Q3 2019 Earnings Call
Oh can take Gamestops third quarter 2019 earnings call. This call is being recorded and will be made available I would now like turn the call over to Eric Cerny Investor Relations. Please go ahead.
You're welcome to Gamestops third quarter fiscal 2019 earnings Conference call. This call will include forward looking statements, which are subject to various risks and uncertainties.
Could cause actual results to differ materially from expectations any such statements should be considered in conjunction with the cautionary statements in the safe Harbor statement on the earnings release.
Risk factors discussed or reports filed with the FCC.
Gamestop assumes no obligation to update any of these forward looking statements or information.
A reconciliation and other information regarding non-GAAP financial measures discussed on the call can be found in the earnings release issued earlier today as well as an investor section of our website.
With me today are Gamestops, Chief Executive Officer, George Sherman, Chief Financial Officer, Jim though.
On today's call George will share insights into our third fiscal quarter performance and updates regarding gamestops strategic framework for the future.
Jim will then provide more detail on our financial results and expectations for the remainder of the year.
Now I'd like to turn the call over to the company's Chief Executive Officer, George Sherman.
Thank you good afternoon, everyone and thank you for joining us today on our third quarter earnings call.
I want to begin today's call my first addressing our results during the quarter their direct impact outlook for the remainder of this year.
And the trend, we anticipate carrying into 2020.
Simply put our topline results remain softer than original expectations.
And we believe the or direct reflection of the overall industry.
During the quarter in which it did you say historically low sales.
The near term headwinds can frame the industry as we enter the final stages of the core Microsoft and Sony Cockle cycles are having an outsized impact in our business given where the loan specialty retailer in the space.
It's important to keep in mind that this is not uniquely a game stop issue.
This is a critical issue and costs all of the trigger point for industry.
Well generation like council on the horizon set to bring excitement and significant innovation to the video game space.
It was anticipated releases in late 2020 or putting pressure on the current generation console and related games.
That's consumers wait for new technology, and publishers address their software delivery plants.
Okay recently reported significant double digit industry decline to new hardware for September and October .
And as an industry leader, we're feeling the pressure more directly than others.
Jim will get into the appeals of all results, but ourselves of new hardware in the third quarter declined 46% versus the prior year quarter.
Well these were generally aligned with the industry are well below our expectations.
Looking ahead, we believe this trend will likely carry through our next several quarters until the launch of the next generation councils.
At this stage, we entered the Commoditization phase of the console cycle or promotional pricing is driving sales and if you're rock shopping you're doing store checked over black Friday or cyber Monday, you likely saw that are examples of that discount stance.
Given the significant promotional stance along with the industry dynamics highlighted by I'm questioning declines.
We're revising our outlook for the year down from prior expectations.
Well the near term top line environment remains challenging we do not believe these results are indicative of what we would expect for the business in the long term.
Despite the topline results from a quarter and their impact on our outlook for the remainder of the year.
We do have several positive developments instead I want to highlight.
First we are shared with you our commitment to evaluate every aspect of our business and take decisive action to address underperforming areas of our business.
In that way, we began the process to wind down or operations in the north region of Europe .
Putting operations in Denmark, Finland, Norway and Sweden.
Obviously takes several months to complete we believe this effort will yield roughly $15 billion EBITDA run rate improvement.
So again I want to optimize the business model, specifically, our efforts to reduce inventory and turn faster resulted in third quarter, ending inventories down over 30% compared to last year.
These initiatives are enabling us to generate strong cash flow despite the sales decline.
Sure and directly tied to our conviction in the strategies, we're pursuing we invested over $115 million in the quarter repurchase over 22 million shares.
This reflects our commitment to returning capital to shareholders and brings our total investment in buybacks for the third quarter of this year $235 billion a repurchase over one third of our shares outstanding at the beginning of the year.
You'll hear more about each of these are all our call today, but I wanted to quickly highlight them before discussing our progress against each of our strategic pillars and our performance for the quarter.
Despite the overall sales results, we do have several things within our business that are doing well.
Even within new hardware, where we have recent innovations such as Nintendo switch and switch like we're seeing strong double digit sales growth, where consumer interest continuing to increase across that platform.
You can see the strength of the switch platform reflected in our recently implemented merchandising floor sets across the chain and in particular cross our black Friday cyber Monday offerings.
As we highlighted the product and give a high profile placement across our omni channel platform.
In software despite fewer titles in an underperforming title slate compared to last year, where we do have strong titles game stuff continues to deliver market share leading performance.
For example, the success of call of duty modern worker launch has been well publicized.
Associates galvanize behind released those exclusive in store events, especially activities centered around the franchise.
Additionally, our collectibles business continued to show growth as we continue to improve our card offering in the category.
We see opportunity in this category as we leverage our unique position to take advantage of fan favorite franchises launching this year and beyond.
As we keep improving our product offering capitalizing on exclusives, we can leverage our retail expertise to driving improvement and product margins for the category.
Despite the near term demand headwinds for current generation gaming hardware and software products Gamestops evolution as an industry leader in our efforts to reposition the business model are on track.
The groundwork to better leverage Gamestops leadership position in video game retail is moving forward irrespective of where we currently are within the console cycle.
However, it is important to ramp or size, our turnaround will not be measured in immediate term cells results.
We do however, we believe there will be a power and impactful the profit flow through what the new copper cycle kicks in.
Let's take a few minutes to share the solid progress you made during the third quarter I get a core pillars of our strategy. We laid out for you recall in September .
Remember that our strategic plan anchored on four key tenants.
Further optimize the core by improving efficiency and effectiveness in everything we do.
Second create the social and cultural hub of gaming within each gamestop stores and online.
Third build a frictionless digital ecosystem to reach our customers wherever they want to do business with access to the best digital content and products.
And fourth transform our vendor can partner relationships for the future of gaming.
Where we have driven the most progress is within the first pillar optimizing our core business.
Recall that this pillar encompasses optimizing the core business by improving efficiency and effectiveness across the organization, including cost restructuring inventory management and optimization.
Adding and growing high margin product categories, and rationalizing the global store base.
This pillar as the primary driver other operating profit improvement goals for 2021, we are well underway implementing the other initiatives that we need in order to deliver on that target.
Of the 200 million dollar profit improvement goal, we got roughly half of that what we delivered in the form of expense reductions or the other half coming from product margin enhancements.
When we spoke in September we executed roughly 40% on the expense reductions and today, we are over 50% complete.
Well the topline decline mask some of our progress you can see that excluding onetime items, we delivered approximately $30 million and reduction in our corporate overhead compared to last year as result of these actions.
We are clear line of sight, the remaining 50% and are confident in our ability to over on the school.
From an inventory management perspective already highlighted our 30% reduction compared to last year, representing a significantly improved position both in terms of quality of inventory in overall stock levels.
We will continue to focus our efforts on optimizing our inventory position to protect our strong cash flows.
We also continue to make progress expanding into higher margin categories and while many of these initiatives may take longer to manifest themselves.
We've already begun carrying PC gaming accessories in the store reinforcing our position at the one stop shop for all things video games.
Along those lines. We also continued to advance our objective to expand into private label opportunities for video game accessories and other items.
Well leveraging capabilities that already exists within our organization the grew our presence across our global footprint.
On the collectibles front.
As I mentioned earlier, we continue to see opportunity to drive margin improvement in the category by leveraging the new leadership team and the new merchandising organizational structure.
Implementing a more strategic and comprehensive good better best pricing architecture that includes include promotional markdown management.
Brought the product lifecycle.
Being more strategic with our initial buys and how we pull inventory into certain categories. We are beginning to see better margins sharper pricing and more optimal markdown strategies.
Another area, where we make a significant transformational progress for efforts to optimize our global store fleet.
This continues to be a top priority of ours is an ongoing focus for Jim in the team.
We believe our overall profitability can be improved by de Densifying, our fleet and by closing and or consolidating underperforming stores, taking advantage of strong historical business transferred remaining stores in each market.
I shared with the early or the action, we are taking the wind down operations in the North region of Europe .
The second pillar of our strategy revolves around establishing gamestops as a social and cultural hub of gaming within each store online and within the digital environment.
We have a tremendous brand to leverage had been a trusted partner of the gaming community for decades.
Ongoing growth of video games and off shoes like E sports offer significant growth potential for game stuff.
As we introduced in September we develop some unique testing capabilities to help us uncovered a proper path to capturing those opportunities.
An important element of this evolution is rapid customer centric experimentation.
To that end, we've re imagined 12 stores within our Tulsa, Oklahoma market and while it's too early to share specifics, we're very encouraged by what we're learning from the numerous customer immersive experiences that we are testing and these 12 stores.
Further what customer engagement at the center of making gains up the social and cultural hub of gaming.
Powerup rewards loyalty program is a huge asset for us to leverage.
Jim are rolling out enhancements to the program.
Specifically within the paid power approach here, we tested race incentives designed to increase customer enrollment and drive more visit frequency from shoppers and found that these efforts resonated with customers.
As a result in November we launched enhance we didn't benefits for the approach here customer such as reward certificates and member access to exclusive opportunities and events.
It has seen a positive reaction from customers reflected in a significant double digit increase in enrollment rate.
Again, while still early we've received strong feedback so far the new initiatives.
Growing this critical affinity network will position the business to over index, our leadership position in the upcoming new console cycle, which will entail a knowledgeable consultative selling process with the advancement of new technology.
In terms of our third pillar. Our recently relaunched ecommerce website is a growing an important leverageable asset for us as we continue to build a frictionless digital ecosystem for access to digital content products.
Since the launch of the new website in September we see an increasing conversion rates and average revenue per user along with longer browsing time from customers using the site.
Importantly, we've seen a triple digit increase can buy online pickup in store transactions, perhaps the most important CPI.
These are all positive indications that the new website is improving the customer experience.
Finally, our fourth pillar, which entails transforming our vendor important relationships is progressing remains a long term opportunity.
We continue to have very constructive discussions with our partners and they recognize the value omni channel reach an extra consumer selling engagement that we provide.
We hope to share more detailed information on this initiative in 2020 as our long term passport is formalized.
In summary, we are making solid progress on our strategic initiatives.
We continue to move quickly and are taking decisive action.
We know that improving this business will not be quick fix.
We see a clear path to success over the near term and even more importantly, the longer term sustainability of the business based on strategies that we are pursuing today.
As we said in September over next several quarters, you should not evaluate our business on retail comparable store sales results.
Instead, you should evaluate our performance during this console transition on gross margin expansion across categories.
Our ability to generate strong cash flows.
And inventory management, and overall expense management, delivering operating profit and cash flow expansion.
All things that we're already seeing traction on while somewhat masked by the topline performance and are committed to enhancing further.
As we transform the business model. We continue believed that our efforts will position the company to drive increased profitability when the industry returns to the new console launch cycle.
Despite the softer topline and stronger industry headwinds than we anticipated we still operate a business model that has a healthy balance sheet and generates positive cash flows.
Importantly, we also remain committed to returning excess capital to shareholders as reflected by our share repurchase activity. This year.
I want to take this moment before I turn the call over to Jim to think Oliver our associates for their hard work and tireless efforts to deliver exceptional product knowledge and service to our customers.
Associates are among the most passionate and dedicated in retail and I know they are working hard to deliver an outstanding experience for our customers around the globe and are eager to close out the holiday period on a strong though.
Thank you for all you do.
Now I'll turn the call over to Jim for more detailed in the quarter results and outlook for the remainder of the year. Thank you George Good afternoon, everyone. As George mentioned, we're disappointed in our results for the third quarter, which reflect the impact of topline challenges from a video gaming industry, primarily driven by where we are in the console cycle.
The decline was more than we originally expected as the depth and breadth of industrywide slowdown reflects a highly penetrated console market.
In earlier than usual announcement of upcoming capital losses from manufacturers.
And the reluctance of Oems to bring tend to cycle discounts to the market.
All these factors are putting significant pressure on the volume of current generation products.
The work your bright spots, however, during the quarter, including solid growth in the Nintendo switch product line as well as continued positive gains within our collectibles business.
However, these gains were simply not enough to offset the slowdown Sony and Microsoft product suites.
As we work through the next several quarters navigate what we believe is a consumer waiting for the next generation of puzzles. Our greatest focus will continue to be on affecting our business model to ensure we are positioned to optimize profit flow through when the next generation of Microsoft and Sony Councils launch late in 2020.
This includes continued focus on expense management, so portfolio optimization rationalization of underperforming businesses and improved inventory management.
It will believe will optimize already strong free cash flow.
Before I get into our outlook for the year I want to take a moment to recap of performance for the quarter.
At a high level, our bottom line results were affected by non cash taxes in the quarter, which stems primarily from our relatively low level of taxable income magnifying the volatility of our tax rate.
And I'll get into that in a little bit more detail in a moment.
Our reported basis, we delivered operating loss of $45.6 million adjusting for onetime items related to our transformation asset impairments and other charges, we delivered an operating loss of 18.6 million.
On the top line perspective, total sales declined 46.9 billion or 25.7% compared to the third quarter fiscal 2018.
This decrease was primarily driven by a comparable store sales decline of 23.2% approximately 150 basis points from closed stores and a negative 100 basis point impact from foreign exchange rates.
While our comp store sales results were primarily driven by lower transaction counts from new hardware and software. We're pleased with positive comparable improvements in units per transaction within the market basket, reflecting the early results of our merchandising management strategies, including enhanced focused on SKU productivity there.
So merchandising and strong attachment rates driven by our store associates.
From a category perspective, as we've mentioned the primary drivers of the decline when new video game hardware and software.
New hardware sales declined 46% or new software sales declined 33%.
Importantly, the categories performing worse than the last console generation ship, whether declines when the mid 30% range.
As an indicator of what we believe continued innovation within hardware product lines can do for the category Nintendo switch platform continues to deliver strong double digit increases.
From a new software perspective growth and intend to switch software was good and not enough to offset double digit negative comps across other platforms.
Thats in the significant decline next spots and PS four software titles in the quarter was driven by last year's strong title lineup, including record setting Red dead redemption to Spider Man.
Hi, collectibles business continues to be a bright spot posting growth of 6.1% for the quarter, but for foreign exchange impact.
And we continue to expect further growth in this category as we improve the product offering and leverage our retail expertise to improve our execution.
Our premium video doing business declined 13% year over year, but we did realizing four percentage points sequential improvement from the second quarter as we continue to find opportunities to leverage our leadership position in the plan product market.
Consistent with new video game categories, we continue to see strong demand for pre owned Nintendo switch products.
Indicative of our efforts to optimize our overall merchandising approach our consolidated gross margins increased 190 basis points to 30.7%.
28.8% in the third quarter last year.
Most all the new England categories saw gross margin expansion versus the third quarter last year.
Now turning to our expenses on expense management objectives.
After adjusting for roughly $16 million and onetime transformation severance and other charges associated with our Gamestop ribbon profit improvement initiatives.
Hi, asking expenses were $436 million, reflecting a decline of 28 million for roughly 6% versus the third quarter last year.
This reduction was directly related to ongoing efforts to aggressively rationalize the overall cost structure rubber business as reported yesterday for the third quarter was 452 million compared to 464 million a year ago.
Revisiting the impact of tax variability.
Thats a tax rate as reported for the third quarter was negative 61% and the impact of lower projected earnings for the year.
Additionally, there were certain discrete tax items, including the third quarter, primarily related to a $20.2 million valuation allowance and the mix of earnings across the jurisdictions in which we operate.
The impact of these noncash tax adjustments was approximately $16 million.
It's important to note that after adjusting for the 16 million noted above the adjusted tax expense $15.6 million or 19 cents per diluted share is also not reflective of our cash taxes for the quarter.
As a result of our taxable income being relatively low our reported us GAAP tax expense and resulting rate can be volatile. However, our cash taxes for the year are not expected to be material. This impact is unique to the quarter results and the effective tax rate overall expense will normalize in the full year results.
On a reported basis, our net loss from continuing operations for the quarter was 83.2 million compared to a net loss of $506.9 billion in the third quarter last year.
Which included approximately $588 million an impairment charges.
The third quarter fiscal 2019 results include charges of $43 million or 52 cents per diluted share, which includes noncash asset impairment charges costs related to ongoing transformation.
The noncash tax adjustments noted above.
Well as other items.
Now turning to the balance sheet.
We ended the fiscal third quarter, we had total cash and liquidity of $703 million, including 290 million in cash and $413 million net availability under our revolving line of credit.
This compares to total cash liquidity of $861 million in the prior year.
We ended the quarter with total debt of $419 million versus 820 million at the end of the third quarter 2018.
We ended the third quarter with total inventory of 1.29 billion.
Compared to $1.8 billion in the prior year a reduction of 31.6%.
As we've said inventory reduction is a significant area of focus for us as we seek to increase our inventory turns and improve our working capital to materially improve on strong cash flow generation of the business model.
In terms of capital allocation, given the strength of our balance sheet and the ability of our business model to continue to generate positive cash flows even in a tough sales environment. We took advantage of our depressed share price during the quarter and returned approximately a $116 million to shareholders through share repurchases equate.
And a 22.6 million shares at a weighted average price for $5, an 11 cents per share.
Year to date through the ended the third quarter, we have now repurchased a total of 34.6 million shares for approximately 34% of the outstanding shares coming into the year.
In total year to date through the third quarter via share repurchases and the first fiscal quarter dividends, we've returned over $218 million to shareholders.
This is a clear reflection of our commitment.
Returning capital to our shareholders and our conviction in the strategic initiatives we are pursuing.
And their ability to enhance our profitability.
As of the into the third quarter, we had approximately $121 million remaining under our current repurchase authorization.
In the third quarter, we had $20 million of capital expenditures, bringing the year to date totaled to 61 million.
We now expect full year capital expenditures to be between 80 and $85 million down from our previous guidance.
Going forward, we will continue to evaluate ways to return capital to shareholders that Optimizes returns for all stakeholders, while balancing the importance to maintain a strong balance sheet as well as our debt ratios.
I will now shift to provide our expectations for the rest of fiscal 2019.
The third quarter behind us and important Black Friday cyber Monday shopping period included we're updating our outlook based on the current trends in the business, including industrywide headwinds in the video game category.
We anticipate the cyclicality of the console business to continue to impact sales through the rest of the fourth quarter and into 2020 until the launch of generation on console from Sony and Microsoft.
We also continue to anticipate a much lighter title slate for publishers, given the pending lots of new consoles next year and have already experienced one publisher announcing a number of title delays in the next year, which contributed to a portion of our downward revision for fiscal 2019.
In light of those trends, we now anticipate consolidated comparable same store sales for fiscal 2019 to decline in the high teens.
As we continue our evaluation of underperforming aspects of our business. We're on track to have between 230 and 250 less stores on a global basis net of new openings by the end of fiscal 2019, the closure rate of underperforming stores, it's very consistent with the last several years.
And supports our continued efforts to densify our fleet.
The optimize profit production in select markets and trade areas.
Approximately 140 of these underperforming stores closed already earlier in the year.
Further as George mentioned, that's a thorough and careful review our business in the four Nordic countries.
Mark, Finland, Norway, and Sweden, we began the process to wind down these operations and expect to exit these markets in fall by late 2020.
We expect the run rate impact once the exit is complete to be a positive full year annualized EBITDA contribution of just over $15 million.
Given the aggregate impact of the above items, particularly the softer than expected trend in sales. We now expect TTS for the full year. After adjusting for one time items to be in the 10 cents to 20% range.
Despite the topline declines in the business our balance sheet remains strong as we anticipate ending the year with total cash liquidity in excess of $1 billion and we expect to generate between 200 and 220 million in adjusted free cash flow for fiscal 2019.
Our objectives remain unchanged and we have maniacal, we focused on continuing to make the necessary changes to strengthen our overall financial architecture, including all key profit and expense levers that will result in an organization that is efficient streamlined and poised to capitalize on a significant profit flow through.
Through improvement as we experienced expected robust sales increases in late 2020.
By the generation nine hardware and software slate.
I'll now turn the call every operator, and we'll take any questions that you may have.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
During his speakerphone. Please make sure any assumption is turned off to allow your signal to reach our equipment.
Please press star one ask a question.
We'll now take our first question comes Stephanie Wissink with Jefferies. Please go ahead.
Hi, This is actually Haggen bunkers definitely thanks, thanks for taking your question.
The FCC ratio remains to start 8% sales, even with the cost optimization program in place how should we think about phasing of savings going forward.
Yes, Hi, Lastly, this is Jim I think you can.
We've talked about.
That's majority savings you can see third quarter this year versus last year, but as it starts to annualize over the course of 2020, you'll see obviously better impact on an annualized basis, just really seeing will first full quarter of the effect.
In the third quarter this year.
Okay, Great. That's helpful. And then if I could squeeze one more just on the cost of margins were down year over year any reason for the change.
Yeah actually it's George we saw the need to walk through some inventory that was not as productive as what's being brought in some of collectible standpoint. So it is the loan category that actually had margin rate goes down and that was a very conscious effort on our part to move through some inventory.
Okay also indicative of how we how we are focused on the inventory management and being able to take decisive action on places where it makes sense for us to do specialties, we won multiple biplanes going forward.
Thank you. Thank you got to the color, but that's not to someone else.
Your next question.
Segment with credit Suisse. Please go ahead.
Hi, this is not as your money on Telesat Sigman.
First question comes on.
Cash from the let me put stackable complements a fee cash flow for the yard in how are you thinking about team.
So on script the more often.
Yes.
Yes, I think.
It's very straight forward any the biggest driver free cash flow.
From the perspective of us continuing to generate strong free cash flow is our.
Focus on inventory management and.
And this is this a critical factor as we continued to drive our inventory levels down manage the way that we're buying inventory managed the way we're turning inventory over managed and then lifecycle Bob.
Really all the way through initial set all the way through promo and Mark down in terms of the product lifecycle that is how we really view the generation of free cash flow in this business in the main driver.
Got it just follow up on the cost reduction blank.
Do you any updated views on how the cost instructions progressing.
Simon.
Well since you apply a plan.
Thank you Michelle.
Want to expand the feed this maybe legal appeals.
Let me start off with your question on on cost it.
I think we said he 40% last time out in at the end of the last quarter instead of the 6% away there on the expense reduction side of the $200 million, so roughly half and half 100 million from cost dog in a 100 million from things like gross profit expansion, we feel very good about the about this anywhere again.
And if the moving target we continue to make progress on the cost that we see full visibility to getting that for $100 million out and obviously, we understand that that flow scraping. The bottom line. So theres upside to be had will certainly go pursue it.
We are you seeing any impact on fields and the shopping drums.
Impacts on the jail seeking.
On the changes, you're making within the stores and rationalizing skew them.
Yes.
It looks.
Yes, I think the best way to think about that is related to the comment that I made.
Regarding the margin expansion.
Really the impact of having better floor set having a better.
You points is in terms of SKU rationalization in the turnover. The inventory has allowed for margin expansion with the category level on virtually all video game categories.
You know will we expect to continue to see that as we go forward. We're really just starting to see the early fruits about labor.
Understood. Thank you.
You bet.
Well now take a next question from race does show with consumer Edge Research. Please go ahead.
Great. Thanks for taking my question can you discuss what you all are seeing from publicly available information on the next Gen console announcements and how you think about that impacting your business in 2020 and beyond a couple key topics that we're talking about with investors is the fact that has a disk drive not as much would jump and file size.
Some of the details around the solid state drives and then of course subscription and even backwards compatibility. Thanks.
Yeah, right, we know a virtually the same thing you do so we learn from the same basic sources were obviously its role that there's a described in the bolt councils going forward a that certainly very very meaningful to our business and I'd say that looking ahead I mean, all those things combined a having to.
Yes, presumably having a higher price point, although we don't know that different will be as well I'm, having a other offers in place even having subscription models, which we think we can play a role in a role in selling are all positive for US we remain supremely confident in our bounced back in I know about November next year.
And I think there'll be a point that show we can almost named the date I mean that is going to have a profound impact on our business we tend to over index early cycle.
Because the just require some level of education to the consumer there's a choice to be made theres functionality to explain where his concepts to be given and that's where we excel. So that's why we're having good conversations with our vendor base and certainly that's why we're very bullish on what's going to happen with this company about 11 months from now.
Got it. Thanks, and then is there anyway that you could comment on the all digital X Pops offers how you think that skews performing in the market and to the extent that you guys are talking to Microsoft about that skew and and the trade and deals that they've had around that skewed. Thanks.
Yeah, Yeah as you know rate we brought it into the holiday season, we featured in a black Friday, and we moved in a pretty well.
Our team embraced it and certainly we believe that we have to embrace digital options and this is one of them. So it. Obviously you can conclude that we found that favorable terms to go ahead of book listen to our Assortments and we're happy with way performed.
Great. Thanks, so much again, yes.
Thank you.
Well now take our next question from Curtis Nagle with Bank of America. Please go ahead.
Good evening. Thanks for taking the question I guess is the first one focused on the buyback.
I guess why buyback so much stock when you know at the moment there still so much uncertainty around the business in.
The results continue just a point I guess a point that you know, there's a new cycle coming but you know.
Your from now and lock it happened from then to now we're not abandoned.
Why should not the best interest to the company to preserve cash.
Yeah, Hi, this is Jim I think again, we constantly evaluate what the optimum utilization of capital was the only say optimal many optimizing returns for our shareholders.
And that's a balance of maintaining property you know appropriate levels of catching.
The strength of our balance sheet. It involves management of our debt ratios. It involves a ultimately there we think is appropriate in a very metered way today in terms of.
Any potential capex in the business, but it also involves really being able to return capital to shareholders, especially when we see the plus pricing in the marketplace that we've seen in our stock simply speaking I think it's a view. The fact that we believe our stock is undervalued and we think that it's appropriate and prudent use of capital to turn that that.
And to our shareholders via the buybacks and I'm, just going to reemphasize that last point, we buy back stock because we funded fundamentally believe there are true or stock is trading at a discount and we're very confident as to where our stocks hitting given what's going to happen in 11 months. So we're very very confident that bounced back very confident that all the way.
That's being done right now around expense structure around margin structure is going to pay off in the form of a profit flow through when sales return and we're certainly going to.
Got it.
And then just a follow up.
He just go through the parameters.
For Q for some comps in from year to date in the New guide it looks like.
For Q regarding down around.
So moving over 20% a is that right and then.
And that gets a little funny, a in terms of <unk> profitability and kind of a share count, but I think you you apply to eat into something around 150 million to give or take.
You bet on it.
Right and then just one more follow up what's the bridge between the Justin on adjusted free cash flow.
Yeah. The primary bridge on is can we take the loss we first yeah, everything you're saying in terms of some of your early model taking in our so I'll just the first part taking in your you know our release in the comments on the on the call or you know there it directionally accurate.
Now the second part of your question.
Yes, I'm, sorry, I repeat that the second part though.
Yeah, just in terms of what what's the dollar bridge between adjusted and on the adjusted Yeah. We did again as we described this and being in the past last year, we got some late inventory.
Ladies a fourth quarter 2018 that carry over and over $400 million are they Peter got paid in the first week or two.
Well 2019 from 22, so just when we talk about adjusted free cash. So it's really affecting that that was really related to 2018 inventory levels.
And the inventory buys that's all seems a little over 400 million.
Okay terrific, thanks very much.
You bet.
Once again, if he'd like to ask a question. Please press star one on your telephone keypad.
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I'll now take our next question, Joe Feldman with Telsey Advisory Group. Please go ahead.
Hi, guys and it's interesting question.
Yeah.
You know we knew.
We're talking about.
Profitability, improving and you know I know, it's hard when you got sales coming down at this level, but.
Can you you said you I think your 50% as a waiting on the cost savings.
Where should we see that I mean, I guess im not quite seen that in the model, yet and I'm curious just too.
Can you maybe highlight where that that is showing up.
Yeah. The first part of it from a cost structure is really all in the us to unite and that's you know again, we're about 50% of the way they are $200 million roughly 800 million.
We talked about on a cost side.
You are starting to see a little bit in terms of some of the margin expansion components, albeit there some product mix effects in there as well.
But this is really starting to.
The main impact is in the cost side yesterday, and Joe Let me add I think you've gotta look at the difference between India and run rates. So when we talk about the new $100 million of expense saving as part of our 200 million dollar profit.
Improvement plans.
That is run rate. So any are saving you can correctly infer that the majority of what you're going to see in year end 2019 is going to come from some of the structural changes that we made toward the end of the summer.
Most of its going to be for looking at run rate contract changes.
So it needs a.
You should you shouldnt be looking for 40 or 50 million just a subset of that that senior sales. So just to be clear that 200 million was a run rate.
Getting 20 to 2021.
So we think that's the accumulation over the course of.
The timeframe that we've been working our ready on continuing to work throughout the course of the next hansel quarters.
Yeah. Thanks, and then just a quick follow up.
You know that I knew you guys change loyalty program and then there's new tier for the pro I guess just curious how the response has been and maybe you with regard to sign ups or the and just the feedback you're getting.
Yeah, it's been terrific. Thanks for asking I mean to change is really meant to drive frequency interesting to the store. It is really built off the premise of some level of coupon every single month.
During the year of membership we were thrilled with the sign up rates that we've seen since launch in the program. So it's off to a nice start you know certainly we leverage that over a holiday Black Friday weekend, when we've seen very good progress on a on the program in just a great reception by the customer.
That's great that's great. Thanks for the update thank you again.
Thanks Joel.
And there are no further questions I'd now like turn the call back over to Mr., James Shannon for closing remarks.
Thank you thanks very much for joining us today, we appreciate everyone's contingent interest against up a little again take the opportunity to think our teams for their hard work. During this the hardest season of the year for our teams, especially at weekends like Black Friday, Cyber Monday, all the time and the epithet but that they put in I want to thank them for everything they do make.
Our euro success for holiday 2019, as a success as a management team. We continue to work in a sense of urgency to approve the business model, but just in game stopped the long term success. We appreciate all the support of our stakeholders as we transition to the future.
Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
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