Earnings Call: Q1 2021

Jun 9, 2021

Greetings, and welcome to the GameStop First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Cerney, Investor Relations. Thank you, Mr. Cerney. You may begin. Thank you, and welcome to GameStop's Q1 fiscal 2021 earnings conference call. This call will include forward looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Any such statements should be 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 Investors section of our website. Joining me today is GameStop's Chief Executive Officer, George Sherman. On today's call, George will discuss our business and strategic initiatives, followed by a review of the financial results. Please note that we will not be doing a Q and A session at the end of this call. Now I would like to turn I'll turn the call over to the company's Chief Executive Officer, George Sherman. Good afternoon, and thank you for joining our Q1 fiscal 2021 earnings call. GameStop is off to a strong start to the year from both the sales and operations perspective. 1st quarter sales grew 25% year over year and We ended the period with $771,000,000 in total cash on the balance sheet, an increase of more than $185,000,000 compared to last year. Throughout the Q1, we also took a number of steps that align with our previously stated priorities. These steps include Adding retail and technology talent to our senior leadership team by appointing a Chief Operating Officer, Chief Growth Officer and Chief Technology Officer. We also made a number of other senior hires across brand, merchandising, e commerce, supply chain and fulfillment. Each of these new additions have proven backgrounds and experience from companies such as Amazon, Google and Chewy. 2nd, we further strengthened the company's balance sheet by raising more than $550,000,000 in net proceeds from our April ATM program. We also eliminated our long term debt with a voluntary early redemption of our 2023 senior notes. 3rd, we expanded our fulfillment network by adding a 700,000 square foot facility in York, Pennsylvania. This new distribution center, which is expected to be operational by the Q4 of this year, will enhance our order fulfillment capabilities on the East Coast. Lastly, we continue to expand our product offering by adding natural extensions such as PC gaming, computers, monitors, Game tables and gaming TVs, just to name a few. We intend to continue taking steps to evolve the business and build a world technology infrastructure, while simultaneously capitalizing on the emerging console cycle. Today, we also announced a new ATM offering through a prospectus Filing to offer up to 5,000,000 shares of our common stock. The company intends to use any net proceeds for general corporate purposes as well as for investing in growth initiatives and further strengthening the balance sheet. Before I review the financial results for the quarter, I'd like to comment on this afternoon's press release announcing the hiring of a CEO and a permanent CFO. Matt Furlong, our incoming CEO, has an impressive background from Amazon, where he most recently led Australia and oversaw significant growth in that region. Matt is a proven e commerce leader with a firm understanding of how to delight customers. His focus, intensity and work ethic We'll set the right tone atop the company as we begin shifting to a growth phase. He also brings a strong understanding of brand and retail from his tenure at Procter Greg Campbell, where he began his career. Mike Recupero, our Incoming permanent CFO also joins us from Amazon, where he is most recently CFO of North American Consumer and CFO of Prime Video. Mike spent nearly 2 decades at Amazon and held a variety of senior finance roles across the organization. His experience helping business lines scale and achieve market leadership is exactly what we need going forward. I look forward to working with Matt and Mike to ensure seamless transitions in the coming weeks. I also want to take this opportunity to thank Diana Jagee for her guidance and within the finance organization once Mike officially joins. Now turning to our financial results. Net sales for the quarter increased 25.1 percent to $1,300,000,000 compared to $1,000,000,000 in the prior year period. Importantly, we achieved this growth with a roughly 12% reduction in the global store fleet due to our strategic densification efforts And the continued store closures in Europe during the quarter due to the COVID-nineteen pandemic. Overall, gross margins were 25.9 percent, down 180 basis points from 27.7% in the fiscal Q1 last year. The decline was primarily driven by an expected increase in mix of lower margin sales. From an SG and A perspective, our reported SG and A expenses were $370,300,000 reflecting a decline 16,200,000 or 4.2 percent versus reported SG and A in the Q1 last year and an 8 80 basis point improvement on a Adjusting for severance, transformation and other costs, our adjusted SG and A declined $29,500,000 Or 7.7% year over year and reflects nearly 10 percentage points of sales leverage. We We reported an operating loss of $40,800,000 compared to an operating loss of $108,000,000 in the prior year Q1. Adjusted operating loss was $21,600,000 compared to a loss of $98,800,000 in the prior year period. Income tax in the Q1 was an expense of $1,300,000 which compares to an income tax expense of $50,400,000 In the prior year Q1, our effective income tax rate for the quarter was 2% and impacted by valuation allowances recorded in prior periods, as well as the mix of earnings across the jurisdictions in which we operate. We reported a net loss of $66,800,000 or $1.01 per diluted share compared to a net loss of $165,700,000 or a loss per diluted share of $2.57 In the prior year Q1, our adjusted net loss was $29,400,000 or $0.45 per diluted share Compared to adjusted net loss of $157,600,000 or a loss of $2.44 per diluted share in the fiscal 20 21st quarter. In the Q1, we continued to focus on strategically de densifying our global store fleet, Closing a net total of 118 stores in the quarter. At quarter end, we operated 4,698 stores across the globe. Turning to the balance sheet. We ended the quarter with cash and restricted cash of $770,800,000 $186,900,000 higher than the end of the Q1 last year. Overall debt levels compared The Q1 of last year were reduced by $504,000,000 and reflect the redemption of $202,000,000 of senior notes during 2021, The voluntary early redemption of $216,400,000 of 10% senior notes due in 2023 And the $135,000,000 pay down of the company's asset based revolving credit facility. At the end of the quarter, We had no borrowings under our asset based revolving credit facility, no long term debt and $48,100,000 of short term debt, Which is a low interest loan from the French government offered to us through the equivalent of the CARES Act in the U. S. Related to the response to COVID-nineteen. Capital expenditures for the quarter were $14,700,000 In the first quarter, cash flow from operating activities was $18,800,000 an increase of $30,500,000 compared to an outflow of $49,300,000 during the same period last year. In terms of our outlook, we remain optimistic about both the emerging console cycle and our future. We recognize business risks remain elevated due to the pandemic and post pandemic uncertainty, and we are not providing specific annual sales and earnings guidance. We are pleased with our start to the year and strong sales in May, which were up approximately 27% year over year. We remain focused on positioning GameStop for long term growth as we prioritize delighting our customer and providing a differentiated and superior customer experience. Finally, given this is my last time speaking with you as GameStop's CEO, I want to share that I'm very proud of what we have accomplished over the past 2 years, Including navigating the pandemic and positioning the company with strong liquidity and an improved platform for growth. It's been Privilege to lead so many dedicated and talented team members who collectively possess tremendous passion for the gaming industry. We have helped bring stability and strength to the business, including by densifying our store footprint, reducing cost and debt and returning our company to growth. I also want to take this opportunity to thank our customers for their belief in us and an amazing group of shareholders who have so demonstrably exhibited their support for us. I look forward to working with our newly appointed Board and leadership team going forward. Thank you again for your support and your interest in GameStop. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful evening.