Gamestop Corporation (GME)

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GameStop (GME)

Q3 2012 Earnings Call

November 15, 2012 11:00 am ET

Executives

J. Paul Raines - Chief Executive Officer

Robert A. Lloyd - Chief Financial Officer and Executive Vice President

Tony D. Bartel - President

Michael K. Mauler - Executive Vice President of International

Michael P. Hogan - Executive Vice President - Stratagy Business & Brand Development

Analysts

Brian Karimzad - Goldman Sachs Group Inc., Research Division

Seth Sigman - Crédit Suisse AG, Research Division

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

Arvind Bhatia - Sterne Agee & Leach Inc., Research Division

William R. Armstrong - CL King & Associates, Inc., Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Presentation

Operator

Good morning. Welcome to the GameStop Corporation's Third Quarter 2012 Earnings Call. [Operator Instructions] I would like to remind you that this call is covered by the Safe Harbor disclosure contained in the GameStop public documents and is the property of GameStop. It is not for rebroadcast or use by any other party without the written prior consent of GameStop. At this time, I would like to turn the conference over to Mr. Paul Raines, CEO of GameStop Corporation. Please go ahead, sir.

J. Paul Raines

Thank you for joining the third quarter GameStop earnings call. Before we begin our remarks, I want to thank our 30,000 hardworking associates in 15 countries around the world who day-in and day-out are providing the finest customer service to gamers, in stores, online and on digital platforms.

I particularly want to recognize our heroic teams along the mid-Atlantic coast and in the Northeast who have worked passionately to reopen our stores, damaged as a result of Hurricane Sandy. We are happy to report that all of our associates and their families are safe, and our Gamer Fund Charitable foundation is working to provide those most affected with the support they need.

As you saw in this morning's release, the quarter played out within our guidance on top line and ahead on earnings by $0.06 over consensus. The GameStop formula continues to show strong resilience in the face of challenging category headwinds, and the new categories of digital and mobile are creating new profit pools that we are exploiting aggressively. Rob Lloyd will give you more detail on how the earnings were achieved in the quarter.

New software declined at a rate slower than the market, driving another unprecedented 320 basis points of market share growth. Our business model is more dominant than ever on new titles, and although the category has declined this year, we are excited about the new titles coming now and in the near future. Tony Bartel will share some insight with you on how we see the software outlook improving now and into 2013.

With just a few days left until the Wii U launch, our consumers' appetite for innovation is very high. We encourage you to come to one of our 3,000 stores with the new interactives and experience for yourself the fresh and unique game play that Wii U provides. It is clear to us that a new console launch has never in history benefited from the kind of holistic strategy we are deploying. And we expect to have significant share growth from the last Wii launch. We are bullish on this new console, and Tony will give you some color on our work with Nintendo on the Wii U coming on November 18.

Once again, we produced very strong margin expansion during the quarter, up 200 basis points year-over-year and 260 basis points in 2 years. As we have shared on previous calls, we are transforming the business model towards richer margins through the creation of the new categories of digital and mobile to supplement our pre-owned and new software and hardware. DLC for consoles, casual game platforms, PC downloads and pre-owned smartphones and tablets are all good profit models where GameStop is uniquely positioned to leverage its assets. Although we have a great deal to learn in these areas still, we are satisfied that we are delivering the potential that we saw in these segments a couple of years ago. We continue to execute our transformational strategy with success through the end of the current console cycle.

Turning to factors that are directly within our control, expense management is rooted in GameStop's D&A and remains a very high priority going forward. We have begun to overlap the large CapEx investments we made during 2010 and 2011 in business transformation. Those investments are showing results that you are seeing in market share growth, digital and mobile profitability and strong positioning of the company as we enter the next console cycle. We are committed to SG&A reduction, while maintaining a high rate of technology innovation.

On the international front, our teams around the world continue to pursue their markets with tenacity around cost reduction and a flair for innovation. During the quarter, all of our International segments had store comps comparable to the United States and our ability to replicate the best practices we developed is accelerating. Loyalty rollouts, websites, digital sales and mobile sales are all ideas developed in only the last 3 years, and they are playing a key role in our success in all of our overseas markets. GameStop is a leading global retail innovator, and Mike Mauler will give you further color on our efforts.

Mike Hogan is joining the call today, and his responsibilities now include marketing, pre-owned video games, GameStop.com, Kongregate.com and strategic planning. We are proud of the work Mike and his team have done in reinventing our marketing approach in the last few years and he will share with you some insights on how PowerUp Rewards is migrating to a dominant consumer platform and how we will leverage the tool at holiday.

Read the rest of this transcript for free on seekingalpha.com