GameStop Corp.
Q1 2018 Earnings Call Transcript

Published: 1 Jun 2018

[Operator:]

Ladies and gentlemen, please standby, we’re about to begin. Thank you, and welcome to GameStop’s First Quarter Fiscal 2018 Earnings Conference Call. Today's call is being recorded. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Any such statement should be considered in conjunction with cautionary statements in the earnings release and risk factors discussed in reports filed with the SEC. GameStop assumes no obligation to update any of these forward-looking statements or information. A reconciliation and other information regarding non-GAAP financial measures discussed on the call can be found in the company’s earnings release issued earlier today, as well as in the Investor section of the company’s website. Now, I would like to turn the call over to the company’s Executive Chairman, Mr. Daniel DeMatteo. Please go ahead.

[Daniel DeMatteo:]

Good afternoon everyone, thank you for joining our 2018 first quarter earnings call. Joining me today on the call is Shane Kim, our newly appointed Interim CEO and longstanding member of the Board of directors; Rob Lloyd, our Chief Financial Officer and as we announced today, our Chief Operating Officer; also, in the room with us are Dan Kaufman, EVP and Chief Legal and Administrative Officer; and Jason Ellis, our President of Technology Brands. I wanted to start today's call by discussing the leadership changes we announced this afternoon in conjunction with our first quarter results. If you know that earlier this year I stepped in as GameStop’s Interim CEO as part of the Board immediate succession, planning and protocol. This was intended to be an interim move while the Board considered candidate to fill the position on a permanent basis. I was happy to fill the role and given my long tenure with the company and continued involvement as Executive Chairman, the move was a natural short-term step to take during a time of unanticipated transition. Today, we are announcing that Shane Kim a valued member of our Board of Directors since 2011 and former Microsoft executive is assuming the role of Interim Chief Executive Officer. Shane will serve in this capacity while we conduct a search for a permanent CEO. He also will continue serving as a Board member. With Shane's appointment I will turn to my supporting and advisory role as Executive Chairman. During this time of transition, we have found ourselves in an advantageous position of leveraging the experience we have on our highly engaged Board of Directors. And this particular instance same brings a number of great assets to the role including his knowledge and expertise in the video game industry, its similarity with GameStop’s based on his 7-year tenure on the Board and his eagerness to get closer to GameStop’s business model and work closely with the senior team. These increased engagement in the business provides another resource with the leadership team as we remain focused on our key priorities to continue improving our overall performance. We are truly fortunate to be able to capitalize on his leadership and experience at this time. Shane spent 20 years working at Microsoft, most of that time was spent in the Microsoft game studios in the Xbox division publisher of some of the biggest franchises in history including Halo. He led that organization from 2004 to 2008. We are excited to have Shane step into this capacity on Interim basis and look forward to the insights, energy and intensity he will bring to the role. As for me stepping back into the role of Executive Chairman is where I believe I can add the most value to the organization. I will remain actively engaged in the business and focus on helping the organization through the transition including assisting with the CEO search and supporting Shane in any way possible. Looking ahead over the next several months we see this interim structure serving us well particularly given we are not announcing a sudden change for our strategy. We remain focused on the fundamentals of being a world class retailer and improving the operations of the three profitable businesses we have today. In the near term, we will hold off making additional acquisitions. We will work diligently to improve the performance of our technology brands and pre-owned business to drive profits. We are also find ways to ignite our videogame business by leveraging our passionate customer base and industry leading position. The collectibles business continues to be a promising opportunities to drive sales growth. A category grew nearly 30% during 2017 and another 25% in this quarter. We look to build on the strength and momentum of that category. With all that said I would like to give Shane a chance to introduce himself, share a little about his experience and talk about why he is eager to take on this role. Then Rob will walk us through a review of the first quarter results. But before I turn it over to Shane on behalf of the Board I want to congratulate Rob on his promotion to COO as well as Chief Financial Officer. Rob has been with GameStop for 20 years and has served as CFO since 2010. His leadership, steady hand and his knowledge of the business are invaluable assets for GameStop, not only do these attributes make Rob a great candidate for the permanent CEO role but they will be instrumental in helping us navigate these changes as well. Now I'll turn it over to Shane.

[Shane Kim:]

Thank you very much for that introduction Dan. I would also like to start by congratulating Rob on his promotion today. Speaking on behalf of my fellow Board members this is a promotion recognizing Rob for his successful track record and performance as well as the many contributions to the company through his time as CFO. He has played a key role in driving our operations in the past few months and as we move forward he will play an even larger role in his expanded capacity. His leadership dependability have always been appreciated by the Board and he has clearly been a source of stability during a period of considerable change. Also, on behalf of the other Board members I want to say thank you to Dan DeMatteo for having step back into the interim CEO role and off course to Dan Kaufman for his continued leadership during this period of transition and change. Now as for me I'm super excited to assume the role of Interim CEO while the Board conducts a search for a permanent CEO. In full transparency I am stepping in strictly on an interim basis because I have a real interest in helping the company at this time. I am not a candidate to fill the role on a permanent basis. My job during this period is to provide the additional leadership, passion and focus needed to enable our associates to drive the company forward. I will be focusing my efforts on the following priorities. First, I will provide additional leadership, strategic thinking and decisiveness to the team, ensuring that we stay focused on the company’s key priorities. We will continue our collective efforts to improve the retailing fundamentals of our video game and tech brands businesses. Second, I will focus on building the unique assets that provide us with valuable competitive advantages including our PowerUp Rewards loyalty program, our pre-owned trade capabilities, our expansive global retail footprint and our strategic partnership with AT&T. And third, I am committed to enhancing our overall performance and profitability. I am not here to make changes to the strategies we have already begun executing. We will continue to be disciplined in our operations, transparent in our communications and shareholder friendly in the way we deploy capital. In addition to fulfilling the daily responsibilities of the interim CEO role I am also going to be working closely with my fellow Board members during the search process for a permanent CEO. This will be a comprehensive search process to ensure we hire the right person to lead the company. GameStop is a very strong company with great people and valuable assets. We are obviously facing some interesting challenges. Our goal is to find the best person to provide the required leadership and energy for the company. Our shareholders and especially our associates deserve nothing less. And as Dan stated, Rob is a strong candidate for the role. We are very aware that we have areas of our business that can be improved and attractive opportunities that can drive GameStop’s profitability in the long run. I am here to help and support the organization deliver on that goal in any way that I can. I appreciate the confidence that Dan and the rest of the Board have placed in me as I step into an operational role after having served on the Board for the last seven years. Prior to that, I’ve spent 20 years in Microsoft with most of that time in Microsoft Games Studios of the Xbox division. I had the honor of leading that organization from 2004 to 2008 when we enjoyed tremendous success. I am intimately familiar with the games industry and will help the leadership team continue to navigate its changing dynamics. So, with that, I would like to thank Dan as our Founder and Executive Chairman as well as the other members for the Board for their confidence in me and for the opportunity to serve in this capacity. Now I will turn the call over to Rob for his review of the first quarter.

[Robert Lloyd:]

Thank you, Shane. And good afternoon, everyone. And thank you to all our associates around the world for your efforts and for taking care of our customers. I am very appreciative of the opportunity and excited to be taking on larger role helping to drive the overall business as COO and CFO. I am looking forward to working even more closely with the US video game business to drive change and improvement. Overall, we delivered first quarter earnings that were in line with our expectations as we anniversaryed a strong quarter last year that included the extremely successful launch of Nintendo Switch as well as a very strong tighter line up. From a top-line perspective, first quarter total sales decreased 5.5%, down 7.5% in constant currency and our comparable store sales declined 5.3%. The comp decline was primarily driven by anniversarying stronger hardware and software performance last year due to product launches. In the U.S. comps decreased 2.6% and international comps decreased to 11.6% with the contrast in performance driven by higher Switch allocation last year in international markets driving stronger sales last year. Our video game hardware business declined 7.9% due to the Switch launch last year, however we saw a nice growth in the Xbox One and PS4 console sales this quarter as both of those platforms remain strong. Software sales decreased 10.3% in the quarter in line with our expectations given the strength of the title line up last year. God of War and Far Cry 5 were solid launches this year however they were up against Tom Clancy's Ghost Recon Wild Lands, Horizon Zero Dawn, For Honor, Mass Effect

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from Colin Sebastian from Robert W. Baird. Please go ahead.

[Colin Sebastian:]

Great, thanks. First of congrats to Shane and Rob on their new roles, whether interim or not. My first question is really high level given the management changes but I wonder if there is an expectation that a new CEO would make changes in the strategies that might hit outlined in the last call and whether the Board might simultaneously take the opportunity to look at any strategic alternatives for the company. And then more specifically on tech brands for Jason or anyone else what is the potential timing for changes being made to the compensation agreement or structure with AT&T? Thanks.

[Shane Kim:]

This is Shane. I’ll take the first shot at that Colin and thank you very much for the sentiment. I think it’s important to remember that the Board is involved in the strategy development for several years, and we have been along for the ride this entire time. And so, we absolutely believe and support the direction that we’re going. And we see no reason to change. Our plan is to continue to execute on the strategies that we have been executing on, there is a lot of work for us to do. But we’re excited about the opportunities that are in front of us.

[Daniel DeMatteo:]

So, Jason do you want to take the second part of the question?

[Jason Ellis:]

You bet. Good afternoon Colin. Let me start by saying that we have a great relationship with AT&T and it continues to strengthen. We’ve met with them several times over the first part of this year and have worked with them to really stabilize the compensation. And as Rob noted in his script, focusing that on some of the higher cost areas, where we funded growth over the last several years. And we expect that we’ll see most of that compensation come into play mid-year for us. I do think it’s important to note that it’s unit-based. So, there is some variability in transaction volumes and traffic in our retail stores, which is, as Rob noted, why we’re not making any changes to the guidance. But we expect that the second half of the year for us will be really good.

[Colin Sebastian:]

And maybe one quick follow-up if I may. How are you evaluating customer engagement resulting from the promotions in the pre-owned category? I wonder, if you’re able to conclude or is it too early whether this is leading to higher lifetime customer value. Or are there KPIs that you’re using to evaluate?

[Robert Lloyd:]

Colin, this is Rob. We use a variety of different metrics to measure whether or not we’re driving the trade, trade penetration, pre-owned sales. And depending upon what it is that we’re doing promotionally to get the customer engage with measuring activity levels by customer to understand whether or not we’re changing their behaviors, bring new people into the mix and things of that nature. It’s early, I think to say, whether or not, we’re driving lifetime value just yet, but among the things that we’re testing, that would obviously be the ultimate goal.

[Operator:]

And we’ll take Ben Schachter with Macquarie. Please go ahead.

[Benjamin Schachter:]

Few questions if I could. First Shane, can you just talk a little bit about why you’re interesting taking the role permanently? And then Rob, if you could talk a little bit about on what the CapEx is been spend and maybe remind us what that looked like last year. And then finally, given where the stock is, should we expect management to be talking about potentially buying shares? I mean, the language about the trend line sound pretty good, stock obviously going the other way. So why wouldn’t we see the company and/or management buying back stock here? Thanks.

[Shane Kim:]

Okay, I’ll start. So, this is Shane sorry. I’ll let Rob handle the last two questions. I’m not a candidate for the job permanently. Because look, I left Microsoft in 2010, I retired then and have really enjoyed my, I guess my next career as a Board Director, especially the time that I’ve spent as a Director for GameStop. I intend to return to the Board when we hire the permanent CEO. And so that’s really the best answer, isn’t that? I am very happy to be stepping in right now. I think there’s tremendous opportunity. Obviously, there’s a need for someone to provide leadership and energy at this particular time until we find the next -- until we find the permanent CEO. So, I will be working very hard on that, and then I will return to my role on the Board of Directors.

[Robert Lloyd:]

With respect to the CapEx, the spend level for the year is estimated 110 million to 120 million which is pretty consistent with where we were last year. We are shifting some of the capital dollars around with the recognition that we in the United States in particular have allowed our store appearance to lag. We have seen better results internationally in the last two or three years and I think that’s largely because we have invested in the stores there, we've remodeled, we’ve made sure that we have a more customer friendly shopping environment and we haven’t kept pace in the U.S. So, we will be using some of the -- again roughly the same size total pool of CapEx to make sure that we are providing a better customer experience in the U.S. stores. And we are also making some omni-channel investments as well in order to drive that part of our business which as you know grew tremendously last year. In terms of stock buying by the company and by management, the Board continues to evaluate the use of capital and our capital allocation plans, that’s a continuous effort. And in terms of stock buying by management, each of us on the management team has a pretty substantial part of our network tied up in GameStop and we are committed to the company 50% or more of our pay is paid to us in the form of stock compensation. So there continues to be investment in that, much of that compensation is tied to performance measures. So, we succeed as the company succeeds. And so, at this stage, I'd say that that’s what’s formed our view on stock purchases.

[Operator:]

And we will move on to Brian Nagel with Oppenheimer. Please go ahead.

[Brian Nagel:]

Congratulations to Rob and Shane. So, my first question, I guess this is for Rob, are to video game hardware and software sales in the quarter, you called out the lapping of the success of Switch last year. Is there a way to parse it out further and say how much the lapping Switch actually did impact those rates or what the trends would have looked like had Switch not been a factor? And then second to that, understand that this gets kind of messy with these comparisons but how would you characterize overall demand at this point for Switch related software?

[Robert Lloyd:]

I am sorry, repeat that last part?

[Brian Nagel:]

I am just wondering if you look at -- and I understand it gets challenging with the comparisons, but how would you characterize the demand right now for the Switch hardware and software?

[Robert Lloyd:]

Okay. Let me start with the first part of the question. So, I think in my remarks what I talked about was that the hardware sales were down 7.9%. What we saw inside of that though was growth in both Xbox One and PlayStation 4 console sales. The Xbox One was a nice driver for us, I don’t know that we get to the level of granularity to tell you what each category did but we are pleased with what we are seeing in Xbox and PlayStation we are pleased with the efforts that we are seeing from those console makers to be competitive in the marketplace. And then of course last year with respect to the Switch we did very well at the launch, it was the hottest thing that customers could get their hands on and so it was -- we sold a lot of it in the two months of the quarter that it was in the marketplace. I think that we are seeing a very steady level of demand for Switch right now and a very steady level of demand for the Switch games. It's surprising to me when I read the reports on a weekly basis how the even Zelda which launched a year ago continues to do on a week-to-week basis.

[Brian Nagel:]

And my follow-up question, with regard to tech brands and you discussed some of the potential changes happening with AT&T compensation plan. In your net comment you also mentioned promotional activity within the space so I'm wondering if you can elaborate -- Robert elaborate a little bit further on that with the nature of the promotional activity how long if you last that type of thing.

[Robert Lloyd:]

Well AT&T and Jason can add some further color. AT&T has not been as promotional as we typically see them in their cadence throughout a quarter and they've not been as promotional with respect to their competition as we would expect to see and that has an impact. I don’t know if Jason is there anything else you'd add to that.

[Shane Kim:]

No, I mean Brain it's a very competitive space that AT&T is in and they are an organization that's going through a tremendous amount of transformation on their own, so we are subject we are finding that consumers are very keen to when the promotions are on versus off and also product launches. So, we are paying a lot of attention to how we maximize the opportunities that are coming in our retail stores during those periods. We also expect that AT&T will be aggressive this year they have a lot of incentive to grow their business and we are a big part of how they do that. So, we don't expect that they will be on the sidelines or not as competitive we really expect them to do promotional with the second half of the year.

[Operator:]

[Operator Instructions]. We'll move on to Curtis Nagle with Bank of America Merrill Lynch.

[Curtis Nagle:]

So, I think you guys mentioned that you would increase square footage in 1Q for the Collectibles business so I was just curious how much that was and what the expectations are for the rest of the year?

[Robert Lloyd:]

Yes, I think that the comment was actually Curt that the part of the reason for the growth was the square footage expansion and that would be a comparison of the first quarter of this year to what the square footage was dedicated to Collectibles in the first quarter of last year. It's not necessarily that we increase square footage again in this quarter.

[Curtis Nagle:]

Right so you are saying from the square foot I mean there was a -- as I understand at least a big increase last year so it's basically tailing off of that?

[Robert Lloyd:]

Yes.

[Curtis Nagle:]

Okay. And is there an expectation to increase within the stores anymore or just kind of steady state from here.

[Robert Lloyd:]

We've got a lot of work going on around making sure that the various store sets with respect to Collectibles are occupying the right amount of space for what was intended given the store size, given the demographics of the markets etcetera. So, with respect to that we've got work going on to increase the number of allocation bands that we use in order to manage that business. So really, I would call it more of a rightsizing than an expansion of the square footage.

[Curtis Nagle:]

And then just as a follow-up. Are you guys still expecting approximately 10% to 15% of earnings falling in 1Q, or sorry 1H?

[Robert Lloyd:]

Yes. If you look at the results for the quarter and compare that to our range for the year. Obviously, we’re at the lower end of that. We exceeded the 10%. But I would certainly not go beyond the 15 as you’re modeling the total impact to the first half.

[Operator:]

And there are no further questions. I would now like to turn the call back over to Interim CEO, Shane Kim for remarks.

[Shane Kim:]

Thank you. Thanks everybody again for your time today. Again, I am super excited to be here and even more excited by the opportunity we see ahead for GameStop. I want to thank our many associates around the globe as we join together to drive our business. We look forward to continuing to update you on our progress in our future and including our next earnings call in early September. Thank you very much.