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GameStop (GME)

Q1 2011 Earnings Call

May 19, 2011 11:00 am ET


Robert Lloyd - Chief Financial Officer and Executive Vice President

Daniel Dematteo - Executive Chairman

Tony Bartel - President

J. Raines - Chief Executive Officer


Michael Hickey - Janco Partners, Inc.

Seth Basham - Crédit Suisse AG

Anthony Wible - Janney Montgomery Scott LLC

Arvind Bhatia - Sterne Agee & Leach Inc.

William Armstrong - CL King & Associates, Inc

Mark-Andre Saucier-Nadeau

Anthony Chukumba - BB&T Capital Markets

Sean McGowan - Needham & Company, LLC



Good morning, welcome to GameStop Corporation's First Quarter 2011 Earnings Conference. Today's call is being recorded.

[Operator Instructions]

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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 Dan Dematteo, Executive Chairman of GameStop Corporation. Please go ahead, sir.

Daniel Dematteo

Thank you, and good morning, and thank you, for attending today's conference call. With me today are Paul Raines, our CEO; Tony Bartel, our President; Rob Lloyd, EVP and CFO; and Mike Mauler, our EVP International.

This morning, we released record sales and earnings for our first quarter. This performance was driven by continued market share gains of new games and growth in our used game business. We couldn't be more pleased with these results. Paul and Rob will give you more information on the quarter. Not only did we have record performance, we continued to execute on our strategic plan in many areas. As a reminder, this plan is a dynamic blueprint for the next several years, with the objective of reaching our ROIC goals and driving earnings growth. Now, some notable strategic investment and results in the quarter include, the continued growth in visitors to Kongregate, our casual gaming site, which now has 13.4 million unique visitors per month. The acquisition of Impulse, a PC digital distribution platform that will be integrated into Tony will talk more about this later. The acquisition of Spawn, which gives us the ability to allow gamers to play console golems games in the cloud. Continued rapid growth in our digital earnings fueled by sales of console DLC. And we have made progress on other strategies, such as growing and enhancing PowerUp Rewards,, digital Game Informer, and others. At our investor conference, you heard Paul talk about our plan for stores and the flexibility we have given the duration of our releases. I am pleased to say we are executing the zero square footage growth plans in the U.S. and Paul will discuss this in more detail later.

In closing, you'll hear a lot today about growth in digital gaming. Do not assume that all digital gaming is cannibalistic with what we sell in our stores. For us, new packaged goods sales continue to grow. We have proven we can sell digital products in our stores and on our website, as witnessed by the growth in digital revenues. We are investing for the future in digital gaming, so we can own a share of these growing markets and tie them into the GameStop brand and PowerUp Rewards.

With that, I'll turn it over to Paul for his comments.

J. Raines

Thanks, Dan. As we begin our remarks today, we would like to thank all of our GameStop associates worldwide who strive everyday to deliver the very best customer service and innovation in video gaming.

As you heard, at our Investor Day on April 1, GameStop is in the midst of executing a strategic plan that has been developed over the past two and a half years. The innovations you see driving our results today are the product of investments we made after thorough analysis of the future trends in gaming and what we see as adjacent opportunities to grow our business. It is clear to us that our investments have been effective, and investors can expect the same focus and insight into the category going forward.

The first quarter was a record quarter for GameStop in many ways. Top line revenues of more than $2.28 billion was a first quarter record, and market share continue to climb to record levels. Store comps of 5.3% are the highest since the fourth quarter of 2008, and both console digital and PC digital revenues had strong double-digit growth. Our PowerUp Rewards program has reached 10 million members, allowing us to build personal customer relationships that are enhancing our in-store, online and even real estate performance. We told you earlier in the year that we would be repositioning the preowned business for growth through a series of initiatives, including the leveraging of the PowerUp Rewards program and in-store marketing. We are pleased to report first quarter growth of 9.5%, proving that our strategy is working and difficult to copy. GameStop continues to grow new software sales by putting trade currency in consumers' pockets, through our buy-sell-trade model. Last quarter alone, processing over 30 million trades in our stores, and refurbishing over 5 million units of hardware and software in our refurbishment center. As we pointed out at our Investor Day, we have significant scale in the preowned business, and have built high barriers to entry for competitors.

A word on our real estate execution. Seasonally, we tend to close more stores during the first quarter postholiday, and are still targeting a net zero square footage growth in the United States for fiscal 2011. As we showed you in April, we have built a unique data asset that integrates our PowerUp Rewards data with our highly flexible real estate portfolio. This tool allows us to take advantage of flexible lease terms to transfer sales from closing stores to adjacent locations at minimal expense, driving comps and productivity of capital. Our real estate store operations marketing teams have created an integrated process for store transfers that communicates directly with customers, providing them incentives for transferring their shopping to nearby stores. Our knowledge of where consumers shop is very precise, and this data creates value in our real estate in a way that is unique in retail. We have set a target on transfers of 40% to 60% of sales transfers yielding a 20% to 30% increase in contribution of the consolidated stores, and our first quarter performance is well within those targets. As is the case across many parts of GameStop's business, we are transforming our real estate process into a best-in-class consumer data driven activity that creates significant value.

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