Highlights From GME's Q3 Conference Call: Wow Wii, Comps Down, But Guidance In Range and Software Sales Grew

November 19, 2009 3:13 PM EST

Gamestop (NYSE: GME) reports Q3 EPS of $0.32, 2 cents better than the analyst estimate of $0.30. Revenue for the quarter was $1.83 billion, which compares to the estimate of $1.73 billion. Q3 comps down 7.8%. Shares are only up 1.41% and hovering around the mid range of the 52-wk high.

Highlights From GME's Q3 Conference Call:

• Sees Q4 comps down 1% to a gain of 7%. GameStop is reaffirming Q4 guidance of diluted earnings per share to range from $1.47 to $1.65,
  
• Gamestop sees FY EPS guidance of $2.45-$2.63, versus the consensus of $2.53. Comparable store sales are projected to range from -7.0% to -4.0% for the full year.
  
• (CEO) 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.
  
• We once again gained significant market share as the budget-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.
  
• (CFO) Sales and earnings in this Q3 were the highest for any Q3 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 line up, 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 segment.
  
• New software sales grew just over 9%, demonstrating GameStop once again gained a significant amount of market share as compared to industry declines reported by NPD 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 Resorts.
  
• Used product sales increased 19% for the second consecutive quarter as budget-cautious consumers continued 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.
  
• Gross margins improved 60 basis points as our product mix shifted from low margin hardware sales to higher margin software sales.
  
• Hardware and new software margins improved as a result of strong co-op advertising by our vendor partners.
  
• Used product margins improved 150 basis points sequentially to 47.3%, but declined 90 basis points compared to last year's Q3.
  
• SG&A expenses on a per store basis increased 11% driven primarily by de-leveraging fixed costs due to negative same-store sales in the quarter.
  
• We have a strong balance sheet with over $290 million in cash at the end of the quarter. Inventory levels increased 15.5% on a per store basis. This change was mainly caused by Call of Duty:
  Modern Warfare 2 inventory being in the stores prior to the release date.
  
• During the quarter, we bought back $50 million of senior notes completing our authorized debt buyback program. We now have $450 million of senior notes remaining on our balance sheet.
  
• We continue to expect to generate free cash flow by the end of our fiscal year of approximately 400 to $425 million after having invested 175 million in capital improvement.
  
• This morning, we also reaffirmed guidance for Q4 of fiscal 2009 and raised the low-end of EPS guidance for the full fiscal year.
  
• For Q4 of fiscal 2009, we still expect comparable store sales to decline between 1% and 7%.
  
• As a reminder, last year there was an extraordinary demand for new hardware systems at price points significantly higher than this year. Given this demand, we are up against a 22% total sales growth in last year's Q4.
  
• Full year 2009 comparable store sales are now projected to decline between 4% and 7%. Earnings per share for the full year are projected to range from $2.45 to $2.53, representing EPS growth between 2% and 10%.
  
• For the industry, we forecast the new video game software sales growth will be flat to minus 5%. We look forward to providing an update on our holiday sales on Thursday, January 7th.
  
• (COO) In Q4, we expect continued strength in new software with Modern Warfare 2, Assassin's Creed II, Left 4 Dead 2 and Super Mario Brothers leading the way.
  
• (Q&A) I have a couple of quick questions. First off, following on the strong launch of Modern Warfare, there's been some concern whether we'd see that strength carry over to titles like Assassins Creed. So, I was curious, I mean, your confidence level that these other key titles for the holidays are shaping up to perform well out of the gates. Secondly, it seems to be clear, you guys are taking share still despite some additional competition. I wanted to put a finer point on that, if you could talk about new software sales on a comparable store basis. And then lastly, I was hoping you could talk in a little more detail about the digital strategy that you've been outlining, a number of different initiatives here, and may be specifically on the acquisition of part of Jolt Games, the strategy behind making the shift in your business, and how that fits into keeping traffic coming to your stores.(A)This is Dan, and I am going to pass it over to Tony. I think we have answers for everything but the comp software - new software number. We do not have that.(A)We don't track that. But Tony I will pass it over to you, and talk about the new titles and then also the digital strategy.(A) Well, clearly, we saw pent up demand that was unleashed with Call of Duty: Modern Warfare 2, and I know that there was some concern on the next three titles that launched, Super Mario, Assassin's Creed, and Left 4 Dead 2. We had high expectations for all of those titles. Those are meeting our high expectations. So, what we are seeing is pent up demand that is being unleashed, and it gives us a lot of confidence. It's great bell weather for the fourth quarter. As to our digital vision, our digital vision really is built on leveraging the strong store foundation that we currently have in place. Our first call is to pursue adjacent opportunities such as the sell of downloadable content on the Microsoft and Sony platforms directly from our store and from our websites, and on building out our websites to be both global and more streamlined. As Dan mentioned early, we recently opened Italy, Canada, Australia, and we will build out Europe next year. At our West Coast digital office that we call Digital Ventures, we continue to assess opportunities to leverage - how to leverage our channel with this new digital content. We are still learning here and a recent acquisition of lt is an example of the testing that we are doing in this area. We like the business model that Dan articulated earlier, of Jolt's ability to take IP from existing publishers and port it over into the browser space, and allow us to sell that through our distribution channel.
  
• One, can you estimate what your overall industry share is this past quarter versus 2008? And then, Cathy, I was wondering if we could get some detail on the timing of getting the European used margin. Could you give us some more detail on that? And then, you've discussed in the past what you thought 2010 might look like on the new software sales, and I think you had mentioned that it looks may be like 2008, and 2008 was a 20% plus software growth environment. Is that how we should be thinking about 2010? Are you thinking about 20% plus in the industry software growth? (A)Thank you for the questions and thanks for the comment. On the market share, we don't give out the absolute number on our market share growth in games, only -- other than we had significant growth. We gave out the growth number, correct, that we are not going to give out - we don't give out the absolute number. On the second or the third part of your question, on 2010 growth, a lot of titles as we all know slipped into 2010, and we are expecting growth -- or we don't have our budget complete yet, we were expecting strong single digit to may be low double digit growth. I don't know that we are going to get 20% growth like we did in 2008 because that was driven a lot by high ARPs with music.(A)And then, I will take, Ben, your question on the timing of the used margins and the maturity of that - of the European business, the used business. It's a great opportunity and we know how -- and have a demonstrated track record of getting the US used margins to some very healthy levels, and to maturing those markets specifically more Europe is an opportunity for margin expansion in time. Realistically, it could take several quarters up to a year to get those margins kind of more in line, and it really relies on the maturity of the used markets, so explaining to customers how -- what a used market really means, but also more importantly, leveraging our US best practices. So, regional balancing, pricing model, and then the whole refurbishment capabilities are key. And the great news is we are well underway of deploying those.
  
• As a follow up to that, and so the Eropean used margins are below US not necessarily because of more competition but just it sounds like more of an inventory management's practice issue?(A)It's really -- it's just the maturing of that business. So, we have to, initially we've to drive more used inventory into the stores and explain to the customers how to deal with a buy-sell-trade model. And then, it's really leveraging the US best practices with regional soft balancing. We have tremendous pricing algorithm, in our huge business as you know. And we have great refurbishment capability. And most of Europe didn't have business practice to that same level.
  
• So the US used margins are in the 48 to 50% range, what would European margins be at this stage?(A)Yeah, they're just less and we don't normally disclose that. The good news is, as I've said in the quarter are, we actually saw the US return to the high end of our historical ranges. And so, as you can just see it's the over influence of the European contribution that's putting a little pressure right now. And we see that as an opportunity in temporary.

Related Categories

Corporate News
Earnings

Stocks Mentioned

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?