Earnings Call: Q2 2020

Sep 9, 2020

Greetings, and welcome to GameStop's Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I would now like to turn the conference over to your host, Eric Sterny, Investor Relations. Thank you. You may begin. Thank you, and welcome to GameStop's 2nd quarter 2020 earnings conference call. This call will include forward looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Any such statement should be considered in conjunction with the cautionary statements in the Safe Harbor statement in the earnings release and risk factors discussed in reports filed with the SEC. GameStop assumes no obligation to update any of these forward looking statements or A reconciliation and other information regarding non GAAP financial measures discussed on this call can be found in the earnings release issued earlier today as well as the Investors section of our website. With me today are GameStop's Chief Executive Officer, George Sherman and Chief Financial Officer, Jim Bell. On today's call, George will share insights into our Q2 performance and updates regarding GameStop's strategic framework for the future. Jim will then provide more detail on our financial results and expectations for fiscal 2020. Then we'll open the call to take your questions. Now, I would like to turn the call over to the company's Chief Executive Officer, George Sherman. Thanks, Eric. Good afternoon, everyone, and thank you for joining us today on our Q2 earnings call. I hope each of you are safe and well. Our Q2 results show significant progress toward our strategic priorities as evidenced by a robust digital growth, meaningful expense reduction and strong free cash flow generation. These results serve as testament to GameStop's ability to navigate COVID-nineteen and bridge the period until the introduction of new consoles. I continue to be proud of our team and their dedication to our mission, our strategy and importantly, safely serving our customers whenever and however they wish to shop during this unprecedented time. Turning to some highlights for the Q2. Our comparable store sales declined 12.7%, which was ahead of our expectations and driven by continued consumer demand for gaming and the success of our e commerce channel. While total sales declined 26.7%, they were also ahead of our initial expectations at the start of the year. Results exceeded our own expectations even as temporary store closures related to COVID-nineteen resulted in 13% fewer store operating days in the quarter versus Q2 last year and year over year we have 10% fewer stores worldwide. Our quarterly sales results were negatively impacted by both the global pandemic and as we've discussed before, the last few months of a 7 year long hardware cycle. We began the quarter with a modest sales decline in May as we responded to continued shelter in place mandates by expanding our ability to deliver exceptional service and product through the omnichannel digital capabilities we developed over the last year. In June July, limited new hardware availability constrained sales as the early surge in demand, coupled with both the pandemic impacts on the supply chain and the end of the generation 8 cycle created a significant limitation on new hardware and accessories availability from suppliers. Despite these emerging supply headwinds, our sales decline was a bit better than we expected as our investment in omni channel capabilities and our ability to connect with our strong loyalty member base, particularly for new software launches kept us engaged with our customers and allow us to meet their needs wherever, however, whenever they chose to shop with us. We continue to make progress on our real estate and market dedensification strategy with a corresponding 10% decline in our worldwide store base year over year, which includes the completion of the wind down of underperforming Nordics region. Importantly, in the United States, where market densification represents the greatest opportunity, we've seen sales transfer of just under 40% closed store sales volume to neighboring locations and online, well in excess of profit breakeven levels. Our high sales transfer rate and expanded omni channel capabilities will continue to allow us to accretively optimize market and trade area profitability. Our e commerce growth has been a major development for GameStop, accelerating our strategic objective to create a frictionless digital ecosystem by several years. As the pandemic shutdowns began, we quickly recognized that we are seeing a dramatic shift towards e commerce and that this represented an historic opportunity. As a result, we diverted additional resources and focus towards our strategic imperative to build a frictionless digital ecosystem in an effort to leverage the moment and build momentum. Global e commerce sales rose 800% for the quarter and ecommerce sales penetration grew from low single digits to over 20%. We believe this shift is long term and highly advantageous for our business. I mentioned in a prior call that I felt e commerce should be at least $1,000,000,000 business and I'm happy to report Rhonda's trajectory to cross that milestone in 2020, well ahead of schedule. We'll only build upon that in 2021 and beyond as we see this critical to our future. The quarter saw us deliver enhanced service capabilities and fulfillment options for our customers such as curbside delivery or delivery at door as we call it, buy online pickup in store and enhanced ship from store and web in store capabilities. In addition to advancing our omni channel capabilities, these capabilities also enable us to quickly adapt to changes in the shopping environment and service customers through any one of these fulfillment options. In the quarter, more than 90% of all buy online pickup in store orders were fulfilled within 24 hours, including almost 70% on the same day. To that end, we'll soon be announcing 2 key advanced capabilities, including same day delivery and a significant expansion of our consumer payment options, including expanded focus on our private label credit card, several buy now pay later options and also leasing options for high value items, providing our customers with a wide array of payment flexibility. We believe enhanced service and expanded payment options will improve GameStop's customer experience and expand affordable options to acquire the next generation of consoles. One final note on our strategic initiative to build a frictionless digital ecosystem. Later this month, we are set to launch our newly redesigned mobile app designed to create engagement and excitement for the gaming enthusiast. We'll be able to evolve the app experience to offer personalized and localized experiences, digital wallet capabilities and a gaming news hub. We believe that the mobile app is going to play a key role in enriching our customers' experience inside and outside of our store shopping experience for all things gaming. We also saw strong progress in other areas of our strategy, most notably our efforts to increase our efficiency and optimize our core operations. Jim will go into further detail on many of these endeavors, but I'm very pleased that our ongoing expense reduction initiatives have yielded significant results as we leveraged our reported SG and A rate by 40 basis points in the Q2. No small task in this environment and are part of the team's work here. These results were achieved despite the sales decline and were driven by $134,000,000 reduction in overall reported SG and A expense for the quarter and a $201,000,000 decline in the 1st 6 months of fiscal 2020. On the merchandising side of the business, we are pleased with our initial launch of an expanded assortment in PC accessories and we'll be extending that assortment chain wide later in the Q3. While it is early, we absolutely believe GameStop can participate meaningfully in the PC accessory market with high quality products that deliver strong margins. Likewise, we are pleased with our assortment of private label merchandise and their high sell through rates with lower cost and higher margin structure. We continue to realize meaningful improvements in working capital efficiency led by a 50% reduction in inventory and a 30% decline in accounts payable. Our continued efforts led to material strength in period end liquidity reflected in our 7 $5,000,000 cash balance even as we further reduced borrowings on our credit facility by $100,000,000 within the quarter. These combined efforts fueled free cash flow of approximately $182,000,000 even with negative adjusted EBITDA for the period and navigating COVID-nineteen, including store closures for most of May early June. Overall, I'm pleased with the operational progress we made in the second quarter amid a challenging operating environment. As we begin the second half of the year, we are appropriately cautious yet excited about our opportunity to capitalize on the next generation of consoles that are expected to launch ahead of the holiday. In the Q2, customers showed tremendous response to newness. And when there was newness available, customers chose GameStop. Specifically, we continue to realize market share leading results with Nintendo Switch hardware and key new physical software titles that launched in the recent few months such as Animal Crossing or The Last of Us 2. Additionally, we have seen strong customer response to the latest technology in headsets and controllers when supply is available. Our customers show us GameStop remains a preferred destination. The success with newness in the 2nd quarter gives us confidence that Game Stop will benefit from the acceleration in demand as new hardware and softwares launched later in the year and well into 2021. And while there has been growth in digitally downloaded games, we believe there are several other areas in our favor that bode well for GameStop in the near and medium term. First, new consoles have a disk drive. So for the next 7 years, the consoles will play both the physical and digital software that we sell. Importantly, across most regions of the U. S. And the world, there remains an increased taxation on broadband. With significant increases in work from home, learn from home activities, many are forced to make trade offs on broadband usage, a natural advantage for physical gaming. We are not debating the growth of digital gaming however. We are simply saying that the life of physical gaming is here to stay for the foreseeable future. Likewise, we have and will continue to redouble our efforts on digital game sales, including subscription offers, which already represent a meaningful portion of our sales and will expand through recent digital revenue sharing agreements we have with select partners. 2nd, we have a strong loyalty base of customers who look to us to educate them on a wide array of new products. A huge asset we intend to leverage, particularly with the new consoles providing significant technological upgrades that provide even more immersive gaming experiences. 3rd, consumers like the physical aspects of games. They collect them and they have value as a trade in. So as software continues to evolve with dramatically better graphics, it does not take up valuable storage space and disks are available to those without broadband Internet. With our current capabilities and added same day delivery, we believe most consumers can get a physical game copy faster than it takes to download. Almost 70% of our buy online pickup in store orders over the last 4 months have been fulfilled on the same day, many within an hour or 2. In summary, we know the environment remains uncertain even as the excitement around the console cycle builds. To be clear, we believe this upcoming console cycle represents the most immediate short term opportunity to win back sales volume. We will participate in the console cycle in a very significant way. However, we will also continue to plan conservatively by tightly managing expenses and inventory while leveraging our unique strengths, including our leadership position in gaming and a strong loyalty base. This combined with our focus on advancing our 4 strategic initiatives positions us to attain long term profitable growth and drive value for our stakeholders. Now let me turn the call over to Jim to discuss our financials in more detail. Thank you, George. Good afternoon, everyone. I'd like to take this time to walk you through our Q2 fiscal 2020 results and then I will share some insight on how we're approaching the remainder of the year. As George just discussed, we're very pleased with our team's ability to adapt to the challenging operating environment during the Q2. Our ability to swiftly pivot to leverage our investment in creating a frictionless omnichannel digital ecosystem, drive efficiencies across the business and continue to optimize our core operations enabled us to generate significant positive free cash flow and exit the quarter with a materially stronger balance sheet, improved liquidity and an overall healthier business model as we approach the console launches later this year. Turning to a review of the 2nd fiscal quarter. Total consolidated global sales declined 26 point 7% to $942,000,000 from $1,290,000,000 in the prior year period. The sales decline, which was slightly better than our internal expectations set at the beginning of the year, reflects the impact of 1, the last few months of the 7 year gaming console cycle 2, a 13% reduction in operating days due to the temporary store closures driven by the global COVID-nineteen pandemic 3, 10% fewer stores versus the end of the Q2 last year as part of our de densification strategy And finally, delays in new software titles in response to the global COVID-nineteen pandemic with several titles continuing to shift to later this year. Despite these headwinds, we reported a comparable store sales decline of 12.7% after adjusting for approximately 8 percentage points from the impact of reduced operating days due to COVID-nineteen. As a reminder, our permanent store closures representing approximately 6 percentage points of our overall sales As part of those ongoing efforts, we continue to realize strong sales transfer, which is accretive to profitability, averaging almost 40% of sales recaptured through the transfer to neighboring locations or our online business. Relatedly, we're pleased to report that we completed the Nordics region wind down as of the end of July. In terms of category performance, while hardware and accessories declined 20% for the Q2, reflecting the end of the Generation 8 console cycle, We did see better than expected sales in these categories with the recent surge in video game product demand during the COVID-nineteen pandemic era. As George mentioned, some of the sales declines later in the quarter are largely reflective of a lack of console hardware supply in the marketplace. Given we're operating at the end of the console cycle along with some COVID-nineteen related effects within the supply chain. However, importantly, the Nintendo Switch continued to perform very well and we leveraged our market share leading position around the world on this product line. Additionally, we have and continue to leverage our pre owned inventory, particularly in hardware and accessories to supplement lower new hardware availability and drive sales. Overall, software was down 31% for the quarter, despite the strong performance of key titles such as Animal Crossing and The Last of Us 2. As George mentioned, when there is newness in video games, whether titles or consoles, we perform very well. However, our performance was somewhat negatively impacted as numerous title launches were pushed from the first half of the year into the latter part of the year. As an example, last year's Q2 benefited from the launch of Madden NFL 20, a title that launched in the Q3 this year. Collectibles were down 34% for the quarter as the opportunity for in store basket additions tend to benefit from higher store traffic and newness continues to push out the various franchise delays. From a product margin standpoint, gross margins declined due to product mix shifting heavily into hardware. Hardware sales represented about 47 percent of sales as compared to 43% last year. As a result, our overall global gross margins were 26.8%, down 4 20 basis points from the more software led 31% in the fiscal Q2 last year. Now turning to our expenses and expense management objectives. After adjusting for roughly $11,300,000 in divestiture and severance expenses and costs related to the exchange of our March 2021 notes. Our SG and A expenses were $336,900,000 reflecting a decline of approximately $108,000,000 or 24% compared to adjusted SG and A in the Q2 last year. These results do not adjust for the approximately $2,700,000 investment in additional protective and sanitary related products and equipment in the quarter to ensure the safety of our associates and customers. Importantly, the pandemic has shown the resiliency of our associates and also continued opportunities to be more effective as an omnichannel retailer. In that light, while some of the lower and A will come back with sales volume increases in future quarters, we will maintain a large degree of operating efficiency throughout our stores and distribution centers. Importantly, a meaningful portion of the expense reductions are permanent and are directly related to our ongoing efforts to aggressively rationalize the overall cost of our business. We realized an operating loss of $85,600,000 compared to an operating loss of $446,700,000 in the prior year Q2. Adjusted operating loss excluding transformation, severance and other charges was $84,700,000 compared to an operating loss of $45,800,000 in the prior year Q2, reflecting this was seasonally slower Q2 period. Our effective tax rate as reported for the Q2 was a negative 19.2% and was impacted by certain discrete tax items, primarily related to the sale leaseback transactions and the mix of earnings across the jurisdictions in which we operate. Excluding those one time items, our adjusted effective tax rate for the quarter was 1.2%. On a reported basis, our net loss was $111,300,000 or a loss of $1.71 per diluted share, compared to a net loss of $415,300,000 or loss per diluted share of $4.15 in the prior year Q2. Adjusted net loss from continuing operations, excluding transformation, severance and other charges, was $91,200,000 or a loss of $1.40 per diluted share compared to an adjusted net loss of 32,000,000 dollars or $0.32 per diluted share. During the Q2, we continue to focus on optimizing our global store fleet and strategically de densifying certain markets. For the quarter, we closed a worldwide net total of 2 0 6 stores, bringing our total worldwide to 388 year to date, including our Nordics wind down. At the end of the quarter, we operated 5,122 stores worldwide, which is 602 fewer stores compared to last year. Given the strong sales and profit transfer rates we continue to experience, we're on track to close a total of approximately 400 to 4 50 stores worldwide this fiscal year. These closures along with the growth in our online business and expanded omni channel capabilities will allow us to more efficiently and profitably service our customers. Now turning to the balance sheet, which continues to be an area of focus for the team and a highlight for the Q2. At the end of the fiscal Q2, we had total cash of $735,000,000 well ahead of our expectations of between $575,000,000 $625,000,000 Importantly, as we ended the period with 0 net debt. We ended the 2nd quarter with total inventory of $474,600,000 compared to $948,900,000 in the prior year period, a reduction of 50%. As we've said previously, effective and efficient inventory management, including improved inventory turns and the resultant cash conversion cycle gains continues to be a significant area of focus for us and is a key driver of the further improvement in working capital efficacy. Our accounts payable at the quarter end were 256,400,000 down from $368,300,000 or 30.4 percent at the end of the Q2 of fiscal 2019, which is directly related to our ability to leverage a flexible supply chain and reduce purchase orders around the world at the very onset of the pandemic and not create a liability drag on the business or on cash flows. As a result of these many continued improvements, we realized positive free cash flow of approximately $182,000,000 in the quarter. In addition to the free cash flow gains during the quarter, we completed the sale of our corporate jet and completed a sale leaseback transaction for 3 of the 5 owned buildings being offered, adding a total of $51,800,000 in liquidity, of which $43,200,000 was related to the sale leaseback. Subsequent to the close of the 2nd quarter, we executed sale leaseback transactions for the remaining 2 buildings being offered, adding an additional approximately $43,700,000 in liquidity not visible in the Q2 balance sheet. Given the relatively stronger performance in the business and the proceeds from monetizing our real estate assets, we also paid down $100,000,000 of the revolver borrowings and had only $35,000,000 outstanding as of August 1. As previously announced on July 2, 2020, we completed an exchange offer and consent solicitation for the remaining unsecured notes due to mature in March of 2021. We exchanged roughly 52% of the notes that were set to mature in March of 2021, well within our range of expectations given the high retail ownership and the participation by the majority of qualified bondholders. The newly issued notes of approximately $216,000,000 provide additional financial flexibility by replacing and extending the maturity to 2023, as we continue to focus on advancing our long term strategy and objectives. With regards to roughly $198,000,000 remaining of the 2021 notes, We anticipate redeeming those bonds over the course of the coming months between now and the maturity date. In the Q2, we had $10,900,000 of capital expenditures, bringing the year to date spend to $17,500,000 dollars We continue to focus on only mandatory maintenance or near term high value strategic projects and anticipate that we'll invest between $55,000,000 $60,000,000 in CapEx for the year before vendor allowances, a significant reduction from the roughly $80,000,000 spent in 2019. I will note this is approximately $15,000,000 more than our previous estimate, but reflects a holiday store merchandising refresh project for which we will receive a full reimbursement from vendors. Due to the uncertainty regarding the ongoing impact of COVID-nineteen on the business, we have suspended formal guidance. However, we do want to provide you with some of the puts and takes that will likely impact the remainder of the year. From a top line perspective, the Q3 will see several key software titles move into Q4. And while the August sales trends are consistent with Q2, those shifts will create somewhat of a headwind for us in September October. With the new product launches that generally drive our business as a specialty video game retailer shifting later in the year, such as Call of Duty and Cyberpunk shifting into Q4 and in the case of Microsoft's Halo Infinite launch shifting into 2021, we expect our sales results could be choppy for the remainder of the Q3. Compounding the sales impact from the software title launches will be the limited availability of current generation new console and accessories supply, as the availability of product for manufacturers remains tight. We have the ability to lean in on our pre owned inventory and we are very well positioned on that side of the business. But as we have anticipated for some time, new hardware sales will likely be pressured as we approach the launch of the new technology. The strength of the balance sheet, in particular, the positive free cash flow trend positions us well from a cash and liquidity standpoint to maximize the upcoming key hardware and software releases in the Q4 and further drive the strategic evolution of our business in 2021 and beyond. As it relates to our reboot objectives, we continue to be pleased with our progress and are seeing firsthand how these efforts are enabling us to navigate this challenging time. We remain intensely focused on continuing to execute actions to further strengthen our overall financial architecture, including all key profit and expense levers. This is important as a result in organization is a GameStop that is meaningfully more efficient, streamlined employees to capitalize on a significant profit flow through improvement as we experience expected robust sales growth in late 2020, led by both the expected new software title slate and the Generation 9 console launch. I will now turn the call over to the operator and we'll take any questions that you may have. Our first question comes from the line of Colin Sebastian with Robert W. Baird. Please proceed with your question. Great. Thank you. A couple of questions. First off, I'm curious with the e commerce and the digital volumes in markets or states where you have had primarily reopenings, do you retain those e commerce volumes or do they shift back to stores? I guess I'm trying to understand if some of that digital volume is incremental ultimately. And then secondly, just any commentary on EBITDA for the fiscal year. I think, yes, that was removed from the press release versus the last quarter, if you can just clarify that. Thank you. Yes. Hi, Pauline. It's Jim. Yes, importantly, as we brought our stores back online, we've seen the contribution of e commerce sales to the total maintain at levels that are north of 20%. Historically, that's been in the single digit range, mid single digit range. So that's important because it's sustainable in the e commerce business. It's not just a simple channel shift. And then secondly, again, we're not providing any guidance and or not reiterating any guidance, I mean, a couple of months more into the pandemic and there's just still too many unknowns. So we're not reiterating any further guidance for the rest of the year. Okay. And then one quick follow-up. On the digital only hardware platforms, what is your view or what's the plan for sales of those platforms? And are there other ways that you can participate in digital software subscriptions for those or other platforms? Thank you. Hey, Collin, it's George. We intend to sell the both platforms for both vendors. So, and a distillate unit and we certainly anticipate participating in those programs. And we certainly see the opportunity to capitalize beyond just the initial gross margin on the console itself. And that means participating in digital sales and in subscription programs. Okay. Thank you very much. Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question. Thank you. Good afternoon, everyone. We also have two questions. The first one, George, probably for you is just to help us think about the volumes of available units that you anticipate come Q4 at the hardware launch. Any sense of how we should benchmark to prior next gen cycle launches? And then Jim, one for you, as we think about the overall cost profile and the overall plans for store closures, are you thinking about SG and A per store as a measure? Any sense you can give us around kind of the future state of the cost model relative to the store base and how you're thinking about overall cost productivity? Thank you. Yes, Steph. Let me start off with the allocations for the new consoles and I would just say that they're in line with expectations and probably with prior releases as well. There are elements of this that we don't know. Like you, we learned the price point of the Microsoft units today at the same time that you did. So we now know that. We don't know what the breakout looks like specifically of the consoles themselves or the accessories that go along with them. So just very much in that stage right now of the production data getting to our partners and they're making the decisions as to how it's going to be allocated out. But I'd say as of this point in time, we would consider to be in line with what we expected. And then Steph, this is Jim. On the cost profile, I think the best way to think about that is over 2 thirds of the SG and A changes quarter over quarter and for the full year year to date are permanent. And some of that is related to the store closures, which you aptly pointed out. But a lot of that is related to the cost out initiatives that we've been undertaking for quite some time. We talked about at the end of last year, we're starting we're seeing some of that anniversary upcoming in the Q3, but really started to get momentum out the Q4 last year. So we'll still have more to go on that here for the rest of the year. Thanks, guys. If I could toss one more in just on the app, we haven't talked about that much in the past. So could you talk a little bit more about what the app features may be? How you expect to roll that out, the content side? And then how you're expecting to leverage your fairly robust CRM and customer data that you've been tracking for many years? Yes, you're right, Steph. We haven't said a lot about it. We have a new Chief Digital Officer. We've been very pleased with the developments that he's made on that front. And we've been in need of a new app. And I think, as you know, if you look at e commerce, a large percentage emanates from a mobile device, not from a desktop or laptop any longer. So it was necessary work for us. It will be a far more intuitive app than what we've had prior. There is a game news section where you can catch up on the latest and greatest in gaming. We actually view that as kind of an extension of the social hub of gaming as well. You'll be able to keep track of things like your PowerUp Rewards. So there's a connection to that piece of it too. And it will launch in late September. So I think it's just something that we'll have more information on certainly on the next call when it's in place and when it's active, but we're certainly bullish about what it can do and we're certainly excited about being able to be at a point where it's almost ready to go. Thank you. Our next question comes from the line of Curtis Nagle with Bank of America. Please proceed with your question. Good morning or sorry, good afternoon guys. Just a very quick one on the gross margins for the quarter. So I know you guys have kind of shifted up in how you report it. We don't have pre owned numbers anymore. It's a little bit difficult to compare things. But just looking at some of the explanations you guys gave for what drove down the gross margins, predominantly mix and hardware, I think, I just can't really get to square the numbers. I mean, is there something else going on here in terms of a big downshift in use, something on margins there, markdowns and collectibles? Any more detail you give would be a huge help. Yes. Hey, Kurt, it's Jim. No, there really isn't. And it's really all about hardware mix. And as the hardware mix and the volume of hardware is significantly higher, 40 over 47 percent of sales versus 43% last year. That's the mix effect that we see on the margin rate. The collectibles business was a little bit more promotional, but not really extensively across the world in all of our various regions. But again, solely around the hardware mix and then certainly what that means in terms of volume impact on overall margins. Not a short cycle. Okay. Thanks very much. Yes, you bet. Our next question comes from the line of Seth Sigman with Credit Suisse. Please proceed with your question. Hey, guys. Thanks for taking the question. I did want to follow-up on that last point because I guess we're struggling with that math a little bit as well. So we get the hardware mix. However, I think the mix shift was more severe last quarter to hardware. So can you just give us a sense what else is going on within categories? And maybe more specifically speak to margin rates by category? I think that would be helpful year over year. And then the second point is, if you could comment specifically on the performance of pre owned relative to the Yes, sure Yes, sure. I mean, again, there's not a whole lot more to talk about with respect to the impact of hardware mix on the margins. That's just the math and ultimately that's what drove the vast majority of the margin differential. And then you talked about pre owned. Again, I think it's also a function of when the stores are not open and the traffic is not into in the stores, our pre owned software tends to be an attached to the market basket. And without stores open and without traffic entering our stores for all of May and the 1st part of June around the world, that business obviously is going to do lower volume. Got it. So pre owned was down more than the negative 31 for the software category overall? No, I didn't say that. But we as you know, we're not we don't disclose the differential between pre owned and new software. Got it. All right. Yes, that's fine. So my follow-up question is around some of the levers that GameStop has used in the past to capture share and a very fair share during past console launches. I'm just curious, what are you guys doing differently this time around? For example, I think some of the tools like currency, your unredeemed currency is just a lot lower right now than it's been in the past. You disclosed that in the Q. You'll also have fewer stores going into this. You also do have some digital assets. So I'm just curious, what's the plan? How are you guys thinking about managing that and making sure that you capture your fair share? Yes. Look, I think there are a number of things we're planning on for this launch. I think as we mentioned in the earnings script itself, we are going to be launching some new payment options. So some delayed or fractional payment options that you can just buy in 4 payments steps along the way. We will be doing leasing alternatives. 1 of those will be Microsoft Owl Access for their pre owned hardware cycle is part of this as well, that there certainly is a trade in alternative that gives you a down payment toward a new gaming console that we expect will be utilized. So I think just to comment a little bit more on the pre owned business and Jim gave you the heavy weighting that contributed to the margin shift. But as he said, we were closed for part of this time period. So if you go back to May and parts of June, there's just no ingress. There's no product coming in. And even when we reopened, we had concerns around the sanitary nature of dealing with trade in product. We've now gotten there to a point that we have a comfort level with that and we see the customer getting to a higher comfort level with that as well. So we're seeing our pre owned activity begin to flex up a bit as we have ways of putting consoles through UV treatment and putting games through either UV or some kind of a 99.99 type percent effective sanitation treatment, we see those volumes come back online. But it's also worth noting that pre owned also gets a push from activity. It's an activity based function as well. And the gaming console cycle is certainly a big activity that's going to drive some interest in that. So payment alternatives, leasing alternatives and a trade in alternative. And then obviously, we'll certainly promote that. We'll have bundles. We'll have our fair share of inventory. George, that's really helpful. Just if I could follow-up on that used point. So it sounds like the trade in activity may be picking up. However, how are you thinking about the other side of that, the secondary market? I mean, obviously, that struggled for some time. I mean, what are you seeing there? And what is your view of that side of the business? You want to clarify a little bit? I can interpret secondary Mark in a couple of ways, one of which is selling something sideways. The resale market, right? So people are trading on games on the other side of that someone needs to buy that game on that side. What does that look like? Obviously, there are alternatives today. That business, your used business has been down and it's not just because of trade, it's also demand. So what is happening on the demand side for used games? Yes. Look, we think the demand will be there. We certainly see high demand right now for gaming consoles for the current generation, as I think Jim noted, and we both mentioned in our script. I mean, there was a period early on in the pandemic, which for this quarter certainly crossed over into May, where there was high demand on any existing current generation gaming device. Clearly, we believe that others had an advantage in that space as they were open for business and our stores were largely closed in that timeframe. But certainly, we've seen sell through across the board and it is very constrained right now. We receive more than our fair share of Nintendo Switches and we sell those very rapidly. But as for the current generation PlayStation and Xbox, it's awfully hard to find. And we're able to create a supply of pre owned devices that certainly can fill the needs. So I think once the flywheel is going again and we have that trading going on both sides, there's an opportunity there for us. Okay. Thanks, George. Good luck. Thank you. Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question. Hi, guys. Thanks for taking my questions. I wanted to ask about traffic. It seems like when you've opened stores, you've got more people in. As you talked about, it helps drive pre owned, it helps drive other parts of the business. How are you thinking about holiday with traffic this year given that it's going to be so different and your stores aren't very large, so you may have to control the flow coming in and out. Can you just share more about the plan for the holiday period? Yes, sure. It's a great question. I think first of all, we're certainly encouraged by the increased penetration of e commerce. So I think that makes it very straightforward. Certainly capabilities like buy online, pick up in store allow us to meter traffic into the stores even to the degree of having appointments potentially. And certainly our pre sell process where we have an advanced view of what's going to happen helps us out as well and allows us to better plan out some of these iconic events and just large influxes store. So we're ready for it. We have more channels to operate than ever before. We can offer customers a contactless transaction. We can offer customers an e commerce pure play transaction. We can offer a buy online pickup in store transaction. We can ship from store. We can do it in many different ways that we think give us great flexibility for the holidays. But I think you're also going to see a more spread out holiday season as well. And I think all indications would point that there'd be a little less emphasis on the Black Fridays and a little bit more on a more elongated promotional period during the Q4 of the year. And then obviously for us with the console cycle launches, there'll be more demand than there is supply clearly and that will kind of go on its own course in its own timeline. So we're and we feel great about it. I mean, I think we have no doubt that we lost some sales early on in existing console hardware due to a little bit of an unlevel playing field in terms of accessibility to our product. And that there probably was some catalog sales that went along with those purchases along the way. But when we see newness, whether that be Animal Crossing, whether that be The Switch, whether that be Last of Us 2, we lead in share and we do well and our customers find us and we find them and we expect that that's going to happen with the console launch in a big way. Got it. Thank you. And then just a follow-up. On the real estate side, can you just remind us where we are? I know the target for this year, the 400 to 4 50 stores. How should we think about the go forward of this? Like is it going to be this continued low single digit reduction in the base to kind of right size and de densify? Or what's that or is it a 2 year process, 3 year process like can you just refresh our memory on that? Yes, sure. I mean, it's going to take a couple of years. And again, as we think about each region is a little bit different. It's your de densification in Europe is going to look very different than it is in the U. S, etcetera. And so we're a large way through this process, but we're not there yet. Obviously, we gave the direction for the rest of the full fiscal year, around 400 to 4 50 stores. But there are more to do out in 2021 as well. And again, our emphasis here is our short lease liability lives give us a great deal of flexibility so that we're not buying out of leases and that we're able to make these choices without capital outlay. So we'll continue to take advantage of that and leverage that favorable position with our leases into 2021. That's great. Thanks guys. Good luck with the quarter. Thank you. Thanks Joe. Our next question comes from the line of William Werder with Bank of America. Please proceed with your question. Hello. My first question, your commentary around the 2021 maturities made it sound like you're not going to wait for the maturity date and you're going to go ahead and either tender for those or buy them back in the open market. I guess is that your plan and how you what do you expect your trough liquidity to be, I guess, through the holiday period? Yes, Edwin. Yes, that is correct. That will our intention is to select points redeem between now and the end of well, I guess it's March of 2021, which is the maturity date. So that is certainly our intention. And again, we're not providing any further guidance on the rest of the year. So suffice it to say, we I mean, let me just reiterate. If we go back and we look at history, the amount of liquidity and overall cash and what we've been able to do here in a little over a year with this management team in place is to the tunes of 100 of 1,000,000 of dollars of improvements in the working capital and inventory turns and all the things that just to remind everybody that we set out to do last year that we communicated we would do and we've delivered on it in a big way despite the global pandemic. So that we are incredibly confident with the strength of our balance sheet and liquidity as we make our way through into this console launch and we're certain and it certainly positions us incredibly well from an overall liquidity standpoint. No, that's all come through, right. You're going to certainly generate more working capital than a lot expected. In terms of the cost savings, you had laid out a goal of $200,000,000 this year. It looks like we've achieved that in the first half of the year. Are there still further cost savings that we're going to see in the back half of this year? We'll start to annualize some of the cost outs that we took out in the back half of twenty nineteen. So you won't see the same type of run rate, but we're still continuing to work on elements of cost efficiencies. Some of that comes inside of the operations of our stores. Some of it comes in our overhead G and A. But we're still working on several elements. We're a lot of the way there, as you said. I mean, a lot of that $200,000,000 as I mentioned, more than 2 thirds of it is permanent. Okay. And then just lastly for me, implementing payment plans, obviously, that can be a drag on working capital. I guess, what is the timing of when you're going to be implementing these payment plans? And I guess, how much of the cash drain do you think those will be on the business? That's it for me. Thanks. Yes. Yes. We'll continue with it, but they won't be at all. I mean these will be FPOS 3rd party options that they can take. So we're not bringing on any liability. So there's no working capital impact whatsoever. Yes, I'll just reiterate. None whatsoever. They're all 3rd parties. Okay. Thank you. You bet. Our final question comes from the line of Brian Hunt with Wells Fargo. Please proceed with your question. Just a couple for me, George and Jim. Thanks for the time. If I look back the last handful of years and granted we didn't have a cycle, a new hardware cycle, your inventory went up somewhere between on the low end $350,000,000 on the high end 750,000,000 going into the holiday season. What should we anticipate given your new inventory discipline and the fewer amount of stores that you all have today versus again the last 5 years in terms of a potential inventory increase? Yes. I'd say, Brian, it's a great question and thanks for that. It's really all about it's centered on the efficiency and the cash conversion cycle, which really equates to inventory turn. This business, if we go back a couple of years in the years you're talking about was turning globally less than 4 times. We're now approaching almost 5 times on a trailing 12 basis. And so our goal is to see those turns above 5 times. And that's our ultimate goal. We're well on our way to see that. We have a little bit more work to do there. What does that mean? That means that the other aspect of even closing stores and the transference of sales to those stores is important because we're recapturing a lot of those sales. We're recapturing the cost of goods sold, that movement of inventory. And so thinking about it on a more average basis, the business was carrying well over $1,000,000,000 in inventory on an annualized average basis. And we won't see any we won't go anywhere near those numbers, even as we spike as we get towards the launch upcoming, especially because there's so much demand and the inventory turns so quickly when you see these launches occur. So hopefully that's helpful. That is. Thank you, Jim. And then my second question, I don't know if there's any way to frame it up. I've got a teenager who was looking for a new controller, went to 3 of your stores, couldn't find anything. So we in the Hunt family live through your hardware shortages. I was wondering is there any way you can quantify what the hardware shortages did to your sales and how they limited sales in the current period and maybe in the current not only in fiscal Q2, but maybe in Q3? Yes. I don't know in terms of quantification. I think the thing was, Brian, is that there was flow of new product, but it was just spotty. And I think that's the critical factor. When the newness was available and the switch is a great example, new controllers are great example. And then and even the sell through that we talked about with our private label accessories was fantastic. The reception from customers is great. Again, I don't know that there's a way to really quantify that. But again, remember part of this is a pull forward from the pandemic peak during the height of the stay at home orders. And then at the same time, the manufacturers have shifted from Gen 8 to Gen 9 in their manufacturing plant. So there's a little bit of a confluence and we think it's a short term lived confluence as we just get into launching the Generation 9 product. All right. And then my last question is kind of theoretical and scenario. Can you talk about the potential opportunity that the conflict in between Epic and Apple may create for a 3rd party seller of hardware and software and how this conflict may bring to light advantages and or opportunities for you all? Yes. I mean, I won't say much other than that we're obviously very aware of the situation. We're following it very closely and we're watching. And we always look for opportunity within the industry and this is no exception. So we're watching from the sidelines at the moment, but watching closely. All right. Very good. I appreciate your time and best of luck. Thanks, Brian. Thanks, Brian. Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back over to Mr. George Sherman for any closing remarks. Thanks very much. Just want to quickly thank the team at GameStop for all that they've done during the course of the quarter. The entire team, particularly our store teams, our distribution center teams, refurbishment operations center, all those working on the front lines. And then really a call out to our omni channel folks for affecting such quick change and such dramatic change so well. And thanks to all of you as always for your interest in GameStop. Appreciate it. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.