This summary is based on the second quarter fiscal 2008 earnings call conducted by GameStop Corp. (GME) on August 21, 2008.
Management:
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Vice Chairman of the Board, Chief Operating Officer: Daniel A. DeMatteo
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Chief Financial Officer, Executive Vice President: David W. Carlson
Key Investors Issues
- Sales increased 35% to $1.8 billion, as compared to $1.3 billion in 2007.
- Net earnings were $57.2 million or 34 cents a share, increasing 162%.
- The firm added 125 new store, 68 in the U.S., 28 in Europe, 25 in Australia/New Zealand, and four in Canada.
Half Year Highlights:
- Sales rose 38.2% to $3.62 billion from $2.62 billion in 2007.
- Earnings amounted to $119 million or 73 cents a share, up 156% from $46.5 million or 30 cents a share in the prior year.
Second Quarter Highlights
GameStop sales increased 35% to $1.8 billion, as compared to $1.3 billion in the prior fiscal year as comparable store sales increased 20%, significantly exceeding prior expectations of 12% to 14% comps.
- These results were driven by exceptional performances across all categories as new hardware sales grew 29%, again exceeding expectations and building a massive installed base for future growth.
- New videogame software sales grew 43%, with the U.S. game release schedule far exceeding the more modest European and Australian releases.
- Used videogame sales grew an astonishing 32% with the current economic environment continuing to stimulate trade-in.
- The top five selling games during the quarter were Take Two''s Grand Theft Auto IV, Metal Gear Solid 4: Guns of the Patriots from Konami, NCAA Football 09 by Electronic Arts, Nintendo''s Wii Fit and Battlefield: Bad Company from Electronic Arts.
Net earnings were $57.2 million or 34 cents a share, increasing 162% over prior year quarter’s net earnings of $21.8 million or $21.8 million a share due to revenue growth.
- The acquisition of three record shops in Norway and Finland reduced operating earnings by $2 million.
- Gross margin rate decreased by 20 basis points, due primarily to product mix and the stronger-than-expected sales of hardware.
- Used videogame margins were especially strong, increasing 120 basis points from the prior year quarter, as fewer promotional activities were needed to drive the business.
- SG&A expenses were leveraged by 150 basis points due to strong sales comps and cost controls, particularly in the U.S. segment, allowing operating earnings to nearly double and operating margins to increase 170 basis points to 5.5%.
- The balance sheet remains strong with $540 million in cash at the end of the quarter and inventories growing ratably to the sales increase during the quarter.
Operational Overview:
- The model, which creates value for the old games consumers are no longer playing, did well with the budget-stretched consumer.
- Nintendo Wii trades, which some people were concerned about, grew five times faster than the average, as the firmfocused on converting this new consumer to the trade model through the marketing activities and sales associates.
- Analyzing U.S. videogame sales in the quarter, as reported by NPD, the growth has been driven by an ever-growing installed base of next generation consoles and handheld systems and new genres.
- The installed base growth continued, with these systems growing 44% on top of 55% last year, led by growth of the PS3, Wii, and Xbox 360.
Clearly the installed base this year will grow over last year, the year in which many predicted was the peak.
- This cycle will be broader and longer than any cycle of the past, as videogames are truly becoming mass entertainment for consumers of all ages.
- The title lineup for the back half includes Fable 2 for the Xbox 360, Call of Duty: World at War for the Xbox 360 and PS3, Gears of War for the 360, Animal Crossing for the Wii, World of Warcraft again for the PC, Guitar Hero World Tour all platforms, Rock Band 2 all platforms, and Kirby Superstar for the Nintendo DS, and many others.
New store growth:
- The firm does not add new stores solely for store count and tries to avoid cannibalization of sales in the existing stores.
- The goal of the new store program is the expansion of the market by growing the used sales, capitalize on the growth in the industry, and take business from competitors.
- The firm added 125 new store, 68 in the U.S., 28 in Europe, 25 in Australia/New Zealand, and four in Canada.
- The specialist model, which includes the buy/sell/trade, largest assortment of games, and best-in-class sales support continues to be accepted around the world in all areas the firm operates.
- The firm is making investments in infrastructure to support growth and continuously make improvements in the used model to drive more trades and manage this inventory.
Fiscal 2008 Outlook:
- U.S. videogame software sales which were expected to grow between 15% and 20% for 2008, are now expected to exceed 20% for the year.
- For the third quarter of 2008, the firm is expecting diluted earnings per share to range from 36 cents to 38 cents, with comparable store sales ranging from flat to plus 2%.
- For the fourth quarter of 2008, diluted earnings per share are expected to range from $1.37 to $1.40, representing EPS growth of 23% at the high end.
Comparable store sales growth should range from 8% to 10% for the fourth quarter, with strong results expected across all product categories.
- The firm raised the diluted EPS guidance for the full year of 2008 to range from $2.45 to $2.50.
- Full year comparable store sales to grow between 12% and 14% and total sales to grow between 23% and 25%.
- Operating margin is expected to be 7.8% at the midpoint of guidance, with gross margins improving 20 basis points from the prior year and SG&A leverage improving by 40 basis points.
- Store openings are on target to hit the high end of our 550 to 600 new store range, with new stores performing above expectations, even in this current economic environment.
