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

We expect diluted EPS to range from $0.58 to $0.64, representing flat to an increase of 10% when compared to $0.58 for the third quarter of last year. We’re using weighted average fully diluted shares outstanding of 114 million, following buyback through the second quarter.

We are reaffirming our full year comparable store sales guidance of plus 6% to plus 12%, and our previous full year 2014 earnings per share guidance of $3.40 to $3.70, using weighted average fully diluted shares outstanding of 114.7 million, following buybacks through the second quarter. Earnings guidance does not include the effect of additional buybacks.

Now, I’ll turn it over to Mike Mauler for his comments.

Mike Mauler – EVP of International

Thanks, Rob. Good afternoon everyone. GameStop’s international businesses had a very strong second quarter, exceeding expectations with a 26.2% same-store sales increase and a significant improvement in operating results over 2013.

Triple digit hardware growth drove strong same-store sales as the installed base of the next generation of consoles continued to increase faster than the previous cycle. During Q3, we also experienced a solid increase in new software sales, driven by new titles such as Ubisoft’s Watchdogs, Sony’s The Last of Us Remastered, and Nintendo’s Mario Kart 8, which also helped drive a more than threefold increase in Wii U hardware sales versus Q2 2013.

Investments in our multichannel strategy continue to pay off as our international ecommerce business entered into its fourth consecutive year of double-digit growth, increasing by more than 46% versus prior year. This growth was driven by an expanded product selection and an ever-increasing number of customers utilizing cross-channel purchasing features such as web in store and pick up in store.

The international sales of digital products accelerated during the quarter, growing at 53% versus 2013, primarily driven by strong DLC attach rate on new titles and significant growth in Steam Wallet and POSA cards, such as League of Legends, Minecraft, and Blizzard.

GameStop’s buy-sell-trade model continued to provide tremendous value to customers as they upgraded to the next generation of consoles. This transition drove an increase in trades, resulting in healthier pre-owned inventory. GameStop’s improved pre-owned inventory position, the expansion of our international loyalty programs, and the more efficient use of our CRM tools to engage customers drove a pre-owned sales increase of 11.2% versus 2013, led by Australia’s growth of 23%.

In addition to the over 28 million PowerUp reward members in the United States, international loyalty programs topped 10 million members during the quarter across 15 countries. Improvements in our CRM capabilities to communicate with our vast membership base played a key role in the sales growth of digital, multichannel, pre-owned, and our expanding franchise marketing efforts on key titles.

Video gaming and entertainment collectables continued to grow at a fast pace during the quarter as we increased our product offerings to meet the needs of our passionate customers. As we have discussed on prior calls, we continue to test new concepts and product lines in different markets around the world. Over the last six months, in Italy, we have been piloting a partnership with Wind Telecommunications in some GameStop stores, under which we are selling Wind’s phone products and prepaid and postpaid services.

During this pilot, we have seen synergies with our existing customer base and an overall increase in store traffic in the test stores. We have been pleased with the results and our partnership with Wind and will be expanding Wind’s offerings to approximately 70 GameStop stores in the third quarter.

As we enter the second half of 2014, we are excited by the slate of new releases and the strong growth we are seeing in next-generation consoles. GameStop’s investments and subsequent progress in expanding multichannel businesses, growing our worldwide loyalty membership, and the diversification into associated products and services positions us to fully leverage the profitability of this new console cycle and to also grow our business in exciting new areas of adjacent technology.

And now, I will turn it over to Mike Hogan for his comments.

Mike Hogan – EVP of Strategic Business and Brand Development

Thanks, Mike. I will cover three topics this afternoon. First, an update on the overall videogames market, including both physical and digital videogames. Second, an update on the pre-owned business and our expanding presence in the value subcategory. And third, GameStop’s multichannel business and its contribution to overall company growth.

From a total videogames category perspective, we continue to see very strong growth, driven primarily by hardware. Sales of the new consoles continue to meet or exceed our initial estimates, further reinforcing our market model projections for physical category growth in 2014 and in 2015.

The attach rate is still building, as publishers release more new titles. GameStop’s attach rate is now above four, which is 75% higher than the rest of the industry. In the nine months since launch, category-wide sales of next-generation hardware are 70% higher than the same period following the PS3 and Xbox 360 launch, and GameStop’s sales are plus 140%. During the same timeframe, category-wide next-gen software sales are plus 26% versus the prior generation launch and GameStop’s are plus 103%.

We are clearly driving the growth of the next-generation console cycle. Our PowerUp rewards consumer research continues to show very strong purchase interest in the next-generation consoles. In our latest polls, 55% of PowerUp members surveyed indicate they are planning to purchase a next-generation console, but have not done so yet. This suggests significant ongoing demand for the new consoles and it also suggests a coming wave of trades as these consumers upgrade to a new generation of hardware and software.

As Tony noted, we are seeing strong growth in console digital, and our model continues to project double digit growth for the foreseeable future. Our internal numbers show that GameStop digital is keeping pace with this growth in the overall category.

In addition to console and PC digital, the category is experiencing big growth in the mobile gaming segment. As you may recall, GameStop entered this growing market in 2013 with Kongregate mobile publishing. We are seeing extremely strong results today.

In the second quarter, Kongregate, our mobile and casual games platform, hosted very strong results, growing plus 123% over the prior year. We currently have 12 games active on the IOS App Store and Google Play Store, with a total of 20 games expected to be launched by year end. We have multiple games running above a $10 million annual rate, and expect Kongregate to be a top-10 third-party mobile games publisher this year.

Through our efforts in the mobile publishing arena, we have learned a great deal about the needs of the development community. Kongregate is providing a value-added platform for mobile game developers, which to date has met with broad acceptance.

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