Earnings Call: Q3 2019

Dec 10, 2019

Welcome to GameStop's Third 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. Please go ahead. Thank you, and welcome to GameStop's Q3 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 statements 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 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 in 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 3rd fiscal quarter performance and updates regarding GameStop's strategic framework for the future. Jim will then provide more detail on our financial results and expectations for the remainder of the year. Now, I would like to turn the call over to the company's Chief Executive Officer, George Sherman. Thank you. Good afternoon, everyone, and thank you for joining us today on our Q3 earnings call. I want to begin today's call by first addressing our results during the quarter, their direct impact on our outlook for the remainder of this year and the trend we anticipate carrying into 2020. Simply put, our top line results remain softer than our original expectations and we believe they are a direct reflection of the overall industry during a quarter in which NPD cited historically low sales. The near term headwinds confronting the industry as we enter the final stages of the current Microsoft and Sony console cycles are having an outsized impact on our business, given we are the lone specialty retailer in the space. It's important to keep in mind that this is not uniquely a GameStop issue. This is a console issue and consoles are the trigger point for our industry. With Generation 9 consoles on the horizon set to bring excitement and significant innovation to the video game space, those anticipated releases in late 2020 are putting pressure on the current generation of consoles and related games. As consumers wait for new technology and publishers address their software delivery plans. NPD recently reported significant double digit declines in new hardware for September October. And as an industry leader, we're feeling that pressure more directly than others. Jim will get into the details of our results, but our sales of new hardware in the 3rd quarter declined 46% versus the prior year quarter. While these were generally in line with the industry, they are well below our expectations. Looking ahead, we believe this trend will likely carry through our next several quarters until the launch of the next generation consoles. At this stage, we've entered the commoditization phase of the console cycle, where promotional pricing is driving sales. And if you're out shopping or doing store checks over Black Friday or Cyber Monday, you likely saw clear examples of that discount stance. Given the significant promotional stance along with the industry dynamics highlighted by unprecedented declines, we are revising our outlook for the year down from prior expectations. While the near term top line environment remains challenged, we do not believe these results are indicative of what we would expect for the business in the long term. Despite the top line results for the quarter and their impact on our outlook for the remainder of the year, we do have several positive developments that I want to highlight. First, we have shared with you our commitment to evaluate every aspect of our business and take decisive action to address underperforming areas of our business. In that light, we've begun the process to wind down our operations the Nordics region of Europe, including operations in Denmark, Finland, Norway and Sweden. While this will take several months to complete, we believe this effort will yield roughly $15,000,000 in EBITDA run rate improvement. 2nd, how it worked to optimize the business model, specifically our efforts to reduce inventory and turn it faster resulted in 3rd quarter ending inventories down over 30% compared to last year. These initiatives are enabling us to generate strong cash flow despite the sales decline. 3rd, and directly tied to our conviction in the strategies we are pursuing, we invested over $115,000,000 in the quarter to repurchase over 22,000,000 shares. This reflects our commitment to returning capital to shareholders and brings our total investment in buybacks for the Q3 of this year $175,000,000 a repurchase of over 1 third of our shares outstanding at the beginning of the year. You'll hear more about each of these throughout our call today, but I wanted to quickly highlight them before discussing our progress against each of our strategic pillars and our performance for the quarter. Despite the overall sales results, we do have several things within our business that are doing well. Even within new hardware, where we have recent innovations such as Nintendo Switch and Switch Lite, we are seeing strong double digit sales growth consumer interest continuing to increase across that platform. You can see the strength of the Switch platform reflected in our recently implemented merchandising floor sets across the chain and in particular across our Black Friday and Cyber Monday offerings, as we highlighted the product and gave a high profile placement across our omni channel platform. In software, despite fewer titles and an underperforming title slate compared to last year, where we do have strong titles, GameStop continues to deliver market share leading performance. For example, the success of Call of Duty: Modern Warfare launch has been well publicized and our associates galvanized behind the release to host exclusive in store events and special activities centered around the franchise. Additionally, our collectibles business continued to show growth as we continue to improve our product offering in the category. We see opportunity in this category as we leverage our unique position to take advantage of fan favorite franchises launching this year and beyond. As we keep improving our product offering and capitalizing on exclusives, we can leverage our retail expertise to drive an improvement in product margins for the category. Despite the near term demand headwinds for current generation gaming hardware and software products, GameStop's evolution as an industry leader to reposition the business model are on track. The groundwork to better leverage GameStop's leadership position in video game retail is moving forward, irrespective of where we currently are within the console cycle. However, it is important to reemphasize that our turnaround will not be measured in immediate term sales results. We do, however, believe there will be apparent and impactful to profit flow through when the new console cycle kicks in. Let's take a few minutes to share the solid progress we made during the Q3 against each of the four pillars of our strategy we laid out for you on our call in September. Remember that our strategic plan is anchored on 4 key tenets. 1st, optimize the core by improving efficiency and effectiveness in everything we do. 2nd, create the social and cultural hub of gaming within each GameStop store and online. 3rd, build 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, transform our vendor and partner relationships for the future of gaming. Where we have driven the most progress is within the first pillar, optimizing our core business. Recall that this pillar encompasses optimizing the core business by improving efficiency and effectiveness across the organization, including cost restructuring, inventory management and optimization, adding and growing high margin product categories and rationalizing the global store base. This pillar is the primary driver of our operating profit improvement goals for 2021 and we are well on our way implementing the other initiatives that we need in order to deliver on that target. 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. When we spoke in September, we'd executed roughly 40% of the expense reductions and today we are over 50% complete. While the top line decline masked some of our progress, you can see that excluding one time items, we delivered approximately $30,000,000 in reduction in our corporate overhead compared to last year as a result of these actions. We have clear line of sight for the remaining 50% and are confident in our ability to over on this goal. From an inventory management perspective, I already highlighted our 30% reduction compared to last year, representing a significantly improved position both in terms 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. We also continue to make progress expanding into higher margin categories. And while many of these initiatives may take longer to manifest themselves, we've already begun carrying PC gaming accessories in the store, reinforcing our position as the one stop shop for all things video games. Along those lines, we also continue to advance our objective to expand in the private label opportunities for video game accessories and other items. We're leveraging capabilities that already exist within our organization to grow our presence across our global footprint. On the collectibles front, as I mentioned earlier, we continue to see opportunity to drive margin improvement in the category by leveraging the new leadership team and the new merchandising organizational structure. We're implementing a more strategic and comprehensive good, better, best pricing architecture that includes improved promotional and markdown management throughout the product lifecycle. Being more strategic with our initial buys in how we flow inventory into certain categories, we are beginning to see better margins with sharper pricing and more optimal markdown strategies. Another area where we're making significant transformational progress is through our efforts to optimize our global store fleet. This continues to be a top priority of ours and is an ongoing focus for Jim and the team. We believe our overall profitability can be improved by de densifying our fleet and by closing and or consolidating underperforming stores, taking advantage of strong historical business transfer to remaining stores in each market. I shared with you earlier the action we are taking to wind down our operations in the Norwich region of Europe. The second pillar of our strategy revolves around establishing GameStop as the social and cultural hub of gaming within each store, online and within the digital environment. We have a tremendous brand to leverage and have been a trusted partner to the gaming community for decades. The ongoing growth of video games and offshoots like e sports offer significant growth potential for GameStop. As we introduced in September, we have developed some unique testing capabilities to help us uncover the the proper path to capturing those opportunities. An important element of this evolution is rapid customer centric experimentation. To that end, we've reimagined 12 stores within our Tulsa, Oklahoma market. And while it's too early to share specifics, we're very encouraged by what we are learning from the numerous customer immersive experiences that we are testing on these 12 stores. Further, with customer engagement at the center of making GameStop the social and cultural hub of gaming, our PowerUp Rewards loyalty program is a huge asset for us to leverage, and we're rolling out enhancements to the program. Specifically, within the paid power approach here, we tested various incentives designed to increase customer enrollment and drive more visit frequency from shoppers and found that these efforts resonated with customers. As a result, in November, we launched an enhanced suite of benefits for the significant double digit increase in enrollment rate. Again, while still early, we've received strong feedback so far on the new initiatives. Growing this critical affinity network will position the business to over index our leadership position in the upcoming new console cycle, which will entail a knowledgeable consultative selling process with the advancement of new technology. In terms of our 3rd pillar, our recently relaunched e commerce website is a growing and important leverageable asset for us as we continue to build a frictionless digital ecosystem for access to digital content and products. Since the launch of the new website in September, we've seen an increase in conversion rates and average revenue per user, along with longer browsing time from customers using the site. Importantly, we've seen a triple digit increase in buy online, pick up in store transactions, perhaps the most important KPI. These are all positive indications that the new website is improving the customer experience. Finally, our 4th pillar, which entails transforming our vendor and partner relationships is progressing, what remains a long term opportunity. We continue to have very constructive discussions with our partners and they recognize the value, omni channel reach and expert consumer selling engagement that we provide. We hope to share more detailed information on this initiative in 20 20 as our long term path forward is formalized. In summary, we are making solid progress on our strategic initiatives. We continue to move quickly and are taking decisive action. We know that improving this business will not be a quick fix, but we see a clear path to success over the near term and even more importantly, the longer term sustainability of the business based on strategies that we are pursuing today. As we said in September, over the next several quarters, you should not evaluate our business on retail comparable store sales results. Instead, you should evaluate our performance during this compil transition on gross margin expansion across categories, our ability to generate strong cash flows, disciplined inventory management and overall expense management, delivering operating profit and cash flow expansion, all things that we are already seeing traction on while somewhat masked by the top line performance and are committed to enhancing further. As we transform the business model, we continue to believe that our efforts will position the company to drive increased profitability industry returns to the new console launch cycle. Despite a softer top line and stronger industry headwinds than we anticipated, we still operate a business model that has a healthy balance sheet and generates positive cash flows. Importantly, we also remain committed to returning excess capital to shareholders as reflected by our share repurchase activity this year. I want to take this moment before I turn the call over to Jim to thank all of our associates for their hard work and tireless efforts to deliver exceptional product knowledge and service to our customers. Our associates are among the most passionate and dedicated in retail, and I know they are working hard to deliver an outstanding experience for our customers around the globe and are eager to close out the holiday period on a strong note. Thank you for all that you do. Now I'll turn the call over to Jim for more details on the quarterly results and outlook for the remainder of the year. Thank you, George, and good afternoon, everyone. As George mentioned, we are disappointed in our results for the Q3, which reflect the impact of top line challenges in the video gaming industry, primarily driven by where we are in the console cycle. The decline was more than we originally expected as the depth and breadth of the industry wide slowdown reflects a highly penetrated console market in earlier than usual announcement of upcoming console launches from manufacturers and the reluctance of OEMs to bring end of cycle discounts to the market. All of these factors are putting significant pressure on the volume of current generation products. There were a few bright spots, however, during the quarter, including solid growth in the Nintendo Switch product line as well as continued positive gains within our collectibles business. However, these gains were simply not enough to offset the slowdown in both Sony and Microsoft product suites. As we work through the next several quarters and navigate what we believe is a consumer waiting for the next generation of consoles, our greatest focus will continue to be on strengthening our business model to ensure we are positioned to optimize profit flow through when the next generation of Microsoft and Sony consoles launch late in 2020. This includes continued focus on expense management, store portfolio optimization, rationalization of underperforming businesses and improved inventory management, all of which we will believe will optimize already strong free cash flow. Before I get into our outlook for the year, I want to take a moment to recap the performance for the quarter. At a high level, our bottom line results were affected by non cash taxes in the quarter, which stems primarily from our relatively low level of taxable income, magnifying the volatility of our tax rate. And I'll get into that in a little bit more detail in a moment. On a reported basis, we delivered an operating loss of $45,600,000 adjusting for one time items related to our transformation, asset impairments and other charges, we delivered an operating loss of $18,600,000 From a top line perspective, total sales declined at $46,900,000 or 25.7 percent compared to the Q3 of fiscal 2018. This decrease was primarily driven by a comparable store sales decline of 23.2%, approximately 150 basis points from closed stores and a negative 100 basis point impact from foreign exchange rates. While our comp store sales results were primarily driven by lower transaction counts from new hardware and software, we are pleased with positive comparable improvements in units per transaction within the market basket, reflecting the early results of our merchandising management strategies, including enhanced focus on SKU productivity, visual merchandising and strong attachment rates driven by our store associates. From a category perspective, as we have mentioned, the primary drivers of the decline were new video game hardware and software. New hardware sales declined 46% and new software sales declined 33%. Importantly, the category is performing worse than the last console generation shift where the declines were in the mid-thirty percent range. As an indicator of what we believe continued innovation within hardware product lines can do for the category, Nintendo Switch platform continues to deliver strong double digit increases. From a new software perspective, growth in Nintendo Switch software was good, but not enough to offset double digit negative comps across other platforms. As I mentioned, the significant decline in Xbox and PS4 Software titles in the quarter was driven by last year's strong title lineup, including record setting Red Dead Redemption 2 and Spider Man. Our collectibles business continues to be a bright spot, posting growth of 6.1% for the quarter before foreign exchange impact, And we continue to expect further growth in this category as we improve the product offering and leverage our retail expertise to improve our execution. Our pre owned video game business declined 13% year over year, but we did realize a 4 percentage point sequential improvement from the 2nd quarter as we continue to find opportunities to leverage our leadership position in the pre owned product market. Consistent with new video game categories, we continue to see strong demand for pre owned Nintendo Switch products. Indicative of our efforts to optimize our overall merchandising approach, our consolidated gross margins increased 190 basis points to 30.7% compared to 28.8% in the Q3 last year. Almost all video game categories saw gross margin expansion versus the Q3 last year. Now turning to our expenses and expense management objectives. After adjusting for roughly $16,000,000 in one time transformation, severance and other charges associated with our GameStop reboot profit improvement initiative, our SG and A expenses were $436,000,000 reflecting a decline of $28,000,000 or roughly 6% versus the Q3 last year. This reduction is directly related to our ongoing efforts to aggressively rationalize the overall cost structure of our business. As reported, SG and A for the Q3 was $452,000,000 compared to $464,000,000 a year ago. Revisiting the impact of tax variability. Our effective tax rate as reported for the Q3 was negative 61% due to the impact of lower projected earnings for the year. Additionally, there were certain discrete tax items, including the 3rd quarter, primarily related to a $20,200,000 valuation allowance and the mix of earnings across the jurisdictions in which we operate. The impact of these non cash tax adjustments was approximately $16,000,000 It is important to note that after adjusting for the $16,000,000 noted above, the adjusted tax expense of $15,600,000 or $0.19 per diluted share is also not reflective of our cash taxes for the quarter. As a result of our taxable income being relatively low, our reported U. S. GAAP tax expense and resulting rate can be volatile. However, our cash taxes for the year are not expected to be material. This impact is unique to the quarterly results and the effective tax rate and overall expense will normalize in the full year results. On a reported basis, our net loss from continuing operations for was $83,200,000 compared to a net loss of $506,900,000 in the Q3 last year, which included approximately $588,000,000 in impairment charges. The Q3 fiscal 2019 results include charges of $43,000,000 or $0.52 per diluted share, which includes non cash asset impairment charges, costs related to our ongoing transformation, the non cash tax adjustments noted above, as well as other items. Now turning to the balance sheet. At the end of the fiscal Q3, we had total cash and liquidity of $703,000,000 including $290,000,000 in cash $413,000,000 in net availability under our revolving line of credit. This compares to total cash and liquidity of $861,000,000 in the prior year. We ended the quarter with total debt of $419,000,000 versus $820,000,000 at the end of the Q3 of 2018. We ended the 3rd quarter with total inventory of $1,290,000,000 compared to $1,880,000,000 in the prior year, a reduction of 31.6%. As we have said, inventory reduction is a significant area of focus for us as we seek to increase our inventory turns and improve our working capital to materially improve 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 positive cash flows, even in a tough sales environment, we took advantage of our depressed share price during the quarter and returned approximately $116,000,000 to shareholders through share repurchases, equating to 22,600,000 shares at a weighted average price of $5.11 per share. Year to date, through the end of the Q3, we have now repurchased a total of 34,600,000 shares or approximately 34% of the outstanding shares coming into the year. In total, year to date through the Q3, via share repurchases and the 1st fiscal quarter dividend, we have returned over $218,000,000 to shareholders. This is a clear reflection of our commitment to returning 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 Q3, we had approximately $121,000,000 remaining under our current repurchase authorization. In the Q3, we had $20,000,000 of capital expenditures, bringing the year to date total to 61,000,000 dollars We now expect full year capital expenditures to be between $80,000,000 $85,000,000 down from our previous guidance. Going forward, we will continue to evaluate ways to return capital to shareholders that optimizes returns for all stakeholders, while balancing the importance to maintain a strong balance sheet as well as our debt ratios. I will now shift to provide our expectations for the rest of fiscal 2019. With the Q3 behind us and the important Black Friday and Cyber Monday shopping period concluded, we are updating our outlook based on the current trends in the business, including the industry wide headwinds in the video game category. We anticipate the cyclicality of the console business to continue to impact sales through the rest of the Q4 and into 2020 until the launch of Generation 9 consoles from Sony and Microsoft. We also continue to anticipate a much lighter title slate from publishers given the pending launch of new consoles next year and have already experienced 1 publisher announcing a number of title delays into next year, which contributed to a portion of our downward revision for fiscal 2019. In light of those trends, we now anticipate consolidated comparable same store sales for fiscal 2019 to decline in the high teens. As we continue our evaluation of underperforming aspects of our business, we are on track to have between 230,250 less stores on a global basis, net of new openings by the end of fiscal 2019. The closure rate of underperforming stores is very consistent with the last several years and supports our continued efforts to de densify our fleet to optimize profit production in select markets and trade areas. Approximately 140 of these underperforming stores closed already earlier in the year. Further, as George mentioned, after a thorough and careful review of our business in the 4 Nordic countries, Denmark, Finland, Norway and Sweden, we have begun the process to wind down these operations and expect to exit these markets in full by late 2020. 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 Given the aggregate impact of the above items, particularly the softer than expected trend in sales, we now expect EPS for the full year after adjusting for one time items to be in the $0.10 to $0.20 range. Despite the top line declines in the business, our balance sheet remains strong as we anticipate ending the year with total cash and liquidity in excess of $1,000,000,000 and we expect to generate between $200,000,000 $220,000,000 in adjusted free cash flow for fiscal 2019. Our objectives remain unchanged and we are maniacally focused on continuing to make the necessary changes to 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 experience expected robust sales increases in late 2020 led by the Generation 9 hardware and software slate. I will now turn the call over to the operator, we'll take any questions that you may have. We'll now take our first question from Stephanie Wissink with Jefferies. Please go ahead. Hi. This is Ashley Helgans on for Steph Wissink. Thanks for taking our question. The SG and A ratio remains distorted versus sales even with the cost optimization program in place. How should we think about the phasing of savings going forward? Yes, I think hi, Ashley, this is Jim. I think you can as we've talked about, vast majority of savings, you can see it in the Q3 this year versus last year. But as it starts to annualize over the course of 2020, you're going to see obviously better impact on an annualized basis. You're just really seeing the 1st full quarter of the effect in the Q3 this year. Okay, great. That's helpful. And then if I could squeeze in one more, just on the collectibles margins were down year over year. Any reason for the change? Yes, Ashley, it's George. We saw the need to work through some inventory that was not as productive as what's being brought in from a collectible standpoint. So it is the loan category that actually had margin rate go down and it was a very conscious effort on our part to move through some inventory. I think this is also indicative of how we are focused on the inventory management and being able to take decisive action on places where it makes sense for us to do it, especially as we then manage our buy plans going forward. Thank you, guys, for the color. I'll pass it off to someone else. We'll now take our next question from Seth Sigman with Credit Suisse. Please go ahead. Hi, this is Laresh Ananya on for Seth Sigman. First question is on, I mean, free cash flow. I mean, could you just talk about the components of free cash flow for the year and how are you thinking about the levers to offset the lower earnings? Yes. I think it's very straightforward. I think the biggest driver of free cash flow from the perspective of us continuing to generate strong free cash flow is our focus on inventory management. And this is a critical factor as we continue to drive our inventory levels down, manage the way that we're buying inventory, manage the way we're turning inventory over, manage the end to end lifecycle of our really all the way through initial set, all the way through promo and markdown in terms of the product lifecycle. That is how we really view the generation of free cash flow in this business and the main driver. Got it. And just a follow-up on the cost reduction plan. Do you have any updated views on how the cost instruction is progressing? And I mean, are you able to find any incremental opportunity versus your prior plan? And related to that, in the short term, I mean, to what extent do you think this may be weighing on sales? Let me start off with your question on cost. I think we said 40% last time out in at the end of the last quarter and better than 50% away there on the expense reduction side of the $200,000,000 So roughly half half, dollars 100,000,000 from cost out and $100,000,000 from things like gross profit expansion. We feel very good about this. I mean, we're again, it's a moving target. We continue to make progress on the cost that we see full visibility getting that full $100,000,000 out. And obviously, we understand that that flows straight to the bottom line. So if there's upside to be had, we'll certainly go pursue it. I mean, are you seeing any impact on sales in the shopping from this? Impact on sales? Yes, from the changes you're making within the stores and rationalizing SKUs and any other initiatives around what the works for you? Yes. I think the best way to think about that is related to the comment that I made regarding the margin expansion and really the impact of having a better force at having a better viewpoint in terms of SKU rationalization and the turnover of the inventory has allowed for margin expansion at the category level on virtually all video game categories. We expect to continue to see that as we go forward, where we're really just starting to see the early fruits of that labor. Obviously, thank you. You bet. We'll now take our next question from Ray Stochel with Consumer Edge Research. Please go ahead. Great. Thanks for taking my question. Can you discuss what you all are seeing from publicly available information on the next gen console announcements and how you think about that impacting your business in 2020 beyond? A couple of key topics that we're talking about with investors is the fact that it has a disk drive, not as much of a jump in file size, some of the details around the solid state drives and then of course subscription and even backwards compatibility. Thanks. Yes, Ray. We know virtually the same thing you do. So we learn from the same basic sources. We're obviously thrilled that there's a disk drive in both consoles going forward. That's certainly very, very meaningful to our business. And I'd say that looking ahead, I mean, all those things combined, having the disc, presumably having a higher price point, although we don't know that definitively as well, having other offers in place, even having subscription models, which we think we can play a role in, a role in selling are all positive for us. We remain supremely confident in our bounce back in on or about November of next year. And I think there'll be a point next year we can almost name the date. I mean that is going to have a profound impact on our business. We tend to over index early cycle because the disc requires some level of education to the consumer. There's a choice to be made. There's functionality to explain. There's context to be given and that's where we excel. So that's why we're having good conversations with our vendor base and certainly that's why we're very bullish on what's going to happen with this company about 11 months from now. Got it. Thanks. And then is there any way that you could comment on the all digital Xbox offers? How you think that SKU is performing in the market and to the extent that you guys are talking to Microsoft about that SKU and the trade in deals that they've had around that SKU? Thanks. Yes. As you know, Ray, we brought it in for the holiday season. We featured it on Black Friday and we moved the unit pretty well. Our team embraced it and certainly we believe that we have to embrace digital options and this is one of them. So it obviously you can conclude that we found a favorable terms to go ahead and pull this into our assortment and we're happy with the way it performed. Great. Thanks so much again, guys. Thank you. We'll now take our next question from Curtis Nagle with Bank of America. Please go ahead. Good evening. Thanks for taking the question. I guess just the first one to focus on the buyback. And I guess why buyback so much stock when at the moment there's still so much uncertainty around the business and results continue to disappoint. I'd disappoint that there's a new cycle coming, but it's a year from now and a lot can happen from then to now or now to then. And why is it not in the best interest of the company to preserve cash? Yes, Kurt, this is Jim. I think, again, we constantly evaluate what the optimum utilization of capital is. And when we say optimum, meaning optimizing returns for our shareholders. And that's a balance of maintaining appropriate levels of cash and strength of our balance sheet. It involves the management of our debt ratios. It involves ultimately where we think is appropriate in a very metered way today in terms of any potential CapEx in the business. But it also involves really being able to return capital to shareholders, especially when we see depressed pricing in the marketplaces that we've seen in our stock. Simply speaking, I think it's a view to the fact that we believe our stock is undervalued, and we think that it's an appropriate and prudent use of capital to return that capital to our shareholders via the buybacks. And I'm just going to reemphasize that last point. We buy back stock because we fundamentally believe that our stock is trading at a discount. And we're very confident as to where our stock's heading given what's going to happen in 11 months. So we're very, very confident about that bounce back. We're very confident that all the work that's being done right now around margin structure is going to pay off in the form of profit flow through when sales return and we're certainly going to. Got it. And then just a follow-up, if we could just go through the parameters on 4Q. First on comps based on year to date and the new guide, it looks like 4Q is guiding down to around something over 20%. Is that right? And then the math gets a little funny in terms of profitability and kind of a share count, but I think the implied EBITDA is something around $150,000,000 give or take in EBITDA. Is that right? And then just one more if I could follow-up. The bridge between adjusted and non adjusted free cash flow? Yes. The primary bridge on this, let me take the last one first. Everything you're saying in terms of some of your early model taking in are, so I'll address the first part, taking in your our release and the comments on the call are they're directionally accurate. Now the second part of your question is I'm sorry, repeat that, the second part about? Yes. Just in terms of what's the dollar bridge between adjusted and non adjusted? On the adjusted. Yes, yes. We and again, we described this in the past. Last year, we had some late inventory that was related to Q4 of 2018. That carried over over $400,000,000 of AP that got paid in the 1st week or 2 of fiscal 2019 from 2018. So just when we talk about adjusted free cash flow, it's really affecting that that was really related to 2018 inventory levels and the inventory buys. That's all. So a little over $400,000,000 Okay, terrific. Thanks very much. You bet. We'll now take our next question from Joe Feldman with Telsey Advisory Group. Please go ahead. Yes. Hi, guys. Thanks for taking the question. I wanted to ask, I know we're talking about profitability improving and I know it's hard when you have sales coming down at this level. But can you and you said I think you're 50% of the way on that cost savings. Where should we see that? I mean, I guess I'm not quite seeing that in the model yet. And I'm curious as to can you maybe highlight where that is showing up? Yes. The first part of it from a cost structure is really all in the SG and A. And that's again, we're about 50 percent of the way there to the $100,000,000 roughly $100,000,000 that we talked about on a cost side. You're starting to see a little bit in terms of some of the margin expansion components, albeit there's some product mix effects in there as well. But this is really starting to the main impact is in the cost side, in the SG and A. And Joe, let me add, I think you've got to look at the difference between in year and run rate. So when we talk about giving you $100,000,000 of expense saving as part of our $200,000,000 profit improvement plan, that is run rate. So in your savings, you can correctly infer that the majority of what you're going to see in year in 2019 is going to come from some of the structural changes that we made toward the end of the summer. The rest of it is going to be forward looking run rate contract changes. So it's a you shouldn't be looking for $40,000,000 or for $50,000,000 just a subset of that that's in your saves. Just to be clear, that $200,000,000 was a run rate exiting 2020 into 2021. So we and that's the accumulation over the course of the time frame that we've been working on already and continuing to work on it throughout the course of the next handful of quarters. Got it. Thanks. And then just a quick follow-up. I know you guys changed the loyalty program and there's a new tier for the pro. I guess just curious how the response has been and maybe with regard to sign ups or the and just the feedback you're getting? Yes, it's been terrific. Thanks for asking. I mean the change is really meant to drive frequency of trips into the store. It is really built off the premise of some level of coupon every single month during the year of membership. We were thrilled with the sign up rates that we've seen since launching the program. So it's off to a nice start. Certainly, we leveraged that over holiday Black Friday weekend and we've seen very good progress on the program and just a great reception by the customer. And there are no further questions. I'd now like to turn the call back over to Mr. George Sherman for closing remarks. Thank you. Thanks very much for joining us today. We appreciate everyone's continued interest in GameStop. I want to again take the opportunity to thank our teams for their hard work during this, the hardest season of the year for our teams, especially at weekends like Black Friday, Cyber Monday, all the time and the effort that they put in. I want to thank them for everything they do to make our year a success for holiday 2019 a success. As a management team, we continue to work with a sense of urgency to improve the business model and position GameStop for long term success. We appreciate all the support of our stakeholders as we transition to the future. Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.