Q3 2020 GameStop Corp Earnings Call
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It is now my pleasure to introduce your host Eric Cerny Investor Relations. Thank you Mr. Cerny you may begin.
Thank you and welcome to Gamestops third 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 statement 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 at another information regarding non-GAAP financial measures discussed on the call can be found in the earnings release issued earlier today as well at the investors section of our website with me today are Gamestops, Chief Executive Officer, George Sherman and Chief Financial Officer, Jim Bell.
On today's call George will share insights into our business at strategic framework for the future George.
Will then provide more detail on our financial results and expectations for fiscal 2020, then.
Then well open the call to take your questions.
Now I would like to turn the call over to the company's Chief Executive Officer, George Sherman.
Thank you Eric good.
Good afternoon, everyone and thank you for joining us today on our third quarter earnings call I hope, you're all safe and well.
The third fiscal quarter represents a key pivot point in our trajectory to stabilize optimize and transform gamestop.
We have made significant strides on stabilizing at optimizing our core operations and are excited about the transformational plan. We are executing that will enable us to create long term value as our industry continues its rapid growth.
Our third quarter results were largely as we had anticipated mark at the end of a challenging sales performance period, because the industry transition from generation eight degeneration nine Council video gaming products.
The transition coupled with the impact of a global pandemic on consumer retail mobility and also to some extent supply chain disruptions is now segue <unk> segue into what we see as a period of sustained growth the beginnings of which I'll highlight at the moment.
First to summarize the third quarter.
As we had anticipated sales and profitability were down the comparable store sales declining 24.6% and adjusted loss of 53 cents per share.
But that notwithstanding we saw at 257% growth in our ecommerce sales versus the prior year, reflecting investments during the year of that enhanced our omni channel capabilities.
We continued to reduce expenses delivering over $350 million initiate expenses expense reductions so far this year.
And we are pleased to end the quarter with almost 300 million more on cash of restricted cash compared to the end of the prior year third quarter.
As I mentioned, we've made significant strides of stabilizing and optimizing our core operations over the last 15 months.
And are excited about the plan, we are executing for the rapid evolution of Gamestop.
Despite the unprecedented environment during the global been pandemic, our strong performance of November shows net only where we are but the rapid pace of our transformation beginning with the cost reductions can see different significantly improved balance sheet delivered by our ongoing work.
Followed by the console launch in early November.
And now our focus on key transformational strategies that will power future growth.
Our goal is simple we are positioning gamestop to be the leading global omni channel retailer for all things gaming and entertainment.
We are encouraged by our successful efforts in 2020 to begin category of product extensions that increased our addressable market.
As well as by our customer early response to an expanded products and services offerings.
At the forefront of this strategy is a digital first approach focused on delivering a best in class E Commerce experience, along with an optimized retail footprint.
Together with enhanced fulfillment options they provide our customers with the most comprehensive set of games and entertainment products on events wherever however, and whenever they want them.
The current console based video game product games products are an important element of our strategy over the next few years and we realized a very successful launch of the next generation products November driving 16.5% growth in comparable store sales.
This was the first positive comparable store sales mark in nearly two years, despite being closed on Thanksgiving day in North America, and the ongoing negative impact of COVID-19, which saw the closure of the vast majority of our European store fronts for the entire month.
In addition to the appeal of the next generation of consoles.
These results also reflect the significant improvements we have already made to the performance of our omni channel platform as global online sales in the month of November grew 352%.
In line with these early results, we expect to generate strong sales growth and profitability in the final quarter of the year.
Let me review some of the additional highlights for the third quarter.
Jim will share some of the specific details of the quarter, but broadly speaking our global store fleet, so on and off periods of store closure or restricted access to customers parts.
Particularly as COVID-19 cases accelerated around the world in October and then through November.
We believe the pandemic and importantly, the depression of retail customer consumer mobility lowered our comparable sales in the third quarter by three to five percentage points.
Pivoting to our strategic accomplishments in the quarter.
We continue to optimize our core business by improving efficiency and effectiveness across the organization.
Moving to reduction NSG day expenses of nearly a $115 million for the quarter, bringing our total for the year to over $350 million versus 2019.
Roughly two thirds of which we view as permanent.
We continue to work quickly to optimize our omni channel capabilities of the transformation of our physical store presence.
Through the third quarter, we have closed almost 800 stores worldwide since the beginning of 2019.
Representing both underperforming locations and didn't densification and certain trade areas.
We expect these closures to create a more profitable footprint.
In the US we continue to see strong sales and profit transfer to neighboring locations and ecommerce an important point in supporting the continued optimization of our store fleet.
Consumer affinity for continually improving ecommerce experience and the ease of shopping and same day delivery of our omni channel fulfillment is increasing efficiency across our store footprint.
By the end of the fiscal year, we will of closed over 1000 stores. Since we began this optimization journey in the middle of 2019, all with little to no capital outlay.
Given the strength of our ecommerce sales and omni channel capabilities, which all comment on momentarily, we now see the opportunity to close additional stores going forward in 2021 in 2022, as we optimize the profitability of an omni channel architecture.
Overall, our goal is to serve our customers wherever whenever and however, they choose to shop.
We continue to improve our balance sheet.
We again improved working capital management with a 33% reduction in inventory and a 38% decline on accounts payable ending the period with $603 million of cash unrestricted cash of $300 million more than the prior year third quarter.
Finally, as a result of the continued strength of our balance sheet. We further enhanced our capital structure with the announcement of the voluntary reduction redemption of $125 million or approximately 63% of our outstanding notes due in 2021.
As you know we remain very committed to our efforts to build a frictionless digital first omni channel ecosystem and our customers are responding significantly changing the way they shop with us.
Our focus on customer Centricity and the best end to end customer experience has led to recent material gains and our ecommerce business and we expect to build on this success reinforcing the core focus of our go forward strategy.
In the third quarter, we delivered a 250 cent, 257% increase in ecommerce sales versus the prior year.
Fueled by our elevated omnichannel capabilities.
Ecommerce penetration continues to grow and represents nearly 25% of total sales this year up from a low single digit percentage historically.
We are also leveraging our expanded fulfillment capabilities, such as curbside pickup byline pick up in store ship from store and in the third quarter. We rolled out same day delivery for online transactions of 2000 locations and now have that option available in all of our U.S stores.
Given our relatively high average transaction size, we can profitably partner with last mile delivery services to provide customers with same day delivery.
Our new on our new mobile App, which launched fully on October is much more engaging the previous version and provides newly available functionality and of dramatically improve customer experience.
The Apis customizable enables customers to personalize.
Features select same day delivery options and browse at curated deal hub.
With more people downloading and using the App on a weekly basis and engaging with it for longer periods of time, we've seen a significant increase in engagements leading the transactions of 30% increase in conversion.
With the increased usage ecommerce sales originating from the App have now doubled.
We are very pleased with the initial performance and look forward to rolling out additional features such as the game or news feed and a comprehensive ease of use digital wallet in early 2021.
Going forward, you will see us leverage our gamestop ecosystem of stores E Commerce, and our App to deliver enhanced 360 degree experience for consumers with products and services that are more relevant to how they connect and play end devices today and in the future.
All of the focus on driving customer lifetime value.
These efforts have already resulted in and we believe will continue to lead to higher conversion basket size frequency of purchase as well as a new customer acquisition for our Powerup royalty program.
As you appreciate these are very encouraging metrics.
The progress we made during the quarter on our strategic initiatives disc.
Despite the COVID-19 backdrop, largely completes our optimization of stabilization phases of our strategy, which you've been working on for over the last 15 months and positions us for the next phase transformation.
Before discussing our future plans on opportunities I'd like to quickly review the material accomplishments that we set out to achieve with the launch of Gamestop reboot, just 15 months ago.
In that time, we optimized our physical store presence through the ongoing densification and will of closed over 1000 stores by the end of 2020.
We exited unprofitable businesses and the four Nordic countries end divested of the simply Mac business unit.
We continue to take cost out of the business significantly reducing EPS you named by $316 million year to date in over $440 million from our starting point in the middle of 2019.
We of course increased productivity with an improved store labor strategy.
We invested in our ecommerce platform driving for 433% growth in the channel to nearly 25% of sales year to date.
We improved inventory management of faster turns delivering well over $300 million on working capital benefits key to our ability to definitely navigate this pandemic.
We monetized several assets, including sale the sale leaseback transactions for five office buildings, and the sale of our corporate jet, adding over $95 million on liquidity.
We enhanced our financial flexibility with the completion of an exchange offer and consent solicitation for $216.4 million of our unsecured notes, reducing the amount due to mature on March 2021 to approximately 198 million of which we've already announced a voluntary early debt redemption of $125 million.
By March will reduce the overall debt on our balance sheet by almost $600 million since early 2019.
We repurchased 38.1 million shares since the spring of 2019, approximately 37% of shares outstanding at the time at a weighted average price of $5.21.
And we significantly expanded our customer payment options, including elevated focus on our private label credit card, adding several new several buy now pay later options and launch rent to own options to complete the payments stack.
As one of the fourth quarter, we have several tailwinds at set us up to win during this holiday season, starting with the new console cycle and including our digital omni channel acceleration.
But to be clear we are not just focused on the console video game market and were expand the spectrum of products and services, we sell to position gamestop to be a worldwide leader of games and entertainment for our customers.
As many of many of you have seen we have begun to expand our skews to include PC gaming computers monitors game tables, and gaming Tvs, Tony only a few categories.
Many of these skews will continue to be online exclusives.
PC hardware and accessories represent a major market opportunity and industry research by NPD shows that at large majority of console gamers also play PC games.
Our overarching goal is to leverage the power and competitive advantages of our brand significant loyalty base dedicated and experienced sales associates and expanse of omnichannel capabilities to drive lifetime value across all things games and entertainment.
As customers of all the way they play we are evolving with them at.
Expanding our addressable market as we expand our suite of products and services to meet their needs.
In closing as we look back over the five quarters since launching Gamestop reboot, we're very proud of the tenacity of our teams to not only produce meaningful results during the stabilized and optimized stages of our plan, but to do so all while delivering our products and services to our customers and doing so in the middle of an unprecedented business.
Trucks on caused by the global pandemic.
We have made advancements that have begun to return on our business to sales growth and profitability, while enabling us to undertake the significant transformational work, we now have underway.
As we look to next year of beyond we are confident in our strategic plans and the transformation of improved results and long term sustainable growth at Gamestop.
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 this time to walk you through our third quarter fiscal 2020 results and then I'll share some insight into the success of the new video accounts will launch and how we're approaching the fourth quarter.
As George discussed we advanced our strategy in the third quarter, making significant progress on our near term goals of optimizing our core business by reducing expenses, improving our inventory management and strengthening our balance sheet and capital structure.
And we did so while continuing to focus on transforming gamestop for the future to deliver profitable long term growth.
With the third quarter behind US we are intently focused on maximizing all the new console cycle has to offer expanding our foundational work on our elevated omnichannel platform and more efficient operating model.
And quickly, but methodically evolving the business to expand our addressable market and support our long term growth and profit objectives.
As the gaming consumer and industry of all we see an opportunity to expand our addressable market beyond our historical predominant focus on the console video game market with a comprehensive suite of product offerings at new services across all categories for games and entertainment and simply put we're making it easier for consumers to find what they are.
Need at Gamestop in an intuitive relevant and frictionless shopping experience all while taking a leadership role across the game and entertainment categories at.
Economically this means adding incremental purchase occasions with higher margin lines of business and therefore, capturing greater share of wallet.
Let me turn to a review of the for third fiscal quarter.
As George mentioned, our third quarter sales performance was as expected as we transition through the final quarter of the generation at console video game cycle, which included the shift of many software titles into the fourth quarter of this year and even into 2021.
Further we realized some topline softness in October as Cove at 19 case bikes drove retail consumer mobility down.
Our consolidated global sales for the third quarter.
It was $1 billion at 30.2% below third quarter of 2019. The decline was the combination of a negative 24.6% comparable store sales the impact of both store closures and lower retail consumer customer mobility through most of our operating countries and the impact of operating 607 fewer stores as part of our store.
That is easy to exit unprofitable businesses and optimize our stores fleet through Densification.
We continue to see strong sales and profit transfer rates from that Densification strategy.
Geographically on our Australia, and New Zealand business unit.
Continue to perform very well relative to other regions delivering a slight increase in sales for the quarter. It.
It is important to note that performance in this region is driven by very little reduction in store operating days as the coated related retail operating mandates of generally not required full full closure or limited access except for short periods of time.
In terms of category performance hardware and accessories declined 24% for the quarter, an expected slight deceleration from the second quarter largely reflected of a lack of hardware product in the marketplace ahead of the launch of the new console much of which was pulled forward into the second quarter.
Despite this Nintendo switch continue to perform extremely well increasing significantly compared to last year and we continue to leverage our pre on inventory to drive sales.
Software was down 39% for the quarter versus 2019, a deceleration from the second quarter. It was driven by the lack of title launches most of which shifted later into the fourth quarter and into 2021, notably call of duty launch in the third quarter of last year compared to the fourth quarter of this year.
Our collectibles business was down 9% for the quarter, which represents a significant improvement sequentially from the second quarter performance as we realize the benefit of store traffic at stores begin reopening during the quarter after being closed during the second quarter.
From a product margin standpoint overall gross margins declined as the increase in the mix of higher margin collectible sales was more than offset by the mix of lower margin hardware sales and an increase in industry wide freight costs and credit card processing fees, driven by our higher penetration of ecommerce sales.
Our overall global gross margins were 27.5% down 320 basis points from our more software led 30.7 in the fiscal third quarter last year.
Now turning to our expenses and expense management objectives.
Our reported EPS DNA expenses were $360 million, reflecting a decline of approximately 115 million or 24% versus the reported SGN a day in the third quarter last year.
The total year to date EPS unit cost reductions reached over 315 million at the end of the third quarter ahead of our expectations.
Importantly, we continue to expect about two thirds of these reductions to be permanent roughly.
Reflecting our ongoing efforts to aggressively rationalize the overall cost structure of our business.
While we expect some of these variable costs to come back in future quarters, as we return to more normalized operations of our stores and distribution centers.
We are also steadfastly focused on further operational efficiencies to create additional permanent spec expense reductions in the future to this end we of more than doubled the original annual cost reductions we expected as a result of these actions we took as part of that rebuild initiative, which began in 2019.
We reported an operating loss of $63 million compared to an operating loss of $45.6 million in the prior year third quarter.
Income taxes of third quarter was a benefit of 53.9 million driven by a change in the tax status of certain foreign entities that we have elected and the impact of the cures Act, which allowed for a five year carry back period for certain current year tax losses.
This tax benefit compares to an income tax expense of $31.6 million in the prior year third quarter.
Our effective tax rate for the quarter was 74.1%.
On a reported basis, our net loss was $18.8 million or a loss of 29 cents per diluted share compared to a net loss of 83.4 million or a loss per diluted share one dollar in two cents in the prior year third quarter.
Adjusted net loss, excluding the gain on sale of assets related to the sale leaseback transactions was $34.4 million or a loss of 53 cents per day per diluted share.
Compared to adjusted net loss of $40.2 million or 49 cents per diluted share in the fiscal 2019 third quarter.
During the third quarter, we continue to focus on optimizing our global store fleet and strategically densifying certain markets.
For the quarter, we closed a net total of 74 stores.
Bringing our total to 461 closures year to date at the end of the quarter, we operated with 5048 stores or 607 fewer compared to the end of third quarter last year.
Given the strong sales and profit transfer rates. We continue to experience. We are on track to close nearly 700 stores in total this fiscal year end over 1000 stores worldwide. Since we began this part of our strategy in 2019.
Importantly, we are completing these closures generally with little to no capital outlay to do so.
Now turning to our balance sheet, which continues to be an area of focus for the team.
At the end of the fiscal third quarter, we had total cash and restricted cash of 602.6 million almost 300 million higher than the end of the third quarter last year, reflecting our continued efforts to optimize working capital.
Additionally, during the quarter, we completed the sale leaseback transactions for the remaining two office buildings being offered country.
Contributing $43.7 million toward total liquidity.
Accounts payable at the quarter end were $440.2 million down from $709.9 million at the end of the third quarter last year, reflecting at 38% reduction.
Which is directly related to our ability to leverage of flexible supply chain and improve our inventory management.
We ended the third quarter with total inventory of $861 million compared to 1 billion $286.7 million in the prior year period, a reduction of 33%.
Inventory efficiency in the third quarter continued to improve as we realized a trailing 12 month inventory turns of 4.7 times from 4.1 times. This time last year.
During the third quarter, we reduced outstanding borrowings under the asset based revolving credit facility by about $10 million down at 25 million outstanding at the end of the third quarter, we had $269.5 million of short term debt and $216 million of long term debt on the balance sheet.
Subsequent to the quarter end, we announced the voluntary early redemption of $125 million in principal amount of our 6.75% senior notes due 2021.
The redemption will take place on December 11, 2020 end covers approximately 63% of the outstanding 21 notes.
The voluntary early redemption is consistent with our actions the strength and enhance our balance sheet improve our debt profile and optimize our capital structure.
In the third quarter, we at $15.1 million of capital expenditures and we continue to focus our capital spending on near term high value strategic projects and mandatory maintenance and still anticipate that will invest approximately 60 to 65 million in capex for the year.
Some of which is offset by our various vendor support programs.
Separately today, we also filed a shelf registration statement and established a related optional at the market program to offer and sell up to $100 million of additional common stock.
As I noted several times. This year, we are extremely pleased with the results we have achieved to strengthen our balance sheet and advance our strategic objectives and believe we have more than sufficient liquidity and balance sheet strength to continue to execute on these endeavors as well as navigate through any potential unknown or extended pandemic effects.
As such the timing and amount of sales of shares under the program. If any will depend on a variety of factors, including including prevailing market conditions, the trading price of shares and other factors we may determine however.
However, as a pragmatic matter initiating this program provides us with the maximum flexibility and optionality to further bolster our balance sheet and liquidity position and increased flexibility gives us the ability to leverage opportunities to accelerate our transformational strategies, such as increasing the speed at which we elevate.
To expand our Omnichannel strategy, while further ensuring middle minimal disruption from any potential further pandemic impacts around the world.
Before moving to our fourth quarter outlook I want to spend a few minutes highlighting the initial results of the console launches that occurred in November by all accounts. These councils are experiencing unprecedented demand and we continue to work with the suppliers to meet that demand importantly, we continue to be able to achieve attachment rates for first party and third pay.
Party software and accessories that are in most cases more than two times that of any other competitor, which is leading to us having opportunities to get additional allocations of these high demand consoles.
Given the strength of our performance so far with the console launch, we expect strong sales growth and profitability in the fourth quarter, something we have not seen in quite a few quarters as George mentioned November comparable store sales increased to 16.5%. Despite the impact of store closures throughout most of Europe and part of Canada in.
November.
In addition, our customers continue to respond favorably to our improved ecommerce experience, including our new app and flexibility of new fulfillment and payment options provided within our.
Elevating the omni channel ecosystem as a result year over year E. Commerce sales grew 352% in November versus the same month last year.
Despite the strong start to of fourth quarter, given the uncertainty around the evolving impact of Cove at 19, we are continuing to suspend guidance as we mentioned we have seen.
Seen varying levels of closures across our international operations, particularly in Europe and at things remain very fluid in the us temporary store closures due to cope at 19 could be likely heading into the rest of December and January.
Keep in mind at the comparable store sales exclude the impact of permanent store closures in locations that of closed for 14 contiguous days or more due to the pandemic.
Before I conclude I wanted to elaborate a little further on our real estate strategy and efforts to optimize our fleet, especially densifying overstored markets and how we are approaching for their actions.
Looking at 2019 in 2020, combined we will of flows over 1000 stores over that timeframe.
With over 320, 19, and nearly 702020 and importantly have spent little to no capital to do so.
With our investments in improving our omnichannel capabilities, including hiring them of almost 30 professionals with extensive digital experience coupled with the impact of Cove. At 19 has had on our customers desire to experience gamestop across our digital platforms, we see an opportunity to further optimize of fleet in the coming year or two.
These efforts come with EBITDA improvement and we have had a very flexible store base in terms of lease expirations.
And that will enable us to to close stores at very little cost of the business. We will update you further on these objectives.
During our fourth quarter at fiscal yearend earnings conference call.
In summary, we're off to a great start for holiday and our associates are energized by the buzz and excitement generated by the console launches.
We have long said at the newness and councils and software drive our business and we see that playing out now while we are now benefiting from a nice tailwind we are equally focused on transforming our company for the future and believe we have the right initiatives in place to achieve this goal reshaping gamestop for effective market reach and offering of broader array.
Of products and services in the games and entertainment space.
In the short term, we will remain intently focused on continuing to improve our financial architecture, but today Gamestop is a meaningful can be more efficient streamlined organization than it was 15 months ago due to all the hard work that our teams have done as part of this.
Stabilization and optimization components of our strategy.
As a result, we believe we are poised to capitalize on significant profit flow through improvement as we experienced sales growth led by both the generation non console launch and expected new software title slate as well as the expansion of the transformation phase of our strategy and many exciting category end product extensions and services we will.
Bring into our ecosystem in 2021 and beyond.
I will now turn the call over to the operator, and we'll take any questions that you may have.
Thank you.
We will now be having our question and answer session if.
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One moment, please while we now poll for questions.
Our first question comes from Stephanie Wissink with Jefferies. Please proceed with your question.
Hi, This is Ashley Haugen Dr. Seth. Thanks, Thanks for taking our question on the SGN at reduction you've been running at about 100 million at quarter, what should we expect for pacing by quarter going forward and whether there are many cost buckets Twitter.
And then how.
On your performance in the quarter, how did at benchmark to industry figures at third party data source at like NPD. Thanks.
Yes, hi, Ashley thanks for the questions.
Respect S.J. I mean look again, where we continue to to address.
As you know for several quarters now addressing as gene and in virtually every facet of the business. So it's not going to will be that different from the contribution of expenses for any quarter as we've seen historically, because we're really we're moving cost out of the entirety of the system.
A lot of it is stores coming offline a lot of it is.
Productivity in our labor forces both in the stores that of Dcs.
All aspects of our corporate DNA. So it really is everywhere. So I don't know that that's going to changed very much.
At all based on the history.
And I'm sorry, the second part of the question was.
Yes. Thank you at its helpful. But the second part of question was just on the performance on the quarter, how did you benchmark to industry. Thank Eric.
Like NPD.
Yes, I'm not exactly sure at it had a comment of benchmark point, but I mean look I think again I think the quarter was was in line with our expectations on if you go back.
Just go back a year I mean, when we first got here last summer and we set out on this journey. We said look these next.
Four quarters will be representative of exactly what we just saw and they met our expectations and then more importantly, what happens at the end of of cycle as we move end transition of the next one is we're not competing on price at the end of the cycle. So again, it's a balance but importantly, I think we are three quarters behind us now on I think the most important.
Point here is that we are indexing very well as we launched into the November timeframe and.
And the launch of these councils. So I think thats. The critical message today is that we we try made that transition and we are laser focused on moving forward, Yes, I think thats right I mean, I think all I'd add is that.
We knew they were at the end of that we're going to experience. Some some voids in hardware as we got to the end of the cycle without the the prior generations at in place on any kind of quantity. We had some software titles moved from Q3 to Q4 and we are we have effected during this pandemic. So I mean, very clearly at as ways breakout across the country.
We feel the impact of that as shoppers become less less comfortable particularly going to of specialty stores for a specialty purchase.
Okay, great. Thank you if I could just squeeze in one more.
On representing 18% of the next quarter.
The online business at South Delta from stores.
Yes, it's that fast at that we've actually supplied but suffice it to say it actually fluctuates and this is important because it's based on what the consumer is demanding and so if it's a ship from store or buy online pickup in store at direct to consumer element.
Or at apps absolute footfall into the box itself from attract pure Pos traffic standpoint.
Again, I think it's fluctuating that's important that's in the end what exactly what we mean by a frictionless digitally led omnichannel retailer is letting the consumer pick when they want it when they want the product that we deliver to it.
Okay, great. Thank you so much I'll pass it off at that level.
Thanks Ashley.
Thank you.
Our next question comes from Colin Sebastian with Robert W. Baird. Please proceed with your question.
Hi, good afternoon, thanks, guys.
Clearly a lot of progress being made with E commerce and with expense controls.
As it pertains to the transformation plan I Wonder if you could provide some context on how this differs from what was outlined in the in the letter to the board.
Because at face value it seems like Theres, a fair bit of overlap.
In terms of the shift to digital first end.
Shrinking the store base, that's my first question.
Yes look I'll only comment on our progress as we see at reboot to date and where we are today.
We look at the business and we feel quite good about the financial stability measures that have been taken place.
You know.
Over the period of reboot Weve.
We reduced long term debt by well over $500 million, we've returned $200 million to the shareholders through buybacks, which represent about 37% of the company.
We ended the quarter with of $300 million more cash than same quarter last year and thats been a trend I mean, thats something thats been pretty.
Pretty continuous throughout reboot process.
Just prior question, you're asking a run rate of reduction seems to be $100 million of a quarter. Yes. It does I mean, that's very much of an important part of getting where we needed to be and then the progress that we've made on working capital has been tremendous and Fortunately that began at the very beginning of reboot 15 months ago and.
What that's done to allow us to navigate through this pandemic is bit I cannot overstate. So on the economic stability of financial stability front end. Good at we made nice progress on on digital for sure from an ecommerce standpoint.
We were behind I mean, we were clearly behind in terms of digital penetration of sales. We are behind in terms of technology. We still are very candid about having worked to do what we've come a long long way of very very quickly so to be up 257% for Q3 to have penetration at that level and really spiking considerably higher than that during peak periods.
To have made investments in our ecommerce capability.
Both in terms of the platforms and human capital that's driving it the.
The capability expansion that we made lease to own options flexible payment terms of proprietary credit cards, all better alternatives for the customer on how to shop and then it just kind of looking ahead. While this generation of console launches is very very important to us and it is and the demand is unprecedented and it clearly is.
We're working to be defined not purely as a console gaming retailer, but as as disturbing the entire gaming community on all the various verticals. So we're glad to see sales up 16, an average despite being closed on Thanksgiving day and during being very comfortable on that decision to close on.
Thanksgiving day.
We have a lot of category expansion that both Jim and I mentioned during the course of our comments that are progressing well and then really good progress on the digital first omni channel store fleet optimization work. So we look back we feel pretty good about where we are and are poised for the next phase of work.
I mean, just to put a fine point on it again in the second pillar that we launched in reboot.
Last year in the August September timeframe was to build a fraction of the digital ecosystem. That's exactly what we've done that is leading with technology, leading with of digital footprint.
At Optimizes, our ecommerce evolution through.
Through the investments advances in technology.
As well as at how it balances with of right footprint of stores.
We launched that when we got here and launched our rebuild program.
So I think I think that's the point George made we did it and we've been making some some.
Some real strides against it.
Thanks, that's helpful and there were lease there's some commentary around providing gross in reference to 2021. So I just wanted to clarify if that.
Basically referencing sales volumes next year or something else.
Yes, absolutely, it's absolutely referencing sales volumes next year.
Okay, and I'd say two part response that first of all we of growth initiatives in place second of all of the console launches not of Q4 phenomenon. As you all know I mean, I think there'll be great carry forward demand into the entirety of next year and beyond.
Okay, and then lastly, do you have a target.
Targets for the cash balance expected at the end of the fiscal year.
Yes, we haven't put it out there, but I would just say consistent with the trajectory that we've been on.
Okay, Alright, thanks, guys.
Yes.
Thank you.
Our next question comes from William Reuter with Bank of America. Please proceed with your question.
[music].
I just had two quick ones.
The first is and I don't think the question was asked this way in terms of the November performance was at inline with your expectations.
Yes, certainly was in line with expectations again, we knowingly took a chunk out of that by closing on Thanksgiving I think it's fair to say that in this environment.
These sales compression that you might sometime see is not not to of prevalent. So we knew that that was going to be an investment in our people and into safety and we don't second guess that for a moment. So yes. If you make that change at it is in line with our expectations.
Okay, and then on in terms of the new shell.
I saw that you mentioned general corporate purposes.
Would you consider issuing stock to repay.
Debt under that program.
No thats absolutely not the intent the intent here is to simply optimize flexibility and Optionality period. There is a lot of unknowns going on in the marketplace with respect to this pandemic ongoing flex of cases across the world the impacts on our on businesses.
And we're not immune to that.
Right and in this in that regard. It look are we're going to continue to execute our strategies of bolstered and strengthen our balance sheet at.
And and you see all the work that we've done including if we go back to.
Even the long term debt levels in early 2019 till today is.
As of this coming Friday, we will of reduced our long term debt by over $530 million by March of 21, there will be over $600 million in that same timeframe that simple roughly 24 month timeframe plus or minus we also returned over $200 million to shareholders.
So I think look the goal is to continue to focus on running the business and optimizing way real on the business, but also be very pragmatic and make sure that we have capital flexibility with no intention to do anything other other than maintain our flexibility hopefully that helps you.
And in some of our debt is concerned we don't need it yes, absolutely we don't need at bottom line and as I mentioned rollout friday's of at first.
Voluntary redemption of $125 million of the remaining March 21 notes.
Great I'll pass to others. Thanks, So much you bet. Thank you.
Thank you.
Our next question comes from Joe Feldman with Telsey Advisory Group. Please proceed with your question.
Yes. Thanks.
Hi, guys.
With regard to the console.
How did your allocation compare to prior cycles I mean, presumably you sold every single unit that you've got.
Is there still at I assume there is still a very heavy backlog at.
What are your thoughts on allocation through the rest of the period, we know Sony's come out and said that they plan to produce more so can.
Can you share any thoughts on that.
Yes, I think the demand has been unbelievable Joe as you mentioned.
And we don't see any ended that insight so certainly.
These are fabulous pieces of technology, the demand is terrific for it.
Any allocation that we get and I think I've mentioned this on past calls the answer is we always want more.
We'll say the competitive set has changed between console launches really with the evolution of direct to consumer from the Oems themselves. So that tells you a bit about what the allocations look like versus last time around but we're playing meaningfully which was our objective and we're winning well. So I think one area in a point of differentiation for us.
And it's been part of our premise all along is we attach differently. So when you look at accessories first party software, we attach differently and Thats been recognized and we we have seen some level of of reward for that and we expect it to be a differentiating point for us going forward in terms of allocation.
Thanks, that's helpful.
And then just another question with regard to the cash balance I mean, I know that some of that's restrictive at yes, six of the $3 million, presumably you generate even more in the fourth quarter.
Let's say, we're getting through this cycle with the pandemic I understand the next couple of months are going to be rough split.
I guess.
How are you thinking about Alec cash allocation or cash usage at this point.
I know weve talked to people that are hoping you were going to buyback more stock in the coming year. So a return to that so I guess I'm curious on how we should think about that.
Going forward.
Yes. Thanks, Joe is the short answer is again nothing's off the table I mean, our job is to find the optimum balance of capital allocation, which starts with ultimately the investment in the transformation of the business for for future growth and profitability. That's the first point and we will continue to do that and if it means.
Accelerating those investments to bring that return in a more rapid fashion, we'll do that it also shows the fine balance of of of the capitalization of the business and ultimately what is the right level of debt. We think we're approaching that after we get on paying down the rest of these March 20 ones.
And you know.
Then outside of that certainly always the consideration.
To return capital to shareholders as well as we've proven like I said last year end 2019 returned over $200 million of shareholder so.
I think every one of those is on that on the table. We are always looking to find the optimal balance of capital allocation and just to kind of add the obvious the underlying environment matter certainly we don't know at a few more months means right. Now. We're obviously encouraged by of vaccine just like all of you are.
But we see more impact ahead, and we don't know the exact timelines or protocols for that nor does anybody at this point. So we look at something that we have to be guarded about into the future is.
There is no particular end day in insight yet this is something we're going to be dealing with of the indefinite future.
Understood. Thanks, and good luck with this holiday season, guys, Hey, Thanks, Joe.
Thank you.
Our next question comes from Seth Sigman with Credit Suisse. Please proceed with your question.
Hey, guys. Thanks for taking the question I wanted to follow up on the Q4 commentary and I just want to confirm the language here. So in the release you talked about positive year over year sales growth I just want to confirm are you guiding to year over year profitability growth as well.
Yes, we're not guiding to anything the comment was specific to growth and profitability in the fourth quarter.
And just to be clear again, we're not guiding to anything.
Again, it's.
I think we've been pretty straight forward on that and what would you call. When I look at Paul at our way of sales year over year is then I mean, you're saying sales year over year will grow and there is a comment about profitability I am just trying to confirm are you, saying year over year profit growth. In addition to year over year sales growth.
Yes, I would just just notation was for the fourth quarter.
Yes for the fourth quarter on asking yes, that's correct.
Okay. So year over year profit gross so then the related question is given the on favorable mix of hardware.
Would you expect gross profit to be up as well you, obviously youre going to have some mix impact here comps are going to be up but you do have the negative mix. So gross profit of or is it really coming from the cost savings.
A little bit of both gross dollar gross profit dollars.
Because look we're talking about volume rate. So you get a little bit of of from the overall top line as a flow through but then you also take advantage of of the.
Flow through to the bottom line as a result of your.
The expense structure, that's a lot more optimized than it was last year.
Okay interesting, Okay, and then just a follow up question on the market share question earlier on your growth rates did seem to trailed the industry per NPD Im just curious what would be causing that do you feel like ecommerce, even though it's clearly progressing do you feel like thats been one of the reasons for lagging or anything else that you would highlight and then at.
Of course with all the initiatives I'm curious what do you think is going to be most incremental.
Regain share as you sort of look out over the next 12 months or so.
Yeah look at I think there are periods. During the course of Q3 certainly free is during the pandemic, where we certainly are aware of the fact that we lost some share. We've had closed stores, we've had a competitive situation where some of our competitors were open for business, we weren't and you've got a very guarded shopping at.
Environment, obviously as it applies to the brick and mortar aspect of our business, where there is a reluctance theres a significant decrease in footfalls across retail in general and were not immune to that in any way shape or manner. So I think you've got a a b.
Prescribed shopping trip to Gamestop to get gaming and you've got a general of trip elsewhere for multiple purposes, I think that probably is factored in on the flipside. When there's again when there is newness in the marketplace. We excel we tend to lead end market share for those of software at leases those new game releases so that is.
Our strength, we out we actually believe that we're going to be in a position to begin to claw back market share going forward.
As we cycle of some of those closure period as we're able to get customers back end stores on leverage the full omnichannel suite that we offer now.
We've gained up certainly through our increases on E commerce, but.
There's still a significant impact on the brick and mortar aspect of the business right now on the will be for a while longer yes, I'd just add one comment on the market share piece of me if you look at the cyclicality.
Back in the 2013 2014 Gen seven Gen. A transition period. This on it at the end of the cycle, we tend to lose a little bit of Mark a couple of points market share and at the beginning of the cycle, we gain those points of market share in the region of huge reason for that and that is our expectations. We had forward, but a big reason for that is again the technical consultation of Rx.
For gaming associates that are in the stores at.
And thats important with the advancements of the technology.
Okay. Thanks, Thanks, and good luck.
Thank you. Thank you.
Thank you.
Our next question comes from Curtis Nagle with Bank of America. Please proceed with your question.
Good evening, thanks very much.
Yes, I just wanted to continue to gain on the comment about the six year half comp in November.
Just how to think about how the rest of the quarter plays out.
November was obviously of the quarter when Tom was launched I think at lease its can be on the quarter where.
Industry will see material sell through due to shortages.
End of November at likely brought a lot of traffic at the stores on the website. So thinking about December at January where.
At you and your peers are likely going to have a kind of slightly so I think you know do you think you see at reversal of traffic how do we think about constant positive what what's the set up for those because two months, where I guess you just don't have that on the traffic driver at any materiality.
Yes, I think I think Kurt first of all let's take let's take any potential effects of unknown components of the pandemic off the table because look we've seen at time and time again that at effects retail mobility. So let's just assume.
Assume no one knows the impact of that take it off the table and a very simple fact outside of that is is that again we are.
We're continuing to execute here in the fourth quarter. This is not a couple of weeks in the month of November the so to be clear that's not what this isn't and it's certainly not the fourth quarter either as George said earlier. This is a multi year evolution here on this is just the beginning yeah look at theres going to be impact on on December as.
You know I mean, youve likely heard.
About global supply chain issues on every call that you've been on and it certainly is effect is of mitigating factor, but we have newness in December we have a release coming up in two days called cyber punk 2077, which is a big driver for us.
And we certainly believe that there are other events that will drive traffic in the month of December.
On.
That will continue this thing is you know again I don't want to.
Miss not playing at.
To the fact that we have added so much customer flexibility both in our debt in delivery options and payment options. These are all resonating incredibly well at our consumers and giving US an advantage. So again. This is out of the you take advantage of of full omnichannel execution.
So that those are continuing to be part of our business as we're moving through December of beyond as well.
Okay, and then just as a quick follow up.
And any commentary on on the used business.
Out of the trend of going through Q.
And I guess how is the hardware.
Portion of that segment to Eric maybe seeing a little bit of boost on.
Near term just given.
Supply constraints across both on our next and current Gen consoles and how to solve for me as well.
Yes on the hardware side for the third quarter as it as it should be expected I mean again, you've got you've got lower supply elements as we go forward and what I mean by is our ability to intake when our stores were closed were not in taking pre on hardware right I mean at just the natural equation.
However, as we're navigating through this launch a big part of that is our engaged with our customers with pre on product and so we're positioning quite well and I think whats different though as we go forward. This time around is that the Oems are not making the prior gen product anymore and that's critical because if you want to prior to end product.
On a lot of people do there's demand in that marketplace. We are really your stock you're shocked to go get that yeah I'd emphasize that last point, we're bullish on pre on hardware for just that reason and just to again go back end time, a little bit of.
The intake issue is.
Pretty self explanatory we of pre sales and then we have a launch of ends for new next generation consoles youre not going to get my old Council until I get my new console. So there's inherent delay on that happening at and then it does and Thats, where we are right now is kind of in the fulfillment in high demand phase workings of those preorders, but.
Really in a very constricted and farm at going for but we actually think that this can be a bit of a renaissance for pre owned gaming would the absence of the older generation consoles out there and we have them and we can remanufacture of them.
Okay. Thank you.
You bet.
Thank you.
There are no further questions at this time I'd like to turn the floor back over to George Sherman for any closing remarks eliminate had you make one quick comment and then we'll close out the call. Yes, I just wanted to call. Your attention. This quarter. We added as we're making this transformation we added some slides of the on our website. So I'll call your attention to those at continuous iterative and.
Layout.
For all of you are at this our journey. So please take a reference those George yes. Thanks to everyone wishing you a safe and happy holiday. It's obviously been of a quite unusual year hope you have a great end, what I want to kind of lay out our communications cadence going forward.
We will provide you with holiday sales results in early January and then more details regarding our strategy and outlook at the IC Our conference happening virtually in January and again following our fourth quarter end year on results. Thank you all very much.
Ladies and gentlemen. This concludes today's conference you may now disconnect. Your lines at this time. Thank you for your participation and have a great. Thanks.