GameStop Corp.
Q4 2019 Earnings Call Transcript

Published: 27 Mar 2020

[Operator:]

Welcome to GameStop’s Fourth Quarter 2019 Earnings Call. This call is being recorded and will be made available.I would now like to turn the call over to Eric Cerny, Investor Relations.

[Eric Cerny:]

Thank you, and welcome to GameStop’s fourth quarter and fiscal 2019 earnings conference call. This 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 the cautionary statement and the Safe Harbor statement 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 earnings release issued earlier today, as well as the Investors section of our website.With me today are GameStop’s, Chief Executive Officer, George Sherman; and Chief Financial Officer, Jim Bell. On today’s call, George will share insight into our fourth quarter and fiscal 2019 performance and updates regarding GameStop’s strategic framework for the future. Jim will then provide more detail on our financial results and expectations for fiscal 2020. Then, we’ll open the call up to your questions.Now, I would like to turn the call over to the company’s Chief Executive Officer, George Sherman.

[George Sherman:]

Thanks, Eric. Good afternoon, everyone, and thank you for joining us today on our fourth quarter and full-year earnings call. Before I begin a review of our 2019 financial results, I’d like to update you on how we are navigating our business during the COVID-19 pandemic.As you’re aware, the situation remains fluid with each day bringing new information. Our highest priority is ensuring the health and safety of our associates and customers around the world. We have been steadfast in our adherence to CDC-guided safety and local government orders for retailers in each of our communities.We have countrywide closures in Europe, primarily in Italy and France. And where we have stores that are open, we have temporarily closed our storefronts moving to curbside pickup at stores to facilitate buy online and pick up in store orders and e-commerce deliveries only.As millions of consumers adapt to remote work, play and learning, we’re pleased to be able to serve their needs. In fact, we’ve seen an increase in store and online traffic over the past few weeks. We remain committed to continuing to meet those needs in a safe environment.As for the impact on any supply chain and manufacturing for the new consoles, we will continue to work with the console makers as the launch approaches. But as of now, we have no indication of any impact on the product launch or delivery date, which is expected in time for holiday 2020.In the near-term, we continue to monitor inventory levels for specific categories that might be impacted by shipping or delivery delays. But as of now, any impact has been minimal.As Jim will highlight during his remarks, we will pay all U.S. employees, whose hours have been eliminated, an additional two weeks at the regular pay rate, based on the average hours worked over the last 10 weeks. In addition, the company will reimburse all benefits – all benefit eligible U.S. employees, one month of the employee portion of the benefit expenses.Now turning to a review of fiscal 2019, beginning with our fourth quarter. The fourth quarter concluded the year in which we achieved significant progress against our key priorities, focused on optimizing our business model, strengthening our balance sheet and improving our cash flow in a period that was expected to see significant declines in sales.Our overarching goal is to capitalize on GameStop’s leading global market position and strong loyalty base to stabilize sales trends and ultimately position the company for sustained long-term profitable growth.Overall, our fiscal year top line results were in line with our January update. Our bottom line results were better-than-expected, demonstrating strong progress toward our key priorities of fueling gross margin expansion, a reduction in SG&A expenses and a strengthened balance sheet.As expected, sales were down double digits, driven by the industry-wide headwinds we’ve discussed before, as we’re in the late stages of the current console cycle, as well as working against the strong fiscal 2018 fourth quarter, which saw a strong accessories business related to Fortnite market penetration.We are steadfast in our mission to accelerate the changes needed to our operating model, to position the company to capitalize on the way consumers are shopping and gaming today. We’re accelerating our digital capabilities and testing new experiential elements in their stores.In 2019, we have built a new web platform, introduced new omni-channel capabilities, including buy online pick up in stores with encouraging results. However, we’re still early in that activity.In terms of the fourth quarter results, overall, consolidated global sales were $2.2 billion, reflecting a comparable sales decline of 26%, and we delivered adjusted operating income of $109 million and adjusted earnings per share of $1.27.For the fiscal year, consolidated global revenue declined 22%, reflecting a comparable store sales decline of 19.4%. Adjusted operating income was $62 million and adjusted EPS was $0.22.We remained intensely focused on inventory reduction and working capital improvements in fiscal 2019. And these efforts drove a 31% reduction in inventory and a 64% reduction in accounts payable, putting us in position to enter fiscal year 2020 with a significantly stronger balance sheet fundamental.2019 was a challenging year as we entered the low point in demand for the current console cycle. However, there were some bright spots and we made significant progress against our key initiatives.As a reminder, our strategic plan is anchored on four key tenets

[Jim Bell:]

Thank you, George. Good afternoon, everyone. I’d like to take this time to walk you through our fourth quarter and full-year 2019 results in more detail. And then I’ll share some insight into how we’re approaching fiscal 2020.As George shared with you, fiscal 2019 saw strong progress toward our transformation plan, as we advanced our goals, focused on strengthening the underlying business and capitalizing on the advantageous position we have in the gaming industry. One of these primary objectives in 2019 was optimizing our balance sheet and specifically reducing liabilities, including payables and long-term debt, increasing cash flow, primarily through significant inventory management initiatives and deploying capital to return value to our shareholders.Additionally, our intense focus on inventory management is also contributing to improved gross margins. The result, we successfully ended the year with a strengthened balance sheet and the financial flexibility to navigate the near-term challenges posed by the end of the console cycle.Turning to our performance. We delivered both fourth quarter and fiscal 2019 top line results, in line with our January update and profitability ahead of our updated expectations on an adjusted basis.Looking at our fourth quarter results, total company sales decreased 28.4% to $2.2 billion from $3.0 billion in the prior year period. The overall sales decline was primarily attributed to a comp store sales decline of 26.1%, with the remaining 230 basis points attributed to closed stores and foreign exchange headwinds.Our comp store sales results were primarily driven by the fact that we’re in the late stages of the console cycle, which is putting pressure on traffic to the stores. We saw declines across all three categories

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Steph Wissink with Jefferies. Please state your question.

[Stephanie Wissink:]

Hi. Good afternoon, everyone. I have a few questions. Hopefully, these will go pretty quickly. But Jim, I just wanted to make sure I heard you correctly that the statistic you gave on 2% comp is month-to-date from March, not quarter-to-date through March last Saturday?

[Jim Bell:]

Hi, Steph, yes, that’s correct. It’s month-to-date through March through last Saturday, correct.

[Stephanie Wissink:]

And that’s a global measure as well?

[Jim Bell:]

That is on a global basis, that’s correct.

[Stephanie Wissink:]

Okay. And then the second question is on the dedensification of the stores. I think, you mentioned 320 at or above that level, which would imply 600 stores plus for the last couple of years. Can you just give us a snapshot of what the transfer rate has looked like? Anything George, you mentioned in your comments as well, this idea of creating kind of network profitability, so looking at adjacent stores and trade regions and looking at the profitability as you dedensify? Can you talk a little bit about what you’re seeing in the data?

[George Sherman:]

Yes. Steph, I think, when you talk about dedensification, we actually view this somewhat as some uncaptured synergy from the past, where there’ve been acquisitions and there’s closed stores in very close proximity.So this is a proactive process on our part is where we see the probability for heavy sales transference from one store to another. We drop occupancy, we operate one staff, we operate a far more efficient in far more profitable store. So we’re kind of working our way around the world as we look at that to see where there’s opportunity, but we certainly see plenty of it.

[Jim Bell:]

Yes. The – Steph, this is Jim. The – we haven’t really quantified publicly the effects. But suffice it to say, the percentage of transfer needed to break-even is fairly low. And while that’s the case, we’re significantly exceeding that in those stores that we’ve closed and what we’ve seen in terms of our transferability. So more to come on that as it unfolds. But at this point, we’re not – we haven’t quantified that in any particular way.

[Stephanie Wissink:]

Okay, that’s great. And last one for us is just on the working capital improvement you’ve seen. And the inventory, in particular, has been quite astonishing. Do you think about the business from a volume per store target level setting aside to generate the nine hardware, but thinking about the business today? How much further do you think you can reduce that inventory level from here?

[George Sherman:]

Yes. It’s – suffice it to say, I think, this is the right way to think about it. This is about cash conversion and optimizing cash conversion across the entire chain. And way – the one measure that we really focus on is the inventory turn. To be clear, this is not about just taking the inventories down, it’s about really creating that turn and cash conversion cycle or optimizing the cash conversion cycle.So from a total inventory turn, our targets are about five times. And so we’re exiting the year at about – just about four times globally. So you can see that on a long-term basis, our goal is one more full turn on the inventory.

[Stephanie Wissink:]

Okay, that’s great. And then I have to ask, when do you expect to start buying inventory in the the gen 9 hardware? When do you expect to be placing those orders?

[George Sherman:]

Yes. I mean, that we’re not going to really talk about the timing of that. But the general point is that, we’re already working and have been working with all the vendors, both on the hardware and the software sides and those cycles are – we’re in normal cycles with those discussions.

[Stephanie Wissink:]

Okay, great. Thanks a lot.

[George Sherman:]

Yes. You bet.

[Jim Bell:]

Thank you.

[Operator:]

Thank you. Our next question comes from Ray Stochel with Consumer Edge Research. Please state your question.

[Raymond Stochel:]

Great. Thanks for taking my question. Can you talk about what the economics of digital revenue sharing look like? And how that might be different from how you previously participated in the digital games market?

[George Sherman:]

Yes. Ray, it’s George. We’re not going to go into much detail on that. I think, if you look at our four growth pillars, certainly, we think the last one vendor – transforming the vendor relationships for the future of gaming is one of the key ones.I think, we’ve said from the start, it’ll take – it’ll have the – take the longest to develop. We’re pleased to say that we’re making some traction on that. We’re excited about what that looks like, but we’re not really going to give any level of detail on that way yet as we’re just getting started.

[Raymond Stochel:]

Got it. Thanks. And are there any details that you can give us in terms of market-level economics or comps for Tulsa, given your remodeled stores in the area, or any just general color on Tulsa and what you’re doing with your remodels?

[George Sherman:]

Yes, I wouldn’t Ray – and the reason that I wouldn’t given all this is that, Tulsa is to a greater extent than most other stores closed, because we put communal arena in gaming into these stores. We closed that portion early on. So when we had the potential for large congregation in our stores, we made a proactive move early in the Tulsa market to move away from that.So Tulsa is in a bit of a state of limbo right now, operating at that same level as other stores at delivery at door and not really a true representation of how the store is intended to work.

[Raymond Stochel:]

Great. Thanks, again.

[George Sherman:]

Thanks, Ray.

[Operator:]

Our next question comes from Curtis Nagle with Bank of America. Please state your question.

[Curtis Nagle:]

Good afternoon. Thanks very much for taking my questions. Maybe just starting with the SG&A in 4Q, it came in a good bit lower than we had expected. Could we just go through, I guess, what were some of the biggest incremental factors? How much do you have to do things like perhaps incentive compensation? How sustainable are these types of declines? And at least at a high-level, how to think about 2020?

[Jim Bell:]

Yes. We – everything that we’ve been talking about with respect to our first strategic tenant, optimizing the business and are focused on our $200 million profit improvement goal. As we’ve said, about half of that is around the expense structure. So what you’re seeing, Curt, is the evolution of all those changes. They do take time.There’s – we’ve – every single aspect of the business from the organizational changes we made in the late summer and early fall last year to every single contract how we operate the business in every facet has been scrutinized and is continuing to be scrutinized. You’re starting to see the evolution and the building and the annualization of those effects. That’s what you saw in the fourth quarter SG&A.As I mentioned, we’ve been – we’ve really only been at this as a leadership team since the middle part of last year. So you’re seeing there’s more opportunities. Those cost reductions start to annualize themselves throughout 2020. That really gives us – suffice it to say, I think, we’re on target with where our run rate is or the run rate of – to meet our target for that 2020 annualized figure that we’ve put out in the market.

[Curtis Nagle:]

Got it. Okay. And then maybe just going back to some of the commentary you made about traffic through – I guess, comps through March. Can you talk about a little, I guess, a little bit more about the cadence? Was there kind of initial buildup? What’s going on now that we have stay at home orders in place? Was there maybe initial buildup and now that’s falling off? But any detail on kind of how to think about that would be helpful?

[George Sherman:]

Yes. I’m not sure we can say that the buildup has changed. There certainly was one. I think, when this all began, there was a pretty good level of demand that we saw while our stores were fully opened. And that is the sales period that Jim talks about when you talk about through Saturday of last week. There have been a number of state, county, municipal regulations since then that have caused us to obviously change the way that we operate.So certainly, in a digital environment with shortened operating hours, we’re seeing a different level of demand in our stores. We’re thrilled with what’s happened in terms of digital. And we stated early on that as part of digital – our digital tenant, that we want to drive that part of the business.We’ve been happy with omni-channel ever since we launched our new platform in August of last year and the progress that it’s been making. We are most certainly seeing a more definitive move toward digital right now, including e-commerce pure play.

[Curtis Nagle:]

Okay. Thanks very much.

[George Sherman:]

Thanks, Curt.

[Operator:]

Thank you. Our next question comes from Joel Feldman with Telsey Advisory Group. Please state your questions.

[Joseph Feldman:]

Yes, hi. Good afternoon, guys. Wanted to better understand that – with the current situation with stores and doing curbside, how do you guys staff the store? Like is there one employee per store? I guess, is that allowed in most locations? And then also, do you need or have you found that you need to compensate the employees more to be working during this time period when there are orders to stay at home? I’m just trying to understand…

[George Sherman:]

Yes. Let me start – yes. Let me start at the top and just kind of make the point that we’re working with a volunteer team right now. So all of our team members be the in-stores, distribution centers or refurb centers are operating on a voluntary basis. So it begins with a team member that wants to be there. It generally is single staffing, in most cases. We are talking about certainly less volume that is traditional and no lock in traffic and no entry into the store.So that certainly changes the program quite a bit. So this is a fulfillment process effectively in the store, where it is in a very natural kind of way, metered in, in a manner that in most cases, one person can handle that workload. And then certainly, where we have breaks and wage hour elements that are for the states, we obviously are writing schedules to support all those as we always do.

[Joseph Feldman:]

Understood. Thanks for clarifying that. And then another question, just given the environment, we’re hearing a lot of your peers out there is talking about really consolidating the cash, and you guys are obviously in very good shape. But one of the things that’s been talked about has been reducing or stopping buybacks altogether in the near-term. I mean, do you guys have any thoughts on that?

[George Sherman:]

Yes. We haven’t been active in buying back stock in the period since the end of the year. We – as we entered 2020, from a capital allocation standpoint, we really, as we’ve talked about previously, really started to pivot and focus on our 2021 maturity of our 6.75 bonds, that hasn’t changed. But as you might expect, everything is about how do we continue to be very prudent and manage through a very – a set of very unforeseen circumstances with COVID-19 and the impacts.So we’re very pragmatic and very focused on how do we continue to manage through really what is an unknown over the course of the weeks and months to come. But again, I think you said it well, Joe, I appreciate that, that we are entering this time with a strong balance sheet. So we’re pretty confident we can navigate.

[Joseph Feldman:]

Got it. Thank you, and good luck with this tough time, guys. Thank you.

[George Sherman:]

Thank you.

[Jim Bell:]

Thank you, Joe.

[Operator:]

Our next question comes from Seth Sigman with Credit Suisse. Please state your question.

[Lavesh Hemnani:]

Hi, this is Lavesh Hemnani on for Seth Sigman. Thanks for taking our questions. So firstly, just to follow-up on the SG&A reduction in the quarter. I mean, it sounds like you guys are halfway through the plan, which should continue into 2020. But how do we think about like the financial impact from the stores that are not being run in the U.S.? I mean, just for curbside pickup right now?

[George Sherman:]

Yes. I mean, as you might expect, I mean, those stores that are running in the U.S., again, are running on a very limited staff. So you have some variable impact that is – that scales with those operations. Further to that point, we do have another variable set of work in the SG&A that is out of our DCs and our refurbishment center. So those obviously flex with the volumes as well.

[Lavesh Hemnani:]

Understood. And just sticking to the profit improvement plan, I mean, when do we expect the second leg to come in, in terms of the product side, on the margin side? Are you already starting to see some of it?

[George Sherman:]

Well, we saw it in this quarter that we’re reporting right now. I think, you see a pretty healthy basis point expansion in gross margin rate. Part of that admittedly due to mix, the other do through good work by our merchandising team.

[Lavesh Hemnani:]

Got it. And just a quick follow-up on just the quarter-to-date trends. I mean, you guys discussed the consumer demand for the products and March had a positive 2% comp. Can you talk about some of the trends exiting Q4 into February? And I mean, what sort of products are you seeing?

[George Sherman:]

Yes. As we’ve talked, I think if we take ourselves out of the current situation, we – and just zoom out for a minute, we have – there’s a pretty consistent underlying trend of the business that we’ve been talking about, which is, we are in a generation eight to generation nine console transition, and that we don’t expect that to change. We know it. We know where we go from here through the third quarter. And we know what to expect when the fourth quarter comes in these consoles come to market and we’re a very big part of bringing those products to the marketplace.

[Lavesh Hemnani:]

Got it. So any other financial parameters you could share about just like the quarter-to-date perspective?

[George Sherman:]

No, not at this point. As you might expect, I mean, again, we’re not providing any further guidance. It’s just too much – there’s too many unknowns.

[Lavesh Hemnani:]

Got it. Thank you so much.

[George Sherman:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Anthony Chukumba with Loop Capital Markets. Please state your question.

[Anthony Chukumba:]

Good afternoon, and thanks for taking my questions. So I had a question on collectibles. So you mentioned that the decline there was mainly driven by lower store traffic. And that’s – because I was just wondering if there’s any more color that you can give, because your store traffic has been declining for a while now with the – with this – at the end of the console cycle, but you managed to sort of buck that trend and collectibles and post sales increases. So I guess, I’m just trying to figure out what was different this quarter?

[George Sherman:]

Yes. Anthony, really, this was driven by a fourth quarter volume. And I think we’ve talked about it a few times, where, number one, we had a lower watermark fourth quarter, given the anticipation around the console cycle. It also went up against a very healthy fourth quarter last year, driven by some really good releases, as well as a lot of activity around Fortnite.So I think if you look at the year-over-year aspect of it, that’s part of it. But, again, our collectibles were positive year-to-date is the fourth quarter that they were down stronger on a relative basis, but certainly impacted by the traffic in the stores, which drives them impulse sales in collectibles.

[Anthony Chukumba:]

Got it. That’s helpful. Thank you.

[George Sherman:]

Thank you.

[Operator:]

And there are no further questions. I would now like to turn the call back over to George Sherman for closing remarks.

[George Sherman:]

Thank you very much. I want to thank, everyone, for joining the call today. I thank, everyone, for tracking the stock. I wish you all a safety and health out there as we navigate through a unprecedented experience in our lifetimes right now. And again, use this opportunity to thank our teams who are out there doing their best, either in a indirect capacity or in-stores working to fulfill the model and thanking them for what they do every day to provide great service. Thank you, all.

[Operator:]

Thank you. This concludes today’s conference. All parties may disconnect. Have a great evening.