Gamestop Corporation (GME)

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GameStop Corporation (GME)

Q3 2009 Earnings Call

November 19, 2009 11:00 am ET

Executives

Dan Dematteo – Chief Executive Officer

Paul Raines – Chief Operating Officer

Cathy Smith – Chief Financial Officer

Tony Bartel – EVP of Merchandising and Marketing

Analysts

Colin Sebastian – Lazard Capital Markets

Ben Schachter – Broadpoint

Bill Armstrong – C.L. King & Associates.

David Magee – Suntrust Robinson Humphrey

Tony Wible – Janney Montgomery Scott

Arvind Bhatia – Sterne, Agee & Leach

Edward Williams – BMO Capital Markets

Anthony Chukumba – FTN Equity Capital Markets

Presentation

Operator

Good morning and welcome to GameStop Corporation's Third Quarter 2009 Earnings Results 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 a property of GameStop. It is not for rebroadcast or use by any other party without the prior written consent of GameStop.

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

Dan Dematteo

Welcome to GameStop’s third-quarter conference call. With me today are Paul Raines, our COO, Cathy Smith, our EVP and CFO, and Tony Bartel, our EVP of merchandising and marketing. This morning, we released our third quarter financial results and our forecast for Q4 and the full year. Given the state of the worldwide economy, we couldn’t be more pleased with our results. In spite of softness in the industry, we managed our business well and had earnings at the high end of the range. In addition, as our release indicates, we once again gained significant market share as the budge-strapped consumer migrated to the value provided by our buy-sell trade model.

New software sales grew 9.4% and used software sales grew 19% as comps declined 7.8% primarily due to new hardware sales declines. In the quarter, we opened 86 stores—48 in the US and 38 internationally. Also, we brought online new e-commerce sites in Australia, Italy, and a bilingual site in Canada. Next year, we plan on completing our e-commerce expansion into the remaining countries where we have significant retail door presence.

Just two weeks, we announced a new executive in charge of our digital and e-commerce business, Shawn Freeman. He will be leading our efforts to make our e-commerce sites important portals for the distribution of not only boxed product but digital also as well as integrating our sites with our vast store network.

Last week we attended the BMO Capital Markets Conference and announced several new initiatives. Working with our publisher partners and platform holders, we’re developing the capability to market add-on digital content in our stores and providing a seamless method for consumers to purchase this content. We believe this segment of the industry underperforms due to lack of awareness and friction points in the purchasing transaction which we will eliminate. Fresh add-on content extends game play and satisfaction that is maintaining higher ARPs later in the cycle and provides an add-on source of income for the developer and retailer.

Earlier in the quarter, we announced the formation of a digital ventures group led by Chris Petrovich. The charter for this group is to explore investment opportunities that would benefit through association with GameStop as we understand that gamers are playing games on many platforms.

I am pleased to announce that we have acquired a majority interest in Jolt Games, a developer of browser games based in Ireland. Their model converts existing IP for many of our publisher partners and ports into a browser environment. Working with Jolt, we plan on promoting their games in our retail doors, thus increasing traffic and therefore revenue.

With that, I’ll turn it over to Cathy for a more in depth financial review, and then Paul will discuss in more detail about what we see driving sales and our plans for Q4.

Cathy Smith

Before the market opened today, GameStop released its financial results for the third quarter of our fiscal 2009. Sales and earnings in this third quarter were the highest for any third quarter in the company’s history.

Total sales increased 8.2% to $1.83 billion as compared to $1.7 billion in the prior fiscal quarter. Comparable store sales declined 7.8%, mainly the result of a decline in hardware sell-through and a tough comparison to last year’s title lineup primarily in October when Fable 2, Fallout 3, and Saints Row 2 launched.

Our European segment comparable store sales outperformed the rest of the company’s segment. Much of Europe entered into a recessionary period earlier than the US and is now seeing somewhat easier comparisons as it begins to recover.

New software sales grew just over 9%, demonstrating GameStop once again gained a significant amount of market share as compared to the industry decline reported by MPD of 12%. Store traffic increased during the quarter driven by strong new titles including Madden NFL 2010, Halo 3 ODST, Batman, Arkham Asylum, NBA 2K10, and Wii Sports Resort.

New hardware sales declined 2% during the third quarter with weaker than expected sales of Nintendo’s Wii, offset by strength from the price cut on Sony’s Play Station 3. Used product sales increased 19% for the second consecutive quarter as budget conscious consumers continue to utilize our buy-sell trade model.

Net earnings for the third quarter were $52.3 million, a 12% increase from the prior year’s Q3 net earnings of $46.7 million. Diluted earnings per share for the quarter were $0.31, including $0.01 of debt retirement cost.

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