Q1 2020 GameStop Corp Earnings Call
Greetings welcome to the Gamestops first quarter 2020 earnings call at this time, all participants are in listen only mode.
Question answer session will follow the formal presentation, if anyone should require operator systems. During the conference. Please press star zero in talking to you.
Please note this conference is being recorded.
I will turn the conference over to your host <unk> Investor Relations.
You may begin.
Thank you and welcome to Gamestops first quarter fiscal 2020 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 on the safe Harbor statement in the earnings release and risk factors discussed in 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 measure.
Scott on the call can be found in the earnings release issued earlier today as well as the investors section of our website.
With me today are Gamestops, Chief Executive Officer, George Sherman, Chief Financial Officer, Jim Bell on todays call George will share insights into our first quarter performance and updates regarding gamestops strategic framework for the future. Jim will then provide more detail on her financial results and expectations for fiscal 2020.
Then we will open the call to take your question.
Now I'd like to turn the call over to the company's Chief Executive Officer, George Sherman.
Thank you Eric Good afternoon, everyone and thank you for joining us today on our first quarter earnings call.
So much has changed since we last spoke to March I truly hope that you're all safe and healthy.
Thoughts with people, who have been affected by the cobot 19 pandemic as was the first responders healthcare workers and medical providers, who run the brought lines. We wanted to extend our appreciation for all of their efforts.
Our priority has been and continues to be well being up or employees customers and business partners. During this unprecedented time.
More recently, we've enjoyed a period of social unrest as a polling acts of cruelty have underscored the race one justice that indoors in this country.
Hi game stop we stand against Us in Justice and as an active solidarity.
Closed door stores in each of the Minneapolis.
Bill and Houston markets through each of the respective memorial services in those markets.
For our time today I'd like to start for providing an overview of the company's response to the koeppen 19 outbreak.
A few comments regarding the company's first quarter performance.
And then briefly discuss the strategic initiatives, we are executing to optimize stabilized and transform our business.
Then Jim will review, our first quarter financial results.
For about a framework for how we're approaching 2020.
As we approach the fiscal year, we articulated we expect is still in the first half of the year to be challenging.
As we are entering the final phase of a seven year console cycle.
The cope with 19 pandemic has presented us with new challenges, we're facing them head on.
We're capitalizing on our global leadership position and gaming to support the surgeon demand stemming from the changing consumer lifestyle and their need for entertainment for home and remote work activities.
At the same time, we greatly increased our financial flexibility to navigate during this unprecedented time.
In March parts of the closure of all of our U.S. stores, we generated a positive 3% sales comp.
Then on March 22nd we temporary close one third of our U.S. locations and for the remaining two thirds, we stopped customer access to storefront and fulfill orders on a digital only basis facilitated by a limited curbside pickup service leveraging our enhanced omni channel capability of buying online pickup in store.
Beyond the U.S., we were largely close not only the customers in our stores, but also our distribution centers in Europe, Canada, New Zealand, either closed or stay at home orders limited our ability to maintain staffing levels affected effectively leaving us unable to fulfill E commerce orders.
Across our global operations, only Australia, representing roughly 10% of our global fleet of stores remain fully open during the final six weeks of the quarter.
In that context, we're encouraged that our global comp store sales were down 17% well above our expectations and the sequential improvement from our fourth quarter 2019 comp sales decline of 26%.
Equally is encouraging giving our strategic initiative to build a frictionless digital ecosystem for content and commerce.
Our ecommerce sales, which are included in our comparable store sales rose 519% in Q1.
I was pleased with our team's ability to to adapt quickly and despite significant disruption stores minutes to retain most of their plans sales volume Armani curbside pickup and deliver total sales for the quarter just shy original expectations.
By category, we saw surgeon demand for hardware and for a limited number of new software titles.
And while the mix shift toward hardware comes at a lower margin the demand demonstrates the game stop is the top destination for gaming needs.
The Nintendo switch continues to perform well far exceeding our expectations.
Sales, increasing during the quarter compared to last year.
Correct. We believe we sold more Nintendo switch console than any other retailers re commerce business globally in the first quarter.
With the surge in demand for gaming, resulting unlimited hardware and the still in stores and OEM manufacturers not in a position the ramp up supply chain production in the last few months with a seven year console cycle.
We were able to leverage our unique buy sell trade competitive advantage to supplement hardware demand from customers, who are new entrance into the category.
Well software perspective, we expected the category to decline for the quarter given a week title slate at the end of the console cycle.
However, the decline was exacerbated by several titles that shifted into the second and third quarters due to cope with 19.
For those in the release titles that did launch we experienced strong growth far exceeding our expectations.
The increased demand for gaming and entertainment has turned good title releases integrate title releases as customers seek entertainment options.
In terms of as she had a we continue to focus on our long term expense reduction efforts and despite the additional cost de leveraging pressures from closed stores, we reduced adjusted as she nay by 16% year over year.
Importantly, our adjusted as today includes over $21 billion of incremental cobot 19 related costs, we incurred including our decision to support our Ali associate base by paying an additional two weeks of pay more for those eligible paid time off to ease some of the burden of the impact of the pandemic related mandated store closures.
Yes.
Importantly, the quarter saw strong progress and our priorities.
Typically we shared with you for strategic pillars.
Today, I'll focus on our pillars optimize the core business by improving efficiency and effectiveness across the organization.
And building a frictionless digital ecosystem to reach game stop customers.
As it relates to optimizing the core the first quarter saw significant financial progress.
We continue to deliver on our goal to greatly improve working capital executing a 43% reduction in inventory at quarter end in a 54% decline and accounts payable all while maintaining 570 million in cash at the end of the quarter.
Regarding our efforts to build a frictionless digital ecosystem. We advance this initiative by leveraging our proof of filmic capabilities, which led to the recapture of sales who stores open for a limited curbside pickup during the quarter.
During the weeks following our store closures to customers, we saw ecommerce sales surge in some weeks to over 1500% year over year growth.
And 519% for the entire quarter versus last year.
Total ecommerce sales grew to over 50% of total company sales during the period.
As we enter the second quarter, we've begun the global phase reopening of stores that were temporarily closed.
As of today, we're nearly 90% reopened around the world to either safe limited customer access for curbside pickup.
Obviously, we have several stores that have been impacted by the recent social unrest in the United States and we continue to affect focus on the safety of our associates and customers.
We have had roughly 100 stores over 3500 locations in the U.S. impacted by temporary closure due to physical damage and looting.
To date, we've reopened about 35% of those locations.
We anticipate another 35 or about one third of those locations will be close for the foreseeable future give an extensive damage.
Well early we are relatively pleased with the performance reopen locations.
There was a ramp to these stores as the reopened.
We are analyzing the return of traffic to these locations to third party mobility indices being published and are fighting some correlation as our experience has so far showing a reopening ramp of three to four weeks before sales go back to our expectations.
We know that our ability to reopen our stores is only part of the equation.
Customers need to continue to feel comfortable getting out interacting in our stores and with our associates.
To that end, we have and continue to strictly follow all published CDC and local guidelines to create a safe enjoyable experience for the customer.
I'd also like to walk with free newly appointed directors to our board all of whom joined us during the quarter.
These appointments represent an important milestone and gamestops transformation as we continue to evolve the company's business strategy for long term success.
We have already benefited from our new board members expertise and perspectives as we navigate the evolving gaming and omni channel retail environments.
Execute on our strategic initiatives.
Prepare the company to maximize value creation associated with the next generation of console launches later this year.
Before turning the call over to Jim I'd like to share why I'm confident that Gamestop has a bright future.
We possess several unique competitive advantages and are developing and implementing initiatives to make us more efficient and better able to fully capitalize on the new console cycle later this year.
First we have a strong leadership position in gaming and a strong loyalty base of consumers that we can monetize through revenue sharing partnerships.
Second we operate a global network of stores with team members that are experts in gaming.
This gives us an advantage as new cancels are introduced as we will be the go to source for education on the advanced technology, how to use the systems along with all the newly advance accessories that go along with them.
Third we are capitalizing on our digital capabilities, and our strong and extensible omni channel capabilities.
You will continue to build on the strong foundation and advance our end to end because customer experience.
Fourth we are more efficient across our enterprise and continue to find ways to further optimize our operations.
Such we expect to drive margin improvement as sales stabilize.
As mentioned in our press release, we expect to deliver positive adjusted EBITDA in 2020.
Fifth.
We are strongly capitalized and have liquidity to navigate the current macro environment challenges and invest in our strategy.
So while we expect the challenges we faced in Q1 to continue into Q2, we also expect to make more progress in our strategic pillars and deliver improved performance during the second half the year.
Now, let me turn the call over to Jim to discuss our financials in response to cope with 19, a more detailed.
Thank you George good afternoon, everyone.
I'd like to take this time to walk you through our first quarter fiscal 2020 results I'll then share some insight into how we're approaching the remainder of the year.
As George just discussed our number one priority is the health and safety of our associates customers and communities during the covert 19 pandemic.
And as such in March we temporarily closed approximately 76% of the company's 1802 international stores.
On March 22nd we temporarily closed all of our 3526 U.S. locations.
Two thirds of which were close to any direct customer access, but did conduct the limited curbside pickup offering leveraging our omni channel byline pickup in store and ship from store capabilities.
During the remainder of the first quarter approximately 10% of the global fleet, which was primarily our Australian business unit remained fully open and accessible to customers.
Despite the impact of store closures around the world our business in Q1 reflected three primary elements first a surgeon gaming and work from home products Secondly, the power of Gamestops deep omni channel engagement with its loyal customer base and finally, the ability of our teams around the.
World too quickly adapt to meet increased product demand. Despite the limited ability to meet face to face with our customers.
In that light for the first fiscal quarter, we delivered a global comp store sales decline of 17%.
Consistent with other retailers. These results exclude the stores that were closed for longer than two contiguous weeks during the quarter.
Importantly, despite these closures and limited operations during the peak pandemic weeks.
Our global sales comp for fiscal March was a decline of 0.7%.
In April was a decline of 14.4%.
In the fiscal month of May we realized comp sales decline of approximately 4%.
As you can see in contrast to the fiscal fourth quarter last year, we believe the predominance of the sales declined. So far this year is represented by the pandemic related store closures across all of our operating regions.
Turning back to the first quarter.
Total consolidated global sales declined 34% to $1.02 billion from 1.55 billion in the prior year period.
The overall sales decline was attributed to the reported comp store sales decline of 17%.
Approximately 13%.
From the impact of Cobot 19 related fully closed stores and the remaining almost four percentage points attributable to permanently closed stores and foreign exchange headwinds.
As a reminder, these permanent store closures are a result of our ongoing efforts to either de densify certain geographies or exit unprofitable businesses. We continue to see strong sales and profit transfer rates from the Densification strategy and are on track for the completion of the Nordics region wind down.
By the end of July.
In terms of category performance hardware and accessories declined 21.8% for Q1, the vast majority of which was attributable to four full store closures.
Despite the decline in overall in the overall category Nintendo switch continues to perform very well with sales in the quarter showing a material increase compared to the first quarter last year.
Software, particularly catalog and pre owned as well as our collectibles tend to be market basket builders in store and as such both of the software uncollectibles categories. Each declined approximately 43% for the quarter, reflecting the customers inability to access our store fronts there.
Only a few new software titles that launched in the first quarter, including animal crossing final fantasy seven and do maternal all of which far exceed exceeded their sales plans.
From a product margin standpoint, gross margin declined due to product mix with hardware sales, representing approximately 50% of sales a much larger penetration level as compared to 42% last year as a result, our overall global gross margins were 27.7% or a 270 base.
At this point contraction from the more software led 30.4% in the fiscal first quarter last year.
Now turning to our expenses and expense management objectives. After adjusting for roughly 5.3 million and transformation severance and other charges associated with our game stop reboot profit improvement initiative, our SGN expenses were 381.2 million, reflecting a decline of approximately 72.
2.5 million or roughly 16% versus the first quarter last year importantly, these results do not adjust for just over $21 million of onetime investments, we made in the quarter related to covert 19.
The first of which was approximately $18.5 million of incremental wages associated with our decision to pay an additional two weeks of pay or if eligible to additional weeks of paid time off to our hourly associates. Secondly, we invested just over $3 million in safety and Santa tour Terry related.
Products and equipment in the first quarter to ensure the safety of our associates and customers.
We do anticipate some of the DNA reductions to come back in future quarters, as we returned to more normalized operations of our stores and our distribution centers. However, a significant portion of the reduction is also directly related to our ongoing efforts to aggressively RAF rationalize the overall cost structure of the business.
As a result of the worldwide impact on our store operations. The covert 19 pandemic, we realized an operating loss of $108 million compared to operating income of 17.5 million in the prior year first quarter.
Adjusted operating loss, excluding the transformation severance and other charges was 98.8 million compared to the operating income of 17.5 million in the prior year first quarter Importantly, again. These results do not adjust for the over $21 million of onetime investments we made in the quarter that I mentioned a minute ago.
So.
Our effective tax rate as reported for the first quarter was negative 43.9% and was impacted by certain discrete discrete tax items, primarily related to a $53 million valuation allowance on our deferred tax assets.
And the mix of earnings across the jurisdictions in which we operate.
Excluding the impact of the $53 million noncash tax adjustment in the quarter, our adjusted effective tax rate for the quarter was 1.5%.
On a reported basis, our net loss was 165.7 million, which includes the $53 million noncash charge or a loss of $2.57 per diluted share compared net income of 6.8 billion earnings per diluted share of seven cents in the prior year first quarter.
Adjusted net loss, excluding the tax charge transformation severance and other charges associated with Gamestop reboot was $103.9 million or a loss of $1.61 per diluted share compared to adjusted net income of 7.5 million or seven cents per diluted share again this net loss.
It is not adjusted for the $21 million, an incremental covert 19 related costs mentioned before.
During the first quarter, we continue to focus on optimizing our global store fleet and street strategically densifying certain markets for the quarter, we closed a net totaled 181 stores.
As we told you in March we expect our strategic market optimization efforts to result in a similar number of store closures in 2020 as compared to 2019 or roughly 320 stores. However, given the positive sales and profit transfer rates. We continue to see we are revising that estimate upwards by roughly 100 additional.
Closures.
Now turning to the balance sheet at the end of the fiscal first quarter, we had total cash of $570.3 million, including $135 million drawn on the revolver.
Subsequently given the relatively stronger performance in the business, we paid down $35 billion, the revolver and had 100 million outstanding as of June Threerd.
Our accounts payable at the end of the quarter were $212 million down from $458.4 million at the end of the first quarter fiscal 2019, reflecting a 54% reduction which is directly related to our ability to leverage a flexible supply chain and reduced purchase orders around the world at the very.
Onset of the viral pandemic, thus not creating a liability drag on the business or on cash flows.
We ended the first quarter with total inventory of 654.7 million compared to $1.15 billion in the prior year period, a reduction of 43%.
As we've said effected and effective and efficient inventory management, including improved inventory turns continues to be a significant area of focus for us and is a key driver the further improvement in working capital advocacy.
We're very pleased with the continued progress, we're making with regards to working capital and specifically the improvement on the efficiency of the cash conversion cycle on our inventory, which is reflected in both the 43 and 54% decline in inventory and accounts payable respectively.
All while maintaining maintaining a strong cash position of over 570 million in total cash and equivalents.
This disciplined management of inventory working capital continues to manifest itself in the balance sheet and is key to providing us the necessary liquidity and financial flexibility to manage the current environment as well as support the upcoming inventory investments in new software titles, and new generation consoles and the associated accessories up.
Coming in the third and fourth quarter.
Due to the ongoing potential impacts of the covered 19 crisis as is consistent across the retail industry. We continue to spend suspend our forward guidance. However, we do believe that our efforts to maintain the strength of our balance sheet will continue for the long term.
As an indication of that we expect our total cash and equivalents at the end of the fifth second fiscal quarter to be in the range of $575 million to $625 million, reflecting roughly flat to positive cash flow from operations.
As of May 2nd the ended the fiscal quarter, we had 417.2 million of our outstanding notes on the balance sheet.
In keeping with our objective to maintain a strong healthy balance sheet last week on June 4th we announced the commencement of an exchange offer to certain holders of the remaining balance of the $414.6 million of our 6.75% senior notes, which are due in 2021.
This offering is intended to provide us with even further financial flexibility by replacing extending the maturity of existing notes that are valvoline tendered as we continue to focus on advancing our long term strategy and objectives.
Further to our goals of maintaining strong balance sheet on June 5th we completed the sale of our corporate jet and continue to work to efficiently monetize certain other real property assets of the business.
In the first quarter, we had $6.6 million of capital expenditures. It's important to note that we have lowered capital spending to focus on mandatory maintenance or near term high value strategic projects and now expect to invest approximately $43 million in capex for the year, a significant reduction from the roughly.
Roughly $80 million spent in 2018.
As I mentioned before we have generally suspended guidance as a result of the cobot 19 impact on our business.
However, it's important to note that in addition to the second quarter cash expectations I shared earlier, we do believe that three things one our performance during the peak of the pandemic to our current trajectory and three our expectations for the back half year console launch will all contribute to generate positive adjusts.
EBITDA for the fiscal year.
We remain confident that the progress against our Gamestop reboot objectives is providing the key support for us to navigate this trying and unusual time.
We remain intensely focused on continuing to execute actions to further 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 improvement as we experiences.
Spec did robust sales growth in late 2020 led by both the expected new software title slate and the generation nine console launch.
I will now turn the call over to the operator, and we'll take any questions that you may have.
At this time will be conducting a question and answer session, who would like to ask your question. Please press star one on your telephone keypad, a confirmation Tony will indicate you line in the question Q Human in press Star too if you would like to remove your question from the Q.
For participate using speaker equipment, it may be necessary to give you answered before question to start keys.
And we also axle all participants to limit themselves to only one question and one follow up question.
One moment, please when we pull for questions.
Okay.
And our first question is from steps.
Distinct from Jefferies. Please proceed with your question.
Thank you good afternoon, gentlemen, I had two quick housekeeping question for you and then George It bigger picture question. If I could the first is just can you remind us what percentage is what percentage of your leases are up for renewal over the next 12 months I mean, you mentioned transfer rates in the script Im wondering if you could just give us a quick statistic update on.
What you're seeing in store closures and the transfer value.
Hi.
The average lease up primarily here in the US remains around two years. So that would obviously seven in 12 month period, we're going to turnover about how the fleet from lease perspective, and in general that kind of how it tracks.
On the second one.
The transferase, it's actually not something that we've published publicly but suffice it to say that we're actually seeing.
A little bit even stronger rates than than we had I think really pragmatically planned early on and so.
That's why we've accelerated some of the closures numbers by about 100 in terms of our expectations. So we're seeing a little bit better than than been what our original expectations were.
[music].
Okay. That's helpful. My question George for you.
So something in the script that really struck me, which is the idea of and this renewed interest in gaming that was maybe inspired by the pandemic Arb resulted the pandemic I'm curious if you can talk a little bit about what you're seeing in your customer database.
Where do you is customers that were once gamers and have returned to become gamers are you finding that this is a new population of gamers.
How does that play into the negotiations you're having right now with the Oems regarding your revenue sharing partnerships.
Yes. Thanks for the question I mean, we saw this early on when the store closures began so really the last couple of weeks of March kind of going into April and it really showed up in the form of hardware sales predominantly I think we mentioned that any gain that was.
Launched in this timeframe really did better than expected and that's on large scale basis like animal crossing and then certainly smaller games performed much better as well. So we saw a lot of new interest and we saw obviously a lot of hardware purchasing late in the console cycle and we know that our core customer has long since.
Second devices in is looking ahead toward the.
The next generation consoles in November so we're certain that we saw new gamers command. We don't have any reason to believe that it is a.
Returned to gaming, we think that its net new gaming predominantly.
And that shows up for us in terms of loyalty as net new email addresses and net net interest so.
It's certainly beneficial to us I mean anytime that the overall pie gets bigger we benefit from that given our market share. So.
Yeah by all means is something that we can parlay entered into conversations with our partners as we look down the road.
And certainly our hope would be that we can maintain close contact build that social interaction with these new customers.
Get them deeper and deeper into gaming and have them start looking forward to new consoles as well so.
Yes, no doubt I mean hardware was a pretty scarce commodity and.
So very very end of cycle and then of course, the then switch which is still.
Thank you.
And our next question is from raised onto from consumer Edge Research. Please proceed with your question.
Great. Thanks for taking my question on E commerce growth the growth that you've seen.
Sure a lot of that is due to.
Just your store closures and all the success that you've had with Omnichannel, but can you give us an update as far as are you going to be able to hit that billion dollar target much earlier than expected as a result, and then what changes you're making to your E. Commerce platform itself to drive results or fulfill demand that you're seeing incremental earnings.
Patients.
Yes, I mean first of all right. Thanks. It obviously is going to help us infant step in the right direction is pretty rapid fire growth that we experienced so again those peak pre is up over 5100% in over 500 for the for the quarter.
You know by all means we've made some process improvements I think it all begins with the hiring of Chief Digital officer. So we put a stake in the ground on this it's obviously one of our for growth pillars is frictionless digital ecosystem, we've been going after this one pretty hard we've been improving the fulfillment process. It's changed the number of things I mean from the amount.
Have a freight that flows through to stores versus how much is held back in and distribution centers. It's had a ripple effect on our supply chain strategy. We are seven days a week operation now in our Dcs as it applies to ecommerce. So it's it's been great growth of course, you're right I mean, a lot of that really began with the.
With the closure of stores, but there's no question that it has been a an unnatural into a certain degree I mean unfortunate inflection point, but it sure drove our business in the right direction in a hurry.
I'd add a cone pointed out because it's important to is not just a function of how the ecommerce channel operates by itself role both brick and mortar locations, but more importantly, how the omni channel the entirety of the omni channel business works collectively and importantly, what we saw it with the growth in E. Commerce, a lot of that was driven by by.
Allied pickup in store and ship from store, but the vast majority of those orders are picked up in the same day or the next day and that's important because that gives us the a fit the true omni channel efficiency and so we'll continue to balance both of those and but as we continue to open stores, we we see.
We see some continued health in in E Commerce, driven ordering yes, and build off what Jim said, we couldn't have done it without this ecommerce capability I mean, our ability to do to have contacts curbside delivery was built directly off of our wireline pick up in store capability.
As I mentioned, we generally would flow through more of our freight to the stores and hold that there. So early on ship from store was a big fulfillment channel for us in terms of driving Omnichannel. So it really was the fungibility of all these assets leveraging off of one another.
Got it. Thank you and then a follow up on pre owned inventory. So you guys have inventory down substantially year over year and you've seen strong demand for some of the hardware pre on that you talked about.
Is there any way to think about where you are sort of a total customer rewards points are trending. So are you seeing a situation where rewards points are falling as people keep buying new things with those rewards points and then so youre sort of going to be heading into holiday with a lack of sort of money in the system.
By other products or is that the wrong way to think about it.
You are doing well as far as the trade in perspective, as well as well as the demand perspective.
Yes. This is Jim.
First of all from an inventory perspective, I think ill comment more globally about our our pre owned inventory. This has been an area that.
Chris Homeister as our chief merchant and myself will work out with our teams extensively not just on new inventory management with the pre owned as well in creating efficiencies and how we manage that.
In terms of overall turn in cash conversion cycle. So that's one too.
Certainly with respect to the way that you discussed the points.
With with loyalty program in the loyalty program and engagement with our products that ended the right way to think about in fact, what we in particular George mentioned the new entrance. What we saw in this last several couple of months here with the surge is really reserve we tend to be new entrance into at least from what we can see in terms of five.
Well, so we think thats important and again the pre on product in that buy sell trade capability gave us the opportunity that we think not a lot of people have which is be able to supplement when the new when there was scarce scarcity for new hardware, we were actually able to lean in on our pre owned product that we have the system.
Got it thanks again.
Hey, but.
Our next question is from Curtis Nagle from Bank of America. Please proceed with your question.
Good afternoon, thanks for taking the question.
So just a clarification on the age may down 4% comp.
Is it an adjusted number excluding closures and expects the case, what's the all in number and could you comment.
On any category performance within the comp.
[noise], yes, no we're not we're not going to we're not providing a more information on may we just want to provide some direction on how may was performing relative to the months that we also disclosed.
How do we make.
We we wanted to make sure that we are giving some information that and some insight into how the business was trending pre during and as we're continuing to make the evolution out of.
Out of the peak of the pandemic and obviously, we're still in in the Middle This process, we're opening stores and we wanted to give some indication of that.
When you say to adjusted Yes, we do not include stores closed for longer than two weeks.
Basis.
So notwithstanding.
Got it okay understood.
And then as a follow up just wanted to dig a little bit more into the comment about.
Had a positive EBITDA for the year.
I know you guys are obviously very positive in terms of.
Coming cycle, but.
I don't know just kind of looking back at.
History, typically should come what I can see.
Quarters, we accomplish launches those aren't great in terms of EBITDA just given.
The sales mix and hardware and maybe less sales for single higher margin audit. So.
Are you expecting an increase EBITDA for Q and how should we think about.
Are you expecting positive free cash as for the year getting my comment, yes, I think I'll comment specifically in Jordan might have some color as well, but the way to think about it is we have been working in the year. This management team has been together here the core of our activities, especially around optimizing the core of the business have been focused on on really.
Architecting the financial architecture of this business and so that we were actually in a much better place to take advantage of of a console launch. So if you're looking at history. I don't think you should look at that flow through because the ability to have lower expenses related to have a much tighter inventory management, you know cash conversion cycle all.
I would say yield better results following through in terms of flow through both of those sales sales growth and we think that thats actually incredibly important number for where gamestops.
Versus engine firewall in cycles, George Yes, what Chris I'd add I think when your specialty retailer or your fuel the full impact of the downside of the cycle as we felt over the last year or so you also get the benefit of the upside it is not our intent to sell gaming consoles by themselves.
Thats where were different thats, where were we play a very important role of vendor community. We attach in a different level. So we certainly wouldn't expect to attach games, we certainly would expect to attach.
Accessories, and we certainly would expect to attach collectible at a higher margin rate as part of it. So it's going to be a traffic event for both online and for our stores no question about it we will partly off the traffic.
Thanks very much.
[noise]. Our next question is from Seth Sigman from Credit Suisse. Please proceed with your question.
Hey, guys. Thanks for taking the question I did want to follow up on that May trend. So the down 4% comps that compares to down 14.4 in April I think I heard.
But presumably very different store numbers included in each of those periods just given the store closing dynamics. So can you just help us a little bit here what percent of your store base.
Is captured in that comp base for May versus April.
Yes.
Way to think about it.
Again, very very dynamic week to week so.
The envy you in the US market as an example, we really started to store starting to open up for some form of limited access.
Well, we said limited access what we mean is.
It is safe and secure or safe insanitary access for a limited amount of customers to maintain proper social business thing.
And so it really is a dynamic number I can't give you any one binary point because it's good it's continuing to evolve today when we still have roughly little over 500 stores that are that are opening as we speak. So it's really difficult for me to answer that question to buy therefore, yes. It really is three dimensional you have opened versus closed.
I have delivery at door versus limited access and you have opened for one week versus open for four weeks, all rolling across the country and across the world. So.
As mentioned in the script, 90% open across the World right now that includes virtually the entirety of Europe. So for all practical purposes save five stores I think it is in France around the.
Large malls the pair suburbs a few in Italy in the Milan area Europe is open.
Australia, New Zealand AEZS, 100% open and that leaves the majority in the us in Canada.
That we're working towards but it's happening very very quickly, but as Jim said Theres, It's just too rolling in nature.
To really answer that one.
Directly.
Okay. This is just a clarification then I have a real follow up but just to help us modeling here. It seems that negative for doesn't really slow supermodel I know, it's really illustrate a bright but its revenue that flows through the models. So can you sort of give us a sense of what the revenue growth in the May time period will look like quarter to date.
So that we can use.
Then in the model.
You know what I don't have in front of me. So I don't think we're prepared to talk about that okay. Okay. So my real fault was around the comments around positive EBITDA for the year.
Can you just help us without a little bit more I want to confirm is that all expected to come in the fourth quarter and it's so it does imply a pretty significant year over year increase.
It doesn't seem like hardware loan gets you. There. So can you kind of give us a sense of some of the other assumptions embedded there and what gives you confidence. Thank you.
Yes, again, we're not giving any breakout of of a quarterly contribution of that so thats just meant to give some indication as to how we view the entirety of the year working together couple of key things I'd share on this is.
In the third quarter, we had there are a number of key software titles, many of which were postponed from last year into this year.
And some of those were were originally slated for earlier in the year that there were then postponed again due to the pandemic from the beginning of the year to the back half than so theres a whole series of moving parts here that around new software launches and then certainly the expected console launches, which.
We expect to see hit hit the marketplace in the in the fourth quarter, but now remember as George indicated in some of the earlier comments that also entails a significant degree of of attachment to those consoles, whether that's warranty levels whether its.
Todd excuse me controllers, whether its collectibles whatever it might be I mean, there's a whole series of things that come along with.
What is now seven years of technological development by the Oems and that that bring further technology in accessories as well.
Got it thanks best of luck.
Okay. Thank you.
Our next question is from Carla Casella from JP Morgan. Please proceed with your question.
Hi, and my question is if you could talk to us about the as the borrowing base and the seasonality of that how you expect it to trend through the year and I'm not sure. If you gave their liquidity number as of the quarter, how much was available under the revolver.
So so I don't remember, saying that actually specifically, but the way the borrowing base works carloads that it's obviously supported by the inventory, it's an asset backed lending revolver. The primary security factor is the inventory they are.
So as a function of that it follows the high seasonality of our fourth quarter.
And so the peak availability in that revolver for 30 million, but that really only is available during a couple of months early November December timeframe. If you think about it that way generally speaking and so in essence anywhere between 150 in $250 million availability for the for the that rest of the year again, depending on the inventory less.
Sales.
And so did you give me that availability was positive one Q and I was just I I understand that seasonality just wondering if this year west to covert disruption expect any of that too.
To be different you've reduced your inventory.
Pretty considerably.
Yeah, and again I, just don't have that number one top my head, but it's in the queue and certainly available there and so sorry about that Carla, but I just don't have enough time ahead, but suffice it to say, yes, we've reduced our inventory levels, but we do have availability and as we mentioned for example.
We paid down about actually John has about 100, we originally borrowed at 150 million on the revolver and we paid down 50 million of that's where we're holding about 100 million as of about a week or two ago.
Okay. That's great and then I had one question on your the business trends and if it will trend any different this year because of the launch. So if we look at margins on pre owned purchased software versus hardware.
We've seen then historically.
It's been a long time since there's been a new hardware launch how do you expect margins to try and your gross margin on those categories as we're going into the launch.
Yes.
So again I think you have to think about so as we saw for example in last couple of months you saw a hardware shift and a lot of that was new hardware and so that was the primary driver between for example, the 270 basis points of year over year change in the margin was really due to the mix.
Shifting to the hardware.
And if you're looking about it for example of those are new entrants. It's important because then there are second third fourth order transactions that come from those new entrance that we enjoy here.
With respect to especially customers that come into our loyalty program and so you'll see a change in that market the margin rate of that market basket at later transactions, but suffice it to say if you if you think about.
Some of the key titles major titles that I talked about a minute ago, we'll have some velocity in the third quarter at least expected launches.
That will tend to pmics into a product mix into software new software.
And those rates are obviously give me better than hardware.
Hardware, new products are going to be from a rate perspective, lower than our pre owned hardware and software.
And pre owned continues to be.
An important part of the business.
Importantly, as I mentioned in my comments.
Pre owned software and collectibles or two categories that are higher margin categories and it's important because when the stores are closed from customers don't comment generally their attachments into a market basket and so the associates in the stores are building that market basket with with customers as they are coming in and.
Sure and it also nuke, new new software that's in the catalog and so.
When we don't have customers able to walk into stores that does change the margin profile of the transaction, but when they come back into the stores than we also see it shift back the other way Yeah, Hey, Jim mentioned in his script me part of the area that we do not see sales in during cold, but especially when rent in the delivery a door mode is catalog sales.
So most of the sales tend to be dominated in this particular case by hardware and new release software as stores open up customers that have access to the store, we would expect to see a different depth of shopping experience getting back into catalog software sales of course, there was no access to to collectibles other than via the web so.
Yes, something was a new release.
Funko pop or something like that it's not going to have much visibility and we would expect a reemergence of our pre owned business going into the fall season as well we've been closed its just not Ben.
From a hygiene standpoint, something that we wanted to do exchanging games and exchanging software via curbside now that stores are open and now we have a UBI cleaning process or putting off our hardware through as we return it to our.
Reefer by operations Center, we do expect to see.
Trade in as a down payment toward new gaming consoles and new games.
Okay, great. That's not that's great. Thank you send lacks very helpful.
Thank you Carla.
Okay.
And our next question is from William Reuter from Bank of America. Please proceed with your question.
Good afternoon.
In terms of the timing of when payables or do I would expect it given that we have a handful of from you know.
Software launches, which are expected to probably two fairly well and then you've got the console, which I imagine you sell out of those extremely quickly will the turn speeds such that the working capital build for inventories should be less than we've seen maybe an historical periods around the holidays.
But the right way to think by yes, right way to think about it is a perspective that when you're turning.
Given our payment terms, which I'm not going to comment on here in terms of the.
In terms of what our agreements our with our vendors, but suffice it to say that debt, yes. Your if you're thinking about selling the product inside of once or twice inside of those payment terms, yes, that's the right way to think about it.
Okay and then.
I'm not sure supervising an aggregate what the shift in terms of the.
New software releases, which were shifted from one Q into Twoq you would be is there any guidance you can help us with there.
No we're really not providing further guidance again importantly, there's just there's two there still remains too much uncertainty in the marketplace right now.
Okay. Thank you very much that's all from me.
Thank you.
And our final questions from Bryan Hunt from Wells Fargo. Please proceed with your question.
Good afternoon, George Jim.
My first question as I was wondering if you could touch on when the plane what your corporate jet was sold over the proceeds and then shifting gears you know looking at asset base what are their asset.
What are their assets may be for sale and what type of proceeds are you expecting to yield from asset sales during the year.
Yes. This is Jim and Brian how are has been a long time.
Meanwhile, it's been a while hey.
On the jet we just sold last week, we were holding it up for sale.
On.
An asset held for sale so.
And so that was roughly around the just sort of $9 million in terms the asset.
And then and then we have.
Real estate assets that are that weve.
We've had in the marketplace here over let's say last several weeks.
And all this break it down 21, and Canada, what Australia and three buildings here in the USA.
And those all your distribution centers.
Their distribution centers in offices as well in all three location, Canada, Australia, and the U.S., we co locate offices with the distribution centers.
Okay and those assets you plan on continuing to use like are you looking through sale lease backs are completely exited the facility.
No. We can will we fully expect to utilize those assets just we all of them, they're sitting on the balance sheet is assets and we feel that as a retailer in the certainly one is making this transition that we are.
For some of the important growth vehicles, we have on the plane that we don't need to be in the business of owning real estate, but we can deploy that capital a much more efficient way.
Very good idea.
So you don't have those listed as assets for sale on the 10-Q.
No because that is.
Yes, because they are bigger the intention is to do sale leaseback. So therefore requirement doesn't doesn't provide for that.
Very good I appreciate Jim and look towards our two more vessel.
Thanks, Brian Thank you.
Thank you we have reached the end of the question and answer session and I'll now turn the comments over so George for any closing remarks.
Yeah look in closing I'd like to thank our entire team across the company I'm very proud of the resilience of our store team distribution team refurbishment teams that they've shown during this unprecedented time and honored to have a group of store associates and total team that are so passionate about gaming and serving our customers. This will serve us well and the rapidly changing.
Environment. Thank you thanks to all of your interest in the stock.
This concludes today's conference you may disconnect you lines at this time, thank you for your participation.