Gamestop Corporation (GME)

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GameStop (GME)

Q3 2011 Earnings Call

November 17, 2011 11:00 am ET

Executives

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

Michael K. Mauler - Executive Vice President of International

J. Paul Raines - Chief Executive Officer

Tony D. Bartel - President

Analysts

James Hardiman - Longbow Research LLC

Anthony C. Chukumba - BB&T Capital Markets, Research Division

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

Seth Basham - Crédit Suisse AG, Research Division

Michael Hickey - National Alliance Capital Markets, Research Division

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

Gary Balter - Crédit Suisse AG, Research Division

Mark-Andre Saucier-Nadeau - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Good morning. Welcome to GameStop Corp.'s Third Quarter 2011 Earnings Call. Today's call is being recorded. [Operator Instructions] I'd like to remind you that this call is being covered by the Safe Harbor disclosures contained in GameStop's public documents and the property of GameStop. It is not for a rebroadcast or the use by any other party without prior written consent of GameStop.

At this time, I'd like to turn the call over to Mr. Paul Raines, CEO of GameStop Corp. Please go ahead, sir.

J. Paul Raines

Thank you, and good morning. Welcome to GameStop's third quarter earnings call. Thank you for joining us. Before we get started, I want to thank our team of over 50,000 associates worldwide for another quarter of giving power to the players. GameStop associates, true to our values and with a passion for gaming, delight customers in 17 countries around the world with the absolute best service, assortment, value and digital offering.

The third quarter continues the transformation of GameStop into a hybrid retailer of physical and digital gaming and electronics products. Our strategic plan developed over the last 3 years is on track and providing tangible results, and our investments in digital businesses continue in a disciplined way. As you read in our release, we achieved our earnings forecast although the quarter presented some challenges in top line due to a cash-strapped consumer that could not afford all the good titles released during the quarter.

Comps in the United States was slightly positive and negative 2.2% in our international market. Globally, new software grew 4.8%, driven by 3 titles that sold over 1 million units in the first week of their release. Meanwhile, our digital businesses are significantly contributing to our gross margin expansion.

Given the amount of strong titles available in holiday 2011, it is clear to us that consumers will make choices on which titles to purchase among the unprecedented quality of offering. At the same time, hardware was flat year-over-year, reflecting some strength in Sony and continued weakness in handheld. As we get through a strong launch schedule and into the holiday shopping season, we believe that our ability to place currency in consumers' hands through our buy-sell-trade model is the most effective way to support consumers.

If you are a PowerUp Rewards member, you know already the types of innovative promotions we are using to help you fund your holiday game shopping through the trade-in of your pre-owned video games, consoles and the electronics.

The pre-owned business grew at 3%. While we saw double-digit growth in the first 2 quarters of this year, the third quarter grew slower due to the investment gamers made in new titles. As we have seen in prior cycles, strong new title releases tend to attract dollars from pre-owned buyers into the new category. We are excited, however, about the work we were able to do on building inventory in the quarter through innovative use of the PowerUp program to drive trades and bring inventory into our stores in preparation for holiday. Our margin rate in the pre-owned business during the quarter reflects some investment in trade promotions. And we are pleased to say we achieved record trade volume at GameStop during the third quarter. This trade volume sets us up for the holiday shopping season where we will use PowerUp Rewards to promote and merchandise our pre-owned assortment of high-quality games, consoles and electronics.

On a competitive note, we continue to watch competitor experimentation in pre-owned closely, and the data indicates no impact in our domestic store base from those competitors' efforts.

As we continue evolving our strategic plan, we launched an extension of our buy-sell-trade model in pre-owned iDevices nationally during the third quarter. We now accept the trades of those products in all domestic stores and are currently selling them on our website and in 260 stores. The early read on consumers is that, as we expected, the trading of pre-owned electronics at GameStop feels natural and is convenient to consumers. While it is early on in this new business model, we estimate that re-commerce market in North America is approximately a $700 million to $800 million market and growing very fast in the mobile handset, MP3 player and tablet categories. The market is highly fragmented and without a clear leader, and retail stores are the best channel to acquire inventory.

We also estimate that there are over $7 billion of used iDevices in homes in the United States. Our investment in refurbishment technology and efficient in-store trade processes is paying off in a rapidly growing emerging category. GameStop is uniquely qualified to integrate these new categories into our buy-sell-trade ecosystem. And the same competitive modes that apply to video games apply in the consumer electronics segment.

We also recently launched a gaming tablet assortment in over 200 stores. Once again, GameStop has created an innovative business model by focusing on gamers and thinking outside the box. Our GameStop-certified tablets work with the Android operating system, come with preloaded games and have a proprietary controller available for console-like game play on cool game. Tablet manufacturers and game publishers are excited by the possibilities we have brought to the market and are meeting with GameStop teams weekly to create innovative products for launch in the upcoming year. By the way, the tablets we carry are eligible for trading at our stores as newer technology tablets become available. We are only beginning to do some work on a market model of what the upgrade cycle on tablets might look like and how we can merchandise and launch immersive tablet games in-store and online and how big a refurbished tablet business could be.

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