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November 29, 2005

Full Transcript of GameStop’s 3Q05 Conference Call – Prepared Remarks (GME)

Filed under: Conference Call Transcript — Tags: — admin @ 12:00 am

Executives:

Dick Fontaine, Chairman and Chief Executive Officer

David Carlson, EVP and Chief Financial Officer

Dan Dematteo, Vice Chairman and Chief Operating Officer

Analysts:

Edward Williams, Harris Nesbitt, Analyst

Elizabeth Osur, Citigroup, Analyst

Michael Wallace, UBS, Analyst

Arvind Bhatia, Southwest Securities, Analyst

Bill Armstrong, C.L. King & Associates, Analyst

Tony Gikas, Piper Jaffray, Analyst

Gary Cooper, Banc of America Securities, Analyst

Operator

Good morning and welcome to GameStop Corporation’s Third-Quarter 2005 Earnings Results 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

I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop’s public documents and is property of GameStop. It is not for rebroadcast or use by any other party without prior written consent of GameStop.

At this time, I would like to turn the call over to Dick Fontaine, Chairman and Chief Executive Officer of GameStop Corporation. Please go ahead, sir.

Dick Fontaine, Chairman and Chief Executive Officer

Thank you. Good morning and thanks to everyone for joining us for our third-quarter conference call. I am Dick Fontaine, the Chairman and CEO of GameStop. With me today, as is our usual lineup, are Dan Dematteo, our Vice Chairman and COO and David Carlson, our executive VP and Chief Financial Officer.

Historically, we have released our third quarter about a week and a half before the kickoff to the holiday season. But this year due to the work pertaining to our merger with EB, we are already into the holiday season and to that degree, we will be touching on some early trends of the fourth quarter, but I want to reinforce that we will not be discussing in detail specifics of that quarter.

As we reported this morning before the market opened, GameStop had another solid and I might add a very busy third quarter. There are three significant aspects to the quarter that I want to stress before I turn the call over to David and Dan. David will take you through the numbers and Dan will talk about some of the trends in the titles and with a number of the pieces of hardware.

First of all, the quarter was a real test of the resiliency of the GameStop model and it came through with flying colors. Given the dual challenges of comping against a gigantic new title schedule in 2004 led by Grand Theft Auto: San Andreas where we sold 400,000 copies last year, Fable and other strong titles, combined with the general economic malaise of the third quarter this year with the hurricane impact and the soaring gasoline prices, we were able to achieve our earnings goal and in large part due to the fact that we had a huge increase in our used business from 27.5% of sales in 2004 to 31.9% this year. The shift to a more value-oriented customer generates more margin per unit but at a somewhat reduced average price point. A trade-off that we will gladly take and particularly as we continue and have again during the third quarter increased our overall marketshare.

Without a question, the most important strategic initiatives to ensure the long-term success of GameStop were cemented during the quarter as we began the hands-on work of integrating two very large former competitors. There is no question in my mind that the building blocks of a successful merger are determined from the very first steps taken and the key decisions made and we are off to an excellent start.

The work involved and the time taken to build the integration teams’ craft, the POS and systems plans, assess the distribution alternatives, evaluate our international operations and identify the interim and permanent organizational structure and so much more doesn’t as yet show up as a positive in the quarterly numbers, but to me it is the single most important accomplishment of the third quarter.

The third point I would like to make is as we roll through November and as we have forecast in the past, we are facing two seismic events that will have a huge impact on the numbers during the quarter. One, last year we sold 750,000 copies of Halo 2 during the quarter, which was the best-selling software title ever. While our title lineup this year is strong, there will be no single software title to compare with Halo 2. Again, this isn’t new news. It is more from the standpoint of reinforcing the order of magnitude.

The second point is the late release of the Xbox 360 on November 22nd. In all our years in business, we have not had such a major hardware release so close to the kickoff of Black Friday. And this was a blowout sell-through success but it did have a depressing effect on sales leading up to the launch as people were saving their money and we believe will exert some continued downward pressure on sales as many consumers for the next couple of weeks continue to hunt and hope. I know you’re all very interested in what the future flow will be like on this product and Dan will be taking you through that in just a second. And with that, I would like to turn it over to David who will get into the numbers of the quarter in more detail.

David Carlson, EVP and Chief Financial Officer

Good morning. Before the market opened today we released our sales and earnings results for the third quarter of fiscal 2005. GameStop’s sales for the third quarter increased 28.2% over the prior year to 534.2 million. This included three weeks of sales from Electronics Boutique from the closing date of the merger. As expected, comparable store sales decreased 12% for the quarter due to difficult comparisons with the prior year when Grand Theft Auto: San Andreas and Fable, among other titles, launched.

For the third quarter we reported a net loss of 2.5 million or $0.04 per diluted share. This loss included pretax merger costs of 18.8 million or $0.19 per diluted share and hurricane losses and disaster recovery costs of $1 million or $0.01 per diluted share. Excluding the merger costs, diluted earnings per share were $0.15, at the high end of our previously released guidance. Gross margin rates improved 460 basis points during the third quarter in spite of a 35% increase in hardware sales. This was accomplished through strong used videogame sales coupled with exceptionally strong co-op advertising funds from our vendors in support of their very competitive title lineups.

Comparatively, co-op funds were weak in the prior year quarter as most vendors did not spend heavily in the face of Grand Theft Auto and Halo 2. SG&A expenses, as expected, were higher than the prior year as a percentage of sales due primarily to expenses related to the relocation of our general office and warehouse to our new facilities in Grapevine, including duplicate occupancy costs for both the new and old facilities and to the negative leverage associated with the forecasted drop in comparable store sales.

Our balance sheet remains very strong with 81 million in cash at the end of the quarter. Inventory on a store-by-store basis increased by 15% from the prior year quarter primarily due to increased videogame hardware levels, experiencing shortages in the prior year. Due to tighter supplies of Xbox 360 than anticipated and slower new videogame software sell-through in the first three weeks of November, we have revised guidance for the fourth quarter and the full year. We now expect comparable store sales for the fourth quarter to range from flat to plus 2%. However, the strength of the used videogame business and the low margins on the lost sales from Xbox 360 hardware shortages give us the confidence in our forecast per diluted earnings per share to range from $1.65 to 1.70 for the full year. Now I’ll turn it over to Dan for his comments.

Dan Dematteo, Vice Chairman and Chief Operating Officer

Thank you, David. As mentioned in our press release, the highly anticipated Xbox 360 has had a negative effect on new title releases in the first three weeks of the quarter as core gamers needed to conserve their cash for this big ticket purchase. As reported everywhere, the very limited quantities sold out in record time and our tie ratios of software and accessories has hit all-time highs. We are attributing this high tie ratio to the continued growth in our trade-in model, which allows consumers to purchase new games with less out-of-pocket cash.

Going forward, we expect Xbox 360 to be extremely constrained and we will fall short of our sales plan in the category. But we do not expect this sales shortfall to have a much effect on fourth-quarter earnings due to very low margins of videogame hardware. As we demonstrated in the third quarter, high levels of used games drive used sales and our inventory per store in the used category has never been higher. So we are well-poised to serve the budget-oriented consumer that drives sales at this point in the cycle.

Our marketing plans for the Company are in place and we have run our first combined company, FSI, this weekend and we will be running others in the quarter.

In summary, we expect sales for the fourth quarter to be driven by games for the current platforms, handheld systems and used games. Some of the best-selling titles are expected to be Call of Duty for the Xbox 360 for Mac division, WWE Smackdown for the PS2 from THQ, Mario Cart for Nintendo DS from Nintendo, 50 Cent Bulletproof for the PS2 and Xbox from Vivendi, Star Wars Battle Front II for PS2 and Xbox from Lucas Arts and Nintendogs for the Nintendo DS. Thank you and I’ll turn it over to the moderator for a question-and-answer period.

Question-and-Answer Session

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