Gamestop Corporation (GME)

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GameStop Corporation (GME)

Q2 2010 Earnings Call

August 19, 2010 11:00 am ET

Executives

Dan Dematteo - Executive Chairman

Paul Raines, our CEO

Tony Bartel - President

Rob Lloyd - EVP and CFO

Mike Mauler - EVP of International

Analysts

Will Armstrong - C.L. King & Associates

Arvind Bhatia - Sterne, Agee

David Magee - SunTrust Robinson Humphrey

Mike Hickey - Janco Partners

Tony Wible - Janney

Sean McGowan - Needham & Company

Robert Higginbotham - Goldman Sachs

Presentation

Operator

Welcome to GameStop Corporation's Q2 2010 earnings conference call. (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 the 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 the Executive Chairman of GameStop Corporation, Dan Dematteo.

Dan Dematteo

Good morning and thank you for attending today's conference call. With me today are Paul Raines, our CEO; Tony Bartel, our President; Rob Lloyd, EVP and CFO; and Mike Mauler, our EVP of International.

As you know, in early June, we announced these promotions as the next step in the succession plan that Dick Fontaine and I developed several years ago. The team, now led by Paul, is doing a great job of running the business and making significant progress on our strategic initiatives which you will be hearing about more today.

As you can see, we gained significant market share in a market that is struggling for growth. The data suggests that U.S. software sales slid 7% in the quarter. The GameStop's U.S. software sales grew significantly. We believe that the slate of new releases for the back-half is stronger than last year and the new console add-ons, Kinect and Move, will help grow the category and return to positive growth.

Also, new console sales and units grew an overall 43% in the quarter, and these new users to be very active buying games in the coming months. Whatever you believe, we are well positioned to continue market share and manage our business to create shareholder value.

Our portfolio of stores has very flexible lease terms and we can right-size for the market quickly. We have slowed our new stores footage and will continue to do so while taking advantage of real estate opportunities to grow share.

Our investments in alternative game distribution methods are well thought-out, have synergies with existing assets and give us a hedge on the future without a huge investment. Our investments in other initiatives, such as our new loyalty program, are working well and you will hear more on this later from Paul. And given the free cash flow we generate, you will hear on how we plan on using this cash to provide even greater shareholder returns in the near future.

With that, I'll turn it over to Paul for a thorough review of the quarter.

Paul Raines

Thank you, Dan. As we begin our comments this morning, we want to thank our team of over 50,000 associates worldwide. The GameStop teams in 17 countries continue to demonstrate our passion for serving video game customers everyday, and we appreciate them.

We saw strength in the core business this quarter, driven by new software titles. New software grew 5.3% as the GameStop model of providing unique content to drive reserves, exciting midnight launches and the best value proposition of buy-sell trade drove record market share at launch. Hardware growth was driven by exciting new SKUs from PS3, Black Wii and the new Xbox Slim.

The used business, which is overlapping 19% growth in 2Q of 2009, grew just under 1%. Next-generation used software continues to grow, while older generation continues to decline. On the hardware side, used hardware sales were impacted by the growth of new hardware.

As we have pointed out in the past, the used sales growth lagged that of new by three to six months, as customers purchased hot new titles and traded them once they're done playing them. We have built our used inventory levels this quarter through a 10.6% trade comp, and that inventory growth gives us confidence on back-half used growth.

We have seen no competitive impact from emerging competitors in the used business and also have not seen any impact from the first user codes in recent titles. We are watching carefully the latest round of competitor entries in the used business, but would remind investors of the extensive competitive barriers GameStop has built around the used business. Rob will give you details around our back-half forecast in his remarks.

Our customer service metrics continued to improve to record levels, as the GameStop team engages customers in-store with industry-leading knowledge and focus on only video games. Our consumers continue to tell us that we set the standard for the in-store experience, thanks to our trusted game advisors, and our record market share growth validates that consumer feedback.

Our International business continues to face pressure from the macroeconomic environment. Mike Mauler and his team have accelerated the rollout of best practices to drive operations improvement.

On the merchandizing side, we are making progress on integrating our go-big and launch process internationally, and we will launch our first title with unique content globally this fall.

As you know, we developed the strategy over the last two years to make GameStop a multi-channel aggregator of gaming. As part of that strategic work, we defined several technology initiatives, and they have been in pilot over the last year.

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