Earnings Call: Q4 2010

Mar 24, 2011

Morning. Welcome to GameStop Corporation's 4th Quarter and Fiscal Year Ending 20 10 Earnings Call. Today's call is being recorded. I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop's public documents and is the property of GameStop. It is not for rebroadcast or use by any other party or have the prior written consent of GameStop. At this time, I'd like to turn the call over to Dan DiMatteo, Executive Chairman of GameStop Corporation. Please go ahead, sir. Thank you and good morning and thank you for attending today's call. With me today are Paul Raines, our CEO Tony Bartel, President Rob Lloyd, EVP and CFO and Mike Mahler, our EVP International. This morning, we announced the final financial results for 20.10 and our forecast for 20 11. 2010 was a record year at GameStop for both sales and earnings and a record 4th quarter. We are pleased that our new initiatives have produced results by growing market share and delivering a new revenue stream of continue to return value to shareholders through stock repurchases and debt retirement. Rob will discuss the financial results in more detail. 2011, we expect more of the same, continue our investment in our strategic initiatives in order to grow market share and develop digital earnings. We believe that the GameStop brand is uniquely positioned to deliver games to our customers matter where or how they play on their console through box product and DLC, on their PC through digital downloads or browser gameplay via Kongregate or through an app store delivering games to their mobile devices. And no matter how they play, they will be earning points and getting benefits from being enrolled in our PowerUp Rewards program. Again, the details of how this all works will be further discussed at our investor conference. With that, I'll turn it over to Paul for his comments. Thanks, Dan. As I begin my remarks, I would like to thank all of our GameStop associates worldwide who continue to serve our customers with the very best customer service, value and the strategic plan we developed over 2 years ago to fulfill our vision of being the premier multi channel player in video gaming. In In strategic initiatives ahead of holiday and we are pleased to see the leverage those initiatives are giving us in the marketplace. The growth of our online websites, digital sales in store and our PowerUp Rewards program are combining with our traditional strengths in merchandising and operations to create a shopping experience for consumers unlike any other in video gaming. Investing in our strategy paid off in the 4th quarter and we believe we'll continue to do so in 2011. In terms of console gaming, we continue to gain share GameStop introduced console digital DLC for the first time this holiday, thousands of consumers bought both physical games and DLC in our stores. The launch of Microsoft's Kinect and Sony's move provided new options for gameplay and consumers made the Kinect the must have gift at holiday. Our pre owned business grew to a record volume in 2010 and Rob Lloyd will give you details on that growth. And greater loyalty and other marketing for the pre owned business. We are focused on a strategy to grow the used business aggressively and we'll be sharing the details of that strategy at our upcoming Investor Day in April. In our international businesses, we saw improvement in Europe's performance versus prior year with continued challenges in Australia and Canada. In 2011, we expect single digit growth in revenues and operating earnings in each international segment. Our strategy is to opportunistically grow in our mature and high potential markets. However, in struggling markets, we are focused on restructuring and closing poorly performing stores with a focus on driving down costs and increasing return on invested capital. We continue to see growth in our pre owned sales and margins 2010, we expanded our e commerce business by adding sites in Germany, Ireland and Spain. Leveraging the investments in technology made in United States over the last 18 months, I am pleased to announce we have just launched the in store sale of console DLC for our customers in France. This is the first step in offering DLC to all of our customers globally as we move forward with our multi channel strategy in each market. As some publishers have acknowledged, the NPD data that many investors use as a proxy for the video game category measures less of our complete business every day. Our console digital offerings, our PC digital businesses, our pre owned business, casual game portals and our international segments are not measured by NPD data. Rob Lloyd will be sharing some of our new segmentation with you in his remarks today. And at our investor conference, you will get insight into the market model we have developed for both console and non console gaming, both physical and digital going forward. A few words on the status of our very successful loyalty implementation. We rolled out PowerUp Rewards nationally during October after a 4 market test and the results have been well ahead of our expectations. We now have well over 8,000,000 members across the United States in just a few months and their collective game libraries hosted at poweruprewards.com include over 90,000,000 games. Members shop us with 3 times the frequency of non members and the average member has bought from us 3.9 times since joining the program. We are using the PowerUp Rewards program as the core of all new title launch marketing, pre owned awareness and promotion and even in the real estate area to facilitate store consolidation. The program allows us to communicate personally with millions of gaming consumers and their feedback has been extremely positive. In terms of new stores, we continue to make progress in understanding where our customers shop based on the power up data file. We have announced that we will not add any incremental square footage in the United States during 2011 as well as opportunistic growth internationally. As a product of our merger with Electronics Boutique and lease expiration opportunities, we can consolidate customer traffic from multiple stores into 1 based on our customer database. We GameStop location. You will see at our Investor Day how we were able to leverage the customer data asset from PowerUp Rewards to consolidate store multi channel strategy and Tony Bartel will give you details of those initiatives in his remarks. We are seeing that hybrid transactions, including both the has traditionally done for physical console gaming, we are now introducing many consumers to a digital gaming SKU for the first time, both for consoles and PC gaming. As we look towards 20 11, we are forecasting solid growth, calculated investments in strategic initiatives for the future and continuing a responsible share and debt repurchase program. We look forward to seeing you at our Investor Conference on April 1 in South Lake, Texas. And I will now turn the call over to Rob Lloyd. Thank you, Paula. Good morning, everyone. I'd like to start today with a brief discussion about our capital allocation plan. During the Q4, we repurchased 5,400,000 shares for a total of $112,000,000 under the share buyback authorization from September 2010. We had approximately $138,000,000 remaining on that authorization when we replaced it with the new $500,000,000 authorization for stock and debt buybacks, which we announced on February 4. Since February 4, we've purchased 5,900,000 shares at an average of 19 $0.88 for a total of $118,000,000 In the last 15 months, we purchased 29,100,000 shares or 17.7 percent of our starting outstanding shares for a total of $579,000,000 and we repurchased $200,000,000 in debt. We intend to 10 year end results, which set records in many areas. Then I'll provide our initial outlook for the Q1 and fiscal 2011. Total sales increased 4.8% over the Q4 of 2009 to $3,690,000,000 on the strength of Connect and new titles like Call of Duty: Black Ops and Assassin's Creed Brotherhood. Comparable store sales for the quarter were 2.6% with U. S. Comps plus 3.7% and international comps slightly positive at 0.4%. Our Q1 of positive international comps since the Q4 of 2,008. We've also had 4 straight quarters of positive comps in the U. S. GameStop increased its 4th quarter new software market share in the U. S. By 200 basis points over Q4 2,009. This is evidence that the PowerUp awards program and e commerce enhancements improved our competitive position during the holiday season. Pre owned product sales increased 3 point 7% to a record $805,000,000 including 5% growth in the U. S. These results reflected strength post holiday as consumers returned with gift cards to buy pre owned. Pre owned margins were 44.2% due to increased promotional activity in the U. S. During the holiday season. Tight expense controls coupled with leverage from the positive comp resulted in a decrease in SG and A as a percent of sales from 13 point 7 last year to 13.1 percent in the Q4 of 2010. Net earnings increased 10.1 percent to 230 $7,800,000 and diluted earnings per share for the quarter were $1.56 an increase of 20.9% over the prior year quarter and in line with reiterated guidance communicated on January 6. Looking at select financials for full year 2010, total sales increased 4.4 percent to a record $9,470,000,000 while comparable store sales increased 1.1%, including positive 3.8 percent in the U. S. Net earnings were also a record $408,000,000 up 8.1% over 2 1009 and diluted earnings per share increased 17.8 percent to $2.65 including debt retirement costs of $0.02 per share. New software sales increased 6.4% year over year as we continued to gain market share, including share gains of 400 basis points in the U. S. Pre owned sales increased 3.2% as consumers clearly opted for new products as evidenced by the sales of Connect, new software during the year and the 9.9% increase in the other category, which includes accessories and PC software. While we missed our forecast for pre owned growth in 2010, it should be noted that pre owned sales and gross profit hit a record high. New hardware sales decreased 2.1% during 2010 declining less than our initial expectations due to strong sales of Microsoft Connect and Xbox 360. One very bright spot during 2010 was the 61% increase in the purchase of our digital product offerings by consumers web properties. We categorize digital sales in 2 buckets, console digital and PC digital. Console digital includes believe our digital sales put us among the top producers of digital revenue in the North American game market. We will provide further commentary on the financial impact of digital on our future next week at our Investor Day. Gross margins were flat with 2,009, pre owned margins were 46.2% in the range of our guidance for the year. SG and A as a percent of sales remained flat with 2,009 at 18% as we invested heavily in strategic initiatives including Power Up, digital and e commerce, but we achieved cost savings in other key areas. The effective tax rate for the year declined from 36.2% in 2009 to 34.5% in 2010 due to the accounting for uncertain tax positions and the expiration of audit statutes. We ended 2010 with over $700,000,000 in cash. Total company inventory levels increased 15% on a per store basis year over year. This change is due to efforts to improve in stock positions in the U. S. Primarily on hardware and hot titles. In addition, inventory to support Connect and Move has added to our inventory levels. As you may recall, hardware was in incredibly short supply in early 2010 and our inventory levels back then were abnormally low. That is less of a factor this year and we are adequately stocked, not over stocked as we move through the Q1. Inventory turnover was comparable at 5.19 in 2,009 and 5.14 in 20 in 20 10. Our AP leverage declined from 91% to 82% due to earlier and larger purchases of hardware. 2010 CapEx totaled 198,000,000 dollars primarily used for technology initiatives including the rollout of PowerUp Loyalty, in store DLC and e commerce upgrades. We also opened 3 59 stores and closed 139 stores. With fewer openings and more closings than planned, our net store growth was 27% less than our initial plans. We ended the year with 107 additional stores in the U. S. And 100 and international. Now for the 2011 financial outlook. We are confident in our ability to deliver a year of revenue and EPS growth. Full year 2011 revenues are projected to grow between 6% 8% with comparable store sales ranging from +3.5 percent to 5.5%. This expect consumer purchases of our digital product offerings to increase in 2011 by a growth rate similar to 2010. We will speak more about our strategic investments on our Investor Day on April 1. Earnings per share for the full year are projected to range from $2.82 to $2.92 representing an EPS growth rate of 6% to 11% based on 20 10 EPS of 2.67 debt retirement costs. Gross margin dollars are expected to increase 5% to 7% with a slight decline in gross margin rate due to the upfront costs associated with the continued growth of PowerUp Rewards. PowerUp drives sales and gross profit dollars, but the cost of signing new members impacts margin rate in the short run. Operating margins are expected to decline by 40 basis points to 60 basis points due to the gross margin impact from loyalty and increased SG and A expenses to support our strategic initiatives. As we mentioned in the release, we expect to invest an additional $26,000,000 or approximately $0.12 per share in these initiatives. Given the success we had in 2010 as a result of our past investments, we believe these continued investments will pay off in the future. For 2011, GameStop's capital expenditure budget is $170,000,000 a 14% decrease from 20 $70,000,000 related to new store openings and remodels, all $100,000,000 will be used for technology systems and support, digital initiatives, global distribution and loyalty program support. Capital expenditures for stores are planned to decline 20% from 2010. We expect to generate approximately $600,000,000 in cash flow from operations, resulting in approximately 430 $1,000,000 in free cash flow. For the Q1 of fiscal 2011, we expect comparable store sales to range from plus 4% to plus 6%, diluted earnings per share expected to range from $0.53 to $0.55 a 10% to 14% increase compared to 0 point 48 dollars in the prior year quarter. Now, I'll turn it over to Tony for his comments. Thanks, Rob. I'm pleased to update you on our digital and e commerce performance quarter. On gamestop.com, we had a productive 4th quarter as we made significant upgrades to our e commerce platform and maintained our status as the fastest growing e commerce video game site, not only for the Q4, but for the full year as well. Our e commerce business grew 120% in the 4th quarter and more than doubled for the full year. Enhancements to our product pages, checkout and our pickup at store process continue to drive significant e commerce growth. On the digital front, we continue to expand our digital offerings with all of our digital efforts contributing to our 61% digital growth that was mentioned earlier. Downloadable content continues to be a strong growth vehicle as our associates and our website help consumers discover this rich content. Our attach Our attach rate of digital offerings as a percent of total transactions grew by 59% in the 4th quarter. During launch of the First Strike Map Pack for Black Ops on the 360 platform, we attached downloadable content to 28% of the games that we sold during the 1st week of the launch. And customers are using all forms of currency to access the digital content, with trade credits representing 23% of the currency used to fund the Black Ops First Strike Xbox Live map pack. The sale of digital goods is also an increase in our sale of physical goods as over half of the people who purchase downloadable content also purchased a physical good in the same transaction. We continue to expand our downloadable content offerings with both Microsoft and Sony. And we have now integrated our systems to the point where we will then begin to accept orders that will be digitally fulfilled to our PowerUp award members at the time of launch. We're also adding 3rd party content to our PlayStation 3 game offerings. So we will now begin pre selling and selling the most popular Xbox Live and Sony PlayStation downloadable content in our stores and on our website. We continue to see this multibillion dollar segment as a strong growth opportunity as well as a PC Digital Distribution. We again doubled our business in this segment and we believe that there is much more growth potential ahead. We have hired a new Head of PC Digital Downloads, Steve Nicks, who joins us from ZeniMax id Software. Steve has rich experience in the development and management of digitally distributed games and platforms and we are committed to providing him with the team and technology that he needs to grow our market share in the increased 55% and revenue grew 47%. We have increased the number of games that monetize through virtual currency threefold and have nearly doubled our virtual currency revenue versus last year. We also integrated PowerUp strategy is working as traffic generated from GameStop properties is monetizing at a rate that is 12 times higher than the average monetization have already seen hundreds of thousands of people download this app. With that, I'll turn it over to the moderator for questions. Thank you. Ladies and gentlemen, the question and answer And we will move to Tony Weibel with Janney. Please go ahead. Hi. Two questions for you this morning. The first is, I guess, Amazon had some comments out about the 3DS preorder activity breaking records. I was wondering if you guys could comment on that for yourself? And then secondly, on the used margin, can you give some color on how we should expect you guys to manage that margin going forward? Is it is the goal to manage the margin in order to kind of drive the revenues? Okay. First, I'll ask Tony to comment on the 3DS. By the way, I think that comment was from the UK, if I remember correctly. Rightly, there was. It was the UK, so it wasn't U. S, but go ahead, Tony. We're seeing very strong demand for the 3DS. We've been working very closely with Nintendo to maintain our reservations, keep them open. And Nintendo has been very good with providing us with additional supply of 3DS so that we can keep our reservations open. But demand has been so strong that literally we are working every day with Nintendo to ensure that we have sufficient product. We and they have been very good partners on this and we fully expect to have sufficient product to launch, but demand is very strong. Okay. And then the used margin, Rob, do you want to take that? Sure. The quarter started slower for used than we hoped. And in December, we executed additional promotions that we thought would provide greater value proposition for our customers during the holidays, perhaps a little bit more than we needed to. We expect used margin rate to return to normal in Q4 2011 and we'll elaborate more on our strategies around used next week. Yes, Rob. This is Paul, Tony. If I can jump in on this one, used is an important lever of the business and you'll hear more at Investor Day, but really we're focused on the cash flow from the complete business. We take a portfolio approach to what we're doing. When you look at our digital growth, our new and record market share in new software, dollars 5.80,000,000 of stock and debt buyback, PowerUp Rewards, we feel that our portfolio approach is working we think it will continue to work. So I just want to make sure we reframe that when we talk about one segment versus looking at the overall. One more point I would make to add to Tony's comment is if you haven't played with the 3DS, come down to a GameStop on Sunday if you can, take a look at this device. I think you'll agree it's very compelling, game changing kind of gameplay. So please come and see us on the 3DS, it's pretty hot. I would just add pre order one before you go. Yes, pre order one if you want get one, right? One last quick follow-up, if I may. Is Congregate seems to be one of those assets that just isn't really fully understood by all. And can you talk about the platform that you're on now with I think the Android devices and your ability We'll provide a lot more detail on that at the Investor Conference. We'll provide a lot more detail on that at the Investor Conference. But right now, our device works on any our application works on any device that is Android enabled. And so, we are expanding that to other platforms as well. But any device that is Android enabled will run the remember, you can download the Congurate app from Google Market and it downloads real well and it plays extremely well on any Android phone. I believe that Sony tablet or Sony phone would probably be an Android phone. I don't know, but I mean, it's not going to be iOS. Not going to be iOS. So we'll see what that platform is. But it is we will expand that to other platforms during this year and we'll talk about that more at our Investor Day. Great. Look forward to hearing about it. Thanks. Thanks, Colin. We'll take the next question from Colin Sebastian with Lazard Capital. I guess first off guys, you got into accelerating growth in revenues in the current year. Maybe you can talk about sort of the industry from a packaged goods perspective, how much that may or may not be part of the growth? Or if we're really starting to see now just an increase in velocity and acceleration due to the digital initiatives and power up really starting to move the needle on the top line? Thanks. Okay. Tony, you want to talk about the packaged goods assumption? Sure. In the packaged goods industry, we expect to see flat to 3% in new video game software in the U. S. So that's our estimate going in. Obviously, what we believe is going to happen is there's going to be tremendous acceleration in the digital business. We see that growing over vehicle next year. So, the category, the digital category, we see growing 20%. Obviously, as Rob said, we believe that we are going to significantly outpace that and grow with growth rates similar to what we saw in 2010. So just to be clear, the 20% was the industry and we expect growth similar to what we had this year. You may want to give some color on recent DLC. Yes. And just to give an example where that growth is going to come from for us in the next year. If you just look at DLC alone, we are going to we are on pace to sell more DLC in the first quarter this year than we sold all of last year. As you recall, some of these programs were not launched in their entirety until later in the year. So, that rollover impact is going to have a massive growth effect on our digital rate next year. DLC guys is a very interesting phenomenon that's happening. GameStop is introducing what I call, we're introducing mom and dad to DLC. So lots of consumers who've never even understood what DLC is are getting introduced to it. They like it and they're buying more and more DLC at GameStop stores. Okay. Thanks for the color on that. I don't want to let the cat out of the bag for your Analyst Day, but the $290,000,000 in digital revenues growing 61%, I don't believe that includes just your over your regular e commerce business, but applying some normalized growth rates to that, I mean, this should be at least a $500,000,000 business for you guys in a couple of years. Is that kind of a fair assumption? Yes, Tony? Yes, actually it does not include the sale of physical games off of our e commerce site. So that is a totally separate fast growing stream of revenue that we have. But yes, we do believe that the digital business is going to grow at similar rates. So you can put that into your model for next year and obviously see a very strong growth rate and very strong business there. And I think at Investor Day, you'll see what we expect a 4 year actually 4 year growth rate on digital. We'll share that model, the market model I referenced in my remarks. Okay, great. And then just lastly and I'll jump off the if you could talk about some of the key software titles you expect for the coming year and be how some of the recent releases have been performing that would be helpful? Thanks very much. Sure. As we talked about earlier and we've seen significant market share growth. We saw significant market share in the Q4. We continue to see strong market share gains on recent launches. Pokemon Black and White were extremely strong for us. Dragon Age 2 and Homefront were strong as well. We increased market share and had strong sales. We're obviously very excited about Nintendo 3DS, Super Street Fighter IV, The Sims and Nintendogs are all going to be very strong titles there. Mortal Kombat, we're seeing very strong reservations for SOCOM 4, Portal 2 and then L. Noire, we're also seeing very strong reservations. That kind of gives you a good update on what we see in the second quarter. Thank you. You're welcome. The next question in line will be from David Magee with SunTrust Robinson Humphrey. Yes. Hi. Good morning, guys. Good morning. Good morning, David. Congratulations on a good year. Thank you. Just a couple of questions on the PowerUp program. I'm curious as you're looking ahead, what sort of assumptions you're making as far as growth in that 8,000,000 member number for 2011? Sure. David, I think Rob would not allow me to make any kind of earnings assumptions on PowerUp. I'm not sure we're ready for that, but let me give you some color and maybe help you think about it. We remember, we made a choice in the 3rd quarter to accelerate PowerUp and that was based on what we saw in our pilot markets. We're pleased that we're well over 8,000,000 members. We added 1,000,000 members in December alone. So our pace of growth on PowerUp is very, very strong. I really don't want to make any forecasts around where it's going to grow. You'll see a lot of detail on that next Friday at Investor Day. As far as where it's headed, there are many interesting pieces that we are just trying to understand. One of those is that PowerUp members trade and buy used at a much higher penetration and resource for new real resource in the real estate area. It's becoming a resource for new launches. It's driving digital content. As Tony mentioned, we're using the PowerUp technology to send consumers their digital codes for DLC. So that asset continues to grow. And as I said earlier, our game library, for example, which is that personalized library that you have as a member, has over 90,000,000 games in it now. And that's an enormous rich marketing asset that we can use to launch games and so forth. So, Adia will probably leave the rest of the details for next Friday and we'll stay away from any kind of earnings impact on PowerUp. Is there a way to sort of estimate what percent of that 8,000,000 members remain active or say active in the last 3 months? Or is it too early to make that kind of a metric? Well, we have lots of data around that, probably none that I would want to share right now. I did say in my remarks, the average member has shopped us 3.9 times since joining the program. And as you know, the program is not that old. So there is a tremendous frequency effect, which is what we were going for when we launched the program. And one of the things we're finding is that the program is much more than just a so called loyalty program. It's becoming very much a personal very interactive process with consumers. So the rate of growth is strong. Very interactive process with consumers. So the rate of growth is strong, the frequency is strong and getting stronger and we're finding that our heavy consumers are increasing share of wallet. Great. Thank you, Paul. And moving along, we will go to Mike Hickey with Janco Partners. Hey, guys. Congratulations on your quarter and your year. Thank you. Just Rob, real quick, just a couple of housekeeping. Housekeeping, your foreign exchange impact for the quarter and then your non comparable store sales, if you have that? I don't have the non comparable store sales in front of me. The store sales in front of me. The foreign exchange impact for the quarter was approximately $30,000,000 downward on sales and about $2,500,000 downward on operating earnings. Okay. And then another question on the 3DS. It seem I don't know if you guys are doing any midnight store openings, if that is just a if that is just a function of supply at the moment. And then I'm curious if you can kind of reflect on how the 3DS is taking shape versus other DS releases. And then I'm also curious if you have any insight into whether the 3DS buyers are new DS consumers or if you just see kind of an upgrade cycle from current DS installed base? 2 things we're actually doing on the 3DS to help the launch and 14 100 of our stores will actually be having on Saturday, we'll actually be having demo days like Paul articulated coming in and seeing this device is really the greatest way to experience it and so it really is a unique experience. So, we will have midnight launches for the 3DS in many of our stores that will be based on the volume of reservation. So, not all of our stores will be doing midnight releases, but we will be doing a significant number of midnight releases for the 3DS. In terms of the type of customer that's coming in, obviously, one of the things that we do really well is execute our buy, sell, trade model and at a $2.50 price point, it is a very attractive offer where you could come in and bring in your DS Lite to your DSI or DSI XL and trade it in for $50 or $75 or $100 So we are seeing a lot of activity on the trade side of that. So that would indicate that there's a lot of people who are current DS users. However, we're also seeing it is such a unique device that we are seeing a fair number of people that seem to be new to the DS category coming in as well. It really is a very unique experience. If you have not had a chance to have hands on experience, you can try it on Saturday or definitely get there on Sunday. Yes, I'll try it. It's awesome and the kids love it for sure. It's a really unique experience. And the last question on the Connect platform, obviously, Microsoft has done a phenomenal job of really growing that platform's installed base. I'm just curious what you're seeing in the market today in terms of software sales attach rate and if you think that this thing is just kind of connect more to the holiday and what you're hearing from publishers in terms of getting games out to support the installed base? It continues to have very strong demand. Fortunately, Microsoft is meeting that demand. So we have strong demand, good supply, both in stock and we continue to see strong sell of the unit. Attach rate is where we anticipated that it would be and we just we obviously just got back from a meeting with all the publishers that we do about this time every year and we talk with them and most publishers are developing games for the Kinect platforms. We were happy to see that there is strong support for the Connect platform. Okay. Thanks, guys. Good luck. Mike, the non comparable sales were about $100,000,000 in the 4th quarter. Thanks, Mike. And moving along, we will go to Brian Nagel with Oppenheimer. Hi, good morning. Good morning, Brian. Congratulations on a nice quarter. Thanks, Brian. I wanted to ask just dig a little deeper on and I think one of the prior questions asked, Tiv, about the used margin on I'm sorry, the margin on used games. And we saw the deceleration from earlier in the year to Q4. You mentioned was that simply a different promotional cadence that you assumed through the end of the year or is there something else to cause that sequential shift, so to say, in that trend? Yes, there was as we said, there was increased promotion at holiday. We put that into the mix of activity that we did at holiday and we're a little more aggressive this holiday probably than we had been. And then the question is as far as the was that there's been a lot of noise out there about other entrants, so to say, into the used game. Our store checks suggest we haven't seen much of that yet, but are you starting to see something as you look at your data, are you starting to see some impact of potentially more competitive environment there in used? We have lots of data on that and we have seen absolutely no impact from competitors. And the way we look at that is we look at stores adjacent to competitors, we look at volumes of those stores, etcetera, and we've seen no impact from those competitors in the used business. Brian, as we spoke about back in January, what we're seeing is that when there is strong new product, the consumers are going for that new product. Yes. And just one if I could, just one larger bigger picture question as well or thought, I guess. So there's been some chatter lately about broadband providers charging more for broadband access. And I know this is one of the concerns that weighs upon your stock as you did direct download of video games. What's your again, this chat has been kicking up. Any new thoughts from you guys as far as that threat to your business? Tony, do I take that? Sure. I think it's very consistent with what we've been saying for the last 18 months that the download of full size games is a very difficult proposition given the broadband limitations that exist in the United States and frankly exist globally. And so, it's not a surprise to us given the fact that there's so much volume on the Internet infrastructure today. So, that's the reason why we decided to move so strongly into the DLC business because it's not that is not taxing to today's infrastructure. It's a very simple download. We still we continue to work with Microsoft and Sony to reduce the amount of friction that's involved in getting that delivered to the system. But we believe that DLC offers a great alternative because it's not a huge download. It accessible on the current infrastructure. And so like we've been saying for the last 18 months, if we were going to go to full digital downloaded games, there is the infrastructure not supported. I think this is just indicative of that fact. Brian, we're going to let you buy some DLC next week at a GameStop. And I think you'll see what that experience Tony is talking about. The other thing is the AT and T announcement, they put dollar numbers around what was already a challenged business model. So now I think you can model what the impact would be to trying to buy a full game. The economics just get tougher and tougher on that. Okay, great. Thank you. Next question in line will be from Bill Armstrong with C. L. King and Associates. Good morning. The 100,000,000 dollars of CapEx and $26,000,000 you're expensing on digital initiatives. I was wondering if you could maybe just give us a little more detail on what specific items those are going to be spent on? Sure. I'll turn it over to Rob here. Rob, do you want to answer that? Well, first of all, the CAD 100,000,000 is not entirely on digital. It's on digital, it's on a lot of systems and infrastructure work, on technology development, etcetera, awards enhancements, etcetera. So the CAD 100,000,000 is not purely on digital, it's on 4 or 5 major initiatives. Got it. CAD 26,000,000 in incremental expense. Rob, do you want to take that? Yes. I guess, first, just a complete thought on the CapEx. There's part of what we anticipate is the CapEx that will be required as we continue to make digital acquisitions. And then I will point out that last year we had the planned distribution expansion in our Australian location and we spent approximately half of what we intended to do last year as that project is going a little slower and we'll finish that up in 2011. So, a portion of the spend is to complete that facility. I think what Dan kind of covered where the 26 $1,000,000 goes and that's into the initiatives that we've been talking about PowerUp Awards, e commerce, digital that will continue to grow and expand next year. As you can imagine, Bill, there is a portfolio of things that we're trying to look at with Tony's Digital Ventures team and then you look at our CapEx reductions that we're making on the legacy traditional side and that frees up some capital. So there's a portfolio approach there of where we're trying to invest and make sure they're as productive as the last year's initiatives. So when we're modeling the out years, should we assume that this $26,000,000 is sort of a recurring expense then? In other words, that we should see something like that each year? I don't know that I have a number to you on that for the out years, but that's one thing that I will point out as you consider your model is that the investments we make on the CapEx side will have a depreciation run out in the future. Right. But the $26,000,000 part, I assume, which would mostly be in SG and A, we should not consider that just to be some nonrecurring one time type of item? Well, again, it's hard for me to sit here today and tell you what that spend might be in 2012 or 2013. I'm sure there is a component of it that is more one time in nature and there's going to be things that become recurring. I can't give you on the amounts However, at the end of the day those spends are going to be driving revenue, okay. And so, where you may have a little bit of upfront loading here in 2011, but you're going to see them driving revenue into the future. Revenue and earnings. And earnings, right. Got it. Okay. On another topic, you're going to have some opportunistic expansion internationally. International markets have underperformed the U. S. So you're pretty much stopping net square footage growth in the U. S, but it looks like you expand a little bit more internationally. I wonder if you could give us your thought process on that? Hey, Mike, you want to take that? Sure. I could add to that. With the rolling out of continued rolling out of best practices and investments in technology, as mentioned, we're starting to gain some momentum. So in Q4, international comped up 0.4% and we expect this year for international to have single digit growth in revenue and sales. From a growth perspective, our growth strategy going forward really will vary by market segment. So in mature markets, we'll have opportunistic store growth and in high potential markets such as Italy and Germany, we will continue to see investments there as well as some controlled store growth with increasing profitability. However, there are some struggling markets where there will be some restructuring as well as closing of underperforming stores with a real focus on driving down costs and increasing ROIC. Got it. Okay. And then finally, on capital allocation, the share buybacks clearly are accretive to earnings. Has the Board seriously considered starting to pay out a dividend on a quarterly basis because even if you took a fraction of this $500,000,000 that you seem be targeting annually and use it as a dividend, the yield on your shares right now at $21 obviously would be very high and I think could be very accretive to for shareholders. What is the Board's thoughts on that? Our capital allocation debt reduction and does not include a dividend at this time. And debt reduction and does not include a dividend at this time. Okay, fair enough. Thank you. We have time for 2 more questions. Callers please limit yourself to one question each. The next question will be from Arvind Bhatia Western HD. Please go ahead. Thank you. Most of my questions have been answered. But one question I did have is on the hardware side. I'm wondering what your assumptions are for 2011? Specifically, are you assuming any kind of price cuts in your numbers, especially as it relates to the same store sales guidance that you have for the year? And on the just wanted to also understand from a real estate strategy perspective, should we look at 2011 as sort of the way to think about going forward? In other words, net square footage 0 or should we be expecting more store closings in 2012 than openings? Any kind of color there would be helpful as well. Okay. First, I'll ask Rob to give you the color on the hardware. Yes. I might defer to Tony on specifically what he sees for Connect and Move. But overall in hardware, because of the 3DS launch and what we think that is going to bring, we do expect growth there. We also expect growth. And we have not made an assumption of price cuts though. We have no visibility into that. Right. Yes, we have no pre knowledge of price cuts on any of the platforms and we do expect Connect to continue to grow very aggressively. We have struggled to stay in stock on the Sony Move controllers. There is a tremendous amount of demand for that and provided that we're able to get into stock and we don't have any unforeseen shortages in Japan, we should see strong growth there as well. On the real estate side, Arvind, I think the net zero number you see for 2011, you could probably expect that that will be a starting point for us going forward. But what's interesting, I think, that you need to understand is that historically, traditionally, the way to expand customer demand was to penetrate geographies that customers weren't in. What's happening now with PowerUp Rewards is we now have a knowledge and an asset of the customer spend independent of store. We actually know at an individual level where you shop and if you shop a mall, you shop a strip, on weekends you go one place and weekdays you go another. So we can use that data to look at our portfolio. As you know, GameStop is a series of acquisitions and mergers. So for example, with EB, we have a lot of stores where you'll have an EB and a GameStop very close to each other. So using the PowerUp program, we're able to identify where those consumers shop and be very smart about consolidation and we can even provide incentives to consumers to migrate from one store to another. So we're heavily engaged with that and that's where you see the 200 closures come in. At the same time, we renew 20% of the portfolio every year, as you know. We have great opportunities every year to eliminate leases or move stores, but we also have real good visibility now to tertiary markets where I may be driving 30 miles to go to GameStop or there may be a GameStop 15 to 20 to 30 miles away. So we can penetrate those markets. GameStop 15 to 20 to 30 miles away. So we can penetrate those markets, particularly if there is a large big box competitor who doesn't have competition. So all of that rolls up into a scenario that's becoming more and more efficient. And you see the impact that has on capital allocation Rob's remarks. And I think you'll see a very good view of that next week at our Investor Day. We'll share with you some of our new technology that we're using to integrate PowerUp Rewards with the real estate selection process. Paul, along those lines, I'm curious what happens when you close the store? Is there some way to think about what percentage of the customers transfer immediately or maybe over the course of 6 months or something like that? Because it sounds like you're able to track them pretty well. Net net, are you obviously, the store that remains open benefits from the sales that get transferred and better margins and what have you, better same store sales. Can you provide some color along those lines for us today? Arvind, what's your the consolidation is a very profitable scenario for us when we do it right, but I'd rather really hold that until our Investor Day. We're going to show you some math and some case studies there that are going to give you a view as to how that works, but it's a very positive impact for us when we do it well. That sounds great. Thank you, guys. Good luck. And our final question for today will be from Marc Andre Saissiere Nadeau with Goldman Sachs. Please go ahead. Hi, guys. Congratulations on the good quarter and the good guidance. Wanted to ask you just a quick question. I think most of my questions have been answered. But I was wondering, in the Q1, could you just give a little bit more color in terms of where we're tracking for the different segments and how do you see the progression or what's the progression that's embedded in your full year guidance for some of those segments? That would be very helpful. And the other piece would be how flexible the incremental expenses are if ever you need to cut back on those eventually? Thank you. Hey, Rob. Yes, I'm not going to get into too much detail on how the quarter is progressing segment by segment. I will tell you that as Mike indicated, we are expecting single digit revenue growth and operating earnings growth in each of the segments for the year. In terms of the flexibility of the incremental expenses, I'd have to at exactly what's what under those covers. I don't have that data in front of me. But I will point out that one of the reasons we were successful in the Q4 is that not just with respect to expenses on initiatives, but within the overall business when we saw that the used business in particular was not getting off to the kind of start that we wanted to in the 4th quarter. We exercised some extensive cost control measures and as a result we're able to gain some leverage in SG and A that helped us in the quarter and I would expect that as we move through 2011 should the need arise to execute similar types of programs, we'll be able to do that as well. Got it. Actually on those cost control measures, could you just discuss a little bit what kind of measures you're you're implementing? I don't want to get into a lot of details on that. Okay, fair enough. Thank you. Thank you for attending today's conference call and we look forward to continue earnings growth in 2011 and we will continue to execute on our strategic initiatives, which will help us grow market share and provide us with a strong digital growth. Thank you very much. Yes, ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.