GameStop Corp. (GME)
Q3 2008 Earnings Call Transcript
November 20, 2008 11:00 a.m. ET

Executives

R. Richard Fontaine - Executive Chairman
Daniel A. DeMatteo - Vice Chairman & Chief Executive Officer
David W. Carlson - Chief Financial Officer & Executive Vice President
Tony D. Bartel - Executive Vice President - Merchandising and Marketing

Analysts

Anthony Gikas - Piper Jaffray
Benjamin Schachter - UBS
William Armstrong - C.L. King & Associates, Inc.
David Magee - SunTrust Robinson Humphrey
Arvind Bhatia - Sterne, Agee & Leach
Mike Hickey - Janco Partners, Inc.
Edward Williams – BMO Capital Markets

Presentation

Operator

Good morning. Welcome to GameStop Corporation’s Q3 2008 earnings conference call. Today’s call is being recorded. At the conclusion of the announcement a question-and-answer session will be conducted electronically. Anyone wishing to ask a question may signal us by pressing the “*” key followed by the digit “1”. If you find your question has been asked, you may remove yourself by pressing the “#” key. I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop’s public documents and is the property of GameStop. It is not for rebroadcast or use by any other party without the prior written consent of GameStop. At this time, I would like to turn the call over to Dick Fontaine, Executive Chairman of GameStop Corporation. Please go ahead sir.

R. Richard Fontaine

Thank you and good morning and welcome to GameStop’s third quarter conference call. I’m Dick Fontaine, GameStop’s Executive Chairman. With me this morning are Dan DeMatteo, our recently appointed CEO, Paul Raines, our Chief Operating Officer, and David Carlson, our Executive Vice President and Chief Financial Officer.

In my new capacity as Executive Chairman I’ll be focusing on the development of our more immature European operations and future growth as well as concentrating on strategic issues and additional acquisition opportunities.

And before I turn the call over to Dan, I want to say how positive I am about his ascendency to the CEO position. Dan understands the video game business better than most anyone in retail and has played a huge role in moving our company to where we are today. Dan and I have worked side-by-side for all 11 years of GameStop’s existence and we couldn’t have a more experienced leader with a real passion for the business leading our company.

And with that I’ll turn it over to Dan.

Daniel A. DeMatteo

Thanks Dick and good morning. As you know, this morning we released our third quarter financial results and gave guidance for Q4. In spite of the current economic environment we grew sales and non-GAAP earnings over last year which was a record-setting quarter with the release of Halo 3 and 46% comps. Once again the consumers accepted the great entertainment value that video games provide. While sales were off slightly off our previous forecast due to unexpected softness internationally, we offset this through strong expense control and met the high end of our earnings guidance. Dave will give you more details on the specifics of our financial results.

In the quarter our 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 us confidence that software sales will continue to grow this year and into next and this cycle will be longer and broader than any before. And our buy/sell trade model continues to work well in this economic environment as consumers traded in record numbers to buy new video games.

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.

We have reduced our earnings estimates slightly in Q4 to reflect some level of uncertainty when we switch from the primary game player to the gift giver as a sales driver. But we are still forecasting double-digit earnings growth in the quarter and 30% to 33% growth for the full year.

In the quarter we 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 we 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. To date we have opened 15 of these stores and expect to have 23 by year end. As a matter of fact, our new store program continues to deliver results well in excess of our IRR expectations.

As Dick mentioned in the release this morning we completed our acquisition of Micromania, 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. We expect to pay off the short-term loan we made for this acquisition by the end of the holiday season out of free cash flow.