Earnings Call: Q4 2019

Mar 26, 2020

Welcome to GameStop's 4th Quarter 2019 Earnings Call. This call is being recorded and will be made available. I would now like to turn the call over to Eric Cerny, Investor Relations. Thank you, and welcome to GameStop's 4th quarter and fiscal 2019 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 statement and 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 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. 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 Q4 fiscal 2019 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 up to 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 Q4 and full year earnings call. Before I begin a review of our 2019 financial results, I'd like to update you on how we are navigating our business during the COVID-nineteen pandemic. As you are aware, the situation remains fluid, with each day bringing new information. Our highest priority is ensuring the health and safety of our associates and customers around the world. We have been steadfast in our adherence to CDC guided safety and local government orders for retailers in each of our communities. We have countrywide closures in Europe, primarily in Italy and France. And while we have stores that are open, we have temporarily closed our storefronts moving to curbside pickup at stores to facilitate buy online and pickup in store orders and e commerce deliveries only. As millions of consumers adapt to remote work, play and learning, we're pleased to be able to serve their needs. In fact, we've seen an increase in store and online traffic over the past few weeks. We remain committed to continuing to meet those needs in a safe environment. As for the impact on any supply chain and manufacturing for the new consoles, we will continue to work with the console makers as the launch approaches. But as of now, we have no indication of any impact on the product launch or delivery date, which is expected in time for holiday 2020. In the near term, we continue to monitor inventory levels for specific categories that might be impacted by shipping or delivery delays. But as of now, any impact has been minimal. As Jim will highlight during his remarks, we will pay all U. S. Employees whose hours have been eliminated an additional 2 weeks at the regular pay rate based on the average hours worked over the last 10 weeks. In addition, the company will reimburse all benefits all benefit eligible U. S. Employees 1 month of the employee portion of the benefit expenses. Now turning to a review of fiscal 2019 beginning with our Q4. The Q4 concluded the year in which we achieved significant progress against our key priorities, focused on optimizing our business model, strengthening our balance sheet and improving our cash flow in a period that was expected to see significant declines in sales. Our overarching goal is to capitalize on GameStop's leading global market position and strong loyalty base to stabilize sales trends and ultimately position the company for sustained long term profitable growth. Overall, our fiscal year top line results were in line with our January update. Our bottom line results were better than expected, demonstrating strong progress toward our key priorities, appealing gross margin expansion, a reduction in SG and A expenses and a strengthened balance sheet. As expected, sales were down double digits, driven by the industry wide headwinds we've discussed before, as we're in the late stages of the current console cycle, as well as working against the strong fiscal 2018 Q4, which saw a strong accessories business related to Fortnite market penetration. We are steadfast in our mission to accelerate the changes needed to our operating model, to position the company to capitalize on the way consumers are shopping and gaming today. We're accelerating our digital capabilities and testing new experiential elements in their stores. In 2019, we unveiled a new web platform and introduced new omni channel capabilities, including buy online, pickup in stores, with encouraging results. However, we are still early in that activity. In terms of the 4th quarter results, overall, consolidated global sales were $2,200,000,000 reflecting a comparable sales decline of 26 percent, and we delivered adjusted operating income of $109,000,000 and adjusted earnings per share of $1.27 For the fiscal year, consolidated global revenue declined 22%, reflecting a comparable store sales decline of 19.4%. Adjusted operating income was $62,000,000 and adjusted EPS was $0.22 We remained intensely focused on inventory reduction and working capital improvements in fiscal 2019, and these efforts drove a 31% reduction in inventory and a 64% reduction in accounts payable, putting us in position to enter fiscal year 2020 with a significantly stronger balance sheet fundamental. 2019 was a challenging year as we entered the low point in demand for the current console cycle. However, there were some bright spots and we made significant progress against our key initiatives. As a reminder, our strategic plan is anchored on 4 key tenets. 1st, optimizing the core by improving efficiency and effectiveness in everything we do. 2nd, creating the social and cultural hub of gaming within each GameStop store and online. 3rd, building a frictionless digital ecosystem to reach our customers wherever they want to do business with access to the best digital content and products and 4th, transforming our vendor and partner relationships for the future of gaming. Starting with optimizing the core by improving and effectiveness in everything we do, as we discussed earlier in 2019, this pillar was expected to deliver the earliest results and, in fact, this is where we have made the most progress and the primary driver so far against our 2021 run rate improvement goal. As a reminder of the $200,000,000 profit improvement goal, we know that roughly half of that will be delivered in the form of expense reductions, with the other half coming from product margin enhancements and implementation of additional revenue streams. In fiscal 2019, we achieved an expense reduction of $130,000,000 on an adjusted basis, with about half directly attributable to cost optimization activities. We still have work to do here, and we'll continue to focus on this objective in 2020 as we remain on track to deliver on our fiscal 2021 goal. From an inventory management perspective, I already mentioned our 31% year over year reduction, representing a significantly improved position both in terms of quality of inventory and overall stock levels. We will continue to focus our efforts on optimizing our inventory position to protect our strong cash flows in fiscal 2020. We made good progress in fiscal 2019, continuing to expand into higher margin categories such as PC gaming accessories, private label and collectibles as reflected in the gross margin expansion across categories. In 2019, we expanded our PC gaming business in the stores and will continue to expand our offering in 2020 beyond as we cater to all the needs of our gaming customers. On the collectibles front, we continued to improve the product offering and combine the product with merchandising discipline around inventory and improved markdown strategies, we are driving margin expansion. Going forward, we have opportunity to better leverage our scale as we source product and act more strategically in our initial buys and in terms of how we flow inventory into certain categories, further enhancing our ability to expand margins in the category. In 2019, as part of our decisive actions to address underperforming areas of the business, we began to wind down our business in the Nordic countries of Denmark, Finland, Norway and Sweden. Through an accelerated effort, we now expect to fully exit these markets by late July of 2020. We continue to anticipate the run rate impact once the exit is complete to be a positive full year annualized EBITDA contribution of just over $15,000,000 Our next strategic priority is creating a social and cultural hub of gaming within each GameStop store and online. An important element of this evolution is rapid customer centric experimentation. As you are aware, we are piloting 12 test stores within our Tulsa, Oklahoma market and are pleased with some of the initial discoveries. We also enhanced our PowerUp royalty program with new features that have been driving increased paid enrollment and attack rates with transactions. Our Power Up loyalty program continues to be well received by our customers and we are pleased with the November launch of the enhanced suite of benefits for the Pro Tier customer, such as reward certificates and member access to exclusive opportunities and events. This loyalty program allows us to engage with our customers to keep them up to date on the new technology, which is especially important ahead of the Q4 console launch. In 2020, we expect to continue to leverage the program, grow the base, and drive customer activation through the program. 3rd, building a frictionless digital ecosystem to reach our customers wherever they want to do business with access to the best digital content and products. Our relaunch website in 2019 continues to drive increased conversion rates and average revenue per user along with longer browsing time from customers using the site. Importantly, it has also driven increased buy online, pickup in store sales, which is key to drive customers to the store. We are very pleased with this performance so far and we'll continue to leverage this asset as we expand our capabilities in fiscal 2020. And finally, transforming our vendor and partner relationships for the future of gaming. In 2019, we began to have very constructive discussions with our partners, and they've recognized the value, omnichannel reach and expert consumer selling engagement that we provide. While still early, we began testing the concept of digital revenue sharing with select key partners. Also under the strategic tenet, we began to optimize our supply chain and global purchasing power to leverage our scale as well as develop new category offerings such as gaming PCs. So in summary, while fiscal 2019 reflects the prevailing industry trends, we are pleased with the operational progress we made against our strategic initiatives. Many of these initiatives will take time before they are reflected in our results, but we feel confident that they will drive improved results and long term sustainable growth. As it relates to our outlook, we view 2020 as a transitional year. As you're aware, the industry anticipating new gaming consoles from both Microsoft and Sony to launch at some point in the late fall. Notwithstanding the improved trend we've experienced over the past few weeks, as we've mentioned several times, over the 1st 3 fiscal quarters, we expect a continued challenging sales environment, followed by a material sequential improvement of the console launch. Before turning the call over to Jim, I want to take a minute to publicly welcome our new board members that we announced earlier this month as part of the board refresh and other corporate governance enhancements. We're able to attract a very talented slate of directors that bring unique skill sets to the table and would be great assets for the company as we start 2020 and continue In addition In addition, I would like to thank and recognize all of our dedicated associates for providing excellent customer service in an unprecedented environment. Thank you for all that you're doing to navigate this challenging time. And with that, I'll turn the call over to Jim for more detail on our Q4 and full year results in addition to our 2020 outlook. Thank you, George. Good afternoon, everyone. I'd like to take this time to walk you through our 4th quarter and full year 2019 results in more detail, and then I'll share some insight into how we're approaching fiscal 2020. As George shared with you, fiscal 2019 saw strong progress toward our transformation plan as we advanced our goals focused on strengthening the underlying business and capitalizing on the advantageous position we have in the gaming industry. 1 of these primary objectives in 2019 was optimizing our balance sheet and specifically reducing liabilities, including payables and long term debt, increasing cash flow, primarily through significant inventory management initiatives and deploying capital to return value to our shareholders. Additionally, our intense focus on inventory management is also contributing to improved gross margins. As a result, we successfully ended the year with a strengthened balance sheet and the financial flexibility to navigate the near term challenges posed by the end of the console cycle. Turning to our performance. We delivered both 4th quarter and fiscal 2019 top line results in line with our January update and profitability ahead of our updated expectations on an adjusted basis. Looking at our 4th quarter results, total company sales decreased 28.4 percent to $2,200,000,000 from $3,000,000,000 in the prior year period. The overall sales decline was primarily attributed to a comp store sales decline of 26.1 percent, with the remaining 2 30 basis points attributed to closed stores and foreign exchange headwinds. Our comp store sales results were primarily driven by the fact that we are in the late stages of the console cycle, which is putting pressure on traffic to the stores. We saw declines across all three categories hardware and accessories, software and collectibles. As you likely noted from our press release, we have adjusted the way we are reporting our category detail. This change was primarily driven by 2 things. First, we have reorganized the business and specifically our merchandising organizations to better align related category management, including the end to end lifecycle of products from new through pre owned sales. And secondly, we feel this is a more appropriate view of the console product vertical and will better align with our expansion of products and business across other video gaming verticals. Finally, we feel this structure provides us with a more accurate reflection of how gamers are consuming video games today, primarily as they consume both digital and physical software in a very integrated manner. For the Q4, we anticipated sales would be tough given the dynamics in the industry. But as we mentioned earlier this year, the accelerated decline in hardware and software after the Black Friday period was more than we had originally anticipated. However, at the time of our holiday sales update in early January, we anticipated full year comp sales to be in the range of down 19% to 21%, and we finished the year towards the high end of that range, down 19.4%. Hardware and accessory sales decreased 32.5%, reflecting anticipated next generation console launches in 2020, as well as being up against significant accessory sales related to Fortnite in the Q4 of 2018. As a percentage of total sales, hardware and accessory sales were 44%. Of note, we continue to see the Nintendo Switch platform resonate with customers, and this was a key positive, both within the merchandising presentation in our stores and as an offset to lower console sales. Software sales decreased 27.8 percent and as a percent of total sales were 44.8%. Given the early announcement of new console launches, the number of title launches for this final holiday period on the current console was much weaker than the prior years, with more than 9 major titles moving out of 2019 and into later fiscal 2020. 2 bright spots in the quarter, however, were Call of Duty: Modern Warfare and Nintendo Switch titles. Collectibles sales decreased 9% to $245,000,000 driven by traffic declines in domestic stores. As a percent of total sales, collectibles were 11.2%. Consolidated gross margins increased 280 basis points to 27.2% in the quarter. This increase was driven by a mix shift to higher margin categories as well as improved merchandising tactics related to inventory management, which led to greater efficacy in both pricing and promotions. Now turning to our expenses and expense management objectives. After adjusting for roughly $23,600,000 in one time transformation, severance and other charges associated with our reboot profit improvement initiative, our adjusted SG and A expenses were $488,100,000 reflecting a decline of $58,000,000 or roughly 11% versus the Q4 last year. This reduction is directly related to our ongoing efforts to rationalize the overall cost structure of our business. We delivered operating income of $75,200,000 in the 4th quarter compared to an operating loss of $232,100,000 in the prior year Q4. Adjusted operating income, excluding transformation severance and other charges, was $109,200,000 compared to adjusted operating income of $202,500,000 in the prior year. Our effective tax rate as reported for the 4th quarter was 63.7% and impacted by certain discrete tax items included in the quarter, primarily related to $31,700,000 valuation allowance on our deferred tax assets and the mix of earnings across the jurisdictions in which we operate. The impact of non cash tax adjustments in the quarter was approximately $29,000,000 Excluding one time items, our adjusted effective tax rate for the quarter was 18.4%. On a reported basis, our net income was $21,000,000 or $0.32 per diluted share compared to a net loss of 187 point $7,000,000 or a loss of $1.84 per share in the prior year Q4. Adjusted net income, excluding goodwill impairment, one time transformation severance and other charges associated with our reboot profit improvement initiative, was 83,800,000 dollars or $1.27 per diluted share compared to adjusted net income of $148,500,000 or $1.45 per share. Now turning to our full year results. Total consolidated company sales decreased 22% in 2019. The sales decline was primarily attributed to comp store sales decline of 19.4%, with the remainder attributed to closed stores and foreign exchange headwinds. In terms of category performance for the year, we saw a 27% decline in hardware and accessories, a 22% decline in software sales, and a 4% increase in our collectibles business. Despite the continued decline in hardware and software categories, there are some highlights within each. As we have previously discussed, the Nintendo Switch platform continued to perform well throughout the back half of the year, and we saw full year growth in pre owned hardware and software and in the new software for the switch. Gross margins increased 160 basis points to 29.5% in fiscal 2019. This increase was primarily driven by the mix shift to higher margin categories, such as collectibles and accessories, but also to merchandising initiatives I spoke to earlier, which were implemented primarily in the back half of the year. After adjusting for roughly $76,000,000 in one time transformation severance and other charges, our adjusted SG and A expenses were $1,846,000,000 reflecting a decline of $130,000,000 or roughly 6% versus 2018. This reduction is largely related to our ongoing efforts to rationalize the overall cost structure of our business. On an as reported basis, we delivered an operating loss of $399,600,000 compared to an operating loss of $702,000,000 in the prior year. Adjusted operating income, excluding transformation, severance and other charges, was $62,300,000 compared to an operating income of $331,300,000 in the prior year. Our effective tax rate as reported for the year was a negative 8.8%. The impact of the tax rate was due to lower projected earnings and certain discrete tax items throughout the year, including a goodwill impairment, a $52,500,000 valuation allowance on our deferred tax assets and the mix of earnings across the jurisdictions in which we operate. The impact of the non cash adjustments in the year was approximately $35,000,000 Excluding one time items, our adjusted effective tax rate for the year was 45.5%. As a reminder, as a result of our taxable income being relatively low, our reported U. S. GAAP tax expense and resulting rate can be volatile. This impact was unique to the quarterly results in 2019 and the effective tax rate and overall expense normalized when looking at the full year results. On a reported basis, net loss was $470,900,000 or $5.38 per share, compared to a net loss of $673,000,000 or $6.59 per share in the prior year. Adjusted net income, including goodwill impairment, onetime transformation severance and other charges, was $19,100,000 or $0.22 per diluted share, compared to an adjusted net income of $218,400,000 or $2.14 per diluted share in fiscal 2018. We continue to focus on optimizing our global store fleet in fiscal 2019 and closed a net total of 321 stores, inclusive of 333 closings and 12 openings. In fiscal 2020, we will continue in our efforts to de densify our store base, focused on maximizing productivity of the entire fleet. Now turning to the balance sheet. At the end of the fiscal Q4, we had total cash and liquidity of $770,000,000 including $499,400,000 in cash and $270,300,000 in net availability under our revolving line of credit. Our accounts payable at the end of the quarter were down 64 percent to $381,000,000 down from $1,000,000,000 at the end of fiscal 2018. We ended the quarter with total debt of $419,000,000 a decline of $401,000,000 or 49 percent versus the $820,000,000 balance at the end of the Q4 of 2018. We ended the 4th quarter with total inventory of $859,700,000 compared to $1,250,000,000 in the prior year, a reduction of 31.3%. As we have said, improvement in inventory efficiency is a significant area of focus for us, and it doesn't mean simply reducing inventory levels, but more importantly is focused on increasing our inventory turns and improving our working capital to materially improve on the strong cash flow generation of the business model. In terms of capital allocation, given the strength of our balance sheet and the ability of our business model to continue to generate cash flows. Even in a tough sales environment, we took advantage of our depressed share price during the Q4 and returned approximately $20,100,000 to shareholders through share repurchases, equating to 3,500,000 shares and a weighted average price of $5.74 per share. For this year, in total, we repurchased 38,100,000 shares or approximately 30 7% of the outstanding shares coming into the year. In total, for fiscal year 2019, via share repurchases and the 1st fiscal quarter dividend, we returned nearly $240,000,000 to shareholders. This is a clear reflection of our commitment prudently return capital to our shareholders and our conviction in the strategic initiatives we are pursuing and their ability to enhance our profitability. As of the end of the Q4, we had approximately $101,000,000 remaining under our current repurchase authorization. In the Q4, we had $17,000,000 of capital expenditures, bringing the fiscal total to just under $80,000,000 at the low end of our full year capital expenditure outlook, which was between $80,000,000 $85,000,000 Going forward, we will continue to evaluate optimal capital allocations that include a prudent management of our debt levels, a return to capital to shareholders and investments in the business that collectively optimize returns for all stakeholders, all while balancing the importance of maintaining a strong balance sheet. I'll now shift to some commentary on the outlook for our base business in fiscal 2020. As George already mentioned, we anticipate the cyclicality of the console business to continue to impact sales through the 1st 3 quarters of fiscal 'twenty until the launch of Gen 9 consoles from Sony and Microsoft. As we all clearly understand, COVID-nineteen pandemic has added significant complexity to the business. In that light, we are not only adhering to the guidelines of the Centers for Disease Control for safety of our customers and guests, but also several state and local orders, which mandate the temporary closure of stores. As of this week, we have closed the majority of our global locations with the notable exception of Australia and New Zealand. Where we continue to operate in the U. S, our stores are closed to customer traffic, but still fulfilling increased demand for our products through our contactless curbside delivery process we call Delivery at the Door. Despite having most of our European stores closed for the last few weeks, the increased demand for our products across the world has led to a positive 2% comparable sales results for the March month to date period through Saturday. Every day brings a new challenge and new information as we navigate this very dynamic environment brought on by COVID-nineteen. As such, and consistent with most retailers, we are suspending any specific sales and earnings guidance for 2020 until we have further clarity. Notwithstanding this, we are intently focused on continuing the work to deliver progress on our transformation goals. In 2020, we will continue our work to de densify our global store fleet and anticipate store closures to be equal to or more than 320 net closures we saw in fiscal 2019 on a global basis. Importantly, we want to emphasize that these store closures are a very specific and proactive part of our de densification plan, and they are not related to recent business trends. Following several years of both organic and inorganic growth, this process is yielding profit synergies not heretofore realized. And in that light, we expect these closures to positively impact both sales and 4 wall EBITDA growth as we transfer sales to nearby stores. As we continue to evaluate some under performing aspects of our business, we'll continue to wind down Denmark, Finland, Norway and Sweden operations and expect to exit these markets in late July earlier than we had originally expected. We expect the run rate impact once the exit is complete to be a positive full year annualized EBITDA contribution of just over $15,000,000 We are intensely focused on continuing to make the necessary changes to further strengthen our overall financial architecture, including all key profit and expense levers that will result in an organization that is efficient, streamlined and poised to capitalize on a significant profit flow through improvement as we experienced expected robust sales increases in late 2020 led by the Generation 9 hardware and software slate. Equally important is that our balance sheet is strong as total cash and liquidity at the end of our fiscal February 2020 was in excess of $680,000,000 ahead of our expectations and will be further supported by recent positive trend in the March business. 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 Seth Wissink with Jefferies. Please state your question. Hi, good afternoon everyone. I have a few questions. Hopefully these will go pretty quickly. But Jim, I just wanted to make sure I heard you correctly that the statistics you gave on 2% comp is month to date from March, not quarter to date through March last Saturday? Hi, Steph. Yes, that's correct. It's month to date through March through last Saturday, correct. And that's a global measure as well? That is on a global basis. That's correct. Okay. And then just second question is on the de densification of the stores. I think you mentioned 320 at or above that level, which would imply 600 stores plus for the last couple of years. Can you just give us a snapshot of what the transfer rate has looked like? And I think, George, you mentioned in your comments as well, this idea of creating kind of network profitability, so looking at adjacent stores and trade regions and looking at the profitability as you de densify. Can you talk a little bit about what you're seeing in the data? Yes, Steph. I think when you talk about dedensification, we actually view this somewhat as some uncaptured synergy from the past, where there have been acquisitions and there's club stores in very close proximity. So this is a proactive process on our part. It's where we see the probability for heavy sales transference from one store to another. We drop occupancy. We operate with 1 staff. We operate a far more efficient and far more profitable store. So, we're kind of working our way around the world as we look at that to see where there's opportunity, but we certainly see plenty of it. Yes. Stefan, this is Jim. We haven't really quantified publicly the effects, but suffice it to say, the percentage of transfer needed to breakeven is fairly low. And while that's the case, we're significantly exceeding that in those stores that we've closed and what we've seen in terms of our transferability. So more to come on that as it unfolds. But at this point, we're not we haven't quantified that in any particular way. Okay, that's great. And last one for us is just on the working capital improvement you've seen. I mean, the inventory in particular has been quite astonishing. Do you think about the business from a volume per store target level, setting aside the Generation 9 hardware, but just thinking about the business today, how much further do you think you can reduce that inventory level from here? Yes. It's suffice it to say, I think this is the right way to think about it. This is about cash conversion and optimizing cash conversion across the entire chain. And the one measure that I think we really focus on is the inventory turn. To be clear, this is not about just taking the inventory down. It's about really creating that turn in cash conversion cycle or optimizing the cash conversion cycle. So from a total inventory turn, our targets are about 5 times. And so we're exiting the year at about just about 4 times globally. So you can see that, that on a long term basis, our goal is one more full turn out of the inventory. Okay. That's great. And then I have to ask, when do you expect to start buying inventory in the Gen 9 hardware? When do you expect to be placing those orders? Yes. I mean, we're not really to talk about the timing of that. But the general point is that we're already working and have been working with all the vendors, both on the hardware and the software side. And those cycles are we're in normal cycles with those discussions. Okay, great. Thanks a lot. Yeah. You bet. Thank you. Our next question comes from Ray Stochel with Consumer Edge Research. Please state your question. Great. Thanks for taking my question. Can you talk about what the economics of digital revenue sharing look like and how that might be different from how you previously participated in the digital games market? Yes, Ray. It's George. We're not going to go into much detail on that. I think if you look at our 4 growth pillars, certainly we think the last one, transforming the vendor relationships for the future of gaming is one of the key ones. Think we've said from the start, it will take the longest to develop. We're pleased to say that we're making some traction on that. We're excited about what that looks like, but we're not really going to give any level of detail on that way yet as we're just getting started. Got it. Thanks. And are there any details that you can give us in terms of market level economics or comps for Tulsa given your remodeled stores in the area? Or any just general color on Tulsa and what you're doing with your remodels? I wouldn't, Ray. And the reason that I wouldn't, given all this, is that Tulsa is, Tulsa is, to a greater extent than most other stores closed. Because we put communal arena gaming into these stores, we closed that portion early on. So when we had the potential for large congregation in our stores, we made a proactive move early in the Tulsa market to move away from So, Tulsa is in a bit of a state of limbo right now, operating at that same level as other stores at delivery, at door, and not really a true representation of how the store is intended to work. Great. Thanks again. Thanks, Rick. Our next question comes from Curtis Nagle with Bank of America. Please state your question. Good afternoon. Thanks very much for taking my questions. Maybe just starting with the SG and A in 4Q, it came in a good bit lower than at least we had expected. Could we just go through, I guess, what were some of the biggest incremental factors? How much does it have to do with things like perhaps incentive compensation? How sustainable are these types of declines? And at least at a high level, how to think about 2020? Yes. Everything that we've been talking about with respect to our first strategic tenant and optimizing the business and are focused on our $200,000,000 profit improvement goal. As we've said, about half of that is around the expense structure. So, what you're seeing, Kurt, is the evolution of all of those changes. They do take time. Every single aspect of the business, from the organizational changes we made in the late summer and early fall last year to every single contract, how we operate the business in every facet has been scrutinized and has continued to be scrutinized. You're starting to see the evolution and the building and the annualization of those effects. That's what you saw in the Q4 SG and A. As I mentioned, we've really only been at this as a leadership team since the middle part of last year. So you're seeing there's more opportunity as those cost reductions start to annualize themselves throughout 2020. That really gives us suffice it to say, I think we're on target with where our run rate is or the run rate to meet our target for that 2020 annualized figure that we have put out in the market. Got it. Okay. And then maybe just going back to some of the commentary you made about traffic through or I guess comps through March. Could you talk about a little I guess a little bit more about the cadence? Was there kind of initial buildup? What's going on now that we have stay at home orders in place? Was there maybe initial buildup and now it's fallen off? Any detail on kind of how to think about that would be helpful. Yes. I'm not sure we can say that the buildup has changed. There certainly was one. I think when this all began, there was a pretty good level of demand that we saw while our stores were fully opened. And that is the sales period that Jim talks about when you talk about through Saturday of last week. There have been a number of state, county, municipal regulations since then that have caused us to change the way that we operate. So certainly, in a digital environment, we've shortened operating hours. We're seeing a different level of demand in our stores. We're thrilled with what's happened in terms of digital. And we stated early on that as part of our digital tenant, we want to drive that part of the business. We've been happy with omni channel ever since we launched our new platform in August of last year and the progress that it's been making. We are most certainly seeing a more definitive move toward digital right now, including e commerce pure play. Okay. Thanks very much. Thanks, Kurt. Thank you. Our next question comes from Joe Feldman with Telsey Advisory Please state your question. Yes. Hi. Good afternoon, guys. Wanted to better understand with the current situation with stores and doing curbside, how do you guys staff the store? Like is there one employee per store? I guess is that allowed in most locations? And then also, do you need or have you found that you need to compensate the employees more to be working during this time period when there are orders to stay at home? I'm just trying to understand. Yes. Joe, let me start at the top and just kind of make the point that we're working with a volunteer team right now. So all of our team members, be they in stores, distribution centers or refurb centers are operating on a voluntary basis. So it begins with a team member that wants to be there. It generally is single staffing in most cases. We are talking about certainly less volume that is traditional and no walk in traffic and no entry into the store. So that certainly changes the program quite a bit. So this is a fulfillment process effectively in the store where it is in a very natural kind of way metered in, in a manner that in most cases one person can handle that workload. And then certainly, where we have breaks and wage and hour elements for the states, we obviously are writing schedules to support all of those as we always do. Understood. Thanks for clarifying that. And then another question, just given the environment, we're hearing a lot of your peers out there talking about really consolidating the cash and you guys are obviously in very good shape. But one of the things that's been talked about has been reducing or stopping buybacks altogether in the near term. I mean, do you guys have any thoughts on that? Yes. We haven't been active in buying back stock in the period since the end of the year. As we entered 2020 from a capital allocation standpoint, we really, as we've talked about previously, really started to pivot and focus on our 2021 maturity of our 6.75 bonds. That hasn't changed. But as you might expect, everything is about how do we continue to be very prudent and manage through a very, a set of very unforeseen circumstances with COVID-nineteen and the impacts. So we are very pragmatic and very focused on how do we continue to manage through really what is an unknown over the course of the weeks months to come. But again, I think you said it well, Joe. I appreciate that that we are entering this time with a strong balance sheet. So we are pretty confident we can navigate. Got it. Thank you and good luck with this tough time, guys. Thanks. Thank you. Thanks, Joe. Our next question comes from Seth Sigman with Credit Suisse. Please state your question. Hi. This is Lavesh Ambani on for Seth Sigman. Thanks for taking our questions. So firstly, just to follow-up on the SG and A reduction in the quarter. I mean, it sounds like you guys are halfway through the plan, which will continue into 2020. But how do we think about like the financial impact from the stores that are not being run-in the U. S, I mean, just for curbside pickup right now? Yes. I mean, as you might expect, I mean, those stores that are running in the U. S. Again are running on a very limited staff. So you have some variable impact that scales with those operations. Further to that point, we do have another variable set of work in the SG and A that is out of our DCs and our refurbishment center. So those obviously flex with the volumes as well. Understood. And just looking to the product improvement plan, when do we expect the 2nd leg to come in, in terms of the product side, on the margin side? Are you already starting to see some of it? Well, we saw it in this quarter that we're reporting right now. I think you see a pretty healthy basis point expansion in gross margin rate, part of that admittedly due to mix, the other due through good work by our merchandising team. Got it. And just a quick follow-up on just the quarter to date trends. I mean, you guys discussed the consumer demand for the products and March had a positive 2% comp. Can you talk about some of the trends exiting Q4 into February? And I mean, what sort of products are you seeing? Yes. As we've talked, I think if we take ourselves out of the current situation, we and just zoom out for a minute, we have there's a pretty consistent underlying trend of the business that we've been talking about, which is we are in the generation 8 to generation 9 console transition. And that we don't expect that to change. We know it. We know where we go from here through the Q3. And we know what to expect when the Q4 comes and these consoles come to market and we are a very big part of bringing those products to the marketplace. Got it. So any other financial parameters you could share about just like the quarter to date perspective? No, not at this point. As you might expect, I mean, again, we're not providing any further guidance. It's just too much there's too many unknowns. Got it. Thank you so much. Thank you. Thank you. Our next question comes from Anthony Chukumba with Loop Capital Markets. Please state your question. Good afternoon. Thanks for taking my question. So I had a question on collectibles. So you mentioned that the decline there was mainly driven by lower store traffic. I guess I was just wondering if there's any more color that you can give because your store traffic has been declining for a while now with this up at the end of the console cycle, but you managed to sort of buck that trend in collectibles and post sales increases. So I guess I'm just trying to figure out what was different this quarter? Yes, Anthony, really this was driven by 4th quarter volume. And I think we've talked about it a few times where, number 1, we had a lower watermark Q4 given releases as well as a lot of activity around Fortnite. So I think if you look at the year over year aspect of it, that's part of it. But again, our collectibles were positive year to date. It's the Q4 that they were down. Stronger on a relative basis, but certainly impacted by the traffic in the stores, which drives some sales in collectibles. Got it. That's helpful. Thank you. Thank you. And there are no further questions. I would now like to turn the call back over to George Sherman for closing remarks. Thank you very much. I want to thank everyone for joining the call today. Thank everyone for tracking the stock. We wish you all safety and health out there as we navigate through an unprecedented experience in our lifetimes right now. And again, use this opportunity to thank our teams who are out there doing their best, either in a indirect capacity or in stores working a fulfillment model and thanking them for what they do every day to provide great service. Thank you all. Thank you. This concludes today's conference. 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