GameStop (GME)

Q4 2011 Earnings Call

March 22, 2012 11:00 am ET


J. Paul Raines - Chief Executive Officer

Robert A. Lloyd - Chief Financial Officer and Executive Vice President

Michael K. Mauler - Executive Vice President of International

Tony D. Bartel - President


Gary Balter - Crédit Suisse AG, Research Division

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Arvind Bhatia - Sterne Agee & Leach Inc., Research Division

Brian Karimzad - Goldman Sachs Group Inc., Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

William R. Armstrong - CL King & Associates, Inc.

Michael Hickey - National Alliance Capital Markets, Research Division

Edward S. Williams - BMO Capital Markets U.S.

R. Scott Tilghman - Caris & Company, Inc., Research Division



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Good morning. Welcome to GameStop Corporation's Fourth Quarter 2011 Earnings and 2012 Outlook Call. [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 this is the property of GameStop. It is not for rebroadcast or use by any other party without prior written consent of GameStop.

At this time, I would like to turn the call over to Paul Raines, CEO of GameStop Corporation. Please go ahead, sir.

J. Paul Raines

Good morning, and welcome to GameStop's year ending conference call and strategic update. Before we get started, I would like to recognize the thousands of GameStop Micromania, EB Games and Kongregate associates, who continue to provide the best customer service and innovation in 15 countries around the world. Thank you for joining us for what we believe will be an important update to investors with interest in GameStop. We have scheduled a longer call than usual today so that we can spend time discussing our strategy for 2012, as well as our 2011 accomplishments and results.

Please be sure to follow along with the slide presentation, which can be found at while you listen to our presentation. I am joined on the call today by Tony Bartel, our President; Rob Lloyd, Executive Vice President and Chief Financial Officer; Mike Mauler, Executive Vice President for International; and Matt Hodges, our Vice President of Investor Relations.

Investors who have followed GameStop know that we launched a strategic review of the company in 2009 and have been executing against that plan during the last 3 years. We are pleased to share with you today the progress we made in 2011, and more importantly, how we will continue to innovate and transform GameStop in 2012 as a hybrid retailer of physical and digital products in the gaming and mobile space.

During early April of last year, we shared with you at our Investor Day a very clear and well-thought-out strategy. That strategy started with maximizing our brick-and-mortar stores. During 2011, we continued to leverage the store footprint to drive sales of physical console gaming products and added a $323 million digital console business or DLC sold at retail. We reduced our store footprint by 1% in the U.S. for the last 2 years by leveraging our PowerUp Rewards program to drive profitable transfers of existing customer traffic from closing stores to open stores. At the same time, we slowed store development in international markets and consolidated support functions in smaller countries to reduce costs. We also exited Northern Ireland and Portugal, which Mike Mauler will discuss later in the call.

During 2011, the physical console category declined faster than we projected in our market model. At the same time, GameStop has grown market share to record levels and created new business models that are filling the profitability gap. Rob Lloyd will provide an update today on our revisions to our outlook.

Our second plank of the strategy we gave you last year was to reposition the preowned business. We are, by far, the largest retailer in the world for preowned games. And multiple competitors around the world have attempted and failed to succeed in this space partly because it is a tougher business than they expected and partly because GameStop is an exceedingly efficient operator.

During 2011, we reorganized our leadership to bring more resources to preowned, added sophisticated assortment planning and visual merchandising around top-selling games and made deeper investments in regional stock balancing algorithms to drive inventory availability. At the same time, we used PowerUp Rewards to bring great preowned value to our best customers and offer them opportunities to trade more frequently with us. We are pleased with the 6% growth in preowned around the world and are forecasting mid-single digit growth for 2012 in preowned. We are also pleased that we generated $1.2 billion of in-store credit around the world that allowed us to grow new game market share.

We also told you in 2011 that we wanted to own and strengthen our relationship with our customers. We are excited to say that the PowerUp Rewards program, launched nationally in October of 2010, has now reached over 17 million members in just 18 months and is integrated throughout the GameStop network. This program, which is much more than a loyalty or a relationship program, is driving growth in new title launches and market share, preowned sales and trade; and is a premier customer-acquisition platform for digital services. The PowerUp Program drives share of wallet of existing customers, maximizes the value of large spender and is a platform for acquiring customers and launching new digital businesses. 90% of members have purchased in the last 12 months with an aggregate game library of over 250 million games.

The impact of the program on spend is compelling. PowerUp members trade at 3x the rate of nonmembers, pick up reservations at a 10% greater rate, open e-mail at double the rate and are 5x more profitable. The PowerUp program at GameStop has gone beyond a loyalty program to become a customer-acquisition platform. I will use 2 examples to illustrate this.

You see on the accompanying slide a PowerUp e-mail sent to a member during holiday, offering preowned games recommended based on a customer's existing game library. This particular customer was notified of their existing trade balance with GameStop and was also offered early admittance to a Buy 2 Get 1 promotion in store. The result of this e-mail campaign was that over 50% of PowerUp members transacted, creating over $20 million in incremental sales.

Another example comes from the launch of recommerce trades at GameStop. In this e-mail, the customer is notified of iDevice trades at GameStop based on their historic spend. And the result is that over 90% of trades on iDevices during the promotional period came from PowerUp customers. If you are a PowerUp Rewards member, you know that we have created a compelling communication channel with you to drive value and launch new businesses as we are using the program to drive growth in DLC, Impulse PC downloads and casual gameplay.

Last year, we also shared with you our strategy to grow the Digital business. Tony Bartel will share further details with you. But I will just note that in 2011, we grew all channels of our digital businesses successfully. Console digital grew at over 64% as GameStop created a unique technology to bring consumers' launch day downloads and opportunities for added content. A testament to our strength in this area is that 2/3 of the 1 million Call of Duty Elite digital subscriptions sold in the first week were sold by GameStop. Our Kongregate casual game platform doubled last year, showing the power of in-store promotion and linkage to PowerUp Rewards.

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