This is a summary of the third quarter fiscal 2007 earnings conference call conducted by GameStop Corp. (GME: chart) on November 20, 2007.
Management:
Chairman of the Board, CEO: R. Richard Fontaine
CFO, Executive Vice President: David W. Carlson
Vice Chairman of the Board, COO: Daniel A. DeMatteo
President: Steven R. Morgan
Key Investor Issues:
- The company earned $52 million, or 31 cents per share, from $13.6 million, or 9 cents per share, in the same quarter last year.
- Profit was bolstered by the 46.3% higher same-store sales.
- Revenue climbed 59.3% from a year ago to $1.61 billion.
- The company said it expects to earn 95 cents to 97 cents per share, compared to 81 cents a share in the same quarter last year.
Third Quarter Highlights:
Total hardware sales by units and as a percentage of sale have never been higher in the third quarter, and while that put pressure, as expected, on the gross margin, the margin decline was more than offset by the operating efficiencies and a 5.8% improvement in SG&A expenses.
Every segment of the company’s business exceeded expectations, led by domestic sales, earnings growth, and comp store numbers, but followed closely by similar strong performances in Australia, Canada, and Europe.
GameStop.com turned in its best third quarter ever in both sales and unique visitors and completely redesigned the site.
- Game Informer surpassed 3 million audited subscribers to increase its dominance in the game magazine field.
- The company has a top flight, high-tech broadcast channel and a top flight, traditional broadcast channel pushing videogames and the success of the categories.
In the third quarter, the company opened 181 stores, 101 in the U.S. and 80 internationally, bringing the store count year-to-date to 417.
- The company is on course to at a minimum reach the high-end of forecast for 2007 openings, which was between 500 and 550 stores.
- During the quarter, Standard & Poor’s raised GameStop''s corporate credit and senior unsecured debt rating to double B from double B minus.
GameStop sales for the third quarter increased 59% to $1.61 billion, as compared to $1.01 billion in the prior year quarter.
- Comparable store sales for the third quarter increased 46.3%, far more than originally anticipated due to strong industry fundamentals in all geographic regions.
- Videogame hardware grew an eye-popping 149% during the quarter, helping to build a strong foundation for software sales in the coming years.
- Videogame software grew at a very strong rate of nearly 60%.
- Halo 3, Madden NFL 2008, and Guitar Hero III topped the list of best-selling games for the quarter.
Net earnings for the quarter grew 283% to $52 million, including debt retirement costs of $2.4 million, far exceeding last year’s third quarter net income of $13.6 million.]
- Diluted earnings per share for the quarter were 31 cents, including 2 cents per share of debt retirement costs.
- These results were 12 cents per share higher than the high end of the guidance issued in mid-August.
Gross margins declined year over year in the quarter, as expected, due primarily to a higher mix of lower margin hardware related to the strong sell-through of next generation systems, and due to lower co-op advertising funds related to the prior year incremental co-op funds the company received for the launch of the new hardware systems.
SG&A leverage improved from the prior year quarter by 580 basis points.
This leverage came primarily from the strong comp sales and continued efficiencies from refining the company’s business model. As such, the company was able to grow operating margins by 160 basis points during the quarter.
The balance sheet remains strong, with nearly $280 million in cash at the end of the quarter.
- Inventories grew 38% from the prior year, significantly lower than the sales growth experienced during the quarter.
- he company finished the call of its senior floating notes in early October, calling $120 million of debt and bringing the total debt to $580 million at the end of the quarter.
