Q2 2019 Earnings Call
Welcome to Gamestop second quarter 2019 earnings call. This call is being recorded and will be made available I would now like to turn the call over to Eric journey.
Investor Relations.
Please thank you and welcome to Gamestop second quarter fiscal 2019 earnings conference call.
This conference call will include forward looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectation.
Any such statements should be considered in conjunction with the cautionary statements and the safe Harbor statement in the earnings release and risk factors discussed in reports filed with the FCC.
Gamestop assumes no obligation to update any of these forward looking statements or information a reconciliation and other information regarding non-GAAP financial measures discussed on the 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 Sherman and Chief Financial Officer, Jim Bell on todays call George will not only discuss some highlights from our second fiscal quarter, but also share specific details of Gamestop strategic framework for the future.
Jim will then provide more detail on our financial results and some key expectations for the remainder of the year and into 2020.
Now I would like to turn the call over to the company's Chief Executive Officer, George Sherman.
Thank you.
Good afternoon, everyone and thank you for joining us today on our second quarter earnings call.
As I mentioned on our last call I, along with my New management team have been moving quickly to assess the business and develop our strategy to reposition the organization for the future.
Following numerous meetings with stakeholders from across every aspect of our business, we've acquired valuable feedback and data to further her for more direction.
And believe we have formulated the strategic framework and specific initiatives, which you all long term growth and profit objectives.
We are committed to taking quick and deliberate action to improve the performance of the company.
Instead on the correct strategic path fully leveraging our unique position and brand in the video game industry.
I believe that during the call today, you're here that we are fully committed to that mission interacting with a sense of urgency to address the areas of the business that are critical to achieving long term success and value creation.
We recognize that there is a need to rebuild credibility with the investment community and some of our stakeholders.
We plan to accomplish this by quickly establishing a track record of delivering on our promises in executing plans for the business that will support improved financial performance and fuel future growth over the long term.
You're going to hear a similar message from Jim Bell regarding clarity of financial metrics in the appropriate level of transparency for how we'll hold ourselves accountable and meeting our objectives.
To that end today, we will outline a strategy that includes both near term and long term measurable objectives.
Which we plan to track our progress against each quarter.
Let's get into the details of that plan.
Our strategic plan is anchored on four key tenants, one optimize core business by improving efficiency and effectiveness in everything we do.
Two.
Great the social and cultural hub of gaming within each game stop store and online.
Really don't compelling digital capabilities to reach our customers wherever they want to do business and give them the full spectrum of content and access to the products, they're looking for and for transform our vendor and partner relationships unlocking additional high margin revenue streams and optimizing the lifetime value of every customer.
Let's take each of these one by one.
First we will optimize the core business by driving efficiency get affected this across everything we do.
There were several initiatives within this pillar, but broadly speaking they include overhead cost restructuring inventory management optimization, including streamlining skew counts.
And pricing and promotion optimization in a full review a rationalization of the store footprint across the globe.
As I mentioned, we're moving with a sense of urgency and have already demonstrated our commitment to doing so with our recent efforts to right size the organization across our corporate infrastructure and our us store leadership organization.
Well last couple of months, we implemented changes that required us to make tough but necessary decisions for the benefit of organization moving forward.
These changes will drive efficiencies and serve as a catalyst to rightsizing our cost structure.
That work is continuing and we are further executing other ways to optimize operational costs, including restructuring or exiting unprofitable businesses or markets.
And each and every aspect of our indirect procurement activities.
As we told you in June we were exiting the simply Mac business and continue to work towards that divestiture in the near term.
We also won but thinking dot com into the game stop dot com environment to leverage that existing platform further streamlining the organization.
As you May know in June we hired Chris Homeister as our Chief merchandising officer.
Chris has an extensive hard lines and specifically consumer electronics retail background, that's already developed and implemented several initiatives to improve the overall productivity of our stores and products.
First we are employing more effective merchandising practices, including among other things you rationalization, which will declare our stores and provide a better experience for our customers.
The first store set will just evolving strategy begins next week.
Second we believe that through a more comprehensive pricing architecture and end to end product and pricing lifecycle management, we can drive higher overall product margins.
And third we are committed to adding and growing high margin product categories, which not only work to offset market driven declines in pre owned software sales, but also add to our credibility with customers as the only retail outlet for the aggregation of all things video gaming and pop culture.
For example, we see further opportunity in expanding our double digit growth collectibles category.
Pretty more exclusive packages with our vendors.
Expanding our PC gaming offerings.
In developing our private label business by leveraging our significant scale in retail expertise.
Optimizing our store base for an increasingly digital world is essential for the future and increasing profit productivity.
We have an expansive unprofitable store base with 95% of our stores posting four wall EBITDA positive results.
However, we know we have the opportunity to do even better and expand profitability by de Densifying, our store footprint in some markets.
We're committed to both closing lossmaking locations as well as maximizing profit productivity, capturing sales and profit transfer historical overlapping trade areas.
We believe that store densification will be materially accretive to the overall business model and remembering that our average lease life is only two years. We can approach these strategic decisions with limited if any cost implications.
In total we believe these operating profit improvement initiatives will substantially exceed the previous management team's initial 100 million dollar target. It was communicated earlier in the year.
We believe the total annualized run rate of our profit improvement initiatives will be in excess of $200 million per 2020 and beyond.
Moving to the second pillar of our strategy, we are committed to creating the social and cultural hub of gaming within each gamestop store online and within the digital environment.
This is especially important as the video game industry experienced a significant change from the evolving methods in which customers are consuming video games to the more near term disruption from the current console cycle coming to an end.
We are and have been a leading expert in the industry for decades and have the ability to leverage that position to create an experience that ignites passion before during and after each transaction.
Not only are we the largest video sales generator for hardware and software partners. We're also the video game authority in countless neighborhoods around the globe.
This is what makes game stop unique.
There was no other brand better positioned to be the aggregator of video game products and content, including E Sports and digital media with a deep expertise of our associates to gamers of all demographics worldwide.
As part of this strategy, we have begun testing a series of experimental offerings within the Tulsa, Oklahoma market.
Think of this approach is alive laboratory, which will help us to find and execute the optimum mix of high margin immersive experience will gaming content with our existing array of video games and collectible products.
For example would try a try before you buy experience with up to 12 gaming base.
The sports focused competitive gaming content delivery.
Our collectibles folks his experience.
All supporting physical and digital video game and accessories transactions.
Of note. This is a very controlled and disciplined test that fits well within our capital expense budget for fiscal 2019, and any roll off in the test will not be implemented in every store in the chain. It's still early and we will share. Some of these findings with you as we progress in the coming quarters.
While we believe these tests along with our other initiatives are necessary to define and add new high growth and high margin revenue streams to our business.
We remain committed to two things.
One we are the leading Omnichannel video game retailer and will continue to be and two we do not intend to completely remodel our chain of stores, but rather we expect results of these tests will yield a highly profitable store model that will complement various key markets further enhancing our already strong customer engagement as well as evolving our product offering and position within the gaming industry.
Finally, an integral part of being the social and cultural hub of gaming is our customer engagement within our loyalty program.
We're exploring ways to expand the Powerup rewards program by enhancing the program's value to our most active shoppers.
While simultaneously driving profitability.
Most importantly, we are redesigning our powerup rewards program, where among other things we're testing various recurring revenue subscription opportunities.
Secondly, we're in the final stages of rolling out a new and improved value proposition for the paid our approach here, which an early test is yielding favorable results in enrollment and customer frequency.
Finally, we've upgraded our customer database management tool set based on the Salesforce marketing cloud platform. This integration along with some new agency partnerships will enable a more sophisticated propensity driven marketing model at the one to one level, thereby focused on growing customer lifetime value and ROI.
Our third strategic pillar is building, a complete and compelling set of digital capabilities.
Digital is not only a growing aspect of our industry. It's also a large part of who we are.
Today, we attach significantly more digital content to in store and online purchases that any other retailers and we're focused on evolving further as we build up best in class Omni channel capabilities.
Simply we have to adapt and meet our customers wherever they want to do business.
We must and will be channel agnostic.
The first component of delivering a best in class Omni channel experience is the new game stop Dot com platform that launched in August .
This new online experience delivers highly engaged in vast online merchandising.
New buyer holes and pick up in store functionality and rich community content.
With enhanced functionality like Apple pay and integrated Powerup rewards enrollments and improve shopability.
This relaunch marks an important step towards our long term goal of creating a billion dollar ecommerce business.
It also provides our customers with the omni channel capabilities that they've come to expect.
Our efforts will endure instead, we are currently working on various capabilities that we believe will add significant value for our customers.
Simply by leveraging existing assets, we have the opportunity to enrich and monetize data available to us and create digital exclusive.
We recognized an embracing digital is an opportunity for game stop and we're committed to supporting our vendor initiatives, both digitally and physically including initiatives such as developing capabilities that allow for or enable a more streamlined embedded digital purchase process.
Finally, the fourth pillar in our strategy.
We're in the early stages of transforming our vendor and partner relationships to better position us for the future video gaming.
When I first spoke to you in June I told you that I believe it was important for gamestop. The transformative all remain a viable player in our industry, which is undergoing meaningful technological change.
We are committed to doing that but recognize that this part of the strategy will take longer to develop.
The good news is twofold first we are advancing very constructive discussions with our partners and they recognize the value that we bring to them and second both Microsoft and Sony recognize the market and technology advancements will still require physical this and the next gaming console cycle.
Our 50000, plus knowledgeable associates worldwide service the only full time dedicated salesforce the video game industry and the results they drive our meaningful.
We attach significantly more games content digital media and related pop culture content.
Our partners are actively engaging with us to evolve the model from a historical transactional model.
To one that rewards us across the customer acquisition and lifetime value spectrum not simply transactions.
As an organization we are intensely focused on advancing each of our four strategic tenants and we will continue to update you on our progress against our goals in the months ahead.
Some of these opportunities will serve to benefit us sooner rather than later and some of these initiatives will take time to nurture and cultivate over the long term.
We will be disciplined with our approach to innovation by focusing on initiatives that will benefit the core video game business and leverage our current portfolio of assets, but not require significantly more capital growth.
In fact, we intend to maintain our historical annual capital expenditure levels and redirect some of those funds toward these initiatives.
We are out of the diversification business, we will test and learn before we deploy and our decision making will be driven by a disciplined approach to capital allocation, we will not under any circumstances that the farm.
As you can tell from my comments Im excited about the opportunity in front of us. It's a tremendous challenge and will require significant effort on our part, but we are well on our way.
Make no mistake this transition will take time and our sales expectations over the next several quarters will reflect the end of console cycle and the next generation of console launches by both Sony and Microsoft slated for 2020.
However, as you can see our strategic framework is focused not only on sales, but expanding our gross margin reducing costs and optimizing inventory management all of which will lead to continued growth of free cash flow of the business both in the near term and over the long term.
Before I turn the call over to Jim for our financial review of the quarter and outlook for the remainder of the year I want to take a minute to address some of the misconceptions that effort over my first few months.
It's clear to me that market sentiment regarding our core business is not fully reflective of our intrinsic value.
There are likely several things driving that many of which we are currently addressing.
What I do know is that we have tremendous assets that have driven and can continue to drive meaningful shareholder value and cash returns.
We believe those assets are being discounted by a market that is focused solely on a short term view and mistakes. The prior management such as failed diversification investment decisions.
And our view our current sales performance reflects the natural end of console cycle that will rebound the console launches later in 2020.
However, while we believe strongly in the value creation opportunity of our initiatives. This management team is committed to being a good steward of capital and being disciplined and highly strategic in terms of any potential investments as well as returning excess capital to shareholders.
We have a strong and improving balance sheet and cash flows.
The highly profitable store base.
A very resilient brand that operates from a position of strength in the industry.
In closing, we have a tremendous chance to shape the future of game stop in this evolving and dynamic industry as a leading provider of rich video gaming products content and expertise across all purchasing channels.
Our team is committed to tackling the challenges in front of us and we are confident that we are positioning the business to deliver strong results.
Particularly with the next console cycle on the horizon.
As we evolve our business model over that same timeframe.
Will be better equipped to drive increased profitability when they use recycled turns and consoles launched in 2020.
I would now like to turn the call over to Jim for a recap of the quarter and our outlook on key business metrics. Thank you.
Thank you George and good afternoon, everyone, it's great to be with you here today.
I'd like George was drawn to game stop by the enormous potential of this business.
Gamestops strong brand positioning and engagement with a large passionate customer base as the leading authority in all things video games, along with the opportunity to be part of a leadership team driving innovation and transformation make this an exciting and pivotal time to be a game stop.
My initial observations are very much aligned with Georges and the other members of our senior leadership team. We have quickly joined forces to take definitive actions on things that needed to be done such as exiting unprofitable businesses rightsizing, our cost structure applying deep retail expertise to elevate the overall efficacy of our operations and setting the stage for developing new revenue streams for the future of the business.
Particularly as the video game industry continues to evolve.
However, as short shared we are not done and have a lot of work in front of us.
But we are acting with a sense of urgency, making tough, but necessary decisions and moving forward with a disciplined approach to deploying the strategies, which we believe will position game stop to maximize shareholder value.
We are committed to providing you as much transparency as possible and updating you as we progress through the transformation of the business.
Which is specifically intended to restore credibility amongst the investment community.
Now I would like to shift to a recap of the second quarter results.
From a topline perspective, total sales declined $215.4 million or 14.3% as compared to the second quarter of 2018.
The sales decline was comprised of an 11.6% comparable store sales decline 130 basis points related to a 195 store closures since the second quarter last year, and 140 basis points of negative foreign exchange impact.
While not up to our expectations. These results are generally in line with declines across the video game industry and indicative of sales volumes at this point in the console cycle.
As such the primary driver of the sales decline was new hardware sales, which was down 41% year over year.
However, as you know we are focused on growing other product lines that are important to our gamer community. Our collectibles business is a great example, it continues to positively expand posting a 21% year over year increase in the second quarter exceeding our expectations.
And marking the 15th consecutive quarter of growth with 14 out of the 15 in double digits.
Software sales declined 5.3% with declines across most categories slightly offset by growth in Nintendo switch software and the release of the current year title in the Madden NFL franchise for the end of the quarter.
In line with the current stage of the console cycle. Our pre owned video game business was down 17.5% with consistent declines across both hardware and software.
It is worth noting that within pre owned hardware, we continue to see strong demand for the Nintendo switch, but a solid sales increase on this platform was more than offset by declines in the other consoles as we await next generation launches later in 2020.
Overall gross margins declined by 30 basis points to 31.0%, primarily driven by markdown activity related to the wind down of our think IEC dot com business.
Excluding the effects of this transition overall margins for the quarter would have been 31.4%, reflecting a 10 basis point expansion.
As reported SDMA for the second quarter was $459 million compared to $442 million a year ago. The increase was driven by $37 million in one time transformation severance and other charges associated with our game stop reboot profit improvement initiatives.
After adjusting for these onetime charges SDMA expenses declined by $19.2 million or 4.3%, reflecting just the beginning of the impact of our organizational changes as we implemented them late in or subsequent to the quarter.
During the quarter, we incurred a noncash nonoperating goodwill impairment charge of $364 million related to a decline in the company's share price.
We reported an operating loss from continuing operations of $447 million, which included the goodwill impairment and the other $37 million in one time charges previously noted.
Excluding these items, we reported an adjusted operating loss of $46 million compared to operating earnings of $1.5 million last year.
Our effective tax rate for the quarter was 8.8% due to the partial deductibility of the impairment charge.
Excluding the effect of the impairment and other charges our effective tax rate was 39.4%.
Which was impacted by certain discrete items recorded in the quarter and the mix of earnings across the jurisdictions in which we operate.
Second quarter adjusted loss per diluted share, excluding the impact of asset impairment charges and other items.
Was 32 cents compared to 10 cents in the prior year period.
We ended the quarter with $707 million of total cash and liquidity comprised of $424 million in cash and $283 million in net availability under our revolving line of credit.
Which is an increase of $20 million from the prior year.
We ended the quarter with long term debt of $419.1 million versus $819.2 million at the end of the second quarter of 2018.
And as we continue to execute against our objective to significantly improve inventory management, we ended the quarter with inventory of $949 million, a 16% decline from the second quarter last year.
Significantly improving inventory management and in particular, increasing our inventory turns is a major initiative and we believe provides an opportunity to materially improve the already strong cash flow of our business.
From a capital allocation perspective during the quarter, we had $23 million of capital expenditures, bringing the year to date total to $41 million.
We are projecting our full year capital expenditures to be between 90 and $95 million, reflecting a reduction to our historical capex levels.
Additionally, we repurchased $62.4 million or 12 million shares through our modified Dutch auction. We also reduced outstanding debt by $51 million, bringing the year to date total reduction in debt to $404 million.
We remain committed to returning excess capital to shareholders when appropriate and have approximately $237 million remaining under the existing share repurchase authorization.
We will be balanced in our approach as we consider additional share repurchases debt reductions and responsibly investing in the business.
For the second quarter behind Us and results that admittedly, we're below what we would want particularly on the topline I want to share with you. How we are approaching the remainder of fiscal 2019.
As you know the video game business is cyclical in generally driven by the launch of consoles as well as some seasonality given this directly strong title launches that for the most part occurred in the second half of the year and the holiday season.
We are approaching the end of the current console cycle with Knights generation console slated to be available in late 2020, and as such we expect our year over year sales to be down over the next three or four quarters, reflecting the end of that cycle.
Compounding this negative impact on sales is the fact that console makers have confirmed the launch earlier than they have in the past.
We anticipate that this will lead to much lighter title slate through the rest of 2019 in early 2020, given the end of the cycle timing for the current consoles.
As a result at this time, we expect the percentage decline of comparable same store sales for 2019 to be in the low teens.
Which includes a difficult comparable sales challenge from last year as we are up against blockbuster titles like Red Dead Redemption 2000, eighteens number one volume title without a comparable launch in 2019.
While we expect the current topline trend to continue through the first half of 2020, we remain focused on the strategic initiatives George outlined which we believe will position us for long term profit and cash flow expansion.
As a result, our results over the coming few quarters will not be sales driven but we believe will reflect the strengthening of our core business with expanding margins disciplined expense management.
In capital expenditures, and finally strong and growing free cash flow.
In that light, we expect the overall annualized run rate of our profit improvement initiatives to be over $200 million in 2021, as we execute on them throughout the rest of 2019 and through 2020.
An important evolution for any retailers the optimization of its store portfolio, we are no different.
After years of growth, both organic and inorganic we maintain a very profitable store base with over 95% of our more than 5700 worldwide stores posting four wall positive EBITDA.
Well that is an impressive statistic, we have a clear opportunity to improve our overall profitability by Densifying. Our chain that work is well underway. We are on track to close between 180 and 200 underperforming stores globally by the end of this fiscal year.
And while these closures were more opportunistic.
We are applying a more definitive analytic approach, including profit levels and sales transferability that we expect will yield a much larger tranche of closures over the coming 12 to 24 months.
We believe these actions will significantly add to our profit improvement run rate with little to no cash expense as our average lease life is approximately two years.
In addition to optimizing our store portfolio, we're continuing to evaluate strategic and operational alternatives for certain unprofitable operating subsidiaries or business units.
Primarily within our international segments.
We will provide more information on that work in the future.
Historically, there is a fair amount of seasonality in our business and our working capital throughout any fiscal year.
In that light after adjusting for the timing of certain invoice payments related to holiday 2018 inventory that were paid after the end of the fiscal year last year, we expect our adjusted free cash flow for fiscal 2019 to be in the $225 million to $250 million range.
Finally, given my earlier comments related to our sales outlook for both the industry and our business. We expect adjusted diluted earnings per share for fiscal 2019 to be in that $1.15 to $1.30 range.
In closing I will reiterate that we fully expect sales across the industry and in our business to be relatively soft for the coming few quarters. However, we are not willing to relinquish our market share leadership in the space.
Which is driven by our unique positioning we are not a transactional retailer, but in fact, the only aggregator of the best in exclusive new and pre owned video game products compelling digital content, including access to E Sports media and the leading industry publication in game Informer.
And the largest group of foremost gaming experts our store associates.
All of which serve one of the largest and most engaged customer databases in retail today.
We look forward to keeping you updated as we progress against our strategic initiatives over the coming few quarters.
And with that I will turn it over to the operator to open the line to any questions that you may have.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
And again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We will now take our first question from Steph Wissink of Jefferies. Please go ahead.
In everyone.
I want to focus on two areas. If we can George My first question is for you is on initiative number four transforming your vendor partnership I'm wondering if you can talk a little bit about.
Some of the incremental or additional high margin revenue streams that you see in that in that specific an agenda item you can just give us a sneak peek at some of those things that you might be looking at and then my second question is you spotlighted collectible as one of the areas of outperformance and I think you mentioned 14 or 15 quarters of double digit.
Comp growth.
Can you talk a little bit more about how that range of products have evolved how the thinkgeek business has evolved how you're thinking about collectibles as a core driver under some of the new initiatives that you described at the beginning of the call. Thank you.
Yeah. Thanks stuff I think starting off with your question on the transforming vendor partner relationships as they covers a very broad spectrum I think first and foremost.
We never really have truly negotiated as a global company and Thats certainly part of our focus going forward.
We're looking at the full spectrum of opportunities with our partners I think that includes new revenue streams and I think that includes things like digital excuse exclusives that physical exclusives, just as we've done in the past.
When we talk about high margin categories, we are referring to other categories as well like private label, we find on a global basis that they use private label penetration is lower than our other operating businesses and that there is an opportunity there to go ahead and drive more of that.
And we certainly look at categories that we think that we've been missing for a while like PC gaming.
Kind of transitioning into collectibles, clearly that's a high margin category for us as well it's been successful I think theres been a level of trial and error along the way with collectibles, because it was new to us.
I'd say that our view as to where success lies in collectibles has become much more focused and.
We are able to kind of hone in those areas. So.
It's one that we intend to grow its one that we see continued double digit growth ahead. It's one that we see as a means of attracting new customers and the gaming, which is very very important for our vendor partners is bringing new folks into gaming for the first time as very often collectibles customers are not necessarily core gamers.
Thank you.
Thank you good luck tomorrow would your trading day for the Bahamas by the way thanks.
Thank you.
Our next question comes from Joe Feldman of Telsey Advisory Group. Please go ahead.
Yes, Hi, guys wanted to understand that you made a comment about digital subscription model for games can you give a little more color on that and my kind of what you're thinking on that front.
Hi, Joe I don't recall the comment on digital subscriptions is clearly something that some of our partners are getting into and.
As we collaborate with them it's important to them, it's important to Washington, We certainly see the sale of digital subscriptions as part of our future on their behalf.
But no more specifics than that right now.
Got it all right, sorry, I misheard I thought I heard subscription associated with digital so.
I apologize on that.
You know with regard to the collectibles growth that you guys have had over the past few years, which has been great.
But.
How much of it is an increasing penetration of collectibles, whether in the store just adding more skews versus.
You know.
Driving incremental demand in that category.
Yes, it's actually more about incremental demand I mean in fact, we're thinking about as we go forward George talked about SKU rationalization. This is an area that we have an opportunity to be more efficient and effective with the inventory within collectible. So if we think about the skew base across that it's more about rationalizing the number of skews and OLED letting those that are highly productive continue to be highly productive and penetrate from a demand perspective.
Got it okay. Thanks, and then if I could just sneak maybe one more in.
You talked about.
Being more formulaic about it.
The approach to store closures in the future you can you share a little more thought on like do you guys have a number in mind or do you have a rough estimate of what you think you might need to close or is it still a little early for that.
Yes, I think we're we're rapidly developing a point of view on that and we haven't disclosed that and I know, we will share more with you in the future, but suffice it to say, we're taking a very specific approach that looks at if you think about this business over multiple years.
The inorganic or acquisition growth of this business created opportunities in certain markets, where we have quite a dense footprint and where we have over stores within an overlapping trade areas or that are overlapping within the trade area that densification gives us the opportunity for transferability, regardless of whether or not we have lossmaking. One of those two stores for example might be loss, making and so that's really how we're approaching it that's the analytic that we're applying that's why we think about it not as a binary function of loss, making versus non loss, making stores, but more importantly in total as we rationalize the chain how can it fully be accretive to per bottom line performance.
Yeah that makes a lot of sense, thanks for sharing that and I'll see you. Thank you.
Thanks, a lot Joe.
If you find your question has been answered you may remove yourself from the queue by pressing Star Kids.
Once again, if you would like to ask a question. Please signal by pressing star one. Our next question comes to US from Ben Schachter of Macquarie Macquarie. Please go ahead.
You guys can we talk about at a high level the shift to digital and how it impacts your business. So a few questions on that one.
When you think about the next cycle what percentage of total gain do you think are going to be sold physically versus digital.
And your share might look like in that too how do you expect to participate in digital and how will that evolve for you guys versus what it is today and then three around the U.S business.
What does that look like as we move more to digital and then somewhat separately you talk about the social cultural hub I think it's an interesting.
Thought there and can you talk about how E sports might play into that and how you might use the store footprint due to participate there. Thanks.
Okay.
Yes. Thanks, then I'll, let me start off with the question around the next cycle in the is the mix between physical and digital games. Our assumption is that they will launch in both formats with the new cycle just as they do now and our assumption is that we will have a piece of both businesses. Obviously, we have a very very significant share when it comes to physical games physical games are still a significant portion of the overall gaming industry today and as we've noted in our in the script, we attach at a significantly higher level on digital gaming than most of the competitive set we want to make it easier we want to make.
More so.
I think it's fair to say that.
Historically, we've probably had a preference for physical games versus digital games, and we make we've been clear to say, both internally and with our and externally that we're going to be have not agnostic and it has to be the customer choice as to which made that we sell so we will focus on making the digital sales process easier more streamlined more embedded.
And we'll we'll push to make sure that.
We have that.
Approach, if you think of a try before you buy type scenario as one of the test that we talked about in Tulsa is that customers choice as to which made it they want to buy gain physical or digital.
Okay.
Oh, yeah as for pre owned we think pre owned is following very similar trends as new physical games are right now while the categories down there is no debate about that it is following the same pattern as we see on the new gaming side of the business, meaning specifically that our sales around.
The switch are our best performers within the pre owned games and that the other two versions are feeling more of the sales pitch right. Now we would expect that to continue by the way in the new gaming cycle.
I think when you think of the new console. So the couple of things that are pretty significant ones backward compatibility. The other is the fact that both new devices will have a disk drive on them. So certainly I think when that becomes widely understood that we'll see a bit of a another bite at the Apple in terms of pre owned gaming.
As that will be certainly alive and well for years to come.
Any thoughts on on what and how thats going to impact the social and cultural initiatives.
Okay.
Yes, yes, yes, esports is something that Weve got involved with we have a partnership with complexity gaming.
In fact, we have the naming rights for their training center here in Dallas, We also have a partnership with team and so we move closer and closer we think that it will be a valuable first of all content. So the ability to to get content from from these facilities from these teams that we can share with our best customers that we can share with their in store gamers and I mean, certainly I think we look down the road and if there are significant gaming activity in stores those are streaming capability as well so we certainly see.
An opportunity to partner and have the.
Our version of the little league's going on in stores or the minor things going on in stores that could over time lead to.
You know a connection with those professional sports businesses.
Our.
Our next question comes to us from re social of consumer Edge Research. Please go ahead.
Great. Thanks for taking my question you guys had mentioned that you looked at a bunch of data with your stake holders do you guys have a broad sense of some capesize one I'd be looking for would be a lifetime value, but other keep you guys would be helpful. As well of your customers versus the lifetime value or other K.P. eyes of customers acquired from Walmart target, Amazon or best buy, especially for Sony and Microsoft and then my follow up question to that would be you know more more on store count has there been a change in the economics of reverse cannibalization or recapture now with E Commerce and as your new ecommerce site position more effectively to recapture consumers whether that be the new can the the consumer purchasing new or the consumer purchasing pre owned thanks.
Yeah. Thanks, Ray I think on the first question as it applies to a the data that we entered in our understanding of our customer base, we've done more and more sharing of that with our vendor partners and it's been a mutual so I think certainly that is one of our competitive advantages is that it's a pretty well known fact, among our partner community that we over index with customers, we have a higher digital attach rate customers, who buy physical games was by more games overall customers, who buy from us by more accessories. Overall, so in virtually every category the business, whether it be digital physical games or accessories, you see a higher attachment rate at a gamestop store no question about it. So that is certainly something that we're proud of and certainly data that we share and again as it applies to lifetime value. We have more of a cross exchange going on with our vendor partners that we probably have in the past.
So yes, I'm on the website I think a couple of things jump in mind first and foremost.
Among the new capabilities as buy online pickup in store. This is very very common in retail, obviously and I see it was a bit of a disadvantage for US you could hold on line by in store, but not buy online pickup in store, we think that will be a significant growth category for us going forward. We also have what we think is pretty unique was the ship to home capability out of every store in our fleet. So when you talk about supply. It's not just two distribution centers virtually every store in our company can serve as one as well and get product quickly to a to a customer shop abilities better ease of navigation. It was a bit cumbersome to buy for instance, soft lines and our prior site.
He was clunky when it came to blame by size. That's now been fixed in this community aspect of it as well that we think is is pretty different.
Great. Thanks again.
Thanks.
Again, if he would like to ask a question. Please signal by pressing star one. Our next question comes from Seth Sigman of Kids <unk>. Please go ahead.
Hi, this is our leverage him nani onto a said thanks for taking my questions. So firstly to start off with the pre owned business. So I think last quarter you spoke of some changes in business stream that you were looking at testing some models to enhance the value proposition I mean could you give us. Some reason it's off the 10 nano frame the magnitude of the margin. When you said that you may see like into and beyond.
Yeah, we've had a couple of tests that we're not quite ready to speak to results on it is applies to both pre owned as well as to our loyalty customer base and the new Powerup offers so there early on.
We're seeing some initial good success I will say that the biggest change that we have made thats now done as it applies to pre owned gaming is to unify the gaming business under a single merchant. So in the past has been fragmented across a pre owned merchant a new game merchants and now we own the business.
Across the spectrum, including pricing optimization. So that's been the biggest change that's done there is a couple of things that are I'd say just too early for us to comment on.
Got it.
So just a follow up on the cost initiatives. So it could be cutting the profit improvement plans that you guys highlighted how do we think about the timeline venture to start showing up I mean, obviously it was supposed to see some sort of benefit in the back half wallet was the handle full Q and then ramping up to the next part of your.
Yes.
Our our initiative our profit initiative is you can think of it almost effectively is a 50 50 split between cost reduction and areas like margin improvement, obviously, the cost reductions going to happen faster and as Jim mentioned in his comments most of what we did here recently happened at the late portion for subsequent to the end of Q2. So it's all very new but it is now in effect.
We think of that call it $100 million of cost reduction opportunity as being roughly 40% complete now and that's a combination of structural changes that we made as well as some indirect procurement initiatives that have taken hold so that gives us a level of confidence again to come to commit to a $200 million number is because we've made very very good progress on.
I'm going to keep track to get there.
Got it and just see if I can just squeeze one more in really quickly your sort of cutting some of the initiatives within the store you guys spoke about internationalizing the collectibles saltman within the store I mean apart from that are there any other store resets that you're working on or that you can elaborate on.
Yeah, I I I'd say generally speaking, we mentioned that we're a week away from a reset in the store and that's not the end product, it's a step in the right direction.
It's what the team did a remarkable job on with about six weeks to get things done so you're going to see some SKU reduction you're going to see I'd say better pairing.
By ecosystem, meaning when you look at the assortment within the Sony Nintendo and Microsoft World that are more logical there's more accessories pull them together there is a bit more private label. There is a bit more attached areas that are part of it and it's a bit cleaner on the collectible side of the business as well and as I mentioned to step on her comment we've become much more focused in terms of where we know collectibles works. There are categories. We have a more remarkable relationship with funko when we've been enormously successful with the Pops business is a big part of our collectibles for us. So I think you're going to see a step in the right direction, but it's not in any in respect to finished product it's.
It's the best effort in a very short period of time.
Got it thank you so much.
That's all the time, we have for questions. At this time I will turn the conference back to George Sherman for any additional or closing remarks. Please go ahead.
Yeah. Thank you and thanks, everyone for joining us today on our call. We appreciate your interest in Gamestop is always a I had to say coming off of our pre holiday store leadership conference in Nashville, just a couple of weeks ago I want to give a shout out to our store teams and particularly our store managers and really the entire team overall I mean as a wildly enthusiastic group, it's obvious that they are ready to execute on new direction.
They are passionate about moving us forward as quickly as possible and we have a great team that is ready to win I want to thank them for their hard work ahead of the important holiday season. Thank you all.
This concludes today's call. Thank you for your participation you may now disconnect.