GameStop Corporation (GME)
Q1 2010 Earnings Call
May 20, 2010 11:00 am ET
Daniel Dematteo – Chief Executive Officer
Robert Lloyd – Interim Chief Financial Officer
Paul Raines – Chief Operating Officer
Tony Bartel – Executive VP Merchandise & Marketing
Mike Maller – Executive VP International
Colin Sebastian – Lazard Capital Markets
David Magee – Suntrust Robinson Humphrey
Benjamin Schachter – Broadpoint AmTech
William Armstrong – C.L. King & Associates
Robert Higgenbotham – Goldman Sachs
Tony Wible – Janney Capital Markets
Anthony Gikas – Piper Jaffray
Arvind Bhatia – Sterne Agee
Edward Williams – BMO Capital Markets
Mike Hickey – Janco Partners
Welcome to GameStop Corporation’s first quarter 2010 earnings conference call. (Operator Instructions)
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At this time, I would like to turn the call over to Dan Dematteo, Chief Executive Officer of GameStop Corporation
Good morning, and thanks for attending today’s conference call. With me today are Paul Raines, our Chief Operating Officer, Tony Bartell, our Executive VP of Merchandizing and Marketing, Mike Maller, our EVP International and Rob Lloyd, our Senior VP of Accounting and Acting CFO.
As we reported today, we had a great quarter and reported record sales and earnings for a Q1. Sales for the first time in a non-holiday quarter exceeded $2 billion as we gained significant market share on new releases during the quarter due to our innovative new release marketing. Paul will give you more color on that later.
Our earnings came in at the high end of expectation and in absolute dollars; we’re at an all time high. And, as we mentioned in the release, Q1 earnings have grown at a compound rate of 62% over the last four years. Truly amazing, and Rob will give you more details on the financials.
Lastly, we made great progress on our strategic initiatives relating to DLC sales, loyalty program development and browser game marketing which will be discussed later. That being said, there’s a great deal of concern over the health of the industry given the April NPD data. Even as our software sales grew 13% in the quarter, industry software sales for the first quarter were not as strong as last year’s due to a weaker catalogue compared to last year when Mario cart We Fit and We Play continued to sell through in significant numbers.
Now in our Q2, we expect U.S. software to be down slightly based on our internal growth expectations and title release schedule. On a month-by-month basis, we expect new video game software to be up in May, due to releases like Red Dead Redemption, which is doing extremely well, USC and Super Mario Galaxy, followed by a decline in June and July, excluding Star Craft 2, as it will fall into the PC software category.
But, if you added the two categories together, PC software and video game software, we believe that the industry in the U.S. will show software growth for the quarter. Based on this analysis, we expect earnings to grow in the quarter 9% to 17%.
Moving on to Q3, we expect to see double digit growth beginning with the release of Halo Reach followed by Medal of Honor, Fall Out New Vegas, Men NFL 2011, Star Wars, Dead Rising 2, and True Crime. Based on the anticipated strength of these titles, we expect earnings to grow in Q3 by 19% to 28% over last year, and at E3, we will be reviewing titles for Microsoft Natal and Sony’s Move, as we have nothing in our forecast for them.
All in all, we expect software sales in the U.S. to grow this year and are holding to our full year guidance of $258 million to $268 million, a 14% to 18% increase over fiscal 2009.
While some may be concerned about our use sale growth of 4%, it should be noted that these sales are on top of 32% use growth in Q1 last year. Indeed, our use sales have grown at a compound annual growth rate of 22% over the last four years, so to expect this same torrid growth to continue in unreasonable.
We will see growth in use this year. It will be more likely to be in the single digit range driven by expansion and less developed markets outside of the U.S.
There have been some questions concerning first user only content and the effect on our use business. We have not seen an impact thus far and as a matter of fact, we will turn this into a positive with our ability to sell DLC through our investments made in technology to market and sell this content in our stores. Paul will elaborate more on that later.
This morning, Wal Mart announced a more aggressive e-commerce initiative to reserve new video games. This is an obvious attempt to increase first week market share, which we dominate. Indeed, many titles we have 60% to 70% first week share.
We believe our pre-release marketing, exclusive content and the immediate currency provided by our trade-in program allow us to continue to gain market share as it has for the last few years. In addition, the profile of the hard core gamer, often identifies a credit cardless consumer that has purchasing online.