Home » GameStop’s (GME) CEO Paul Raines on Q2 2014 Results – Earnings Call Transcript

GameStop’s (GME) CEO Paul Raines on Q2 2014 Results – Earnings Call Transcript

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.

Our comps were up 21.9%, up 19.7% in the U.S., and up 26.2% internationally. For the last four quarters, our comp was 12.3%, demonstrating the power of the console cycle and compelling titles like GTA IV and Watchdogs. Our same-store sales for the quarter exceeded the high end of that range we outlined in last quarter’s call, due to strong next-gen hardware sales. We outperformed the U.S. market, leading to a hardware share gain of 360 basis points.

There were a few major releases in the quarter, but the success of Watchdogs, Mario Kart 8, and The Last of Us for PlayStation 4 helped drive our new software sales up 15.6%, compared to an 8.5% increase in the U.S. market. Overall, we gained 240 basis points of new software market share in the quarter.

Pre-owned and value sales grew 5.5% compared to the prior year quarter. The U.S. was up 5.3%, and international was up 11%. Our GAAP digital sales totaled $52.3 million, a 5.9% increase over the second quarter of last year, with growth coming in PC digital. Our digital receipts, or non-GAAP revenue, totaled $179.2 million, a 17.6% increase over Q2 last year, with growth in both console and PC digital.

Our mobile revenues grew 85% to $112.1 million, from $60.6 million in the second quarter of last year. The technology brands business continues to grow rapidly, with revenues of $70.1 million, and operating profit of $7.1 million during the second quarter.

Technology brands represented about 40% of the operating profit growth for the quarter. [Life] to date, the store contribution from the tech brands acquisitions and new stores is far ahead of our aggressive pro formas. We are well on our way to adding the 300 to 400 new tech brand stores we outlined earlier this year, and are aggressively seeking additional growth.

Consolidated global net earnings were $24.6 million, up 134% from $10.5 million a year ago. Diluted earnings per share for the quarter of $0.22 exceeded our guidance range and grew 144% from $0.09 per share earned in the second quarter of last year.

Gross margins for the quarter were 31.8%, which are down 300 basis points from Q2 last year, driven by the growth of console hardware as a percentage of total sales. Gross margins in new hardware decreased 100 basis points due to selling more next-gen consoles. New software margins increased slightly when compared to the second quarter of 2013.

Gross margins on pre-owned and value were 47.0%, comparable to the same quarter of last year. As Tony said, we are not seeing an impact from competitors in the pre-owned business. Based on what we learned from the simplified trade price program that we use in Australia, we implemented the new trade pricing policy in the U.S. This will simplify pricing for our customers and our associates, and will not impact margins going forward.

The digital gross margin rate was 65%, and the gross profit was $34 million, with slight declines compared to the prior year quarter due to the mix of underlying products. The gross margin in the mobile and consumer electronics category was 36.1%, with gross profit of $40.5 million, up from $16.3 million in the second quarter of last year. This growth was primarily driven by the Spring Mobile and Simply Mac acquisitions and store growth.

Total SG&A expense dollars increased $53.8 million, due primarily to the addition of Technology Brands, which accounted for $26.1 million of the increase. SG&A decreased as a percentage of sales from 30.5% in the second quarter of 2013 to 27.5% this quarter, evidencing that we leveraged the increase in sales in the videogame brands segments.

Depreciation and amortization was also about 5% less than the prior year quarter. We ended the quarter with 6,698 stores, 4,197 U.S. videogame stores, 2,182 international videogame stores, and 319 Technology Brand stores. We opened six videogame stores and closed 24 in the U.S. and opened four and closed 17 internationally.

We added 26 Tech Brands stores through acquisitions and opened 23 more. At the end of the second quarter, we had short term debt of $214 million, with the increase over the prior year balance due to M&A activity and additional cash returned to shareholders in the form of buybacks and dividends.

As we indicated in the earnings release, our board of directors authorized a dividend of $0.33 per share for this quarter to be paid on September 16. We repurchased 1.9 million shares in the second quarter at an average price of $39.67, for a total of $75.5 million.

Year to date, we’ve repurchased 127.7 million, well on our way to the annual guidance we gave of 250 to 300 million. Life to date, we’ve now bought back over 1.5 billion of our shares, at an average price of $23.51. We have approximately $323 million remaining on our current buyback authorization.

Now I’ll turn to the third quarter outlook. We are forecasting same-store sales to increase ranging from plus 1% to plus 5%, once again driven by next-gen hardware sales. The third quarter title lineup is exciting, as Tony outlined. However, new software comparisons for the third quarter will be difficult with the overlap of Grand Theft Auto IV. We sold well over 6 million units of GTAIV in the third quarter of last year.

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