Q2 2020 GameStop Corp Earnings Call
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Thank you and welcome to Gamestops second 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 under the Safe Harbor statement in the earnings release and risk factors discussed and 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 discussed on this call 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 Chairman, and Chief Financial Officer, Jim Bell on todays call George well share insights into our second quarter performance and updates regarding gamestops strategic framework for the future.
Jim will then provide more detail on our financial results and expectations for fiscal 2020, then we'll open the call to take your question.
Now I would like to turn the call over to the Companys Chief Executive Officer, George Sherman.
[music].
Thanks, Eric Good afternoon, everyone and thank you for joining us today on our second quarter earnings call.
I hope you each of you are safe and well.
Our second quarter results show significant progress toward our strategic priorities as evidenced by a robust digital growth.
Meaningful expense reduction and strong free cash flow generation.
These results service Testament to Gamestops ability to navigate coping 19 and bridge the Korean until the introduction of New Castle.
I can seem to be part of our team and their dedication to our mission or strategy and importantly safely serving our customers whenever and however, the worst the shop during this unprecedented time.
Turning to some highlights from the second quarter.
Our comparable store sales declined 12.7%.
Which was ahead of expectations and driven by continued consumer demand for gaming and the success of our E Commerce channel.
While total sales declined 26.7%. They will also ahead of our initial expectations at the start of the year.
Results exceeded our own expectations, even as temporary store closures related the cobot 19 resulted in 13% fewer store operating days in the quarter versus second quarter last year.
And year over year, we have 10% fewer stores worldwide.
Our quarterly sales results were negatively impacted by both the global pandemic and as we've discussed before the last few months all the southern your long hardware cycle.
He began the quarter with a modest filled decline in may as we responded to continued shelter in place mandates by expanding our Billy deliver exceptional service and product to the omni channel digital capabilities. We just developed over the last year.
In June and July when they do a hardware availability constrain sales as the early surgeon demand coupled with both the pandemic impacts on the supply chain and the end of the generation eight cycle quite a significant limitation on new hardware in accessories available the from suppliers.
Despite these emerging supply headwinds ourselves to claim was a bit better than we expected.
Our investment not only channel capabilities and our ability to connect with our strong loyalty member base, particularly for new software launches Baptist engage with our customers and allow us to meet their needs wherever however, and whenever they chose to shop with us.
We continued to make progress on a real estate market. The densification strategy with a corresponding tempur set decline can our worldwide store base year over year, which includes the completion of the wind down of underperforming Nordics region.
Importantly, in United States, where market do you Densification represents the greatest opportunity we've seen sales transfer of just under 40% of close stores sales volume to neighboring locations in online well in excess of profit breakeven levels.
Our high sales transfer rate, an expanded omni channel capabilities will continue to allow us to accretively optimize market in trade area profitability.
Our ecommerce growth has been a major development for Gamestops accelerating our strategic objective to create a frictionless digital ecosystem by several years.
That's a pandemic shutdowns began we quickly recognize that we're seeing or dramatic shift towards E commerce and that this represented an historic opportunity.
As a result, we diverted additional resources and focus towards our strategic imperative to build a frictionless digital ecosystem.
Effort to leverage the moment and build momentum.
Global ecommerce sales rose 800 per cent for the quarter and our E Commerce sales penetration group, a low single digits to over 20%.
We believe the shipped as long term and highly advantageous for our business.
I mentioned it apart recalled that if <unk> E commerce would be at least a billion dollar business and I'm happy to report Ronald trajectory to cost that milestone in 2020, well ahead of schedule well only build upon that and 2020 Wanna be on as we see this critical to our future.
The quarter soft deliver enhanced service capabilities in fulfillment options for our customers such as curbside delivery or delivery at doors, we call. It.
Why am I pick up in store and enhance ship from store and weapon store capabilities.
In addition to advancing our omni channel capabilities. These capabilities also will enable us to quickly adapt to changes in the shopping environment and service customers through any one of these fulfillment options.
In the quarter well, the 90% of all buy online pick up in store orders were still within 24 hours.
Putting almost 70% on the same day.
To that end will still be announcing two key advanced capabilities, including same day delivery in a significant expansion of our consumer payment options, including expanded focus on our private label credit card. Several by now pay later options and also leasing options for high volume items, providing our customers with a wide array of.
Payment flexibility.
We believe enhanced service and expanded payment options will improve gamestops customer experience and expand affordable options to acquire the next generation of councils.
One final note and our strategic initiative to build a frictionless digital ecosystem.
Later this month, we are set to wash our newly redesigned mobile app designed to create engagement and excitement for the gaming enthusiast.
We'll be able to evolve the app experience to offer personalized and look lies experiences.
Digital wallet capabilities and a gaming news huh.
We believe that the mobile app is going to play a key role than enriching our customers experience inside and outside of our store shopping experience for all things gaming.
We also saw strong progress and other areas of our strategy, most notably our efforts to increase our efficiency and optimize our core operations.
Jim will go into further the tail on many of these endeavors, but I'm very pleased that our ongoing expense reduction initiatives have usually significant results as we leverage our reported as she any rate by 40 basis points in the second quarter No small task in this environment and our part of the teams work here.
These results were achieved despite the sales decline and were driven by $134 million reduction in overall reported <unk> expense for the quarter and a 201 billion dollar decline in the first six months the fiscal 2020.
On the merchandising side of the business. We're pleased with our initial launch of an expanded assortment and PC accessories. It will be extending that assortment chain wide later in the third quarter.
Oh. This early we absolutely believe gamestops can participate meaningfully in the PC accessory market, what high quality products that deliver strong margins.
Likewise, we're pleased with our assortment of private label merchandise.
And there are high sell through rates, but lower costs and higher margin structure.
We continued to realize meaningful improvements in working capital efficiency led by a 50% reduction in inventory and a 30% decline and accounts payable.
Our continued efforts led to material strength in pre them liquidity reflected in our three to 735 million dollar cash balance even as we further reduced borrowings on our credit facility $500 million within the quarter.
These combined efforts fuel free cash flow of approximately $182 million, even with negative adjusted EBITDA for the period and navigating cobot 19, including store closures for most of May in early June.
Overall I'm pleased with the operational progress we made in the second quarter met a challenging operating environment.
As we begin to second half of the year, we're probably cautious get excited about our opportunity to capitalize on the next generation console their expected. The launch ahead of the holiday.
In the second quarter customer show tremendous response to newness and when there was newness available customers chose gamestops.
Specifically, we continue to realize market share leading results would intend to switch hardware and key new physical software titles that launched in the recent few months such as animal crossing over the last of us too.
Additionally, we have seen strong customer response to the latest technology and headsets and controllers when supplies available.
Our customer show Us Gamestops remains a preferred destination.
The success with new this in the second quarter. It gives us confidence that came stock will benefit from the acceleration in demand as new hardware and software is launched later in the year and want to 2021.
And while there has been growth conditionally downloading games. We believe there are several other areas in our favor that bode well for game stop in the near and medium term.
First new console, how about just tried so for the next seven years. The cost was will play both the physical and digital software that we sell.
Importantly across most regions of the U.S. and the world the remains an increase taxation on broadband.
With significant increases in work from home for more activities. Many are forced to make trade off some broadband usage.
Natural advantage for physical gaming.
We're not debating the growth of digital gaming. However, we're simply saying that the life of physical gaming is here to stay for the foreseeable future.
Likewise, we have and will continue to redouble our efforts on digital game sales, including subscription offers which already represent a meaningful portion of our sales and we will expand through recent digital revenue sharing agreements we have would select partners.
Second we have a strong loyalty base of customers, who lost look to us to educate them on a wide array of new products.
A huge asset we intend to leverage, particularly with the new conflict, providing significant technological upgrades that provides even more immersive gaming experiences.
Third.
Consumers like the physical aspects of games, they collect them and the value was a trading.
So with software continues to evolve with dramatically better graphics. It does not take a valuable storage space and debts are available to those without broadband internet.
With our current capabilities and that is same day delivery. We believe most consumers can get a physical game copy faster than it takes to download.
Almost 70% of our buyer line pick up in store orders over the last four months had been fulfilled on the same day, many within an hour or too.
In summary, we know the environment remains uncertain, even as the explain or on the console cycle builds.
To be clear, we believe this upcoming console cycle represents the most immediate short term opportunity to win back sales volume.
We will participate in the console cycle in a very significant way.
However, we will also continue to plan conservatively by tightly managing expenses and inventory, while leveraging our unique strengths, including our leadership position in gaming and a strong loyalty base.
This combined with our focus on advancing our four strategic initiatives positions us to attain long term profitable growth and drive value for our stakeholders.
Now, let me turn the call over to Jim to discuss our financials in more detail.
Thank you George good afternoon, everyone I'd like to take the time to walk you through our second quarter fiscal 2020 results and then I will share some insight in how we're approaching the remainder of the year.
As George just discussed we're very pleased with our team's ability to adapt to challenging operating environment during the second quarter.
Our ability to swiftly pivot to leverage our investment in creating a frictionless omnichannel digital ecosystem.
Drive efficiencies across the business and continue to optimize our core operations enabled us to generate significant positive free cash flow and exit the quarter with a materially stronger balance sheet improve liquidity and then overall healthier business model as we approach the console launches later this year.
Turning to review of the second fiscal quarter.
Total consolidated global sales declined 26.7% to 942 million from 1.29 billion in the prior year period.
The sales decline, which was slightly better than our internal expectations set at the beginning of the year before.
Reflects the impact.
One last few months.
Seven year gaming console cycle.
Two.
13% reduction in operating days due to the temporary store closures driven by the global Cobot 19 pandemic.
Right, 10% fewer stores versus the end of the second quarter last year as part of our de Densification strategy.
And finally delays the new software titles in response to the global Tobin 19 pandemic with several titles continuing to shift the later this year.
Despite these headwinds we reported a comparable store sales declined 12.7% after adjusting for approximately eight percentage points from the impact of reduced operating days due to covert 19.
As a reminder, our permanent store closures, representing approximately six percentage points for overall sales decline.
Our results of our ongoing efforts to either de death by certain geography or exit unprofitable businesses.
As part of those ongoing efforts, we continue to realized strong sales transfer, which is accretive to profitability, averaging almost 40% of sales recaptured through the transfer to neighboring locations or our online business.
Lately, we're pleased to report that we completed the Nordic Nordic region wind down.
As of the end of July.
In terms of category performance, well hardware and accessories declined 20% the second quarter, reflecting the end of the generation a console cycle, we did see better than expected sales in these categories with the recent surgeon video game product demand during the cold it that gene pandemic era.
As George mentioned some of the sales declined later in the quarter are largely reflected of a lack of console hardware supply in the marketplace.
Given we're operating at the end of the console cycle, along with some cobot 19 related effects within the supply chain.
However, importantly, the Nintendo switch continue to perform very well and we leveraged our market share leading position around the world on this product line.
Additionally, we haven't continue to leverage our pre owned inventory, particularly in hardware accessories to supplement lower new hardware availability and drive sales.
Overall software was down 31% for the quarter. Despite this strong performance of key titles such as animal crossing in the last of us too.
As George mentioned, when there is newness and video games, whether titles are console, we performed very well. However, our performance was somewhat negatively impacted as numerous title launches were pushed from the first half the year into the latter part of the year.
As an example last year second quarter benefited from the launch of Madden NFL 28 title that launched in the third quarter. This year.
Well most were down 34% for the quarter has the opportunity for in store basket additions tend to benefit from higher store traffic.
And newness continues to push out various franchise delays.
From a product margin standpoint, gross margins decline due to product mix shifting heavily into hardware hardware sales represented about 47% of sales as compared to 43% last year.
As a result, our overall global gross margins were 26.8% down 420 basis points from the more software led 31% in the fiscal second quarter last year.
Now turning to our expenses and expense management objectives.
After adjusting for roughly 11.3 million, a divestiture and severance expenses and costs related to the exchange of our March 2021 notes.
Our SGN expenses were 336.9 million, reflecting a decline of approximately 108 billion or 24% compared to adjusted asked you named the second quarter last year.
These results do not adjust for the approximately 2.7 million dollar investment in additional protective insanitary related products and equipment in the quarter to ensure the safety of our associates and customers.
Importantly, the pandemic has shown the resiliency of our associates and also continued opportunities to be more effective as an omni channel retailer.
In that light, while some of the lower SDMA will come back with sales volume increases in future quarters, we will maintain a large degree of operating efficiency throughout our stores and distribution centers importantly, a meaningful portion of the expense reductions are permanent and are directly related to our ongoing efforts to aggressively rationalize the overall cost structure.
Our business.
We realized an operating loss of 85.6 million compared to an operating loss of 446.7 million in the prior year second quarter.
Adjusted operating loss, excluding transformation severance and other charges was 84.7 million compared to an operating loss of 45.8 million in the prior year second quarter, reflecting the Swiss seasonally slower second quarter period.
Our effective tax rate as reported for the second quarter was a negative 19.2% and was impacted by certain discrete tax items, primarily related to the sale leaseback transactions and the mix of earnings across the jurisdictions in which we operate.
Excluding those onetime items.
Our adjusted effective tax rate for the quarter was 1.2%.
On a reported basis, our net loss was 111.3 million or a loss of $1.71 cents per diluted share compared to a net loss of 415.3 million or loss per diluted share of $4.15 in the prior year second quarter.
Adjusted net loss from continuing operations, excluding transformation severance and other charges.
Was 91.2 million or a loss of $1.40 cents per diluted share compared to an adjusted net loss of 32 million or 32 cents per diluted share.
During the second quarter, we continue to focus on optimizing our global store fleet and strategically densifying certain markets for the quarter. We closed a worldwide net total of 206 stores, bringing our total worldwide.
The 388 year to date, including our Nordics wind down.
At the end of the quarter, we operated 5122 stores worldwide, which is 602 fewer stores compared to last year.
Given the strong sales and profit transfer rates, we continued to experience. We're on track to close a total of approximately 400, a 450 stores worldwide. This fiscal year.
These closures along with the growth in our online business and expanded omni channel capabilities.
Will allow us to more efficiently and profitably service our customers.
Now turning to the balance sheet, which continues to be an area of focus for the team in a highlight for the second quarter.
At the end of the fiscal second quarter, we had total cash of $735 million.
Well ahead of our expectations of between 575 and 625 million.
Importantly, we ended the period was zero net debt.
We ended the second quarter with total inventory at 474.6 million compared to 948.9 million in the prior year period, a reduction of 50%.
As we've said previously effective and efficient inventory management, including improved inventory churns and the result in cash conversion cycle gains continues to be a significant area of focus for us and as a key driver of the further improvement in working capital efficacy.
Our accounts payable at the quarter end were 256.4 million.
Down from 368.3 million for 30.4% at the end of the second quarter fiscal 2019.
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 pandemic and not create a liability drag on the business or on cash flows.
As a result of these many continued improvements we realized positive free cash flow of approximately 182 million in the quarter.
In addition to the free cash flow gains during the quarter, we completed the sale of our corporate jet and completed a sale leaseback transaction for three of the five own buildings being offered adding a total of 51.8 million a liquidity of which $43.2 million was related to the sale leaseback.
Subsequent to the close of the second quarter, we executed sale leaseback transactions for the remaining two buildings being offered adding an additional approximately 43.7 million in liquidity not visible in the Q2 balance sheet.
Given the relatively stronger performance in the business and the proceeds from monetizing our real estate assets. We also paid down 100 million of the revolver borrowings and had only 35 million outstanding as of August 1st.
As previously announced in July 2nd 2020, we completed an exchange offer and consent solicitation for the remaining unsecured notes due to mature in March of 2021, we exchanged roughly 52% of the notes that were set to mature in March of 21.
Well within our range of expectation given the high retail ownership and the participation by the majority of qualified bondholders.
The newly issued notes of approximately 216 million provide additional financial flexibility by replacing and extending the maturity to 2023 as we continue to focus on advancing our long term strategy and objectives.
With regards to roughly 198 million remaining of the 2021 notes, we anticipate redeeming those bonds over the course of the coming months between now and the maturity date.
In the second quarter, we had $10.9 million of capital expenditures, bringing the year to date spend to 17.5 million.
We continue to focus on only mandatory maintenance or near term high value strategic projects and anticipate that we'll invest between 55 and 60 million in capex for the year before vendor allowances a significant reduction from the roughly 80 million spent in 2019.
I will note. This is approximately 15 million more than our previous estimate but reflects a holiday store merchandising refresh project for which we will receive a full reimbursement from vendors.
Does the uncertainty regarding the ongoing impact with over 19 on the business. We have suspended formal guidance. However, we do want to provide you with some of the puts and takes that will likely impact the remainder of year.
From a topline perspective, the third quarter, we'll see several key software titles move into Q4 and while the August sales trends are consistent with Q2.
Those shifts will create somewhat of a headwind for us in September and October.
With the new product launches the generally drive our business as a specialty video game retailer shifting later in the year.
Let's just call of duty and cyber functioning into Q4, and then the case of Microsoft Halo Infinite.
Launching lunch shifting into 2021, we expect our sales results could be choppy for the remainder of the third quarter.
Compounding sales impact in the software title launches will be the limited availability of current generation, new console and accessories supply as the availability of product manager Factures remains tight.
We have the ability to leaning on our pre owned inventory and we're very well positioned on that side of the business, but as we have anticipated for some time, new hardware sales will likely be pressured as we approach the launch of the new technology.
The strength of the balance sheet in particular, the positive free cash flow trends positions us well from a cash and liquidity standpoint to maximize the upcoming key hard hardware and software releases in the fourth quarter and further drive strategic evolution of our business in 2021 and beyond.
As it relates to our reboot objectives, we continue to be pleased with our progress and are seeing first hand, how these efforts are enabling us to navigate this challenging time.
We remain intensely focused on continuing to execute actions to further strengthen our overall financial architecture, including all key profit in expense lovers.
This is important as a result in organization is a game stop that is meaningfully more efficient streamlined and poised to capitalize on a significant profit flow through improvement as we experienced expected robust sales growth in late 2020 led by both the expected new software title slate and the generation nine talks a lot.
Yes.
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 conducted a question and answer session. If you like that's question. Please press star one on your telephone keypad confirmation. So indicate your line is in the question Q. You May proceed to fuel at your move your question from the Q for participants using speaker equipment. It may be necessary to pick up your hand, simple focus and the start keys.
First question comes the line of Colin Sebastian with Robert W. Baird. Please proceed with your question.
Great. Thank you couple of questions first off I'm curious with the E commerce or the digital volumes in markets are states, where where you have had primarily reopenings.
Do you do you retain those ecommerce volumes or to this shift back to stores I guess I'm trying to understand if if if some of that digital volume as incremental ultimately.
And then secondly, just any commentary on EBITDA for the fiscal year.
Thank you, yes that was removed from the from the press release versus the last quarter Im just clarify that thank you.
Yes, Hi, Paul and it's Jim Yes importantly.
As we broader stores back online we've seen the contribution of E commerce sales to the total maintain at levels that are north of 20%.
Historically, that's been in the single digit range.
Mid single digit right. So that's important because it's sustainable in E Commerce business, it's not just a simple channel chefs.
Then secondly, again, we're not we're not providing any guidance and or not.
Reiterating any guidance mean, a couple of months more into the pandemic and and there's just still too many unknowns.
So we're not we're not reiterating any any further guidance for the rest of the year.
And then one quick follow up on the on the digital only hardware platforms.
What is what is your view or what's the plan for for sales of those platforms and are there other ways that you can participate in digital software subscriptions for those or other platforms. Thank you.
Yeah, Hey College, George we intend to sell the the both platforms for both the centers so.
Just in additional us unit and we certainly anticipate participating in those programs.
And we certainly see the opportunity to capitalize beyond just the initial gross margin on the coastal itself and that means participating in digital sales and in subscription programs.
Okay. Thank you very much.
Our next question comes on line of step was it with Jefferies. Please state your question.
Thank you. Good afternoon, everyone. We also have two questions. The first one George probably for you is just to help us think about the volumes available units that you anticipate come fourth quarter at the hardware launch any sense of how we should benchmark to prior.
Next Gen cycle launches and then Jim one for you as we think about the overall.
Cost profile on the overall plans for store closures.
Are you thinking about DNA per store as a measure any sense you can give us around kind of the future stated the cost model relative to this darby and how you're thinking about overall cost productivity. Thank you.
Yes, let me start off with the allocations for the new consoles and I would just saying that there are inline with expectations and probably would prior releases as well there are elements of this that we don't know like you. We learned the price point of the Microsoft Munis today at the same time that you did so we now know that we don't know what the breakout looks like so.
Specifically of the the console themselves or the accessories. They go along with them. So just very much in that stage right now of the production data getting to our partners and they're making the decisions as to how it's going be allocated out, but I'd say as of this point in time, we would consider to be in Lima, what we expected.
[noise] and then stuff. This is Jim on the cost profile I think the best way to think about that is.
Over over two thirds of of the call DNA changes quarter over quarter, and then for the full year year to date.
Our permanent and some of that is related to the store closures, which you aptly pointed out but a lot of that is related to the cost out.
Initiatives that we that we've been undertaking for quite some time.
We talked about at the end of last year. We're starting you know we're seeing some of that anniversary of coming in the third quarter, but really started to get momentum out in the fourth quarter last year. So we'll still have more to going up here for the rest of the year.
Thanks, guys. If I can talk one more than just on the App you haven't talked about that much in the past it could you talk a little bit more about.
Well the featured may be how you expect to roll that out the content side, and then how you're expecting to leverage you're fairly robust CRM and customer data that you've been tracking from anywhere.
Yeah, you're right stuff, we haven't felt a lot about it we have a new chief digital officer been very pleased with the developments that he's made on on that front and we've been in need of anyway, but I think as you know if you look at E. Commerce, a large percentage emanates from a mobile device not from a a desktop laptop any longer so it was net.
He worked for us.
It will be a far more intuitive.
GAAP than what we've had prior there is a game news section, where you can catch up on the latest and greatest in gaming, we actually view that as kind of an extension of the social hub of gaming as well.
You'll be able to keep track of things like your Powerup rewards. So there's a connection to that piece of it.
Two.
And it will launch in late September So I think it's just something that.
We'll have more information on certainly on the next call when it's in place and when it's active but we're certainly bullish about what it can do and personally excited about being able to be at a point, where it's we're almost ready to go.
Thank you.
Our next question comes from lineup Curtis Nagle with Bank of America. Please do it's a question.
Good morning, or sorry, good afternoon, guys, just a very quick one on the gross margins for the quarter. So.
I know you guys are kind of shifted up and how you reported we don't have numbers anymore, there's a little bit difficult comparisons, but I'm just looking at some explanation you guys gave for what drove down the gross margins predominantly mix hardware I think I'd I just can't really got to come square. The numbers I mean is there something else going on here in terms of.
You know a big shifted use something on margins there Mark Johnson collectibles.
Any more detail you get with DHL.
Yes, Hey, Curt it's Jim no there really isn't and it's really all about hardware mix.
And.
As the hardware mix and the volume of hardware is significantly higher 40, or 47% of sales versus 43% last year. That's the mixed effect that we had that we see on the market rate. The collectibles business was a little bit more promotional but not really extensively across the world.
In all of our various reasons, but you know again solely around the hardware mix and then certainly what that means in terms of light volume impact on on on overall margin topic short cycle. Okay. Thanks very much.
You bet.
Our next question comes the line of Seth Sigman with Credit Suisse. Please proceed with your question you guys. Thanks for taking the question I didn't want to follow up on that last point, because I guess, we're struggling with that math, a little bit as well. So we get the hardware mix. However, I think the mix shift was more severe or last quarter to hardware. So can you just gives a sense what else.
It is going on within categories, and maybe more specifically speak to margin rates by category I think that would be helpful year over year, and then and then the second point is if you could comment specifically on the performance of pre owned relative to the the software bucket overall that would be helpful. Thanks.
Yes, sure I mean, you again does not.
Not a whole lot more to two to talk about with respect to the impact of of hardware mix on the mortgage that's just the mapping.
Ultimately that's that's what's drove.
The vast majority of the margin differential.
And then you talked about pre owned again I think it's also a function of when the stores are not open and the traffic is not into in the stores our pre on software it tends to be an attach to the market basket.
What's still without stores opened or without traffic.
During our stores for all of May in the first part a June.
Around the world.
That business, obviously, we're going to do lower volume.
Got it so pre owned was down more than the negative 31 for the software category overall.
No I didn't say I believe as you know we're not we don't disclose the differential between pre owned a new software.
Got it alright.
That's fine. So my follow up question is around some of the levers that gamestop had used in the past capture share.
In a very fair share during past console launches I'm just curious what do you guys doing differently. This time around for example, you know I think some of the tools like currency. Your unredeemed currency is just a lot lower right now than it's been in the past you disclose that in the queue. You'll also have fewer stores going into this.
No you also do have some digital assets. So I'm just curious what's the plan. How are you guys thinking about managing that and making sure that you capture your fair share.
Yes, I think there are number of things were planning on for this launch I think as we mentioned in the a in the earnings script itself, we ought to be launching some new payment options. So some a delayed or.
You know fractional a payment options that you can just buy and four and for payment steps along the way we won't be doing leasing alternative is one of those will be Microsoft all access for their particular platform together will be a product that we have a wrong.
And then we continue to believe that the pre owned hardware cycle as part of this as well that there certainly is a trade and alternative that gives you a down payment towards new gaming console that we expect will be.
Utilized so I think just a comment a little bit more on the pre owned business and Jim gave you. The heavy weighting that contributed to the margin ship, but as he said we were closed for part of their part of this time period. So she go back to May in parts of June There's just no ingress theres no product coming in and even reopened we had concerns.
We're on the sanitary nature of dealing with would trade him product. We've now gotten there to a point that we have a comfort level with that and we see the customer get into a higher comfort level with that as well. So we're seeing our pre owned activity begin to flex up a bit as we have a ways of putting console through UBI treatment and.
Putting games through either you or some kind of us a 99.99 type of percent effect of sanitation treatment.
We see those volumes coming back online, but it's also worth noting that pre owned also gets a push from that activity is an activity based a function as well and the gaming console cycle is certainly a big activity that's going to drive some interest on that so.
Payment option alternatives leasing alternatives and a trade and alternative and then obviously you know what we'll certainly promote that will help bundles, we'll have our fair share of inventory.
George that's really helpful. Just if I could follow up on that use point. So it sounds like the treat in activity maybe picking up however, how are you thinking about the other side of that the secondary market I mean, obviously that struggled for some time what are you seeing there and what is your view on that side of the business.
Let me clarify a little bit I I could interpret secondary market a couple of ways, one of which is selling going sideways. The resale market right. So people are trading gains on the other side of that someone needs to buy that game on on on that side. What is that looked like obviously there are alternatives.
Today that business your use business has been down that it's not just because of trade. It's also demand. So what is happening on the demand side for use games. Yeah look we think the demand will be there, we certainly see high demand right now for gaming consoles for the current generation as I think Jim noted in when we both mentioned in our script I mean, there was a period.
Too early on the pandemic, which for this quarter certainly crossed over into May where there was high demand on any existing current generation came in gaming device.
We believe that others had an advantage in that space as they were open for business and our stores were largely closed in that timeframe.
But certainly we've seen sell through across the board and it is very constrained right now.
We receive.
More than our fair share of Nintendo switch is that we sell those very rapidly, but as for the current generation Playstation and Xbox It's awfully hard to find and were able to create a supply a pre owned devices that certainly can fill the needs. So I think once the flywheel is going again, and we have that trading going on both sides theres an opportunity there for us.
Thanks, George Good luck.
Thank you.
Our next question comes a lot of Joe Feldman with Telsey Advisory Group. Please proceed with your question.
Hi, guys. Thanks for taking my questions.
Wanted to ask.
Without traffic it seems like you know the when you hope in stores you got more people in as you talked about you know and helps drive pre owned it helps drive other parts of the business.
How are you speaking about holiday with traffic this year given that it's going to be so different and your stores aren't very large so you may have to control the flow coming in now.
Can you just share more about the plan for the holiday period.
Yes, sure. It's a great question I think first of all we're certainly encouraged by the increased penetration of E. Commerce. So I think that makes it very straightforward certainly capabilities like buy online pickup in store allow us to meter traffic into the stores even to the degree of having appointments potentially.
And certainly our pre sell process, where we have an advanced view of what's going to happen helps us out as well and allows us to better played out some of these iconic events and just large influx of the population into the store. So we were ready for it we have more channels to operate the never before we can offer customers a.
Hey, contact list transaction, we can offer customers and ecommerce pure play transaction, we can offer a buy online pickup in store transaction. We can ship from store, we can do it in many different ways that we think give us great flexibility for the holidays, but I think you're also going to see a more spread out holiday season, as well and I think all indications would point that there'll be a little less epic.
On the black Fridays and a little bit more on a more elongated promotional period during the fourth quarter of the year and then obviously for us with the console cycle launches.
There will be more demand and the risk supply clearly and that will kind of go on its own course in its own timeline. So we're in we feel great about it I mean, I think Oh, we have no doubt that we lost some sales early on in existing console hardware due to a little bit of an a level playing field in terms of accessibility to our price.
And that there probably was some.
Catalog sales at one along with those purchases along the way, but when we see newness whether that be animal crossing whether that be the switch whether that be last of us too, we leading share and we do well in our customers find us and we find them and we expect that that's going to happen with the costs of launch in a big.
Got it. Thank you and then just a follow up.
On the real estate side.
Can you just remind us where we are I know, where you know the target for this year. The 400, a 450 stores.
How should we think about the go forward of this like is it going to be this continued.
Low single digit reduction in the base to kind of right size and de densify or what's that or is it two year process through your process like can you just refresh our memory on that.
Yes, sure I mean, it's good it's going to take a couple of years and again.
As we think about each region is a little bit different. It's your Densification Europe still look very different than live in U.S. et cetera, and so.
We're a large way through this process.
But we're not there yet obviously, we gave the direction through the rest of the full fiscal year.
Around 400 to 450 stores.
But there are there are more to do out in 2021, as well and again our emphasis here is our short lease liability lives.
Give us a great deal of flexibility so that we're not buying out of leases.
And now we're able to make these choices without without capital outlay. So we'll continue to take advantage of that and leverage that because they've got favorable position with our leases.
Into 2021.
That's great. Thanks, guys. Good luck with the corner.
Thank you thanks, Joe.
Our next question comes in line or William Reuter with Bank of America. Please state your question.
Hello.
My first question your commentary around the 2021 maturities made it sound like you're not going away.
For the maturity date, and you're going to go ahead, neither tender for those are buying back in the open market I guess is that your plan and how do you. What do you expect your troughs liquidity to be I guess through the holiday period.
Yes.
Yes that is correct that will our intention is to at select points redeem between now and the end of Oh, Yes. Its March 21, which is the maturity date so.
That is certainly our intention and again, we're not providing any further guidance on the rest of the year. So.
Suffice it to say, we I mean, let me just reiterate our if we go back when we look at history the amount of liquidity.
And overall cash.
And what we've been able to do here.
A little over a year.
With this management team in place is.
In terms of hundreds of millions of dollars of improvements in working capital and inventory turns and all the things that just to remind everybody that we set out to do last year that we communicated we would do and we've delivered on it in a big what despite the global thanks.
So we are incredibly confident with the strength of our balance sheet liquidity as we make our way through into this council launch and we're certainly certainly positions us credibly wells from the overall liquidity standpoint.
To know that a that's all come through right.
Certainly generated more working capital than lot expected.
In terms of the cut cost savings you had laid out a goal of 200 million. This year. It looks like we've achieved that in the first half year are there still further cost savings that we're going to see in the back half this year.
Well start to annualize some of the some of the cost out. So we took out in the back half of 2019.
You won't see the same type of run rate, but we're still continuing to work on elements of of cost efficiencies.
So that comes inside of the operations of our store some of it comes in our overhead unit.
We're still working on on several elements, where a lot of the way there as you as you said I mean, a lot of that 200 million as I mentioned.
More than two thirds of it is permanent.
Okay, and then just lastly from me.
Implementing payment plans, obviously that can be a drag on working capital I guess, what is the timing of when you're going to be implementing these payment plans and I guess, how much of the cash stream do you think those will be on the business. That's it for me. Thanks.
Yeah, Yeah, you bet Lastly, we know what you think they won't be at all I mean, these will be at POS third party options that they can take so.
We're not bringing on any liability so there's no working capital impact whatsoever.
Yeah, I'll, just reiterate none none none whatsoever, there all the third parties.
Okay. Thank you.
You bet.
Our final question comes from line of Bryan Hunt with Wells Fargo Kecy with your question.
Just a couple from me George and Jim Thanks for the time.
If I look back to last handful of years and ground, we didn't have a cycle a new hardware cycle.
Your your inventory went up somewhere between on the low end $350 million on the high end 750 going into the holiday season.
What should we anticipate given your new inventory discipline in the fewer amount of stores.
Thank you all had today versus you know again the last five years in terms of a potential inventory increase.
Yes, I'd say, Brian it's a great question and then thanks for that it's it's really all about it centered on the efficiency and the cash conversion cycle, which really equates the inventory turn.
This business. We go back a couple of the couple of years in the years, you're talking about was turning globally less than four times, we're now approaching almost five times.
Trailing 12 basis and so our goal is to see those turns above.
Above five times and that's our ultimate goal, we're well on our way to see that we have a little bit more work to do there what does that mean that means that.
The other aspects of even closing stores and the transference of sales to go stores is important because we'll recapturing a lot of those sales were recapturing the cost of goods saw that movement of inventory and so thinking about it on a more average basis, the business was carrying well over $1 billion and in inventory on an annual.
Hi, its average basis, Oh, we won't see any we will go anywhere near those numbers, even as we spike as we get towards these towards the launch upcoming especially because there's so much demand in the inventory turns so quickly when you see these are these launches occur so hopefully that's helpful.
That is thank you Jim and then my second question and I don't know if there is anyway to frame. It up you know I'm I've got a teenager was looking for.
New controller went to three or stores couldn't find anything. So you know we will we in the family live through your hardware shortages I was wondering it is there anyway, you could quantify you know what the hardware shortages Didier sales and how they limited sales in the current period and maybe in.
The current you know and I'm not only in fiscal Q2, but maybe in Q3.
Yeah, I don't know in terms of quantification I think it's the thing was Brian is that there was no slow of new product, but it was just spotty and I think thats. The critical factor when the newness was available in the switch is a great example, you control is a great example, and then and even the sell through that we talk.
It's about with our private label accessories was fantastic reception from customers is great again I don't know this is what it really quantify that but again remember part of this is a pull forward from a pandemic peak during the height of to stay at home orders and then at same time the manufacturers have shifted from Jay.
It's a gen nine in there in their manufacturing plants. So.
There's a little bit of a confluence of we think it's a short term lives confluence as we just get into launching a generation nine product.
All right and then my last question, you know kind of theoretical and and scenario.
You know can you talk about the potential opportunity that in the conflict in between epic in Apple may create for a third party seller of hardware and software and how and how this conflict may bring delight.
You know advantages and or opportunities for you all.
Yeah, I won't say much other than that we're obviously very aware of the situation. We're following it very closely and we're watching and ER.
We always look for opportunity within the industry and this is no exception. So we're we're Washington This islands at the moment, but watching closely.
Hi, very good I appreciate your time at best look.
Thanks for thanks, Brian.
Ladies and gentlemen, if we see in the book question, Mitch decision and I will let's turn the call back over to Mr., George <unk> for any closing remarks.
Thanks, very much just want to quickly. Thank the team at Gamestop roll it they've done during the course of the quarter or the entire team, particularly our store teams our distributors distribution center teams refurbishment operation Center, all those working on the front lines and then really a call odd for omni channel folks for effect affecting such quit quick change can such dramatic change so well.
And thanks to all of you as always for your interest in a and Gamestops appreciate it.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation have a wonderful day.
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