Source: Seeking Alpha
Q2 2014 Results Earnings Conference Call
August 20, 2014, 4:30 p.m. ET
Tony Bartel – President
Robert Lloyd – EVP and CFO
Mike Mauler – EVP of International
Mike Hogan – EVP of Strategic Business and Brand Development
Matt Hodges – VP of Public and Investor Relations
Tony Wible – Janney Capital Markets
David MaGee – Suntrust
Curtis Nagle – Bank of America
Brian Nagel – Oppenheimer
Arvind Bhatia – Sterne Agee
Edward Williams – BMO Capital
Sean McGowan – Needham & Company
Good day, and welcome to GameStop Corporation’s second quarter 2014 earnings conference call. 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 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 Tony Bartel.
Tony Bartel – President
Thank you, operator. Good afternoon everyone, and welcome to GameStop’s second quarter earnings call. As always, we would like to start by expressing our gratitude to our associates around the world for their performance and dedication to customers again this quarter. Whether they are in EB Games, Micromania, Spring Mobile, Game Informer, Kongregate, Simply Mac, GameStop, or Cricket, they are truly professionals at what they do, and the secret to GameStop’s success.
Joining me today on the call are members of one of the most tenured management teams in all of consumer electronics retail. Rob Lloyd, chief financial officer; Mike Mauler, executive vice president of international; Mike Hogan, executive vice president of strategic business; and Matt Hodges, our vice president of public and investor relations.
Paul Raines is not joining us as he is recovering from his recent medical procedure. He is in good spirits as he continues his recovery, and, as we’ve previously communicated, the prognosis is very positive for a full recovery. We all wish him well, and look forward to having him back in the office in a few weeks.
We are executing against our vision of a family of specialty retail brands that makes your favorite technology affordable and simple. And today, we are going to share with color around how all of our segments, physical gaming, multichannel, digital, and technology brands are working together to drive solid and diversified profit growth and return to our shareholders.
The second quarter exceeded our expectations, with earnings per share beating the high end of our guidance by $0.02. The new console cycle is gaining momentum, driving positive 21.9% comp sales and total sales growth of 25%, driven by 125% growth in new hardware and 16% growth in new software. We have now had four consecutive quarters of positive comps, and we expect that trend to continue for the foreseeable future.
Our international business also had a strong quarter, which Mike Mauler will elaborate on further. Another major contributor to the earnings beat came from our technology brand segment, which contributed $70.1 million of sales and $7.1 million of operating profit, representing 19% of our operating profit for the quarter.
This highlights the importance of evolving our business into mobile and consumer technology by leveraging the core strength of our vibrant PowerUp rewards community, our unique buy-sell-trade model, our real estate expertise, and our human and capital strength. We are aggressively expanding this part of our business as we added 49 stores during the quarter through acquisition and development, bringing our total store count to 319, a 46% increase since the beginning of the year.
It is hard to believe that it has been less than a year since we announced our initial investment in Simply Mac, our first foray into technology brands. We have learned much, and our relationships with AT&T and Apple are strong and are leading to significant growth opportunities. We have proven our ability to operate at high service levels and provide relevant customer solutions, and this is resulting in an ever-expanding growth relationship.
We have a robust pipeline of additional acquisitions and development opportunities in the tech brand space. Rob will have more comments on the positive impact that these businesses have on our financial performance.
For the quarter, our digital receipts rose 18%, with console digital increasing 13% and PC digital increasing 24%. On a year to date basis, we have grown our digital receipts by 13%, which is essentially in line with the mid-teens digital growth rates of our top four publishers.
We are pleased with our digital market share, which we estimate is in line with our overall market share. Our knowledgeable associates, our proprietary digital delivery system, and our unique buy-sell-trade process gives us a dominant share of digital retail sales by driving discovery and affordability. Mike Hogan will provide more commentary about how Kongregate is helping bring new developers to a crowded games market.
Although no credible market share source exists for digital receipts, a couple of external sources have recently validated our importance in driving this high-growth segment. Microsoft recently announced that over 40% of their digital receipts are sold at retail, and we believe that we sell the dominant portion of that revenue. Likewise, Ubisoft recently announced that 70% of their DLC sales from their Watchdogs title came from retail locations. Again, we are dominant, especially at launch, at selling digital content.
As Mike Hogan will share with you in his remarks, we expect to see continued double digit digital category growth in the foreseeable future, and maintain our market share. Looking ahead to the second half of the year in video gaming, we are excited about the unprecedented lineup of high-quality games this fall and holiday season.
Even with titles like Battlefield Hardline, Evolve, and Batman Arkham Knight moving out of our year, we have 24 high-quality games launching this season, including Activision’s Destiny, Call of Duty: Advanced Warfare, and Skylanders Trap Team; Take-Two’s GTA V, NBA 2K15, and Borderlands: The Pre-Sequel; Ubisoft’s Assassin’s Creed Unity and Far Cry 4; EA’s Madden NFL 15, FIFA 15, and Dragon Age: Inquisition; and Nintendo’s Super Smash Brothers, amiibo, and Pokémon Alpha Sapphire Omega Ruby.
Our hardware and software market share continues to expand and is now at an all-time high as we go into the critical holiday season. We continue to sell over one half of all PS4 and Xbox One titles. We face a challenging third quarter as we roll over the Grand Theft Auto IV launch, but expect to see significant software growth in the fourth quarter.
Our pre-owned business grew 5.5% and a 47% margin. Our value initiative, which provides us with in-demand inventory from existing relationships, helped drive our growth as we brought in over $30 million of product to replace out of stock value items.
Earlier this week, we rolled out a simplified trade-in pricing policy to help customers better understand the value that they get for their games and electronic devices. It should be noted that this policy will not impact our overall pre-owned margins. This move simply creates better visibility to the true value that customers receive using our trade center on the GameStop mobile app, GameStop.com, and in our stores. We continue to see little if any impact from other big box competition in the pre-owned game business.
In just two weeks, we will have over 5,000 of our managers from all of our brands and all of our countries in Anaheim, California to experience a week of immersion in the great slate of new games that we will be launching over the next few quarters. There is no doubt that we will again have the most knowledgeable sales force in the entire videogame category. In addition, we’ll also be hosting thousands of gaming fans through our gaming expo and hosting our first annual developers conference.
We will continue to drive a high rate of internal change to keep GameStop ahead of the curve. We will continue to provide best-in-class customer service in videogames, multichannel, digital, and technology brands and we remain committed to returning free cash flow to shareholders.
I will now turn the call over to Rob.
Robert Lloyd – EVP and CFO
Thanks, Tony. Hello, everyone. I’d like to begin by reviewing our second quarter results including highlights of 25% revenue growth and EPS growth of 144%, up to $0.22 per share. GameStop’s consolidated global sales were $1.73 billion, up over 25% from $1.38 billion in the prior year quarter.