Home / Business / GameStop Corp. (GME) Q4 2017 Result Conference Call Transcript – The Motley Fool

GameStop Corp. (GME) Q4 2017 Result Conference Call Transcript – The Motley Fool

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Source: The Motley Fool

GameStop Corp. (NYSE: GME)
Q4 2017 Revenue Conference Call
March 28, 2018, 17.00 ET


  • Prepared Comments
  • Questions and Answers
  • Participants Call

Prepared Comments:


Please wait. We are just beginning. Thank you and welcome to GameStops Fourth Quarter 201

7 earnings conference call. This conference call contains forward-looking statements that involve various risks and uncertainties that could cause actual results to differ materially from expectations. Such statements should be read in conjunction with cautionary statements in the earnings disclosure and risk factors discussed in the SEC filings.

GameStop undertakes no obligation to update these forward-looking statements or information. For a reconciliation and other information on non-GAAP financial measures discussed in the call, see the Company's earnings release published today and the Investor section of the Company's Web site.

Now I want to call Mike Mauler, the company's CEO. Please move on, sir.

Mike K. Mauler General Manager

Hello and welcome to GameStop's fourth quarter 2017 earnings advisory vote. With me today is Rob Lloyd, our CFO; Dan Kaufman, our EVP and Chief Legal and Administrative Officer; Troy Crawford, our SCP and Chief Accounting Officer; and Jason Ellis, our president of Technology Brands.

It's great to be here with you today and we thank you for taking the time to talk with us about our fourth quarter and full year results for 2018. It's time to call you CEO of Calling GameStop to a win call, and I am honored by the support and trust of the Board of Directors and its employees, and I look forward to leading GameStop into the future.

This company has a tremendous legacy of constantly evolving to meet the needs of our global customer base and transform the industry's momentum, and I hope to build on that by expressing the innovative thinking and ingenuity of our culture first hand in my 16 years in the company.

Before we discuss our results, I would first like to talk about the demise of our good friend Paul Raines. As you know, Paul left the business in November 2017 to focus on his family and health. We had hoped that Paul would return to the GameStop family, but unfortunately his fight proved too much. He was an integral part of our company and a truly inspiring and compassionate leader. I know that those of you who have called today are some of the many people who touched Paul throughout his life, and are saddened by his loss and grieve with us.

Let me now turn to our results for 2017 and our outlook for 2018. Our fourth quarter revenue increased 15%, driven by strong sales of new hardware, software, and collectibles. The ability of our store team to boost sales and provide exceptional customer service during the key holiday season resulted in a 12% increase in sales in the same stores.

In hardware sales, we are powered by innovative new consoles like the Nintendo Switch, the PS4, Pro and the Xbox 1X. The software has also been expanded as we have proven to be the customer's choice for the purchase of video game software for the holidays as well as strong title launches such as Call of Duty: World War II and new software for the Nintendo Switch.

Our Collectibles Business grew more than 20% during the quarter, benefiting from recent investments in this category. This also includes increasing the footprint in our video game stores to offer unique and compelling products in a variety of categories.

Not all our businesses have met our expectations, but we have opportunities for improvement, such as technology brands and used ones. These areas will be addressed and our categories video games and collectibles will be further enhanced. In 2017, our used business decreased by almost 5% compared to the previous year. This is a store where GameStop has a built in advantage. By leveraging our loyalty program, our trade credit benefits, and the know-how of our sales representatives, we can retain our loyal customers and add value like no other retailer.

Considering the strong performance in new hardware and software sales, especially the Nintendo Switch We believe that the used categories have experienced a certain natural softness and expect the components and games of Nintendo Switch to make their way into our used one in the near future Ecosystem will be found. However, we can also improve the execution. The main driver of used sales are healthy trade-ins for the right products. Therefore, in the near future, we will do the following:

We need to strengthen customer awareness among our customers as well as our customers. Only 30% of our customers trade in games, which is a great opportunity. This is achieved through increased marketing spend for communication via social media, CRM and other marketing channels. We also need to increase both the trades and the reservations, which we will do through more attractive trade-in promotions for new releases. Finally, we need to prioritize trading with our employees, and do so through more objective training and a stronger focus on KPIs.

If we turn to the power of technology brands, the business has not delivered all the returns we expected, as we have communicated on earlier calls. Due to the changed compensation structure of AT & T, the delayed and staggered launch of the iPhone 8 and iPhone X challenges and the operational implementation, we missed the sales and profitability targets we had implemented at the beginning of the year. Rob goes into more detail about the depreciation the department has caused, but I'd like to share some of my first thoughts with you.

We believe that AT & T is a good partner and we are discussing with them to improve the compensation plans. Both partners want the other to succeed, and I think we will find improvements that are a win-win situation for both companies. In the meantime, we have taken several steps to improve the profitability of this business. These include the sale of our wireless cricket markets, the closure of underperforming AT & T locations and the restructuring of our operational structure.

Almost 40 acquisitions have put pressure on internal systems, business processes and organizational capabilities. All of these steps enable the team to focus on operational improvements in the retail portfolio that offers potential for long-term growth. While the first half is the most difficult to overlap due to the AT & T compensation change, we expect the division's operating income to improve in 2018.

Before I pass the call to Rob, I would like to share with you my thoughts in short-term areas of strategic and tactical focus for 2018. We have five key strategic imperatives. First, we will take a break from investing in new businesses and acquisitions and focusing on the basics of fixing existing businesses. We have three profitable core businesses – video games, collectibles and technology brands – and once these companies operate at the level that I know they can achieve, we can explore other opportunities to drive shareholder growth. Second, we need to improve our value proposition with hardcore gamers to consolidate this key demographics. We also need to expand our customer base to include more mothers, families and occasional consumers. I think that's a great opportunity for us in the future. Fourth, we need to improve each customer's average transaction value, both in-store and online, by adding other relative products and services. Finally, fifthly, we need to reduce operating expenses in areas where neither sales nor operating profit is achieved. We will be thrifty but not cheap and spend our money wisely to get the most revenue for our shareholders.

These imperatives will be central to our success, but without a tactical execution plan, they are just desires. The key tactics to succeed in these areas are as follows. On the one hand, we are improving the shopper capability of our stores by expanding hybrids and remodeling to improve the store experience. Second, expand our range of cool and relevant products such as collectibles, high-end e-sports accessories and other licensed merchandise. Third, we will further extend the benefits of our loyalty program to meet our expanded demographic needs. Four, continue to invest in an advanced omni-channel experience. And, five, drive operational excellence to improve GameStop's life cycle and prioritize the number of new reservations, trade-ins, second-hand sales, warranties and accessories.

Our overall goal is to improve the performance of our business, drive growth, and improve profitability, to generate strong cash flows and solid returns for our shareholders. Investment will focus on systems and conversions and maintenance, not on new business growth. There will continue to be some rationalization of the business to the extent that we can improve profitability in neighboring businesses. We continue to seek to return excess cash to our shareholders. Rob will discuss that in more detail.

Finally, the GameStop management team is expected to focus on operational excellence over the next few quarters to increase sales and operating income. We will review all our assumptions in all areas of the business and together we will explore new approaches to how we work, from our trading partnerships to the way we attract and retain customers. And in the coming quarters, we will share our findings and reflect on how to revise our approach.

Meanwhile, as I mentioned earlier, we have some clear, short-term areas that will form a solid foundation for the years ahead. Now I want to pass the call on to Rob to get more color for our finances and the prospects for 2018.

Rob Lloyd – Chief Financial Officer

Thank you, Mike. Good day. I start reviewing our fourth quarter and full year results for 2017, and then share our outlook for 2018. Looking back at the year, overall sales exceeded forecasts we made in the year and we have adjusted earnings per diluted share near the top end of the annual report that we provided at the beginning of the year and maintained throughout the year. In a quarterly comparison, total revenue increased 15% and sales revenue increased 12%. In the US, comps rose 14% and international comps 8%. For fiscal year 2017, total revenue increased 7% and we were able to increase the comps by nearly 6%. In the US, comps rose 4%, while international comps rose 9%.

Fiscal year 2017 included a 53rd week, which represented a turnover of approximately $ 143 million. Our video game business was strong in the fourth quarter and throughout the year, mainly due to the success of the Nintendo Switch. This innovative console made the biggest contribution to revenue growth, increasing hardware sales by 45% in the quarter and by 28% for the year. Software sales increased 12% in the quarter and nearly 4% for the year. Call of Duty, with an increase of over 36% over 2016, was the best-selling title both in the quarter and in the year. Star Wars: Battlefront 2 was the second bestseller for the quarter, while Nintendo Switch titles were also strong, contributing to year-over-year growth.

Our used business met our expectations, dropping nearly 3% in the quarter and 5% for the whole year. Given the relative novelty of the Nintendo Switch, it is important to point out that it does not make a meaningful contribution to our used business. In addition, we've seen that hardware used software has shifted to hardware as fewer physical games are released and sold every year, and consumers spend a lot of time to take advantage of additional digital content and in-game transactions. 19659013] The move to tech brands led to a 14% decline in revenue due to a weaker iPhone adoption than expected. For the year, Tech brand sales were down 1% to $ 804 million, as the change in compensation, the weakening of the upgrade cycle, and the weaker start of the iPhone impacted the results.

For collectibles, the category increased by 23% in the quarter and 29% for the year. Despite the strong increase in sales, we narrowly missed our target of $ 650 to $ 700 million for the year and generated $ 630 million in revenue.

In the future, we have improved our sourcing and distribution strategy and are continuing to work with sellers to gain more exclusivity and, whenever possible, first to market non-exclusive launches. We believe these improvements can help to improve this already healthy and growing business.

Gross margin declined 380 basis points from the first quarter to 29.3% and 200 basis points, equating to a margin of 33%. The decrease was primarily due to the extraordinary strength of hardware sales in the quarter and year. The decline in second-hand business and the departure from tech brands also weighed on gross margin. Gross profit for the year increased $ 31 million to $ 3 billion and the 53rd week of fiscal 2017 contributed approximately $ 43 million in gross dollars. Our hardware and software margins declined both quarterly and year-over-year due to the mix of sellers and co-operative marketing finance and our advertising activities.

Margin in proprietary trading was 45% in the quarter, down 190 basis points. For the year, proprietary margins were 45.5%, down 80 basis points. We have done more promotional activity in the international markets, where used sales increased to lower margins. Used sales in the USA declined, but had a higher margin rate in our international markets.

For the future, we see opportunities to increase sales similar to Europe in the past year Increase in hardware and software used equipment. We are working hard to increase our awareness and our customer base of mothers and families, and this kind of activity can help us. Expect that we will advertise more and make more hardware and software advertising, as we find the right balance between revenue and margins and better understand this evolving business.

Therefore, we expect our lead from the 40s to the 40s. For Collectibles, the gross margin was 29.6% for the quarter and 32.7% for the full year. We ran strategically targeted promotions during the Christmas season to boost sales and eliminate excess inventory. We continue to learn more about collectibles, and by leveraging the expertise of our new leadership team for this business, we seek to improve our Product Lifecycle Management and optimize our markdown cycle.

Refining these activities across different product types and intellectual property We believe that we can prevent inventory buildup in the future. These insights should allow us to introduce exciting and compelling product ranges more timely and more frequently to provide the customer with a better experience. However, we estimate that margins in this category range from 30 to 30 from quarter to quarter, as we can leverage peak sales to execute sales and clearance events.

Switching to SG & A without fees, SG & A rose $ 54 million or nearly 9% for the fourth quarter and $ 130 million or 6% for the full year. The 53rd week of operations in fiscal 2017 resulted in an increase of approximately $ 29 million, while the foreign currency accounted for $ 15 million for the quarter and $ 20 million for the quarter. The remaining $ 10 million increase for the quarter was driven by a 15% increase in revenue. Non-cost selling and administrative expenses as a percentage of sales were 19.4% in the quarter, compared to 20.4% in the fourth quarter of the prior year. For the full year, $ 51 million of the SG & A increase was attributable to the increase in tech store numbers. The remaining $ 30 million increase in revenue was driven by the increase in total revenue, including the strong growth of our collectors business. Selling and administrative expenses excluding expenses as a percentage of sales were 25.6% for the full year compared to 25.9% in the previous year.

The following costs were incurred in the fourth quarter: $ 339.8 million for intangible assets and $ 32.8 million for goodwill, the performance of the Tech Brands Division. $ 23.3 million before tax and $ 17.0 million after-tax on asset impairment charges, store closure charges for tech brands, as we closed 75 stores in the fourth quarter. We lost $ 2.7 million of storage in the video game store database and incurred another $ 7.9 million in business sales and other costs. The tax effect of $ 406.5 million in fees totaled $ 95.6 million.

In terms of technology branding, rationalization will continue to be a normal activity as we focus on a portfolio of businesses that are most profitable. We will see some costs associated with additional store closures as some of the underperforming businesses will close in the first quarter of 2018.

On an adjusted basis, the Company's total operating income decreased $ 33 million for the quarter and $ 83 million for the year. The two biggest contributors to the overall decline were a $ 21 million decline in the quarter and $ 67 million for the year and a $ 3 million decline in the operating profits of the Tech brands for the quarter and $ 15 million for the quarter.

Our effective tax rate on adjusted earnings before tax was 3.9% for the quarter and 29.5% for the year due to our tax planning efforts in some of our overseas companies and the month-on-month impact of the new US Tax Reform Act. Adjusted earnings per share for the full year were $ 3.34

In 2017, we made the following changes to our store portfolio, all of which met the aforementioned expectations. We have closed a network of 131 video game stores around the world, completing the year with 3,827 video game businesses in the US and 1,969 internationally. During the year, we closed a network of 80 technology brand stores and sold our 65 cricket stores in January 2018, ending the year with 1,329 AT & T stores and 48 Simply Mac stores. We opened a network of 17 collectibles throughout the year and now have 103.

In 2017, we returned $ 155 million to dividend shareholders and generated $ 325 million in free cash flow, with working capital Focus on year-end management. The impact of week 53 was lower than we had anticipated given the timing of payments and the actual settlement of outstanding checks. Our cash position at year-end was $ 864 million.

In light of our recent management changes, including Mike & # 39; s appointment as CEO and his desire to evaluate all of our businesses and focus on the basics of retail operations, we have postponed our outlook for 2018 this year at a very high level and continue the annual performance. For the financial year 2018, full-year sales are expected to be between 6% and 2%, while sales in the same business will be between 5% and 2%. We expect to grow in the collectibles business, while the video game business is expected to be in the mid single-digit range due to the overlap of the switch's great success. As a reminder, the first quarter will be a tough one for tech brands until we celebrate the change in compensation with AT & T. For the year, we expect an improvement in the operating results of the Tech brands.

We forecast a tax rate of approximately 26% to 27% for 2018 compared to an adjusted effective rate of 29.5% in 2017. The lower tax rate is due to the US tax reform. Due to the mix of our revenues and the legal systems in which we operate and the impact of government taxes, our overall rate is higher than that of the new state. For the full year, we expect $ 3.00 to $ 3.35 per share for 2018, with average shares of $ 101.5 million. The 53rd week in 2017 was approximately $ 0.11 per share, higher than we expected based on revenue and the new tax rate.

Excluding the effects of the 53rd week in fiscal 2017, our EPS guidance for fiscal 18 is very similar to the guidance for & # 39; 17. We expect the first half of the year to be significantly different from that of last year due to the great success of the Switch launch and the strength of the names in the first quarter of 2017. In the second half of 2018, Call of has a stronger stock list Duty Black Ops 4 and Red Dead Redemption 2. Given the timing of these events, we anticipate between 10% and 15% of our annual profit in the first half of the year at 23% for fiscal year & # 39; 17 and 25% each in the two years prior.

Our first quarter results will include burdens from recent changes in our leadership team, some of which are tied to the terms of employment contracts. We expect free cash flow for fiscal year 2018 to be approximately $ 300 million due to the projected decline in earnings. We expect investments to range between $ 110 million and $ 120 million in 2018, similar to 2017. From the store portfolio perspective, we will further streamline the video game store footprint by evaluating the profitability of individual stores and when the opportunity to shift sales arises sense.

In terms of capital allocation, our Board of Directors recently approved the quarterly dividend of $ 0.38 per share, in line with our quarterly dividend distribution in 2017. In light of our commitment to maintaining a robust and resilient balance sheet, we will Shareholders continue to prioritize returns and our decision-making around capital structure and capital allocation. As part of our 2018 capital allocation strategy and our balance sheet management, we expect to refinance our 350 million senior notes maturing in 2019 through proceeds from longer-term funding and approximately $ 75 million in cash.

In conclusion We were satisfied with our Topline results in 2017 and look forward to the opportunity that 2018 offers. We remain optimistic that if we focus on operational excellence in the coming months, we can improve our business and improve operating income.

I'll hand it over to the moderator for questions.

Questions and Answers:


Ladies and Gentlemen, If you would like to ask a question at this time, press * 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute is off to allow your signal to reach our devices. Again, to ask a question today, press * 1.

Our first question will be from Colin Sebastian with Robert W. Baird.

Colin Sebastian – Robert W. Baird – Managing Director, Senior Research Analyst

Thank you for answering my questions and, Mike, glad to have you. So, I think, first, in your comment on Focus and Operational Excellence, I wonder if you show in some of the specific areas of opportunities that you see for the company, to see improvement or to go into more detail about the improvement Year? And then, secondly – and maybe that's Rob – about the gross margins for used cars, you've talked about more or more focus on advertising. I assume that the promotion is also embedded in terms of the decline in the gross margin? And I have one to pursue. Thank you.

Mike K. Mauler – General Manager

Okay. Yes, in terms of focusing on fundamentals, we talked about what drove the results of last year and some of the opportunities we have in our three business areas. We need to expand the demographics of our customers. For example, if we develop this strategy, we need to change the store availability of our stores to provide better value for mothers and families, for example. We need to expand our assortment of cool and relevant products and the kind of goods we sell. If we win these new customers, we can offer them other products as soon as we've added them to the GameStop ecosystem. And with that in mind, we need to better serve the value proposition of our loyalty program. At the moment, we are very much focused on video games and there is a chance that we will focus more on collectibles and these new customer demographics.

On the used page I have mentioned a number of things we are focusing on in terms of increasing trade penetration. It's amazing that only 30% of our customers actually trade in games. Therefore, we need to market those non-gaming customers and we need to improve to be at the top of our product businesses with sales people who are more involved in better training and ensuring that they have used second-hand sales and businesses. that we have the right KPIs for it.

We need to invest more in our omnichannel experience so that we can make more sales online as well as different channels like ordering online, picking up at the store or ordering at the store and have it sent to your home. And finally, it's really about the circle of life achievement. I think there are a number of measures we can take to increase the number of reservations for new releases and link them to trade-in promotions to promote the sale of second-hand products. And finally, a better attachment rate – as soon as we get these new customers into our business and expand those demographics to make sure we increase the average transaction value with warranties and accessories. Well, these are just a few examples of the areas we want to focus on.

Rob Lloyd – Finanzvorstand

Colin, gemessen an der Bruttomarge auf vor Ich denke, ein Teil von dem, was Sie sehen werden, ist, dass wir mehr Werbetätigkeiten haben werden, um nicht nur die bestehende Macht der Kunden, die wir traditionell durch unsere Marketingbemühungen erreicht haben, anzukurbeln, Besitzer – aber das erweiterte Kundenstamm, über den Mike gerade gesprochen hat. Die Mütter und die Familien, wie bekommen wir sie, eine, die sich der Tatsache bewusst ist, dass wir Handel treiben und dann, zwei, wie bringen wir sie dazu, am Prozess teilzunehmen? Daher erwarten wir, dass wir auch mehr fördern.

Colin Sebastian – Robert W. Baird – Geschäftsführer, Senior Research Analyst

Vielen Dank. Und mein Follow-up, denke ich, ist, da Sie nicht planen, das Tempo der Rationalisierung des Ladens zu beschleunigen, ich frage mich, ob Sie eine Änderung des Formats in den Läden sehen? Zum Beispiel, in Europa, die Hälfte des Ladens proportional zu Sammlerstücken und der andere Rest zu den Spielen? Da es in Bezug auf die Geschäfte eine gewisse Vision gibt, würden alle Details geschätzt werden. Thank you.

Mike K. Mauler – Hauptgeschäftsführer

Sicher. Wenn wir unsere Geschäfte, wo es angebracht ist, zu Hybriden und dem neuen Modell umwandeln, haben wir außerhalb der Kernspieler eine Menge Feedback erhalten, dass unsere Läden für jemanden, der normalerweise keine Videospiele oder Sammlerstücke kauft, ein bisschen unorganisiert oder verwirrend sein können . Und was wir in Europa gemacht haben, haben wir in der Vergangenheit besprochen, und in Australien ist es so, dass viele dieser Läden offener, organisierter, freundlicher für diese Bevölkerungsgruppe geworden sind und wir versuchen, dies zu tun Das Gleiche gilt auch für die USA

Jetzt gibt es einen entscheidenden Unterschied zwischen den verschiedenen Märkten. Außerhalb der USA sind etwa 90% unserer Geschäfte Mall-basierte und Malls sind außerhalb der USA gesund und nur etwa 10% unserer Geschäfte, unsere Street Stores, sind Strip-Stores. In den USA ist es umgekehrt, so dass etwa 90% unserer Geschäfte tatsächlich Einkaufszentren sind. Und so ist der Unterschied, die Strategie ist die gleiche und was wir mit diesen Kundenbasen zu tun versuchen, ist die gleiche, aber die Ausführung muss anders sein. Um nur ein Beispiel zu nennen: Wenn ich in einen Einkaufszentrum gehe und das Fenster und die Beschilderung wechsle und Sammlerstücke in den Vordergrund stelle, habe ich einen unmittelbaren Einfluss auf den Verkehr in dem Einkaufszentrum, das gerade an diesem Laden entlang läuft. In einem Einkaufszentrum ist es eher ein Zielgeschäft, also müssen wir einen besseren Weg finden, um diesen Kunden zu vermitteln, dass wir ein neues Wertangebot haben – wir haben neue Produkte, es ist relevant, es ist cool – und bringen Sie sie in unser Ökosystem.

Und so, es gibt eine Reihe von verschiedenen Tests, die in diesem Frühling durchgeführt werden, um verschiedene Wege zu untersuchen, sowohl in Bezug auf das Laden-Design als auch das Marketing. Und dann werden wir darauf aufbauen, um diese zu erweitern – das Konzept, das funktioniert.

Rob Lloyd – Finanzleiter

Colin, lassen Sie mich nur die Rede sein Tempo der Schließungen in den Läden. Was wir herausgefunden haben, ist, dass wir, nachdem wir etwa sechs Jahre aktiv daran gearbeitet haben, Läden mit der Macht der Übertragung von Programmtransfers an andere nahegelegene Geschäfte zu schließen, dass wir eine maximale Rentabilität von Geschäften betrieben haben, nennen sie es , $ 50.000.00, um ein Kandidat für die Schließung zu sein. Also, alles unter 50.000 $, würden wir die Läden dicht machen.

Und als wir durch die Jahre zogen und tatsächlich Profitabilität in dieser Ladenbasis und bemerkenswert gut behielten, finden wir, dass die gleiche ungefähre Zahl von zu schließen Geschäfte oder ein Prozentsatz der Geschäfte, wir müssten die Rentabilität dieses Ladens auf 75.000,00 $ treiben und es ist einfach nicht so überzeugend auf die Wirtschaftlichkeit, dies zu tun. Wo also die Chancen bestehen, diese marginal profitablen Geschäfte zu schließen, werden wir dies auch weiterhin tun. We just don't see that that is at as great of a level on annual basis as we've seen in the past.

Colin Sebastian — Robert W. Baird — Managing Director, Senior Research Analyst

Great. Thanks, guys.


Our next question will come from Brian Nagel with Oppenheimer.

Brian NagelOppenheimer & Co — Managing Director

Hi, good afternoon. Congratulations on your new role, Mike. So, I've got a couple questions. First off, with regard to tech brands and the change you've made here — you mentioned the change in compensation structure — can you just go into a little more detail as to what that actually means in both the near and the longer-term implications for that business given this change from AT&T? Thanks.

Mike K. Mauler — Chief Executive Officer

Sure. I just want to start off with… just say it again that AT&T is a really good partner for us. We have a great relationship and we are working closely with them to change the compensation plan so that it's a win-win. They would like us to expand, we would like to, obviously, have a profitable business, so I think we both have goals that tie together and I'm confident we're going to be able to make some improvements in that area. And, maybe, Jason, you can take it from there?

Jason EllisPresident of Technology Brands

So, Brain, last year AT&T made some changes to the compensation — how they reward us for activating customers in our retail stores — and I think well-intended to move more of that compensation toward the entertainment category, which is obviously where they've made some large investments. And, quite honestly, whether it was through sales execution or the macro category, we didn't get the traction in entertainment sales like we would have hoped so we're back at the table with AT&T. As Mike has indicated, they want us to be a healthy distribution partner. Obviously, this business has the potential to really provide great returns — it has, historically, with the exception of last year — so we're optimistic that we're at the table with them and we're going to get something that will produce longer-term results.

Brian NagelOppenheimer & Co — Managing Director

So, Jason, is there any idea or can you say anything with regard to timing of these negotiations?

Jason EllisPresident of Technology Brands

Yeah, I would say, Brian, they're active and expect that something will happen in 2018 and we're hopeful that they'll happen sooner than later. As Rob mentioned, I think the first quarter will be the toughest for us to comp but then, when we get to the back side of that, if we can reach some reasonable terms with AT&T, then I think the second half will look really good for us.

Brian NagelOppenheimer & Co — Managing Director

Got it. Many Thanks. And then my second question, Rob, you had mentioned in your prepared comments, when you talk about the pre-owned business that, I guess, some efforts you've put forth in Europe and success there, so wondering if you can elaborate a little bit more on that and how that may translate to what you could do in the United States and also timing around any of those initiatives?

Rob Lloyd — Chief Financial Officer

So, what we saw in Europe, I'd say that the largest thing that we did is we ran some very targeted PS4 promotions around trading in an old PS4 to get the PS4 Pro. Those were funded in part by Sony to help protect our margins and they were highly, highly successful. We ran them in the spring and they were much more successful than either party anticipated. It helped drive our market share and it kept us pretty well-stocked on PS4 inventory on the pre-owned side on hardware for quite a while. We ran that kind of promo again in the holiday season. I think both Sony and GameStop were a little more focused on where we were going to put the outer limits of the test. Again, we were pleased with that.

So, as we look back on the results across the year for Europe, what we're seeing is that the hardware pace was different than it was in the U.S. That, in turn, translated to the software pace as well. There was an investment made in the margin in order to drive that promotion, but it changed the dynamics of that business a bit for us. And so, we're going to look at how we can employ that in other markets as well, just recognizing that running the same old playbook that we've been doing inside the U.S. hasn't been working for us as we've seen declines in pre-owned, overall, so that's really what we're talking about.

Brian NagelOppenheimer & Co — Managing Director

Got it. Many Thanks. And then, one more if I could just slip it in, with regard to the Switch, clearly, itself was a big sales driver to you in 2017. As we look out and see, basically, how, I guess, the Switch phenomena continues to evolve, will it be similar to other platforms where, over time, you get a better and better attachment rate just because you have this installed base of hardware?

Mike K. Mauler — Chief Executive Officer

Yeah, I think that's a fair question with Nintendo. We know what happened with the Wii U. I'd say this is definitely a whole different platform that we saw in the past. We have visibility to the software… So, last year was a tremendous year for their software as well as hardware, between Zelda and Mario Odyssey and all the games that they had, it really drove a lot of hardware sales as well as software. I think, this year, when we look at the slate of titles — many of which haven't been announced yet — this year looks also very, very strong. So, I think, at least for 2018, we'll continue to see the strong software slate drive additional install based on the hardware and increase attach rate. We don't have, really, visibility for '19 yet, but for '18, it should play out that way.

Brian NagelOppenheimer & Co — Managing Director

Thank you.


And, once again, ladies and gentlemen, if you'd like to ask a question at this time, please press *1. Our next question will come from Curtis Nagle with Bank of America-Merrill Lynch.

Curtis NagleBank of America-Merrill Lynch — Vice President, Equity Analyst

Great. Thanks very much for taking the question. So, I guess, the first one, could you guys, if possible, talk a little bit about the balance sheet and gross margin SG&A this year? I was looking at recent trends and some of your comments on what you think the segments are going to do this year — I think implies that SG&A dollar growth would be fairly minimal. Is that the right way to think about it?

Mike K. Mauler — Chief Executive Officer

Well, I'd start with, certainly, SG&A reduction is part of our strategy and that was one of the drivers in some of the restructuring we've done already this year. And I think we'll see additional focus… We talked about focusing on the fundamentals and the basics. One of the fundamentals is to make sure that you're controlling and reducing costs and so that'll be an important part of our strategy. I think, maybe, Rob, you could probably talk to that in a little more detail?

Rob Lloyd — Chief Financial Officer

Yeah. So, if you look at just the raw dollars year-over-year, we talked about the forecasted decline in revenues and comps. Obviously, that would contribute to a lower gross profit level, but that 53rd week is a component there — the amount I stated in my script was $43 million of margin from that 53rd week — so we do expect to see that we would have a related decline in gross margin but we would also see, through SG&A focus and that 53rd week, we would expect to see some decline in SG&A as well.

Brian NagelOppenheimer & Co — Managing Director

Got it. And then, just as a follow-up, ex the extra week, where did U segment sales trend for 4Q?

Rob Lloyd — Chief Financial Officer

We're going to have to get back to you on that. I don't have that number in front of me.

Brian NagelOppenheimer & Co — Managing Director

Okay. And I'll just pop, maybe, one more. Just it looks like both inventory and payables were up pretty significantly, more or less in balance — just curious what was going on there?

Rob Lloyd — Chief Financial Officer

Well, to a large degree, what you saw on the inventory side of the equation was that we had sizable increase in our collectible sales for the year so there was an increase in the collectibles inventory to support that sales growth. We also had an increase in the inventory to support hardware and software sales as well.

In terms of the accounts payable, that was up, basically, in greater proportion, I believe, than the inventory was. Some of the timing, with respect to the accounts payable, had to do with purchases of hardware. We generally get shorter payment terms on hardware and we were pretty well in-stock on a couple of the consoles at the end of the year.

Brian NagelOppenheimer & Co — Managing Director

Okay. Thanks very much.


Our next question comes from Joe Feldman with Telsey Advisory Group.

Joseph FeldmanTelsey Advisory Group — Senior Managing Director

Hi, good afternoon, guys. Thanks for taking my question. I wanted to ask, on the collectibles business, I know you guys mentioned and have been expanding space within the store — do you have a sense of how much that expanded space was up year-over-year, I guess, if you think about the stores in aggregate?

Mike K. Mauler — Chief Executive Officer

Yeah, I don't… That's something we'll have to get back to you on, I would think, in terms of the exact amount of space increase. I know, in Europe, we took quite a few of our stores — maybe more than 50% — to a 50/50 model. I think, in the U.S., we're really just starting out with that and so, while we did do some expansion, it wasn't as aggressive and that's something we're still continuing to look at for this year.

Rob Lloyd — Chief Financial Officer

I believe the overall came in at about an increase from about 8 linear feet at the end of 16 to about 15 on average across the portfolio.

Joseph FeldmanTelsey Advisory Group — Senior Managing Director

Got it. OK. Many Thanks. And then, another question, to stay on the collectibles theme for a minute, can you share any, maybe, the upcoming licenses in 2018 that gives you some confidence in driving the business there? And, also, wanted to understand if there's any type of products — I know, within collectibles, there's a lot of different categories that you guys sell and that people seek out — but is there any trend around a certain category or two and then, also, the licenses like I said? Thanks.

Mike K. Mauler — Chief Executive Officer

Sure. I think we're seeing very strong growth with some of the video game licenses. Overwatch is a really good example of that. We're seeing strong growth with Fortnite. I think Black Panther did well for us globally — the movie was a blockbuster and the licensed merchandise did really, really well. In terms of the categories, Funko Pop Vinyls are our most popular category and we've been working very hard with Funko to get good exclusives that other retails don't carry and we're able to pre-sell those and they drive a lot of traffic when they launch — it's almost like a new release.

I'd say the other area of focus, from a category perspective, is apparel. We're really just scratching the surface on what we've done in the past with apparel. We now have someone dedicated to that. And, along with our strategy to focus on moms and families beside just the hardcore, we've opened a couple stores now that focus on female and kid sizes and they have done very, very well for us. So, I would say those would be the two categories right now that are doing the best.

Joseph FeldmanTelsey Advisory Group — Senior Managing Director

Thank you.

Rob Lloyd — Chief Financial Officer

This is Rob. In response to that question Curtis asked, I didn't have the data in front of me. It's now been placed in front of me. Ex the 53rd week, pre-owned would have been down 8% in the fourth quarter, 6% for the year, which is in-line with the mid-single-digit guidance we gave at the beginning of the year.


And, once again, ladies and gentlemen, if you'd like to ask a question at this time, please press *1 now.

Mike K. Mauler — Chief Executive Officer

Okay. Well, thank you, everybody, for joining us this afternoon on our call. We look forward to speaking with you on our Q1 Earnings Call in May and providing you with more details on our strategy.


That does conclude our conference for today. Thank you for your participation.

Duration: 46 minutes

Call participants:

Mike K. Mauler — Chief Executive Officer

Rob Lloyd — Chief Financial Officer

Dan KaufmanEVP and Chief Legal and Administrative Officer

Troy Crawford SCP and Chief Accounting Officer

Colin Sebastian — Robert W. Baird — Managing Director, Senior Research Analyst

Brian NagelOppenheimer & Co — Managing Director

Jason EllisPresident of Technology Brands

Curtis NagleBank of America-Merrill Lynch — Vice President, Equity Analyst

Joseph FeldmanTelsey Advisory Group — Senior Managing Director

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