Q4 2020 GameStop Corp Earnings Call
Greetings and welcome to the Gamestop fourth quarter and fiscal 2020 earnings call. At this time, all participants are in a listen only mode and if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded and it.
And now my pleasure to introduce your host Eric Cerny Investor Relations. Thank you Mr. Cerny you may begin.
Yeah.
Thank you and welcome to Gamestop fourth quarter and 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 and the safe Harbor statement and the earnings release and risk factors discussed in reports filed with the SEC.
Gamestop assumes no obligation to update any of these forward looking statements or information a reconciliation and other information regarding non-GAAP financial measures.
And as discussed on the call can.
Can be found and the earnings release issued earlier today as well as the investors section of our website.
Joining me today is gamestop as Chief Executive Officer, George Sherman on today's call George will share insights into our business and strategic framework for the future.
Led by our review of the financial results.
And strategic direction as we head into fiscal 2021.
Please note that we will not be conducting a Q&A session as part of today's call.
Now I would like to turn the call over to the company's Chief Executive Officer, George Sherman.
Good afternoon, everyone and thank you for joining us today.
Before reviewing our results I'd like to take this opportunity to personally thank our entire gamestop team for all that it has accomplished over the past year.
Throughout the year, we worked incredibly hard to meet our customers' needs whenever however, and wherever and wherever they chose to shop, Mr. Pandemic impacted backdrop I'm so grateful for our.
Dedication to our customers and our brand.
Fiscal 2020 was an unprecedented time on.
Our full year results reflect our organizations adapt and this and focused on navigating the various operating challenges presented by the pandemic.
I am, particularly proud of how our team members met the.
<unk> of our customers by greeting them during curbside pickups packing orders that ship from stores, assisting with online orders and offering advice to customers and store.
During this time, our top priority was safeguarding the health and wellbeing of our associates customers and communities.
As you recall we closed.
Closed the majority of our global fleet during the height of the pandemic, resulting in a significant reduction on operating days compared to 2019.
When stores were allowed to reopen we operated under limited hours and at reduced capacity in many locations and.
And in several of our operating countries returned to full store closure protocols later in the year.
And during this time, we've worked diligently to plan for safety openings and and introduce more members of Gamestop slower customer base to our e-commerce capabilities.
In terms of operational initiatives, we accomplished the following and fiscal 2020.
We delivered a 191% increase and global e-commerce sales to represent.
At present, approximately 29% of total net sales.
Up from a low single digit percentage, historically and reflecting investments during the year that enhanced our e-commerce capabilities.
This growth allowed us to recapture a substantial majority of our sales from temporary government mandated store closings and leveraged our improved fulfillment.
Abilities, including the initial rollout of same day delivery and several flexible payment options, which helped to facilitate sales and improve the shopping and delivery experience.
Sliver over $400 million over a $400 million reduction and a reported year over year SG&A expenses as a result of ongoing cost optimization efforts.
This combined with and SGA reduction of 130.002 million 19, adjusted for severance and transformation costs has resulted in a total SG&A decline over $530 million over the last two years.
We continue to transform our physical store presence through ongoing market optimization and global.
Densification efforts.
This resulted in closing a net 693 stores and reduced store operating costs for the year, while transferring some of the sales online and to neighboring locations.
We enhanced our financial position and flexibility with a stronger balance sheet, reflecting signet.
Significant improvements and inventory management and related working capital.
And healthy overall cash and liquidity position.
A material reduction and overall debt and the completion of an exchange offer for our March 2021 notes.
Overall, we're pleased with the work we accomplished to achieve our objectives and stabilize and strengthen our business ops.
Operations.
That work will continue, particularly as we explore options for our European businesses, which may include further store closings exiting unprofitable businesses or investing and ecommerce capabilities.
As we go forward, we are focused on transforming into a customer obsessed technology company that delights gamers.
We are working to create a differentiated customer experience that positions us to access new customers.
Further engage with existing ones and reactivate former ones.
We are maintaining an intense focus on initiatives that drive customer lifetime value.
Steps were taken and execute on this mission include.
One.
One investing in technology capabilities, including by in sourcing talent revamping systems and evaluating next generation assets.
We continue to build out our team expertise in this area, noting our recent addition of a chief Technology Officer, and Chief operating officer to the senior leadership team.
Two building superior customers.
Customer experience, including establishing a U S based customer care operation.
We are focused on providing exceptional customer service levels across all channels, regardless of where when or how our customers shop with us.
We are accomplishing this with technology driven approach along.
Emerging our streamlined retail footprint to provide an unparalleled service proposition with a focus on surprising and delighting our customers.
To this and we have recently added a senior vice president level head of customer care and other new additions with e-commerce background to the senior leadership team.
Three expanding our product offerings.
We are continuing the work to expand our addressable market by growing Gamestop product catalog. This includes growing our product offerings across PC gaming computers monitors game tables mobile gaming and gaming Tvs to name only a few.
These categories represent natural extensions that our customers would expect to buy from us expanding our addressable market size by over five times and over time will reduce our reliance on the cyclicality of the console base gaming market.
For modernizing U S fulfillment operations to improve speed of delivery.
Delivery and service.
We are improving our distribution network to coincide with the continued optimization of our store footprint.
This will enable us to provide customers convenient flexible and competitive delivery options across the entire product spectrum.
With our recent additions to the senior leadership team we are quickly evaluating additional.
Distribution options to improve delivery speed.
This group is also working to further optimize our warehouse management and order management technologies and other capabilities that will improve the experience for our customers.
We expect to accelerate these and other elements of our transformation and while continuing to focus on allowing the company.
And to build upon its progress and capitalize on the emerging console cycle.
The progress we've made over the past two years position Gamestop for long term growth and to deliver value for shareholders.
Now turning to financial results.
I am very pleased with how we navigated a challenging environment and all that we achieved.
And the fourth quarter and fiscal 2020.
Specific to our fourth quarter results sales were $2 1 billion and comp sales increased six 5% supported by mid teens positive comparable sales and fiscal January.
Global E Commerce sales increased 175%.
And represented 34% of total sales and the fourth quarter versus 12% of net sales and the prior year period.
These results were reflective of the increased console demand as we transitioned from generation eight to generation nine console gaming products from Microsoft and Sony.
Our six 5%.
And comp growth Mark are returned to positive quarterly comp sales growth, which we achieved despite further COVID-19 mandated closures around the world, particularly in Europe.
The most challenging industry wide shipping crisis realized during the holiday period.
And severe supply limitations of new products.
Notably console demand.
And more robust and we can meet with supply from console makers and as a result, we continue to see sell through rates for a console events and a matter of minutes.
And the fourth quarter, we estimate that additional pandemic related store closures mandated by local governments led to a reduction of approximately 27% European store operating.
Days versus the prior year fourth quarter.
Regionally, Australia was our strongest performing region, given minimal disruption to stores and delivered a nearly 30% comp increase.
Building on that momentum 2021 is off to a great start.
Led by positive 23% comparable.
Remains on February as we continued to benefit from the launch of new consoles and the accessories and games that come with that product.
Further total consolidated sales for February were up five 3% versus last year, despite having permanently closed about 12% of stores globally through densification efforts and losing.
<unk> sales, 36% of store operating days and our international business units, primarily in Europe due to pandemic related temporary closures and the month.
From a product margin standpoint overall gross margins were 21, 1% down 610 basis points from our more software led 27, 2% gross.
<unk> and the fiscal fourth quarter last year.
Decline was driven by an expected increase in mix of lower margin hardware sales.
A continued increase and industry wide freight cost.
Credit card processing fees, driven by a higher penetration of e-commerce sales and a broader promotional stance.
Now turning to our expenses and expense management objectives.
On a reported SG&A expenses were $419 1 million, reflecting a decline of approximately $92 6 million or 18, 1% versus the reported SG&A and the fourth quarter last year and representing approximately 30.
340 basis point improvement on a percentage of sales basis.
The decrease was driven by a combination of tight expense controls, particularly lower store costs and corporate G&A expense and to a lesser extent sales leverage.
On an adjusted basis, SG&A declined $68 4 million or <unk> 14.
And 1% year over year.
We reported operating income of $18 8 million on a reported basis compared to operating income of $75 2 million and the prior year fourth quarter.
Adjusted operating income was $28 9 million compared to $109 2 million.
Prior year period.
Income tax and the fourth quarter was a benefit of $69 7 million.
Driven by a change and the tax status of certain foreign entities based on a certain check the box elections that we made.
Along with the impact of the cares act, which allowed for a five year carryback period.
And the certain current year tax losses.
This tax benefit compares to an income tax expense of $43 $8 million and the prior year fourth quarter.
On a reported basis net income was $85 million or $1 19 per diluted share on 67 8 million shares.
For search and net income of $21 million or earnings per diluted share of 32, and the prior year fourth quarter.
Adjusted net income was $90 7 million or.
And $1 34 per diluted share compared to adjusted net income of $83 8 million or $1 27 per diluted share.
<unk> thousand 19.
The fourth quarter.
And the fourth quarter, we continued to focus on day, densify and streamlining our global store fleet.
We closed on net total of 232 stores in the quarter for a total of 693 closures in fiscal 2020.
At year end, we operated four.
And the seven and 816 global stores.
Now turning to our full year results.
Total consolidated sales were $5 1 billion a decline of 21, 3% over the prior year sales.
The sales decline was attributed to our comp store sales decline of nine 5%.
Approx.
4100 permanent global store closures.
Disruption from the pandemic around the world, including temporary store closures.
Vendor supply shortages and the new generation nine hardware and a lack of new product at the end of the generate generation eight cycle.
E Commerce sales increased 191% for the fiscal.
Fiscal year to represent nearly 30% of total net sales.
Gross margin for the fiscal year decreased 480 basis points to 24, 7% from 29, 5% and 2019.
SG&A expenses for the fiscal year, or one $5 billion, reflecting decline.
And a $408 5 million or 21, 2% versus reported SG&A and fiscal 2019.
On an adjusted basis, SG&A declined $348 9 million or 18, 9% year over year.
Importantly, these expenses include approximately 25 million.
And Covid related safety protocol costs.
As we've said before we continue to expect more than two thirds of these reductions to be permanent as they relate to permanent closures of stores and related labor costs associated with our day Densification strategy.
We reported net operating loss of 237.
$7 $8 million compared to an operating loss of $399 $6 million.
And the prior year.
Adjusted operating loss was $238 million compared to operating income of $62 3 million and the prior year.
Income tax for the year was a benefit of 55.
And $3 million driven by the changes in tax status of certain foreign entities and the impact of certain carryback provisions of the cares Act previously mentioned.
This tax benefit compares to an income tax expense of $37 6 million and the prior year.
Our effective tax rate for the year was 18, 9%.
Importantly, we believe these tax elections will yield between 125 and $115 million and cash tax benefit.
To be received early next fiscal year.
On a reported basis, our net loss was $215.3 million or a loss of $3 30.
<unk> and <unk>.
<unk> per diluted share compared to a net loss of $470 9 million or a loss per diluted share of $5.38 and the prior year.
Our adjusted net loss was $138 8 million or a loss of $2.14 per diluted share compared to adjusted net income of $19.
$31 million or 22 cents per diluted share and fiscal 2019.
Turning to the balance sheet at the end of the fiscal year, we had cash and restricted cash of $635 million $121 5 million higher than the end of last year, reflecting our continued efforts to operate optimize.
One can capital and overall capitalization of our balance sheet.
We ended the year with total inventory of $602 5 million, a 30% reduction from prior year inventory levels of $859 7 million.
As a result of our ongoing inventory management efforts, our inventory efficiency continued to improve.
Mike worried at the fourth quarter as we realized a trailing 12 month inventory return of five nine times versus four four times at the end of 2019.
At the end of 2020, our balance sheet and liquidity position were significantly improved versus 2019, despite the impact of the pandemic.
This.
Prove result of actions, we took to strengthen our financial health and 2020, including completion of an exchange offer and consent solicitation for $216 $4 million of our unsecured notes, reducing the amount due to mature in 2021.
Execution of five sale leaseback transactions related to.
Office buildings, and a sale of a corporate travel asset contributing approximately $95 million towards total liquidity.
And the reduction of overall debt for the year by $57 million, including the early redemption of $125 million of our remaining March 2021 notes.
Additionally, as of March.
Was routines and 2021 we fully redeemed the remaining $73 $2 million of 2021 notes and repay the outstanding balance of $25 million on our ABL.
Capital expenditures for the year were $60 million at the low end of our previously provided guidance of 60 to 65 million.
And fiscal 2020 cash flow from operating activities was an inflow of $123 $7 million and increase of $538 2 million compared to an outflow of $414 5 million during the same period last year.
The increase was primarily due to improvements in working capital.
Mark spilt of optimizing inventory and accounts payable levels through maximizing the cash conversion cycle and more efficient carrying levels of inventory.
In terms of our outlook, we are optimistic about our transformation and the emerging console cycle, we recognized business risks remain elevated due to the pandemic and post pandemic uncertainty.
As well, we are not providing specific annual sales and earnings guidance.
In summary.
2020 was an unprecedented year, but we're very proud of all that we accomplished to advance our strategic priorities and enhance our financial health.
We finished 2020, a stronger company and are well positioned to capitalize on.
And he was ahead of us and 2021 as we move to the next phase of our transformation.
Gamestop is the only retailer scale exclusively focused on the gaming industry and adjacent categories.
We have a unique opportunity to become the ultimate destination for gamers.
I want to take a moment to address several changes.
On the operating to our leadership team.
As you know we announced in February that Jim Vella stepping down from the CEO CFO role with the company later this week I want to thank him for his significant contributions to our company during the stabilization and optimization phases of our transformation.
Particularly his leadership and managing several hundred million dollars and expense reductions.
<unk> $350 million and working capital generation.
We also analysis with that Frank Hamlin, our chief customer Officer is leaving the company and I'm very appreciative of his leadership and efforts over the last couple of years of our transformation.
Specifically he is spearheading the concept development and execution of our Tulsa project.
Of interactive gaming stores.
Finally, we are very excited to welcome Jennifer <unk> as our new Chief operating Officer, We believe Genesis extensive career and technology led organizations such as Amazon and Google are another important addition to our leadership team and our future transformation initiatives.
And thank you again for your support and interest and Gamestop and we remain very excited about the momentum we have the many positive changes we are making and the talent. We are attracting the gamestop all of which we believe will deliver long term value creation for our stakeholders.
This concludes today's conference.
You may disconnect your lines at this time. Thank you for your participation and have a wonderful evening.
Yeah.