This summary is based on the third quarter fiscal 2008 earnings call conducted by GameStop Corp. (GME) on November 20, 2008.
Management:
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Executive Chairman of the Board: R. Richard Fontaine
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Vice Chairman of the Board, Chief Executive Officer: Daniel A. DeMatteo
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Chief Financial Officer, Executive Vice President: David W. Carlson
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Executive Vice President - Merchandising and Marketing: Tony D. Bartel
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Chief Operating Officer: Julian Paul Raines
Key Investors Issues
- Sales rose to $1.7 billion from $1.6 billion in the prior year.
- Net income was down 10% to $46.7 million or 28 cents a share.
- The firm completed the acquisition of Micromania, a retailer of video games in France.
Year to Date Highlights:
- Sales were up 26% to $5.3 billion from $4.2 billion in 2007.
- Earnings were up 68% to $165 million or $1.02 a share.
Third Quarter Highlights
Sales increased 5% to $1.7 billion as compared to $1.6 billion in the prior fiscal year as comparable store sales declined by 1.8% due primarily to the difficult comparison to the Halo 3 launch last year.
- The slight moderation in comparable store sales in comparison to original expectations was due entirely to weaker results internationally related to the global economic and financial crisis.
- New video game software increased 10% even with the difficult Halo 3 comparison while used video games grew 19% with the current economic environment continuing to stimulate trade-ins.
- Earnings were $46.7 million or 28 cents a share, a decrease of 10.2% from $52 million or 32 cents a share in 2007 due to merger related expenses.
Gross margin rate increased by 190 basis points as product mix shifted from low-margin hardware sales to higher-margin new and used software sales.
- The increases in the new hardware and new software category margins were due primarily to strong co-op advertising programs related to fall and holiday titles.
- SG&A expenses came in significantly under forecast as costs and expenses were cut in response to the global economic issues and the resulting moderation in sales.
- The balance sheet remains strong with $478 million in cash at the end of the quarter, an increase of over $200 million from the prior year quarter held in anticipation of closing the acquisition of Micromania last week.
- Inventories increased 22% over the prior year as many hot titles released in the first weeks of November were shipped to warehouses during October.
Operational Highlights:
- Video game sales grew 10% driven by new title releases across all console platforms.
- In addition the US installed base of next gen consoles continued to expand with 18% year-over-year growth led by Nintendo’s Wii.
- This continued growth in the next gen installed base gives confidence that software sales will continue to grow this year and into next and this cycle will be longer and broader than any before.
- The fourth quarter has started well driven by a strong lineup of titles of new releases such as Call of Duty: World at War, Gears of War 2, and World of War: Wrath of the Lich King, again reflecting the resilience that video game sales have in tough economic times.
The buy/sell trade model continues to work well in this economic environment as consumers traded in record numbers to buy new video games.
- GameStop opened 191 stores, 94 in the US and 97 internationally, putting the total number of new store openings for the year so far at 526.
- In addition in 2008 it began experimenting with stores in PX compounds on US military bases and these have proven to be homeruns delivering sales and profits well beyond the average store.
- The firm completed the acquisition of Micromania for $636 million, the largest retailer of video games in France with 332 stores and now have an extremely well positioned company in the second largest European market.
- GameStop expects to pay off the short-term loan we made for this acquisition by the end of the holiday season out of free cash flow.
Fiscal 2008 Outlook:
- For the fourth quarter of 2008, the firm is expecting diluted earnings per share to range from $1.29 to $1.34 representing EPS growth of 18% at the high end.
- Comparable store sales growth should range from +4% to +5%.
- 2008 full-year EPS is now expected to range from $2.35 to $2.40 with full-year comparable store sales growing between 10% and 11%.
[Key questions and answers from the third quarter earnings call conducted by GameStop Corp(
GME) on November 20, 2008.
Anthony Gikas (Piper Jaffray):
How do you plan to execute differently over the holidays than you would relative to a few months ago?
Daniel A. DeMatteo: Some of the things we are doing differently now given the economic environment that we are in. We are clearly more cautious in our merchandise ordering due to uncertainty and are ordering smaller amounts more frequently to make sure we aren’t overstocked.
