GameStop Corp. (GME)
Q4 2009 Earnings Call Transcript
March 18, 2010 11:00 a.m. ET

Executives

Dan DeMatteo – Chief Executive Officer
Rob Lloyd – Interim Chief Financial Officer
Paul Raines – Chief Operating Officer
Tony Bartel – EVP of Merchandising & Marketing

Analysts

Sean McGowan – Needham & Co.
Matt Hickey – Janco Partners
Eric Cohen [ph] for Anthony Chukumba – BB&T Capital Markets
David Magee – Suntrust Robinson Humphrey
Ben Schachter – Broadpoint Amtech
Scott Tilghman – Hudson Square Research
Robert Higginbotham – Goldman Sachs
Edward Williams – BMO Capital Markets
Arvind Bhatia – Sterne, Agee & Leach

Presentation

Operator

Good morning. Welcome to GameStop Corporation''s 2009 quarter four and year-end earnings conference call. Today''s call is being recorded. At the conclusion of the announcement, a question-and-answer session will be conducted electronically. (Operator Instructions) 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 can remove yourself from the queue by pressing the pound 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 a 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 Mr. Dan DeMatteo, Chief Executive Officer of GameStop Corporation. Please go ahead, sir.

Dan DeMatteo – Chief Executive Officer

Good morning and thank you for attending today''s GameStop conference call. With me today are Paul Raines, our Chief Operating Officer; Tony Bartel, our EVP of Merchandising & Marketing; Mike Mauler, our EVP of International; and Rob Lloyd, our Senior VP of Accounting and acting CFO.

As we reported today, January finished strong, and earnings came in at the high end of the range, due to better-than-anticipated software sales. As a matter of fact, we gained significant share in both January and February, as our new software grew single digits compared to double-digit declines for the industry; and we had a record month in February, when we sold almost 50% of the new title releases. We attribute this market share increase to the model we have developed, which continues to resonate with the value-conscious consumer. Rob will give you more details on the 2009 financial wrap-up.

And just as an aside about the industry in 2009, as reported, video game sales declined 9.7% from the prior year, but if you back out the music genre out of both years, sales were flat with 2008, the highest record software year ever. We expect to see growth in both new and used software in 2010, and used continued gaining market share. Our first quarter should be positive over last year, with releases like Final Fantasy XIII, Heavy Rain, and many others. Paul will give you more color on this quarter and prognosis for the future. Based on this release schedule, we forecast earnings growth between 14% and 18% for the year; and Rob will go over the financial details for 2010.

Now, I would like to address some concerns that have been raised while we were in our quiet period. The resignation of our CFO will have no impact on the company. She left for another opportunity. There is nothing wrong with our books or our future outlook. Rob Lloyd has been with us 14 years and is well qualified to act in this role.

Next, Redbox is testing video game rentals in some markets. Video game rental has always been a channel of distribution in the industry, and I see it as a shift from rental stores to machines if they are successful with no impact on our sales.

There seems to be concern over our used model. The recent promotion we have been giving consumers, and incremental 50% for trades is in line with other promotions we have done in the past to drive trades post-holiday, when we are low on inventory. Used USA inventory was down 2% on a per-store basis before we began this offer, and now it is up. We don''t expect it to have a meaningful impact on margin rate in Q1. As an aside, it has worked extremely well, and because of our external marketing of the offer, we are seeing consumers trade with us that never had before. The competition in this used space has diminished, with the removal of the trade machines in Best Buy and Wal-Mart, and the closure of many Game Crazy stores, which is part of Hollywood. And as we discussed last quarter, our margin rates will be impacted by a mix, as less mature companies countries ramp up their used game penetration. Rob will discuss this in more detail.

We have been asked why we are continuing to add more stores. First, we see many opportunity to add stores in markets where we have no presence. In all but some rare circumstances, we opened stores to take share from our competitors and not cannibalize our stores. This is translated to a continuous market share growth, and the returns on these stores are fantastic, and they continue to over achieve our financial model. Paul will give you more on this model.

Now, I would like to switch and discuss some strategies that we unveiled last fall at the BMO Conference. Beginning later this quarter, we will be testing the marketing of downloadable add-on content and its acquisition right in the retail store. This project has been worked on with our internal IT team and Microsoft. We have great expectations for our ability to drive sales of downloadable add-on content for the industry, and see it as a meaningful way to participate in digital sales. In May, we will be testing a new loyalty program that is designed to increase our share of boxed product sales, increase our knowledge of our customers'' purchasing preferences, and allow us to better serve and recommend products to our consumers today and in the future.

And last year, we announced the acquisition of a browser game publisher, Jolt. Beginning this month, you will see marketing in our stores to drive traffic to their game, Legends of Zork. We see this test as another meaningful way we can participate in the growing browser game category, and we will use key learnings from the test to drive traffic to other publisher''s browser games.

With that, I will turn it over to Rob for a more detailed financial review.