Q4 2019 Earnings Call
Welcome to Gamestops fourth quarter 2019 earnings call.
This call is being recorded and will be made available.
Now I'd like to turn the call over to Eric Cerny Investor Relations.
Thank you walk into Gamestops fourth quarter fiscal 2019 earnings conference call.
This call will include forward looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.
Any such statements should be considered in conjunction with the cautionary statements under Safe Harbor statement in the earnings release and risk factors discussed in reports filed with the assay.
Gamestop assumes no obligation to update any of these forward looking statements or information.
Reconciliation and other information regarding non-GAAP financial measures discussed on the call. It can be found in the earnings release issued earlier today as well as the Investor section of our website.
With me today are Gamestops, Chief Executive Officer, George Sherman, Chief Financial Officer, Jim Bell on todays call George welfare insights into our fourth quarter in fiscal 2019 performance and updates regarding gamestop strategic framework for the future.
Jim will then provide more detail on our financial results and expectations for fiscal 2020.
Then well open the call up to your questions.
Now I would like to turn the call over to the company's Chief Executive Officer, George Sherman.
Thanks, Eric Good afternoon, everyone and thank you for joining us today on our fourth quarter and full year earnings call.
Before I begin a review of our 2019 financial results I'd like to update you on how we're navigating our business during the cold with 19 pandemic.
Yeah, sure where the situation remains fluid with each day, bringing new information.
Our highest priority is ensuring the health and safety ever associates and customers around the world.
We have been steadfast in our here's the CDC gotten safety and local government orders for retailers each of our communities.
We have countrywide closures in Europe, primarily in Italy, and France.
Yeah, well Oreo stores that are open we have temporarily closed or storefronts moving to curbside pickup at stores, but this will take buy online pick up the store orders an E commerce deliveries only.
As millions of consumers adapter remote work quite and learning we're pleased to be able to serve their needs. In fact, we've seen an increase in store and online traffic over the past few weeks.
We remain committed to continuing to meet those needs in a safe environment.
As for the impact on any supply chain and manufacturing for the new car. So you will continue to work with a console makers. That's the launch approaches but as of now you have no indication of any impact on the product launch or delivery date, which is expected in time for holiday 2020.
In the near term, we continue to monitor inventory levels for specific categories that might be impacted by shipping or delivery delays, but there's no any impact has been minimal.
It's Jim will highlight during his remarks, we will pay all U.S. employees, whose hours have been eliminated an additional two weeks at the regular pay rate based on the average hours worked over the last 10 weeks.
In addition, the company worried reimbursed all benefits all benefit eligible U.S. employees, one month of the employee portion of the benefit expenses.
Now turning to review of fiscal 2019, beginning with our fourth quarter.
The fourth quarter concluded a year in which we achieved significant progress against our key priorities focused on optimizing our business model strengthening our balance sheet and improving our cash flow in a period that was expected to see significant declines in sales.
Our overarching goal is to capitalize on Gamestops, leading global market position is strong loyalty base to stabilize sales trends and ultimately position the company for sustained long term profitable growth.
Overall, our fiscal your topline results were in line with our January update.
Bottom line results are better than expected demonstrating strong progress toward our key priorities appealing gross margin expansion.
Oh reduction industry, M&A expenses, and a strengthened balance sheet.
As expected sales were down double digits, driven by the industry wide headwinds we've discussed before as we're in the late stages of the current console cycle as well as working against the strong fiscal 2018 fourth quarter, which saw strong accessories business related to foreign like market penetration.
We are steadfast in our mission to accelerate the changes needed to our operating model to position the company to capitalize on the way consumers are shopping and gaming today.
We're accelerating our digital capabilities and testing new experiential elements in their stores.
In 2019, when build a new web platform introduced new omni channel capabilities, including buy online pickup in stores with encouraging results. However, we're still early in that activity.
In terms of the fourth quarter results overall consolidated global sales were $2.2 billion, reflecting a comparable sales decline of 26%.
And we delivered adjusted operating income of $109 billion and adjusted earnings per share or $1.27.
For the fiscal year consolidated global revenue declined 22%, reflecting a comparable store sales decline of 19.4%.
Adjusted operating income was $62 million and adjusted EPS was 22 cents.
We remain intensely focused on inventory reduction and working capital improvements in fiscal 2019, and these efforts drove a 31% reduction in inventory and 64% reduction and accounts payable putting us in position to enter fiscal year 2020, well the significantly stronger balance sheet fundamental.
2019 was a challenging year as we entered the low point in demand for the current console cycle.
However, there were some bright spots and we made significant progress against our key initiatives.
As a reminder, our strategic plan is anchored on four key tenets.
First optimizing the core by improving efficiency and effectiveness in everything we do.
Second, creating a social and cultural hub gaming within each gamestop stores and online.
Third building, a frictionless digital ecosystem to reach our customers wherever they want to do business with access to the best digital content in products.
And for transforming our vendor in partner relationships for the future of gaming.
Starting with optimizing the core by improving efficiency and effectiveness and everything we do.
As we discussed earlier in 2019. This pillar was expected to deliver the earliest results and then stack. This is where we have made the most progress and the primary driver so far against our 2021 run rate improvement goal.
As a reminder of the 200 million dollar profit improvement goal, we know that roughly half of that will be delivered in the form of expense reductions well the other half coming from product margin enhancements and implementation of additional revenue streams.
In fiscal 2019, we achieved an expense reduction $130 million on an adjusted basis with about half directly attributable to cost optimistic optimization activities.
We still work to do here and we'll continue to focus on this objective in 2020 as we remain on track to deliver on our fiscal 2000 2021 goal.
From an inventory management perspective, I already mentioned, 31% year over year reduction representing a significantly improved position both in terms of quality of inventory and overall stock levels.
We will continue to focus our efforts on optimizing our inventory position to protect our strong cash flows in fiscal 2020.
We made good progress in fiscal 2019, continuing to expand into higher margin categories, such as PC gaming accessories private label and collectibles as reflected in the gross margin expansion across categories.
In 2019, we expanded our PC gaming business in the stores and we'll continue to expand our offering in 2020 and beyond as we cater to all the needs of our gaming customers.
On the collectibles front, we continued to improve the product offering.
And combining the political merchandising.
Discipline around inventory in improved markdown strategies, we're driving margin expansion.
Going forward, we have opportunity to better leverage our scale as we sourced product and act more strategically and our initial buys and in terms of how we flow inventory in the certain categories further enhancing our ability to expand margins in the category.
In 2019 as part of our decisive actions to address underperforming areas of the business, we began to wind down our business and the Nordic countries of Denmark, Finland, Norway and Sweden.
So we accelerated the effort we now expect to fully exit these markets by late July 2020.
We continue to anticipate the run rate impact once the X is complete TV a positive four year annualized EBITDA contribution of just over $50 million.
Our next strategic priority is creating a social and cultural hub of gaming when they each game stop store and online.
An important element of this evolution as rapid customer centric experimentation.
As you're aware, we're piloting 12 test stores within our Tulsa, Oklahoma market and are pleased with sold the initial discoveries.
We also enhanced our power up loyalty program with new features that have been driving increased paid enrollment and attach rates with transactions.
Our Powerup loyalty program continues to be well received by our customers.
And we're pleased with the November launch of the enhanced suite of benefits for the pro to your customer such as reward certificates and member access to exclusive opportunities and events.
This loyalty program allows us to engage with our customers to keep them up to date on the new technology, which is especially important ahead of the fourth quarter console launch.
In 2020, we expect to continue to leverage the program well the base and drive customer activation through the program.
Third building, a frictionless digital ecosystem to reach our customers wherever they want to do business with access to the best digital content on products.
Our realized website in 2019 continues to drive increased conversion rates and average revenue per user along with longer browsing timeframe from customers using the site.
Importantly, it has also driven increase buy online pickup in store sales.
Which is key to drive customers to the store.
We're very pleased with this performance so far and we'll continue to leverage this asset as we expand our capabilities in fiscal 2020.
And finally, transforming our vendor and partner relationships for the future of gaming.
In 2019, we began had very constructive discussions with our partners and they recognize the value omni channel reach an expert consumer selling engagement that we provide.
While still early we began testing the concept of additional revenue sharing which select key partners.
Also under the strategic Tenet, we began to optimize our supply chain and global purchasing power to leverage our scale as was developed new category offerings, such as gaming Pcs.
So in summary, while fiscal 2019 reflects the prevailing industry trends, we're pleased with the operational progress we made against our strategic initiatives.
Many of these initiatives will take time before they are reflected in our results, but we feel confident that the will drive improved results and long term sustainable growth.
As it relates to our outlook, we view 2020 as a transitional year as you're aware of the industry is anticipating new gaming consoles from both Microsoft and Sony don't to launch at some point in the late fall.
Withstanding the improved trend weve experienced over the past few weeks as we've mentioned several times over the first three fiscal quarters. We expect a continued challenging sales environment, followed by a material sequential improvement the console watch.
Before turning the call over to Jim I want to take a minute to publicly welcome our new board members that we announced earlier this month as part of the board refresh and other corporate governance enhancements.
Were you able to attract great very talented slate of directors that bring unique skill sets to the table and would be great assets for the company as we start 2020 and continue to execute our transformation.
I also want to reiterate that our thought start with all of those who've been personally impacted by October 19.
In addition, I'd like to thank and recognize all of our dedicated associates, who are providing excellent customer service in an unprecedented environment.
Thank you for all that you're doing to navigate this challenging time.
And with that I'll turn the call over to Jim for more detail on our fourth quarter and full year results. In addition to our 2020 outlook.
Thank you George good afternoon, everyone.
I'd like to take this time to walk you through our fourth quarter and full year 2019 results in more detail and then I'll share some insight into how we're approaching fiscal 2020.
As George shared with you fiscal 2019 saw strong progress toward our transformation plan as we advanced our goals focused on strengthening the underlying business and capitalizing on the advantageous position we have in the gaming industry. One of these primary objectives in 2019 was optimizing our balance sheet and specifically.
Reducing liabilities, including payables and long term debt, increasing cash flow, primarily through significant inventory management initiatives and deploying capital to return value to our shareholders.
Additionally, our intense focus on inventory management is also contributing to improved gross margins.
The result, we successfully ended the year with a strengthened balance sheet and the financial flexibility to navigate the near term challenges posed by the end of the console cycle.
Turning to our performance, we delivered both fourth quarter and fiscal 2019 topline results in line with our January update and profitability ahead of our updated expectations on an adjusted basis.
Looking at our fourth quarter results total company sales decreased 28.4% to $2.2 billion from 3.0 billion in the prior year period.
The overall sales decline was primarily attributed to a comp store sales decline of 26.1% with the remaining 230 basis points attributed to close stores and foreign exchange headwinds.
Our comp store sales results were primarily driven by the fact that we are in the late stages of the console cycle, which is putting pressure on traffic to the stores.
We saw declines across all three categories hardware and accessories software and collectibles.
As you likely noted from our press release, we've adjusted the way we're reporting our category detail. This change. This change was primarily driven by two things.
First we have reorganize the business and specifically our merchandising organization to better align related category management, including the end to end lifecycle of products from new through pre owned sales.
And secondly, we feel this is more a more appropriate view of the console products vertical and will better align with our expansion of products and business across other video gaming verticals. Finally, we feel this structure provides us with a more accurate reflection of how gamers are consuming video games today primary.
Finally, as they consume both digital and physical software in a very integrated manner.
For the fourth quarter, we anticipated sales would be tough given the dynamics in the industry, but as we mentioned earlier this year, the accelerated decline and hardware and software after the Black Friday period was more than we had originally anticipated.
However, at the time of our holiday sales update in early January we anticipated full year comp sales to be in the range of down 19% to 21% and we finished the year towards the high end of that range down 19.4.
Our current accessory sales decreased 32.5%, reflecting anticipated next generation causal launches in 2020, as well as being up against significant accessory sales related to fortnight in the fourth quarter of 2018.
As a percentage of total sales hardware accessory sales were 44%.
Of note, we continue to season intend to switch platform resonate with customers and this was a key positive both within the merchandising presentation, our stores and as an offset to lower console sales.
Software sales decreased 27.8% and as a percent of total sales were 44.8%.
Given the early announcement of new console launches the number of title launches for the spinal holiday period on the current console was much weaker than the prior years with more than nine major titles moving out of 2019 and into later fiscal 2020.
Two bright spots in the quarter. However, we'll call of duty modern warfare and Nintendo switch titles.
Collectible sales decreased 9% $245 million driven by traffic declines in domestic stores.
As a percent of total sales collectibles were 11.2%.
Consolidated gross margins increased 280 basis points to 27.2% in the quarter. This increase was driven by mix shift to higher margin categories as well as improved merchandising tactics related inventory management, which led to greater efficacy in both pricing and promotions.
Now turning to our expenses in expense management objectives. After adjusting for roughly 23.6 million and onetime transformation severance and other charges associated with our rebid profit improvement initiatives.
Our adjusted SGN expenses were 488.1 million, reflecting a decline of 58 million a roughly 11% versus the fourth quarter last year. This reduction is directly related to our ongoing efforts to rationalize the overall cost structure of our business.
We delivered operating income of $75.2 million in the fourth quarter compared to an operating loss of 232.1 million in the prior year fourth quarter.
Adjusted operating income income excluding transformation severance and other charges was 109.2 million compared to adjusted operating income of 202.5 million in the prior year.
Our effective tax rate as reported for the fourth quarter was 63.7% and impacted by certain discrete tax items included in the quarter, primarily related to $31.7 million valuation allowance on our deferred tax assets and the mix of earnings across the jurisdictions in which we operate.
The impact of noncash tax adjustments in the quarter was approximately $29 million.
Excluding onetime items, our adjusted effective tax rate for the quarter was 18.4%.
On a reported basis, our net income was $21 million or 32 cents per diluted share compared to a net loss of 187.7 million or a loss of $1.84 cents per share in the prior year fourth quarter.
Adjusted net income, excluding goodwill impairment onetime transformation severance and other charges associated with our reboot profit improvement initiative.
Was 83.8 million or $1.27 cents per diluted share compared to adjusted net income of 148.5 million.
$1.45 per share.
Now turning to our full year results.
Total consolidated company sales decreased 22% in 2019, the sales decline was primarily attributed to comp store sales decline of 19.4% with the remainder attributed to close stores and foreign exchange headwinds.
In terms of category performance for the year, we saw a 27% decline in hardware and accessories.
A 22% decline in software sales.
And a 4% increase in our collectibles business.
Despite the continued decline in hardware and software categories. There are some highlights within each as we've previously discussed the Nintendo switch platform continue to perform well throughout the back half the year and we saw a full year growth in pre owned hardware and software and in the new software for the switch.
As.
Engines increased 160 basis points to 29.5% in fiscal 2019. This increase was primarily driven by the mix shift to higher margin categories, such as collectibles and accessories, but also to merchandising initiatives I spoke to earlier, which were implemented primarily in the back half of the year.
After adjusting for roughly $76 million in onetime transformation severance and other charges.
Our adjusted EPS DNA expenses were 1.846 billion, reflecting a decline of $130 million roughly 6% versus 2018.
This reduction largely is largely related to our ongoing efforts to rationalize the overall cost structure of our business.
On an as reported basis, we delivered our operating loss of $399.6 million compared to an operating loss of 702 million in the prior year.
Adjusted operating income excluding transformation severance and other charges was 62.3 million compared to an operating income of 3300 $31.3 million in the prior year.
Our effective tax rate as reported for the year was a negative 8.8%.
The impact of the tax rate was due to lower projected earnings and certain discrete tax items throughout the year, including a goodwill impairment.
$52.5 million valuation allowance on our deferred tax assets and the mix of earnings across the jurisdictions in which we operate.
The impact of the noncash adjustments in the year was approximately $35 million.
Excluding onetime items, our adjusted effective tax rate for the year was 45.5%.
As a reminder.
As a result of our taxable income being relatively low our reported us GAAP tax expense.
The resulting rate can be volatile.
This impact was unique to the quarterly results in 2019, and the effective tax rate and overall expense normalized when looking at the for full year results.
Our reported basis net loss was $470.9 million or $5.38 per share compared to a net loss of 673 million for $6.59 per share in the prior year.
Adjusted net income, including goodwill impairment on time transformation severance and other charges was 19.1 million or 22 cents per diluted share compared to an adjusted net income of 218.4 million or $2 in 14 cents per diluted share in fiscal 18.
We continue to focus on optimizing our global store fleet in fiscal 2019 and closed a net total of 321 stores inclusive of 333 closings and 12 openings.
In fiscal 2020, we will continue in our efforts to densify, our store base focused on maximizing product productivity of the entire fleet.
Now turning to the balance sheet.
At the end of the fiscal fourth quarter, we had total cash and liquidity of $770 million, including 499.4 million in cash and 270.3 million in net availability under our revolving line of credit.
Our accounts payable with the ended the quarter were down 64% to 381 million.
Down from 1 billion at the end of fiscal 2018.
We ended the quarter with total debt of 419 million a decline of 401 million or 49% versus the 820 million balance at the end of the fourth quarter of 2018.
We ended the fourth quarter with total inventory of 859.7 million compared to 1.25 billion in the prior year a reduction 31.3%.
As we've said improvement in inventory efficiency is a significant area of focus for us and it doesnt mean simply reducing inventory levels, but more importantly is focused on increasing our inventory turns and improving our working capital to materially improve on the strong cash flow generation of the business model.
In terms of capital allocation, given the strength of our balance sheet and ability of our business model to continue to generate cash flows.
Even in a tough sales environment, we took advantage of our depressed share price during the fourth quarter and returned approximately $20.1 million to shareholders through share repurchases equating to 3.5 million shares at a weighted average price of $5.74 per share.
For this year in total, we repurchased 38.1 million shares or approximately 37% of the outstanding shares coming into the year in total for fiscal year 2019 via share repurchases and the first fiscal quarter dividend, we returned nearly $240 million to share.
Holders.
This is a clear reflection of our commitment to prudently return capital to our shareholders and our conviction in this strategic initiatives we are pursuing.
And their ability to enhance our profitability.
As of the ended the fourth quarter, we had approximately $101 million remaining under our current repurchase authorization.
In the fourth quarter, we had $17 million of capital expenditures, bringing the fiscal total to just under $80 million at the low end of our full year capital expenditure outlook, which was between 80 and 85 million.
Going forward, we will continue to evaluate optimal capital allocations that include a prudent management of our debt levels a.
A return to capital shareholders and investments in the business that collectively optimize returns for all stakeholders, all while balancing the importance of maintaining a strong balance sheet.
I'll now shift to some commentary on the outlook for our base business in fiscal 2020.
As George already mentioned, we anticipate the cyclicality of the console business to continue to impact sales through the first three quarters of fiscal 20 until the launch of Gen nine tonsils from Sony and Microsoft.
As we all clearly understand cobot 19 pandemic has added significant complexity to the business in that light, we're not only to hearing to the guidelines of the centers for disease control for safety of our customers and guess, but also several state and local orders, which mandate the temporary closure of stores.
As of this week, we have closed the majority of our global locations with a notable exception of Australia New Zealand.
Where we continue to operate in the us our stores or close to customer traffic, but still fulfilling increased demand for our products through our contact Willis curbside delivery process, we call delivery at the door.
Despite having most of our European stores closed for the last few weeks the increased demand for our products across the world has led to a positive 2% comparable sales results for the March March month to date period through Saturday.
Everyday brings a new challenge.
And new information as we navigate this very dynamic environment brought on by coated 19.
As such the consists and consistent with most retailers.
We're spending any specific sales and earnings guidance for 2020 until we have further clarity.
Notwithstanding this.
We are intently focused on continuing to work to deliver progress on our transformation goals. In 2020, we will continue our work to densify, our global store fleet and anticipate store closures to be equal to or more than 320 net closures. We saw in fiscal 2019 on a global basis.
Importantly, we want to emphasize that these store closures are a very specific and proactive part of our Densification plan and they are not related to recent business trends.
Following several years of both organic and inorganic growth. This process is yielding profit synergies not heretofore realized.
And in that light, we expect these closures to positively impact both sales and for EBITDA growth as we transfer sales to nearby stores.
As we continue to evaluate some underperforming aspects of our business, we will continue to wind down, Denmark, Finland, Norway, and Sweden operations and expect to exit these markets in late July earlier than we had originally expected we expect the run rate impact once the exit is complete to be a positive full year annualized EBITDA contribution.
End of just over $15 million.
We are intensely focused on continuing to make the necessary changes to further strengthen our overall financial architecture.
Including all key profit and expense levers that we will result in an organization that is efficient streamlined and poised to capitalize on a significant profit flow through improvement as we experience expected robust sales increases in late 2020 led by the generation 900 hardware and software slate.
Equally important is that our balance sheet as strong as total cash and liquidity at the end of our fiscal February 2020 was in excess of 680 million ahead of our expectations and will be further supported by recent positive trend in the March business.
Ill now turn the call over to the operator, and we will take any questions that you may have.
Thank you.
Ladies and gentlemen at this time, we will conduct our question and answer session. If you'd like to ask a question press star one on your telephone keypad confirmation Tom will indicate that your line is in the question Q you may remove your question by pressing star to on your telephone keypad.
It's against asked the question Press Star one on your telephone keypad.
Our first question comes from Steph Wissink with Jefferies. Please state your question.
Hi, good afternoon, everyone.
A question hopefully these are pretty quickly, but Jim I just wanted to make sure I heard you correctly that statistic you gave on 2% comp is month to date from March not quarter to date through March last Saturday.
Hi, Steph, yes, that's correct its month to date through March through last Saturday correct.
And at the global measure as well.
It's on a global basis Thats correct.
Okay and then just second question is on the Densification of the stores I think you mentioned 320 at or above that level.
It would imply.
800.
Stores plus for the last couple of years can you just give us a snapshot of what the transfer rate has it looks like and I think George you mentioned in your comments as well this idea of creating kind of network profitability. So looking at adjacent stores and trade regions and looking at the profitability. As you did densify can you talk a little bit about what you're seeing in the data.
Yes step I think when you talk about Densification, we actually view this someone as some uncapped your synergy from the past with a bit acquisitions and Theres clipped stores and very close proximity. So this is a proactive process on our part it's where we see the part the probability for heavy sales transfer and some once through another.
We drop occupancy we operate one staff, we operate a far more efficient far more profitable store so.
We're kind of working our way around the world as we look at that to see where theres opportunity, but we certainly see plenty of it.
Yes, the step as Jim the the we Havent really quantified publicly the effects, but suffice it to say the percentage of transfer needed to breakeven is fairly low and well. That's the case were significantly exceeding that in those stores that we've closed and what we've seen in terms of our transferability. So.
More to come on that as it unfolds.
But at this point, we're not we haven't quantified that in any particular way.
Okay, that's great and last one for US is just on the working capital improvement you've seen in inventory in particular has been quite astonishing do you think about the business from.
Volume per store target level setting aside the generation nine hardware, but just thinking about the business today, how much further do you think you converting that inventory level from here.
Yes.
Suffice it to say I think good. This is the right way to think about it. This is about cash conversion and optimizing cash conversion across the entire chain.
And the way the one measure that I think we really focus on is the inventory turn it to be clear. This is not about just taking the inventories guidance about really creating that that turn in cash conversion cycle are optimizing the cash conversion cycle. So from a total inventory turn.
Our targets are about five times.
And so we're exiting the year at about just about four times globally. So you can see that that on a long term basis. Our goal is one more full turn out of the inventory.
Okay, great and I have to ask I when do you expect to start buying inventory in the Gen nine hardware.
When do you expect the pipe sales order.
Yes, I mean that we're not really to talk about the timing of that but the general point is that we're already working and have been working with with all of vendors both on the hardware and software sides. In those cycles are were normal cycles with those discussions.
Okay, great. Thanks, a lot.
You bet you.
Thank you. Our next question comes from race Stoeckle with consumer Edge Research. Please state your question.
Great. Thanks for taking my question can you talk about what the economics of digital revenue sharing look like and how that might be different from how you previously participated in the digital games market.
Yes, it's George we're not going to go into much detail on that I think if you look at our for growth pillars.
Certainly we think the last one vendor rail transforming the vendor relationships for the future gaming is one of the key ones I think we've said from the start we'll take it will have the.
Take the longest to develop we're pleased to say that we're making some traction on that we're excited about what that looks like but we're not really going to give any level detail on that we had as we're just getting started.
Got it thanks and are there any details that you can give us in terms of market level economics are comps for Tulsa, given your remodeled stores in the area or any just general color on Tulsa, and what you're doing with your Remodels.
Yes, I wouldn't rate and the reason that I wouldnt given all this is that Tulsa is to a greater extent the most other stores closed.
Because we put communal arena gaming into these stores, we closed that portion early on so when we had the potential for large congregation in our stores. We made our proactive move early in the Tulsa market too to move away from that so Tulsa is in a bit of a state of limbo right now operating at that same level as other stores at delivery at dawn.
Sure and not really its representation of how the store is intended to work.
Okay.
Great. Thanks again.
Thanks, Greg.
Our next question comes from Curtis Nagle with Bank of America. Please state your question.
Good afternoon, thanks, very much for taking my questions.
Maybe just starting with yesterday for Q. It came in a good bit lower than we had expected.
Could you just go through I guess, what were some of the biggest incremental factories, how much good afternoon or things like perhaps incentive compensation, how sustainable restrictions declines.
At least at a high level, obviously about 2020.
Yes, we.
Everything that we've been talking about with respect to our first strategic tenant and optimizing the business and our focus on our 200 million dollar profit improvement goal as we've said about half of that is around the the expense structure.
So what you're seeing Kurt is the evolution of all of those changes they do take time Theres Weve every single aspect of the business from the organizational changes we made in the late summer and early fall last year to every single contract. How we operate the business in every facet is been bins scrutinize.
We need to be scrutinized, you're starting to see the evolution in the building the annualization of those effects Thats, what you saw in the fourth quarter SG today.
As I mentioned Weve Benno, we really only been that this as a leadership team since the middle part of last year. So you're seeing Theres theres more opportunity is those cost reduction start to annualize themselves.
Throughout 2020.
That really gives us despite so to say I think we're on target with where our run rate is and where are the run rate of to meet our target for that 2020 annualized figure that we put out in the market.
Got it Okay, and then maybe is going.
Back to some of the commentary made about.
Traffic through gets comps through March.
Can you talk about a little I guess, a little bit more about the cadence.
Is there kind of initial build up what's going on now that.
We have outstanding.
Stay at home orders in place.
And I was there maybe initial build up about what's going on.
Any detail and kind of how to think about that would be helpful.
Okay.
Yes, Im not sure we can say that the buildup is changed there certainly was one I think when this all began there was.
A pretty good level demand that we saw while our stores were fully open and that is the sales pre that Jim talks about when you talk about through Saturday of last week, there have been a number of state.
County Municipal regulations. Since then that have caused us to offer to change the way that we operate so certainly in a digital environment, we shortened operating hours.
We're seeing a different level of.
Of demand in our stores, we're thrilled, but what's happened in terms of digital and we stated early on that as part of digital our digital.
Tenet that we want to drive that part of the business, we've been happy with Omnichannel ever since we launched a new platform in August of last year on the progress that has been making we are most certainly seeing a more definitive move toward digital right now, including ecommerce pure play.
[music].
Okay. Thanks very much.
Thanks Kurt.
Thank you are next question comes from Joe Feldman with Telsey Advisory Group. Please state your question.
Yes, hi, good afternoon guys.
Wanted to better understand with the current situation, which stores in doing curbside.
How do you guys staff. This store like is there one employee per store I guess is that allowed in most locations and then also.
Do you need.
Have you found that you need to compensate the employees more to.
Be working during this time period when their their orders to stay at home.
I'm just trying to again, Joe let me start that yeah. Let me, let me start at the top and just kind of make the point that we're working with a volunteer team right now so all of our team members be the in stores distribution centers refurb centers, our operating on a voluntary basis. So it begins with the team member that wants to be there generally is single staffing in most cases, we are talking.
Okay.
Certainly less volume that is traditional and no walk in traffic and no entry into the store so thats certainly changes.
The program quite a bit so this is a.
A film and process effectively in the store where it is in a very natural kind of way metered in a manner that in most cases, one person can handle that.
Workload, and certainly where we have.
Breaks and wage and hour elements that are for the states. We obviously are writing schedules to support all of those as we always do.
Understood. Thanks, Thanks for clarifying that and then another question.
Just given the environment, we're hearing a lot as you know your peers out there is talking about.
Really consolidating the cash and you guys were obviously very good shape, but one of the things it's been talked about has been.
Reducing or stopping buybacks altogether in the near term I mean do you guys have any thoughts on that.
Yes, we haven't been active in buying back stock in the in the in the in the period since the end of the year.
We as we entered 2020 from a capital allocation standpoint, we really as we've talked about previously really started to pivot and focus on our 2021 maturity of our of our 6.75 bonds that hasn't changed.
But as you might expect.
Everything is about how do we continue to be very prudent and manage through a very a set of very unforeseen circumstances. We covered 19 in the impacts. So we're very pragmatic and very focused on how do we continue to manage through really what is an unknown over the course in the weeks and months to come.
But again I think you said it well Joe I appreciate that we are entering this time with a strong balance sheet. So we're pretty confident we can navigate.
Got it thank you and good good luck with this tough tough time guys. Thanks. Thank you Joe.
Our next question comes from Seth Sigman with Credit Suisse. Please state your question.
Hi, This is lavish amani on for set segment. Thanks for taking my questions.
So firstly just follow up on exchanges reduction in the quarter I'm in sounds like you guys are how fits with a plan. We should continue into 2020 back how do we think about like the financial impact from the stores.
Being drawn in the US I mean, just spoke upset pick up right now.
Yes, I mean as you might expect I mean, those stores that are running in the US again are running on a very limited staff. So you have some variable impact that is.
At that scales with Fios operations.
Further to that point, we would you have another variable set of work in the SGN a that that is out of our Dcs and our refurbishment center. So those obviously flex with with the volumes as well.
Understood and just sticking to the profit improvement plan I mean, when do we expect into the second leg to coming in terms of the product side on the margin side, you already starting to see some of it.
Well, we saw in this quarter that we're reporting right now I think you see.
Pretty healthy basis point expansion in gross margin rate part of that it merely due to mix. The other do through good work by our merchandising team.
Got it I'm just a quick follow up on just the quarter to date trends I mean, you guys discussed the consumer demand for the products and and March had a positive 2% comp can you talk about some of the trends exiting Q4 into February and I mean, what sort of products, how you're seeing.
Yes, as Weve as we've talked I think if we take ourselves out of the current situation.
We and resume out for a minute we have it theres a pretty consistent underlying trend to the business that we've been talking about which is we are in the generation eight to generation nine console transition and that we don't expect that to change.
We know it we know where it is where we go from here through the third quarter and we know what to expect when the fourth quarter comes in these councils come to market and we're very big part of bringing those products to the marketplace.
Got it so any other financial environment as you could share about just say for the quarter to date perspective.
No.
Not at this point as you might expect I mean again, we're not providing any further guidance, it's just too much theres too many unknowns.
Got it thank you so much.
Thank you.
Thank you and just a reminder to ask a question at this time press Star one on your telephone keypad to take yourself out of the question Q Press Star too.
Our next question comes from Anthony Chukumba with capital markets. Please state your question.
Good afternoon. Thanks for taking my questions are answered a question on collectibles.
So you mentioned.
The decline there was mainly driven by lower store traffic.
Because I was just wonder if you're getting more coverage because your store traffic skin.
In declining.
For a while now were.
But beyond that the console cycle, but you are put you managed to sort of.
Buck that trend in collectibles and post.
Sales increases I guess I'm, just trying to figure out what what's what was different this quarter.
Yes, and they really this was driven by fourth quarter volume and I think we've talked about it a few times where.
Number one we had a lower watermark fourth quarter, given the anticipation around the console cycle. It also went up against a very healthy fourth quarter last year, driven by some really good releases as well as a lot of activity around fortnight. So I think if you look at the year over year aspect of it thats part of it but again our collector.
Those were positive year to date is the fourth quarter that they were down stronger on a relative basis.
But but certainly impacted by the traffic in the stores, which drives some impulse sales and collectibles.
Got it that's helpful. Thank you.
Thank you.
And there are no further questions I would now like to turn the call back over to George Sherman for closing remarks.
Thank you very much you want to thank everyone for joining the call today. Thank everyone for tracking the stock wish you all our safety and health out there as we navigate through a unprecedented experience in our lifetime is right now and again use this opportunity. Thank our teams who are out there doing their best.
Either in a indirect capacity or in stores working fulfillment model and thanking them for what they do everyday to provide great service. Thank you all.
Thank you. This concludes today's conference all parties may disconnect have a great evening.