Gamestop Corporation (GME)

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GameStop (GME)

Q2 2011 Earnings Call

August 18, 2011 11:00 am ET

Executives

Michael Mauler - Executive Vice President of International

Robert Lloyd - Chief Financial Officer and Executive Vice President

Mike Hogan - CA and CFO

Tony Bartel - President

J. Raines - Chief Executive Officer

Analysts

Seth Basham - Crédit Suisse AG

Anthony Wible - Janney Montgomery Scott LLC

David Magee - SunTrust Robinson Humphrey, Inc.

Edward Williams - BMO Capital Markets U.S.

Scott Tilghman - Caris & Company

Michael Olson - Piper Jaffray Companies

Brian Nagel - Oppenheimer & Co. Inc.

Presentation

Operator

Good morning. Welcome to GameStop Corporation's Second Quarter 2011 Earnings Call. Today's call is being recorded. [Operator Instructions] I would like to remind you that this call is covered by the Safe Harbor disclosure containing 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'd like to turn the call over to Mr. Paul Raines, CEO of GameStop Corporation.

J. Raines

Good morning, and thank you for attending GameStop's second quarter earnings call. Joining me today are Tony Bartel, our President; Rob Lloyd, our Chief Financial Officer; Mike Mauler, our Executive Vice President of International; and Mike Hogan, our Senior Vice President of Pre-Owned Merchandising and Marketing. Before we get started, we would like to thank all of our GameStop associates worldwide who strive everyday to deliver the best customer service and innovation in video gaming.

The second quarter demonstrated the resilience of the GameStop model. As we projected on our first quarter call, new software sales declined as the new title lineup was lighter than last year's second quarter, and hardware sales also decreased due to weak demand and product shortages.

At the same time, our focus on our pre-owned and digital businesses as well as the productivity of our store consolidation methodology yielded positive benefits to our earnings during the quarter. The GameStop model combines leading market share on new software, hardware and digital content with the best value proposition in gaming through the pre-owned business.

We added million of customers to our PowerUp Rewards program during the quarter to reach more than 12.5 million members, and they represent over 60% of our transactions in the United States. We now estimate that the PowerUp Rewards customer base represents 25% to 30% of all video game consumption in the United States.

Our unique ability to consolidate customer demand into a reduced store footprint while growing new digital businesses is proving to be a very productive business model, and our earnings in the quarter are a clear example of our strategy's effectiveness.

In terms of the pre-owned business, we saw strength around the world. Growth in Pre-Owned was 12%, helping to drive overall gross margins to a 5-year high of 31.2%. The strategy we outlined at the beginning of the fiscal year continues to drive growth as we bring the power of in-store merchandising, dedicated leadership and the PowerUp Reward's marketing weapons to the pre-owned business.

It is interesting to note that our pre-owned business is accelerating as competitors help us create more awareness among consumers about the value of pre-owned games. We are also seeing that the launch of DLC in our stores is creating opportunities for attaching digital content to used titles. The rate at which we attach DLC with a pre-owned copy of a game is similar to that of a new game. Tony Bartel will provide some color on DLC, as well as how the launch of digital content is driving a new cycle of pre-owned selling and trading.

A word on retail competition in the pre-owned business. We have watched all our competitors' new initiatives in the business closely, as we have watched the previous 5 to 6 attempts to enter the business during the last 3 years. We have created significant competitive moats around the pre-owned business, and those moats are: one, proprietary pricing algorithms developed during 15 years of pre-owned merchandising; two, SKU level balancing of inventory across market areas to drive demand and get the right titles in the right stores; three, world-class refurbishment capacity through a 200,000-square-foot, 1,000-employee high-tech facility in Grapevine, Texas, owned and operated by GameStop; four, detailed knowledge of secondhand dealer laws in over 2,000 municipalities to ensure compliance; and five, a rich in-store staffing model that gives consumers efficient trade processing and services. Competitors can seek to understand these competitive moats, but consistent in-store execution proves to be far more difficult.

To further our competitive advantage, during the last 2 years, we have added new stealthy weapons to our industry-dominant merchandising on the pre-owned business. PowerUp Rewards brings the power of personal relationships with 12.5 million consumers who receive private communications and offers from GameStop and who are growing in their trading and purchasing activity.

We have added unique digital content that can be bought with trades, adding to the ecosystem for gamers. We are even expanding the universe of trade currency by allowing iPod, iPhone and iPads to be traded in many of our stores in a rapidly growing i-devices trade business.

As the leader in pre-owned sales, we know that we can never stop innovating and executing at a high level. As we look at pre-owned sales and trades in our stores adjacent to big-box competitors, we do not see any significant impacts.

On the international front, we see continued progress, particularly in driving best practice adoption in pre-owned and in cost reduction and consolidation. We saw pre-owned sales and margins expand in all international markets. We have added significant e-commerce capacity across the world, even using our online platforms to enter countries where we do not have brick-and-mortar stores. Mike Mauler will provide more details on our work in the international area.

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