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Market Update : 
GameStop Third Quarter Earnings Call Summary
Author: Albena Toncheva
123jump.com
Last Update: 1:47 PM EST November 22 2007


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Revenue of the video game retailer climbed 59.3% from a year ago to $1.61 billion. Profit was bolstered by the 46.3% higher same-store sales. During the latest quarter new video hardware sales more than doubled with ""Halo 3"" from Microsoft and ""Madden NFL ''08"" by Electronic Arts leading the top sellers. The company expects to earn 95 cents to 97 cents per share, compared to 81 cents a share in the same quarter a year ago.

 
Benjamin Schachter (UBS): When you think about the debt level by the end of ’08, how should we think about modeling that? Any color you can give on modeling actually the net interest income line in the next year?

David W. Carlson: We’ll be giving guidance on that in March, but we have cash flows coming and we will have to discuss with the board exactly what we want to do with those cash flows. But one of the options is to pay off some more debt, so we’ll probably be discussing that after Christmas with our board.

Bill Armstrong (C.L. King & Associates): You mentioned PS3 run-rate a little better than double since the price cut. Was that enough to move the needle much in the third quarter or is that going to be more of a fourth quarter event in terms of significance to your top line?

Daniel A. DeMatteo: It’s more a fourth quarter event in our top line and it’s just one of many things though that are significant events in our top line for the fourth quarter. I would add that equally important was the price cut on the PSP and the new bundles that have come out on the PSP. Equally important was the new SKU on the 360, the arcade pack that has come out on that, and equally important are the expected sales of the Nintendo DS, which is the other handheld that is doing extremely well.

Bill Armstrong (C.L. King & Associates): Could you elaborate on the availability of Wii hardware and the outlook for the fourth quarter there?

Daniel A. DeMatteo: Wii hardware will be in short supply. We will have it in our stores the day after Thanksgiving. Each store will have a supply of Wii and then I expect it to be gone, and then we’re getting resupplied in December a couple of times and we are expecting a resupply also in January.

We have our forecast accurate with what the anticipated flow of the Wiis are going to be, but the Wii will be short throughout the quarter.

Bill Armstrong (C.L. King & Associates): On the gross margin side, within the new hardware, new software categories, gross margin is down year over year. Could you elaborate on that?

David W. Carlson: We received some additional co-op last year for the launches of the new systems, the PS3 and the Wii. The preorder programs we had in place and a lot of marketing that was going on in the third quarter for the launches, so that is the reason for the slight decrease in the new video game software margin.

The same reason for the new video game hardware but in addition, we have a mix issue there. The Wii and the PS3 were not in sales last year during the third quarter, so that has brought the margin down some, so it’s a mix issue in addition to the co-op funds that we received for the launches. But if you look at the numbers, they are very consistent with the first and second quarter. In fact, I think they are up a little bit from the first and second quarter gross margin numbers on both of those lines.

Bill Armstrong (C.L. King & Associates): Should we see that co-op dollar impact flattening out in ’08?

David W. Carlson: That ’06 third quarter co-op number was a one-time incremental item so you should see similar gross margins going forward that we are experiencing now.

Colin Sebastian (Lazard Capital Markets): Just following up first on the hardware unit lift and looking at the 7% to 9% comp store sales growth for the fourth quarter, could you drill down a little in terms of the mix between hardware and software. Have you made any changes to your industry or platform growth assumptions for this year?

David W. Carlson: The platform growth assumptions haven’t changed significantly since we talked about them in the third quarter.

Daniel A. DeMatteo: We expect positive units growth in hardware and very slight, if any, dollar growth. So you can compute that, so we expect much stronger growth therefore in software and accessories than we do in hardware because hardware will be more like flat - not in units but because of the dollar declines on the PS3, the PSP, and the 360.

R. Richard Fontaine: So for the sales mix variance you will not see the same proportionate impact in all likelihood that you saw in the third quarter.

Colin Sebastian (Lazard Capital Markets): You also talked about a record quarter for the online sales. How material that is for the business at this point?

R. Richard Fontaine: At this point, from a pure financial standpoint, it’s not tremendously material to our earnings but it’s extremely important to our high-tech broad promotion of the business and the category. Perhaps what is more important to us at this point in time is the amount of unique visitors, which established an all-time record. But truthfully, from the standpoint of its earnings contribution, given how fast the company has grown and our total size, it’s relatively immaterial but important.

Daniel A. DeMatteo: We believe that our e-commerce site with all the information it provides about games, what’s coming is a big driver of customers also to our stores. It’s hard to quantify that but it is a very great broadcast channel, the best broadcast channel in the industry about videogames.

Colin Sebastian (Lazard Capital Markets): Did you mention the number of stores you closed during the quarter?
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