GameStop Corp (GME) 2019 Q3 法說會逐字稿

Welcome to GameStop's Third Quarter 2019 Earnings Call.

This call is being recorded and will be made available.

I would now like to turn the call over to Eric Cerny, Investor Relations.

Please go ahead.

Thank you and welcome to GameStop's Third Quarter Fiscal 2019 Earnings Conference Call.

This call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

Any such statements should be considered in conjunction with the cautionary statements and the safe harbor statement in the earnings release and risk factors discussed in reports filed with the SEC.

GameStop assumes no oblation to update any of these forward-looking statements or information.

A reconciliation and other information regarding non-GAAP financial measures discussed on the call can be found in the earnings release issued earlier today as well as in the Investors section of our website.

With me today are GameStop's Chief Executive Officer, George Sherman; and Chief Financial Officer, Jim Bell.

On today's call, George will share insights into our third fiscal quarter performance and updates regarding Gamestop's strategic framework for the future.

Jim will then provide more detail on our financial results and expectations for the remainder of the year.

Now I would like to turn the call over to the company's Chief Executive Officer, George Sherman.

Thank you.

Good afternoon, everyone, and thank you for joining us today on our third quarter earnings call.

I want to begin today's call by first addressing our results during the quarter, their direct impact on our outlook for the remainder of this year, and the trend we anticipate carrying into 2020.

Simply put, our top line results remains softer than our original expectations, and we believe they are a direct reflection of the overall industry during the quarter, in which NPD cited historically low sales.

The near-term headwinds confronting the industry as we enter the final stages of the current Microsoft and Sony console cycles are having an outsized impact on our business, given we are the loan specialty retailer in the space.

It's important to keep in mind that this is not uniquely a GameStop issue.

This is a console issue, and consoles are the trigger point for our industry.

With Generation 9 consoles on the horizon, set to bring excitement and significant innovation to the video game space, those anticipated releases in late 2020, are putting pressure on the current generation of consoles and related games, as consumers wait for new technology and publishers address their software delivery plans.

NPD recently reported significant double-digit industry declines in new hard work for September and October.

And as an industry leader, we're feeling that pressure more directly than others.

Jim will get into the details of our results, but our sales of new hardware in the third quarter declined 46% versus the prior year quarter.

While these were generally in line with the industry, they were well below our expectations.

Looking ahead, we believe this trend will likely carry through our next several quarters until the launch of the next-generation consoles.

At this stage, we've entered the commoditization phase of the console cycle, where promotional pricing is driving sales.

And if you were out shopping or doing store checks over Black Friday or Cyber Monday, you likely saw clear examples of that discount stance.

Given that significant promotional stance, along with the industry dynamics highlighted by unprecedented declines, we're revising our outlook for the year down from prior expectations.

While the near-term top line environment remains challenged, we do not believe these results are indicative of what we would expect for the business in the long term.

Despite the top line results for the quarter and their impact on our outlook for the remainder of the year, we do have several positive developments that I want to highlight.

First, we have shared with you our commitment to evaluate every aspect of our business and take decisive action to address underperforming areas of our business.

In that light, we've begun the process to wind down our operations in the Nordics region of Europe, including operations in Denmark, Finland, Norway and Sweden.

While this will take several months to complete, we believe this effort will yield roughly $15 million in EBITDA run rate improvement.

Second, our work to optimize the business model, specifically, our efforts to reduce inventory churn faster, resulted in third quarter ending inventories down over 30% compared to last year.

These initiatives are enabling us to generate strong cash flow despite the sales decline.

Third, and directly tied to our conviction and the strategies we are pursuing, we invested over $115 million in the quarter to repurchase over 22 million shares.

This reflects our commitment to returning capital to shareholders and brings our total investment in buybacks for the third quarter of this year to $175 million, a repurchase of over 1/3 of our shares outstanding at the beginning of the year.

You'll hear more about each of these throughout our call today, but I wanted to quickly highlight them before discussing our progress against each of our strategic pillars and our performance for the quarter.

Despite the overall sales results, we do have several things within our business that are doing well.

Even within new hardware, where we have recent innovations, such as the Nintendo Switch and Switch Lite we are seeing strong double-digit sales growth, with consumer interest continuing to increase across that platform.

You can see the strength of the Switch platform reflected in our recently implemented merchandising floor sets across the chain, and in particular, across our Black Friday and Cyber Monday offerings.

As we highlighted the product and gave a high-profile placement across our omnichannel platform.

In software, despite fewer titles and an underperforming title slate compared to last year, where we do have strong titles, GameStop continues to deliver market share-leading performance.

For example, the success of Call of Duty: Modern Warfare launch has been well publicized, and our associates galvanized behind the release to host exclusive in-store events and special activities centered around the franchise.

Additionally, our Collectibles business continued to show growth as we continue to improve our product offering in the category.

We see opportunity in this category as we leverage our unique position to take advantage of fan-favorite franchises launching this year and beyond.

As we keep improving our product offering and capitalizing on exclusives, we can leverage our retail expertise to drive an improvement in product margins for the category.

Despite the near-term demand headwinds for current generation gaming hardware and software products, GameStop's evolution as an industry leader and our efforts to reposition the business model are on track.

The groundwork to better leverage GameStop's leadership position in video game retail is moving forward, irrespective of where we currently are within the console cycle.

However, it is important to reemphasize that our turnaround will not be measured in immediate term sales results.

We do, however, believe they'll be apparent and impactful to profit flow through when the new console cycle kicks in.

Let's take a few minutes to share the solid progress we made during the third quarter against each of the 4 pillars of our strategy we laid out for you on our call in September.

Remember that our strategic plan is anchored on 4 key tenets.

First, optimize the core by improving efficiency and effectiveness in everything we do; second, create the social and cultural hub of gaming within each GameStop store and online; third, build a frictionless digital ecosystem to reach our customers wherever they want to do business with access to the best digital content and products; and fourth, transform our vendor and partner relationships for the future of gaming.

Where we have driven the most progress is within the first pillar, optimizing our core business.

Recall that this pillar encompasses optimizing the core business by improving efficiency and effectiveness across the organization including cost restructuring, inventory management and optimization, adding and growing high-margin product categories and rationalizing the global store base.

This pillar is the primary driver of our operating profit improvement goals for 2021, and we are well on our way to implementing the other initiatives that we need in order to deliver on that target.

Of the $200 million profit improvement goal, we know that roughly half of that will be delivered in the form of expense reductions, with the other half coming from product margin enhancements.

When we spoke in September, we had executed roughly 40% of the expense reductions.

And today, we are over 50% complete.

While the top line decline masked some of our progress, you can see that excluding onetime items, we delivered approximately $30 million in reduction in our corporate overhead compared to last year as a result of these actions.

We have clear line of sight to the remaining 50% and are confident in our ability to deliver on this goal.

From an inventory management perspective, I already highlighted our 30% reduction compared to last year, representing a significantly improved position, both in terms of quality of inventory and overall stock levels.

We will continue to focus our efforts on optimizing our inventory position to protect our strong cash flows.

We also continue to make progress expanding into higher-margin categories.

And while many of these initiatives may take longer to manifest themselves, we've already begun to order PC gaming accessories in the store, reinforcing our position as the one-stop shop for all things video games.

Along those lines, we also continue to advance our objective to expand in the private label opportunities for video game accessories and other items.

We're leveraging capabilities that already exist within our organization to grow our presence across our global footprint.

On the Collectibles front, as I mentioned earlier, we continue to see opportunity to drive margin improvement in the category by leveraging the new leadership team and the new merchandising organizational structure.

We're implementing a more strategic and comprehensive, good, better, best pricing architecture that includes improved promotional and markdown management throughout the product life cycle.

Being more strategic with our initial buys and how we flow inventory into certain categories, we are beginning to see better margins, with sharper pricing and more optimal markdown strategies.

Another area where we're making significant transformational progress is through our efforts to optimize our global store fleet.

This continues to be a top priority of ours and is an ongoing focus for Jim and the team.

We believe our overall profitability can be improved by dedensifying our fleet and by closing and/or consolidating underperforming stores, taking advantage of strong historical business transfer to remaining stores in each market.

I shared with you earlier, the action we are taking to wind down our operations in the Nordics region of Europe.

The second pillar of our strategy revolves around establishing GameStop as a social and cultural hub of gaming within each store, online and within the digital environment.

We have a tremendous brand to leverage, have been a trusted partner to the gaming community for decades.

The ongoing growth of video games and offshoots like eSports offer significant growth potential for GameStop.

As we introduced in September, we have developed some unique testing capabilities to help us uncover the proper path to capturing those opportunities.

An important element of this evolution is rapid customer-centric experimentation.

To that end, we've reimagined 12 stores within our Tulsa, Oklahoma market.

And while it's too early to share specifics, we're very encouraged by what we are learning from the numerous customer immersive experiences that we are testing in these 12 stores.

Further, with customer engagement at the center of making GameStop the social and cultural hub of gaming, our PowerUp Rewards loyalty program is a huge asset for us to leverage, and we're rolling out enhancements to the program.

Specifically, within the paid PowerUp approach here, we tested various incentives designed to increase customer enrollment and drive more visit frequency from shoppers and found that these efforts resonated with customers.

As a result, in November, we launched an enhanced suite of benefits for the pro tier customer, such as reward certificates and member access to exclusive opportunities and events and have seen a positive reaction from customers reflected in a significant double-digit increase in enrollment rate.

Again, while still early, we have received strong feedback so far in the new initiatives.

Growing this critical affinity network will position the business to over-index our leadership position in the upcoming new console cycle, which will entail a knowledgeable consultative selling process with the advancement of new technology.

In terms of our third pillar, our recently relaunched e-commerce website is a growing and important leverageable asset for us as we continue to build a frictionless digital ecosystem for access to digital content to products.

Since the launch of the new website in September, we've seen an increase in conversion rates and average revenue per user, along with longer browsing time from customers using the site.

Importantly, we've seen a triple-digit increase in buy online, pick up in store transactions, perhaps the most important KPI.

These are all positive indications that the new website is improving the customer experience.

Finally, our fourth pillar, which entails transforming our vendor and partner relationships is progressing but remains a long-term opportunity.

We continue to have very constructive discussions with our partners, and they recognize the value, omnichannel reach and expert-consumer selling engagement that we provide.

We hope to share more detailed information on this initiative in 2020 as our long-term path forward is formalized.

In summary, we are making solid progress on our strategic initiatives.

We continue to move quickly and are taking decisive action.

We know that improving this business will not be a quick fix.

But we see a clear path to success over the near-term and even more importantly, the longer-term sustainability of the business based on strategies that we are pursuing today.

As we said in September, over the next several quarters, you should not evaluate our business on retail comparable store sales results.

Instead, you should evaluate our performance during this console transition, on gross margin expansion across categories, our ability to generate strong cash flows, disciplined inventory management and overall expense management delivering operating profit and cash flow expansion, all things that we are already seeing traction on, while somewhat masked by the top line performance and are committed to enhancing further.

As we transform the business model, we continue to believe that our efforts will position the company to drive increased profitability when the industry returns to the new console launch cycle.

Despite a softer top line and stronger industry headwinds than we anticipated, we still offer a business model that has a healthy balance sheet and generates positive cash lows.

Importantly, we also remain committed to returning excess capital to shareholders as reflected by our share repurchase activity this year.

I want to take this moment before I turn the call over to Jim, to thank all of our associates for the hard work and tireless efforts to deliver exceptional product knowledge and service to our customers.

Our associates are among the most passionate and dedicated in retail.

And I know they are working hard to deliver an outstanding experience for our customers around the globe and are eager to close out the holiday period on a strong note.

Thank you for all that you do.

Now I'll turn the call over to Jim for more details on the quarter results and outlook for the remainder of the year.

Thank you, George, and good afternoon, everyone.

As George mentioned, we are disappointed in our results for the third quarter, which reflect the impact of top line challenges in the video gaming industry, primarily driven by where we are in the console cycle.

The decline was more than we originally expected, as the depth and breadth of the industry-wide slowdown reflects a highly penetrated console market and earlier than usual announcement of upcoming console launches from manufacturers and the reluctance of OEMs to bring end-of-cycle discounts to the market.

All of these factors are putting significant pressure on the volume of current generation products.

There were a few bright spots, however, during the quarter, including solid growth in the Nintendo Switch product line as well as continued positive gains within our Collectibles business.

However, these gains were simply not enough to offset the slowdown in both Sony and Microsoft product suites.

As we work through the next several quarters and navigate what we believe is the consumer waiting for the next-generation of consoles, our greatest focus will continue to be on strengthening our business model to ensure we are positioned to optimize profit flow-through, when the next-generation of Microsoft and Sony consoles launch late in 2020.

This includes continued focus on expense management through portfolio optimization, rationalization of underperforming businesses and improved inventory management, all of which we believe will optimize already strong free cash flow.

Before I get into our outlook for the year, I want to take a moment to recap the performance for the quarter.

At a high level, our bottom line results were affected by noncash taxes in the quarter, which stems primarily from our relatively low level of taxable income magnifying the volatility of our tax rate.

And I'll get into that in a little bit more detail in a moment.

On a reported basis, we delivered an operating loss of $45.6 million, adjusting for onetime items related to our transformation, asset impairments and other charges, we delivered an operating loss of $18.6 million.

From a top line perspective, total sales declined $46.9 million or 25.7% compared to the third quarter of fiscal 2018.

This decrease was primarily driven by a comparable store sales decline of 23.2%, approximately 150 basis points from closed stores and a negative 100 basis point impact from foreign exchange rates.

While our comp store sales results were primarily driven by lower transaction counts from new hardware and software, we are pleased with positive comparable improvements in units per transaction within the market basket, reflecting the early results of our merchandising management strategies, including enhanced focus on SKU productivity, digital merchandising and strong attachment rates driven by our store associates.

From a category perspective, as we have mentioned, the primary drivers of the decline were new video game hardware and software.

New hardware sales declined 46% and new software sales declined 33%.

Importantly, the category is performing worse than the last console generation ship where the declines were in the mid-30% range.

As an indicator of what we believe continued innovation within hardware product lines can do for the category, the Nintendo Switch platform continues to deliver strong double-digit increases.

From a new software perspective, growth in Nintendo Switch software was good, but not enough to offset double-digit negative comps across other platforms.

As I mentioned, the significant decline in Xbox and PS4 software titles in the quarter was driven by last year's strong title lineup, including record-setting Red Dead Redemption 2 and Spider-Man.

Our Collectibles business continues to be a bright spot, posting growth of 6.1% for the quarter before foreign exchange impact, and we continue to expect further growth in this category as we improve the product offering and leverage our retail expertise to improve our execution.

Our pre-owned video game business declined 13% year-over-year, but we did realize a 4 percentage point sequential improvement from the second quarter as we continue to find opportunities to leverage our leadership position in the pre-owned product market.

Consistent with new video game categories, we continue to see strong demand for pre-owned Nintendo Switch products.

Indicative of our efforts to optimize our overall merchandising approach, our consolidated gross margins increased 190 basis points to 30.7% compared to 28.8% in the third quarter last year.

Almost all video game categories saw gross margin expansion versus the third quarter last year.

Now turning to our expenses and expense management objectives.

After adjusting for roughly $16 million in onetime transformation, severance and other charges associated with our GameStop reboot profit improvement initiative, our SG&A expenses were $436 million, reflecting a decline of $28 million or roughly 6% versus the third quarter of last year.

This reduction is directly related to our ongoing efforts to aggressively rationalize the overall cost structure of our business.

As reported, SG&A for the third quarter was $452 million compared to $464 million a year ago.

Revisiting the impact of tax variability.

Our effective tax rate, as reported for the third quarter, was negative 61% due to the impact of lower projected earnings for the year.

Additionally, there were certain discrete tax items included in the third quarter, primarily related to a $20.2 million valuation allowance and the mix of earnings across the jurisdictions in which we operate.

The impact of these noncash tax adjustments was approximately $16 million.

It's important to note that after adjusting for the $16 million noted above, the adjusted tax expense of $15.6 million or $0.19 per diluted share is also not reflective of our cash taxes for the quarter.

As a result of our taxable income being relatively low, our reported U.S. GAAP tax expense and resulting rate can be volatile.

However, our cash taxes for the year are not expected to be material.

This impact is unique to the quarterly results and the effective tax rate and overall expense will normalize in the full year results.

On a reported basis, our net loss from continuing operations for the quarter was $83.2 million compared to a net loss of $506.9 million in the third quarter last year, which included approximately $588 million in impairment charges.

The third quarter fiscal 2019 results include charges of $43 million or $0.52 per diluted share, which includes noncash asset impairment charges, costs related to our ongoing transformation, the noncash tax adjustments noted above as well as other items.

Now turning to the balance sheet.

At the end of the fiscal third quarter, we had total cash and liquidity of $703 million, including $290 million in cash and $413 million in net availability under our revolving line of credit.

This compares to total cash and liquidity of $861 million in the prior year.

We ended the quarter with total debt of $419 million versus $820 million at the end of the third quarter of 2018.

We ended the third quarter with total inventory of $1.29 billion compared to $1.88 billion in the prior year, a reduction of 31.6%.

As we have said, inventory reduction is a significant area of focus for us as we seek to increase our inventory turns and improve our working capital to materially improve on strong cash flow generation of the business model.

In terms of capital allocation, given the strength of our balance sheet and the ability of our business model to continue to generate positive cash flows, even in a tough sales environment, we took advantage of our depressed share price during the quarter and returned approximately $116 million to shareholders through share repurchases, equating to 22.6 million shares at a weighted average price of $5.11 per share.

Year-to-date, through the end of the third quarter, we have now repurchased a total of 34.6 million shares for approximately 34% of the outstanding shares coming into the year.

In total, year-to-date, through the third quarter via share repurchases and the first fiscal quarter dividend, we've returned over $218 million to shareholders.

This is a clear reflection of our commitment to return capital to our shareholders and our conviction in the strategic initiatives we are pursuing and their ability to enhance our profitability.

As of the end of the third quarter, we had approximately $121 million remaining under our current repurchase authorization.

In the third quarter, we had $20 million of capital expenditures, bringing the year-to-date total to $61 million.

We now expect full year capital expenditures to be between $80 million and $85 million, down from our previous guidance.

Going forward, we will continue to evaluate ways to return capital to shareholders that optimizes returns for all stakeholders while balancing the importance to maintain a strong balance sheet as well as our debt ratios.

I will now shift to provide our expectations for the rest of fiscal 2019.

With the third quarter behind us and the important Black Friday and Cyber Monday shopping period concluded, we are updating our outlook based on the current trends in the business, including the industry-wide headwinds in the video game category.

We anticipate the cyclicality of the console business to continue to impact sales through the rest of the fourth quarter and into 2020 until the launch of Generation 9 consoles from Sony and Microsoft.

We also continue to anticipate a much lighter title slate from publishers, given the pending launch of new consoles next year and have already experienced 1 publisher announcing a number of title delays into next year, which contributed to a portion of our downward revision for fiscal 2019.

In light of those trends, we now anticipate consolidated comparable same-store sales for fiscal 2019 to decline in the high teens.

As we continue our evaluation of underperforming aspects of our business, we are on track to have between 230 and 250 less stores on a global basis, net of new openings, by the end of fiscal 2019.

The closure rate of underperforming stores is very consistent with the last several years and supports our continued efforts to dedensify our fleet to optimize profit production in select markets and trade areas.

Approximately 140 of these underperforming stores closed already earlier in the year.

Further, as George mentioned, after a thorough and careful review of our business in the 4 Nordic countries, Denmark, Finland, Norway and Sweden, we've begun the process to wind down these operations and expect to exit these markets in full by late 2020.

We expect the run rate impact once the exit is complete to be a positive full year annualized EBITDA contribution of just over $15 million.

Given the aggregate impact of the above items and particularly, the softer-than-expected trend in sales, we now expect EPS for the full year, after adjusting for onetime items, to be in the $0.10 to $0.20 range.

Despite the top line declines in the business, our balance sheet remains strong as we anticipate ending the year with total cash and liquidity in excess of $1 billion, and we expect to generate between $200 million and $220 million in adjusted free cash flow for fiscal 2019.

Our objectives remain unchanged, and we are maniacally focused on continuing to make the necessary changes to strengthen our overall financial architecture, including all key profit and expense levers that will result in an organization that is efficient, streamlined and poised to capitalize on a significant profit flow-through improvement as we experience expected robust sales increases in late 2020, led by the Generation 9 hardware and software slate.

I will now turn the call over to the operator, and we'll take any questions that you may have.

(Operator Instructions) We'll now take our first question from Stephanie Wissink with Jefferies.

This is Ashley Helgans on for Stephanie Wissink.

The SG&A ratio remains distorted versus sales even with the cost optimization program in place.

How should we think about the phasing of savings going forward?

Yes.

I think -- Ashley, this is Jim.

I think you can -- as we've talked about, the vast majority of the savings, you could see it in the third quarter -- this year versus last year.

As it starts to annualize over the course of 2020, you're going to see, obviously, better impact on an annualized basis.

You're just really seeing a first full quarter of the effect in the third quarter this year.

Okay.

Great.

That's helpful.

And then if I could squeeze in one more.

Just on -- the Collectibles margins were down year-over-year, any reason for the change?

Yes.

Ashley, it's George.

We saw the need to work through some inventory that was not as productive as what's being brought in from a Collectibles standpoint.

So it is the lone category that actually had margin rate go down, and it was a very conscious effort on our part to move through some inventory.

I think this was also indicative of how we are focused on the inventory management and being able to take decisive action on places where it makes sense for us to do it, especially as we then manage our buy plans going forward.

We'll now take our next question from Seth Sigman with Crédit Suisse.

This is Lavesh Hemnani on for Seth Sigman.

Our first question is on free cash flow.

I mean, could you just talk about the components of free cash flow for the year?

And how are you thinking about the levers to offset the lower earnings?

Yes.

I think it's very straightforward.

I mean, the biggest driver of free cash flow, from the perspective of us continuing to generate strong free cash flow, is our focus on inventory management.

And this is a critical factor as we continue to drive our inventory levels down, manage the way that we're buying inventory, manage the way we're turning inventory over, manage the end-to-end life cycle really all the way through initial set all the way through promo and markdown in terms of the product life cycle.

That is how we really view the generation of free cash flow in this business and the main driver.

Got it.

And just a follow-up on the cost reduction plans.

Do you have any updated views on how the cost restructuring is progressing?

And I mean, are you able to find any incremental opportunity versus your prior plan?

And related to that, in the short term, I mean, to what extent do you think this may be win on sales?

Let me start off with your question on costs.

It's, I think we said, 40% last time out in -- at the end of the last quarter.

Better than 50% of the way there on the expense reduction side of the $200 million.

So roughly half and half, $100 million from costs out and $100 million from things like gross profit expansion.

We feel very good about the -- about this.

I mean, we're -- again, it's a moving target.

We continue to make progress on the costs out.

We see full visibility to getting that full $100 million out.

And obviously, we understand that, that flows straight to the bottom line.

So if there's upside to be had, we'll certainly go pursue it.

I mean are you seeing any impact on sales in the short-term from this?

Impact on sales?

From the changes you're making.

Yes, from the changes you're making within the store and then rationalizing SKUs, and any other initiatives that -- that works for you.

Yes, I think the best way to think about that is related to the comment that I made regarding the margin expansion.

And really, the impact of having a better floor set, having a better viewpoint in terms of SKU rationalization and the turn of the inventory has allowed for margin expansion at the category level on virtually all video game categories.

We expect to continue to see that as we go forward, where we're really just starting to see the early fruits of that labor.

We'll now take our next question from Ray Stochel with Consumer Edge Research.

Can you discuss what you all are seeing from publicly available information on the next-gen console announcements and how you think about that impacting your business in 2020 and beyond?

A couple of key topics that we're talking about with investors is the fact that it has a disk drive, not as much of a jump in file size, some of the details around the solid-state drives.

And then, of course, subscription and even backwards compatibility.

Yes, Ray, we know virtually the same thing you do.

So we learn from the same basic sources.

We're obviously thrilled that there's a disk drive in the -- in both consoles going forward.

That's certainly very, very meaningful to our business.

And I'd say that looking ahead, I mean, all those things combined, having the disc, presumably, having a higher price point, although we don't know that definitively as well.

Having other offers in place, even having subscription models, which we think we can play a role in, a role in selling, are all positive for us.

We remain supremely confident in our bounce back in -- on or about November of next year.

And I think there'll be a point next year, we can almost name the date.

I mean, that is going to have a profound impact on our business.

We tend to over index early cycle because the disc requires some level of education to the consumer.

There's a choice to be made.

There's functionality to explain.

There's context to be given and that's where we excel.

So that's why we're having good conversations with our vendor base.

And certainly, that's why we're very bullish on what's going to happen with this company about 11 months from now.

Got it.

And then is there any way that you could comment on the all-digital Xbox offers.

How you think that SKU is performing in the market?

And to the extent that you guys are talking to Microsoft about that SKU and the trade-in deals that they've had around that SKU?

Yes.

As you know, Ray, we brought it into the holiday season.

We featured it on Black Friday, and we moved the unit pretty well.

Our team embraced it.

And certainly, we believe that we have to embrace digital options and this is one of them.

So it -- obviously, you can conclude that we found favorable terms to go ahead and pull this into our assortment, and we're happy with the way it performed.

We'll now take our next question from Curtis Nagle with Bank of America.

I guess, just the first one.

Focus on the buyback.

And I guess, why buy back so much stock when, at the moment, there's still so much uncertainty around the business and results continue to disappoint?

I get the point that there's a new cycle coming, but it's a year from now, and a lot can happen from then to now or now to then.

And why is it not in the best interest of the company to preserve cash?

Yes, Curt, this is Jim.

I think, again, we constantly evaluate what the optimum utilization of capital is.

And when we say optimal, meaning optimizing the returns for our shareholders.

And that's a balance of maintaining appropriate levels of cash and strength of our balance sheet, it involves the management of our debt ratios.

It involves ultimately, where we think is appropriate in a very metered way today in terms of any potential CapEx in the business.

But it also involves really being able to return capital to shareholders, especially when we see depressed pricing in the marketplace that we've seen in our stock.

Simply speaking, I think it's a view to the fact that we believe our stock is undervalued, and we think that it's an appropriate and prudent use of capital to return that capital to our shareholders via the buybacks.

And I'm just going to reemphasize that last point.

We buy back stock because we fundamentally believe that our stock is trading at a discount, and we're very confident as to where our stock is heading given what's going to happen in 11 months.

So we're very, very confident about that bounce back.

We're very confident that all the work that's being done right now around expense structure, around margin structure is going to pay off in the form of profit flow-through when sales return, and we're certain they're going to.

Got it.

And then just a follow-up.

If you could just go through the parameters on 4Q.

First, on comps based on year-to-date and the new guide.

It looks like 4Q is guiding down around -- some moving over 20%.

Is that right?

And then the math gets a little funny in terms of profitability and kind of the share count, but I think the implied EBITDA is something around $150 million, give or take in EBITDA, is that right?

And then just one more, if I could follow up.

What's the bridge between adjusted and non-adjusted free cash flow?

Yes.

The primary bridge on this -- let me take the last one first.

Everything you're saying in terms of some of your early model taking in our -- sorry, I'll address the first part, taking in our release and the comments on the call are -- they're directionally accurate.

Now the second part of your question is -- I'm sorry, repeat that, the second part about...

Yes.

Just in terms of -- what's the dollar bridge between adjusted and non-adjusted?

On the adjusted.

Yes, yes, we -- and again, we've described this in the past.

Last year, we had some late inventory that was related to the fourth quarter of 2018.

That carried over $400 million of AP that got paid in the first week or 2 of fiscal 2019 from 2018.

So just -- when we talk about adjusted free cash flow, it's really affecting that -- it was really related to 2018 inventory levels and the inventory buys.

That's all.

It's a little over $400 million.

(Operator Instructions) We'll now take our next question from Joe Feldman with Telsey Advisory Group.

I wanted to ask, I know we're talking about profitability improving, and I know it's hard when you have sales coming down at this level.

But can you -- and you said you -- I think you're 50% of the way on that cost savings.

Can -- where should we see that?

I mean, I guess I'm not quite seeing that in the model yet.

And I'm curious as to -- can you maybe highlight where that is showing up?

Yes, the first part of it from a cost structure is really all in the SG&A.

And that's -- again, we're about 50% of the way there to the $100 million, roughly $100 million that we talked about on a cost side.

You're starting to see a little bit in terms of some of the margin expansion components, albeit there's some product mix effects in there as well.

But this is really starting to -- the main impact is in the cost side and the SG&A.

And Joe, let me add.

I think you've got to look at the difference between in year and run rate.

So when we talk about getting to $100 million of expense savings as part of our $200 million profit improvement plan, that is run rate.

So in your savings, you can correctly infer that the majority of what you're going to see here in 2019 is going to come from some of the structural changes that we made toward the end of the summer.

The rest of it is going to be forward-looking run rate contract changes.

So it's a -- you shouldn't be looking for $40 -- or $50 million, just a subset of that that's in your savings.

And just to be clear, that $200 million was a run rate exiting '20 to 2021.

So we -- and that's the accumulation over the course of the time frame that we've been working on already, and we'll continue to work on throughout the course of the next handful of quarters.

Okay.

And then just a quick follow-up.

I know you guys changed the loyalty program and there's a new tier for the pro.

I guess, just curious how the response has been?

And maybe with regard to sign-ups or the -- and just the feedback you're getting?

Yes.

It's been terrific.

Thanks for asking.

I mean, the change is really meant to drive frequency of trips into the store.

It is really built off the premise of some level of coupon every single month.

During the year of membership, we were thrilled with the sign-up rates that we've seen since launching the program.

So it's off to a nice start.

Certainly, we leverage that over holiday -- Black Friday weekend.

And we've seen very good progress on the program and just a great reception by the customer.

And there are no further questions.

I'd now like to turn the call back over to Mr. George Sherman for closing remarks.

Thank you.

Thanks very much for joining us today.

We appreciate everyone's continued interest in GameStop.

I want to, again, take the opportunity to thank our teams for their hard work during this, the hardest season of the year for our teams, especially weekends like Black Friday and Cyber Monday.

All the time and the effort that they put in, I want to thank them for everything they do to make our year a success, for holiday 2019 a success.

As a management team, we continue to work with a sense of urgency to improve the business model and position GameStop for long-term success.

We appreciate all the support of our stakeholders as we transition to the future.

Thank you.

This concludes today's call.

Thank you for your participation.

You may now disconnect.