HD Wii out next year.

Wondering if you are expecting refreshes from Sony and Microsoft, as well?

Tony, I'll leave the first question to you.

I'll take the first two questions.

In terms of activation codes, in fact, we just had a contingency get back from destination PlayStation; we just arrived last night.

We talked -- obviously, we talked about all of our major -- with all of our major publishing partners on this area and there is a lot of enthusiasm and excitement for GameStop to be selling DLC in their stores.

The concern that the publishers have is they provide great content, but like Dan said earlier, their biggest opportunity is to have that discovered.

And there's no -- we believe there is no better way to discover it than to have people who are actively using it assist customers who want to know about it and sell that in the stores.

There is a lot of excitement about that.

The relationship with the platform holders is also very good and we are making great strides in that.

We talked about Microsoft.

We believe that a Sony decision will be imminent -- is imminent and we will work with that as well.

In terms of percent of games that offer that, it's relatively small at this point, and in terms of DLC that has been added on.

However, due to the strong online component that is being added to practically every game and given the opportunity that they see ahead of them, what we heard this week is that most publishers are looking to accelerate the percent of games that they develop DLC for; and we are clearly encouraging that trend as we believe that it's great augmentation for the gamer.

On the hardware, obviously the Nintendo [DSi XL] is coming out this month.

So, yes, there is a new Nintendo.

We've heard the rumors like you have on a Nintendo Wii upgrade early next year, but it's just that, a rumor.

We don't have any confirmation on anything there.

We have nothing in our financial plans for anything different, either price change or new upgrade of either the PS3, and/or the 360.

As a matter of fact, I wouldn't expect it.

I think their total focus is on the new ocean detection devices, et cetera.

That's where their focus is this year.

Based on what we've seen on those really practically makes it like a different console of game changers in that regard.

One follow-up if I may, there is certainly within the CE world been a big push towards 3D with 3D TVs now beginning to hit the retailers.

What is your thinking on 3D as it pertains to gaming over the next 18 months?

I think two things.

Again we just talked to the publishers and this is obviously a point of discussion with them.

I think as the adoption curve on 3D TVs accelerates, I think you will see that accelerate as well and as a result, since adoption since availability and adoption is very low, I don't see that as a huge push in 2010.

I do think it will accelerate in 2011, I think the good news is the consoles will be able to accommodate that without a lot of changes and it does not seem to be a huge expense from publisher standpoint to do that.

I think it's an enhanced game play, which we are all for that.

I think we will see that evolve as the adoption curve ramps up on that format.

Great, thank you.

Moving on to Robert Higginbotham with Goldman Sachs.

Thanks for the question.

A couple of things, first on your industry growth outlook, you mentioned that you are looking for a flat to plus 2 software growth for the US, and as you contrast that with what the -- at least the top two major publishers have talked to, being flat to down at least low single digits, what do you think are the differences in your two outlooks?

Essentially, why do you have a more favorable one than those two major publishers?

Thanks.

I think historically Robert this has been the case, and that is they often don't look of games coming from outside the United States.

When they look at their -- when they do their forecast.

And we look at -- Nintendo is going to have some really great games for the Wii this year.

We just talked about Final Fantasy.

That came out.

You have -- Tony, you probably have other big games outside the United States that we have in our forecast that maybe they wouldn't be looking at.

Absolutely, there is definitely, like you talked about, Final Fantasy, Pokemon that we have.

Pokemon, right.

Two of the best games this quarter came from outside the United States.

Super Mario Galaxy is one that's coming in.

So there is --

Metroid.

Metroid will be coming.

There is Significant Super Street Fighter.

There are several additional games, and you are right, I don't think that -- sometimes we can get very US-centric when we look at those forecasts.

Another one if I could, which is to touch on some of the economics around the digital revenue sources.

When you look at the add-on content, can you give us -- that you will be selling in the stores that is -- can you give us a sense of what the average ticket of those items might be?

What the margins might be?

Whether they would be similar to your physical media software margins?

And also if you could talk in any way to the economics around the point cards?

I think that would be helpful.

Thanks.

I think in terms of the average price point, today we know it's very low.

We think that that's -- in fact, that is part of the reason why we want to get into it.

We anticipate that it's going to be around anywhere from $5 to $15, plus it will be the average selling price of what we sell.

So we think it will probably average around the $10 price point, especially as we have better and better content.

I think as we increase discoverability I think what you are going to see is that there will be an increase in the sales price of that game as well.

In terms of margins, that is something that we haven't gotten all of the details worked out on that, but we would anticipate it would be similar.

Robert, two things -- this is Paul -- that I can add to that.

One is the number we quoted in here about digital revenues just from last year, that is a very global business for us and our ability to launch and market globally will be very meaningful in that space.

Number two is, remember that as you build models and as publisher of building models, they have the opportunity to attach DLC to both new and also used titles sold at GameStop.

If you think about the attach rate to the most popular used titles of a $5 to $10 mat pack, it could be very meaningful.

Very helpful.

Thank you.

Take two more questions.

We will hear from Edward Williams with BMO Capital Markets.

Good morning.

A couple of quick questions for you.

First of all, can you let us know what the share base should be for the first quarter?

Then, also I want to be clear, you are not including Move in your guidance as well as Natal?

Then, if you could comment a little bit about the game download business from the GameStop website?

What sort of growth we are seeing in that or and if you can give us some color as to the scale of it?

Finally, with the loyalty program, when does it kickoff in the US?

If you can describe, Paul, this would probably be for you, describe how the program has performed in France, because I assume it's going to be based on the Micromania program?

And/or to the extent that it is different from the Micromania program, what some of the key differences are?

Thanks, Ed.

That was five questions, by the way.

It was a, b, c, d, and e.

Rob, you want to take the share base.

You should use $155 million.

Okay.

Tony, do you want to take the question on the Sony?

Add on?

On the add-on, we --

No, the Move.

The Move is also not in our forecast, nor is Natal.

On the growth in terms of the downloaded games on our website, that more than doubled this last year; we are seeing that same trend and we are seeing very healthy trend in our online sales, as well.

Paul do you want to take the question on the loyalty.

It's a good question, Ed.

Loyalty programs, so Micromania's had the Megacard program for many, many years; it's probably the most successful video game loyalty program in existence.

If you look at Micromania, as we did early on, 86% of their transactions have a Megacard ID associated with them.

Megacard is not only a loyalty program, it becomes a launch device and vehicle, it becomes marketing vehicle; even helps you decide where to put new stores as a real estate vehicle.

We believe that the loyalty program at Micromania drove some of the highest sales per store in Europe that we see.

We think it's a very effective program and that's the base for what we added to our existing loyalty program here at the edge.

How will ours be different?

Our program will build heavily on what you see at Micromania today, but it will add significant pieces.

Our marketing team has done extensive surveys of the kinds of rewards consumers are looking for.

If you recall on one of our previous calls or one of our conferences, we talked about the fact that we did an internet survey and had to shut down the response engine because there was so much interest in a GameStop loyalty program.

Ours will have different rewards.

It won't be purely a mark down program that gives you discounts once you reach a certain threshold.

It will also have unique rewards like tickets to shows and early entrants to a midnight launch, et cetera.

We think it builds on what we have for Micromania, but it really adds a lot of sophisticated consumer insights to monetize that GameStop consumer.

It brings unique rewards that only GameStop can bring you, so we like our plan on that.

Okay.

When will you be testing it in those four markets?

It will be in May.

In May, we will be in four markets and we can provide you the details on that.

The name of the game is to drive share of wallet.

Because we've got great share, but we're not getting everyone's -- we're not getting all of 100% of the heavy consumer spots.

Okay.

Great, thank you very much, guys.

Final question will come from Arvind Bhatia with Stern Agee.

Thank you.

Just wanted to ask you a question on inventory again.

Rob, this might be for you.

Should we expect this trend of declining inventory per store to continue into the first and second quarters of this year?

And, would you guys be willing to share, provide some color on the mix of inventory?

Can you tell us what percentage of your overall inventory coming out of Christmas might have been used?

I know you haven't disclosed that in the past, but would you be willing to share that information with us?

Arvind, we are not in a position to share the breakdown of what the inventory is.

I will tell you, on your first question that the inventory levels move around quarter to quarter just based upon where we are in the year and can move around based upon what titles are coming at the beginning of the next quarter.

You may recall in the fourth quarter, or the beginning of the fourth quarter, we had Call of Duty and as a result, our inventory levels at the end of the third quarter were high, because we had already received the product.

At this point, we would be hesitant to forecast what inventory levels might be.

Let me try it another way.

On the new product side, can you give us color on how many weeks of inventory you would typically have on hand, whether it's hardware or software?

Again that's going to move around from time to time and quarter to quarter based upon the business and titles and the other things we expect.

Great, thank you, guys.

Thank you all for attending this morning.

As you can see, we are very excited about growth in 2010 and the implementation of our initiatives that will make us the destination of choice for all game consumers.

Thank you very much.

This does conclude today's conference.

Thank you for your participation.