Earnings Call: Q3 2016

Nov 22, 2016

Good day, and welcome to GameStop Corporation's Third Quarter 2016 Earnings Conference Call. A supplemental slide presentation is available at investor. Gamestop.com. At the conclusion of this announcement, a question and answer session will be conducted electronically. I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop's public documents and is a property of Game Stop. It is not for rebroadcast or use by any other party without the prior written consent of GameStop. At this time, I would like to turn the call over to Paul Raines. Please go ahead. Thank you. Good afternoon and welcome to the GameStop earnings call. I want to first thank our family of associates for their efforts and ask them to make this the best holiday season ever for our family of companies. Speaking with me today are Rob Lloyd and Tony Bartel. And available in the room to answer your questions are Mike Hogan, Mike Mahler, Mike Buskey, Jason Ellis and Matt Hodges. Our Q3 played out along the lines of the guidance revision we issued on November 2. Video game hardware and software came in below our forecast and caused us to reduce our original guidance. Hardware sales declined by double digits and new software and pre owned value sales declined mid single digits. Most of our miss related to the weak pickup rate on a few key titles and related hardware bundles. There has been a lot of discussion about the rate of change in digital penetration, but the truth is that in the console business only Sony and Microsoft know the exact numbers of the entire ecosystem. We are comfortable with the digital transition of our console business at 5% per year as outlined in our Investor Day document. As we think about what our cash flow generation looks like across several potential scenarios regarding digital penetration, we feel very confident in our ability to transform our business, appropriately manage our variable versus fixed costs and ultimately drive strong long term free cash flows, which will support our balanced approach to capital allocation, including a commitment to repurchase activity and our strong dividend. Further, we have prepared for this digital migration through an innovative diversification of our business and a full half of our profit came from these new ventures in this last quarter. We also expect lift from 3 new consoles plus virtual reality next year, but more on that later. Moving on to our growth businesses, they all had very good quarters. Our digital business grew 13.2% with particular strength coming from our mobile segment including animation throwdown. Also remember that we are linked to the growth in console digital gaming through our sale of digital currency for the PlayStation Network and Xbox Live as well as downloadable content. We have a 35% to 40% market share of those digital currency products and this portion of our digital business grew 26% during the quarter. Collectibles grew 37.3% led by hot intellectual properties such as Pokemon, 5 Nights at Freddy's and Harry Potter. We expect continued growth in this category as we continue to integrate our GameStop branded stores, thinkgeek.com website and our ThinkGeek and Xyng standalone stores. We will also benefit as we globally maximize supply chain and merchandising efficiencies. Technology Brands had a strong quarter as we integrated our largest acquisition, weathered through the Samsung recall and still managed to deliver a whopping 262% increase in operating earnings for the quarter, strong performance and we recognize Jason Ellis and his team in Salt Lake City for another good quarter. Our capital allocation policy remains unchanged as we continue to pay our dividend and buyback shares in line with our previous guidance. So you see the GME team continues to be optimistic and energized. We foresaw the cyclical downturn of the console industry as well as the digital migration and we strategically and proactively have been preparing for it by diversifying the company. Unfortunately, last month, some key titles underperformed our expectations, but that happens from time to time in a hit driven category. Our job is to improve our ability to forecast those titles and mitigate risks. Our operating earnings were up 9% over last year, but our overall earnings were hampered by debt costs related to the recent AT and T dealer acquisitions. Those dealer acquisitions are highly accretive to us and we are excited to be working with such a great partner. We are cautiously optimistic on the future of video gaming. The arrival of virtual reality in larger quantities creates an opportunity for us. The Nintendo Switch, which I played at Nintendo a few weeks ago, we believe could be another game changer that will expand the audience for gaming. And the new PlayStation and Microsoft Scorpio consoles will also provide innovation to the category. Our digital business will continue as we ride the growth of DLC, gaming currency, indie titles and our congregate mobile game publisher. The collectibles business is big and getting bigger. Managing the fast growth of the category with the variety of omni channel and standalone formats we use for distribution is complex, but it's in our wheelhouse. We saw strong growth in the early days of video gaming, so we are prepared for it on the collectible side. Lastly, our technology brands is one of the most exciting growth units we have and our partnership with AT and T will continue to bring us greater opportunities. The foundation for all these businesses continues to be our PowerUp Rewards program. At roughly 50,000,000 members worldwide, the CRM program brings us many advantages. 1st, it brings us deep consumer insights as we execute weekly and monthly consumer survey panels to understand their behavior in gaming, collectibles, mobile and other products. As an example, we discovered through our PowerUp Rewards catalog that our gaming consumers really like the ThinkGeek items for the use of their points, which led us ultimately to the acquisition of that innovative website called thinkgeek.com. Another advantage is that we are also able to pinpoint what specific collectible item consumers want with a video game like a statue or a T shirt. PowerUp also allows us to have tailored communication directly with members via email or their PowerUp phone app. As an example, we can identify which consumers have the heaviest trade inventory at home to provide incentives for them to come in and trade towards a new title. Another example of this power is the promotion we stealthily launched today to provide for a $1 purchase of Call of Duty: Infinite Warfare with selected trades. We are only beginning to scratch the surface of the potential of this program. In summary, we enter the holiday season with optimism. Our strategy for the last few years has been to diversify the business and we're seeing solid signs of progress on that front. The fact that our operating earnings increased this quarter in the face of negative physical video games is an indicator of that progress. Another indicator of progress is the fact that this quarter 50% of our earnings came from businesses other than physical gaming. Now the Q4 is all about execution and delighting our customers in our stores and websites. We hope to do so and expect to report solid results in our January update. And with that, I will now turn the call over to Rob. Thank you, Paul. Hello, everyone. As you can see in the release, we separated Tech Brands out into its own category due to its rapid growth and materiality to our overall business. It was previously included in mobile and consumer electronics. Starting now, we will report the mobile and consumer electronics sales that occur in the GameStop branded stores in the other category. With that, let's dive right into the results of the quarter. Total sales were $1,960,000,000 a decrease of 2.8% compared to the prior year quarter. Comparable store sales decreased 6.5% driven by a 20.6% decline in hardware and 8.6% in software. The U. S. Comp was down 8.4% and the international comps were down 2.3%. Pre owned sales declined 6.4% during the quarter, but continued to outperform hardware and software. Hardware margins increased from the prior year quarter due to warranty sales. Software margins were comparable to last year. Pre owned margin for the quarter was up was 46.4%, up slightly from Q3 2015. Digital receipts increased 13.2% driven by DLC and console digital currency. GAAP digital revenues increased 11.8%, led by the contribution from Animation Throwdown, our new Fox game on Kongregate. GAAP digital gross profit was 35,000,000 dollars up 11% from Q3 last year with the margin rate reaching 78.3 percent comparable to Q3 2015 but down from Q2 due to the mix of gross versus net sales recognition within the category. Tech Brands revenues grew 54.4 percent to $216,300,000 and Tech Brands operating earnings were $23,500,000 an increase as Paul said of 2 62% compared to Q3 last year. Year to date Tech Brands has delivered $56,000,000 of operating earnings, a 4 56% increase from $10,100,000 last year. The operating margin for the quarter was 10.9% and year to date was 10.1%. Collectibles revenues grew 37.3% compared to the prior year quarter. This is the Q1 with ThinkGeek results included in both periods. Our collectibles margin rate was 36.3 from Q3 last year. 3rd party fulfillment costs for ThinkGeek will continue to impact the category margin rates until we complete the move of the ThinkGeek distribution operations in early 2017. On the strength of our new higher gross margins were 36.1 percent, up 3 60 basis points from last year. Year to date, gross margins are 3.90 basis points. The expansion of gross margin and the growth in gross profit comes from the shift in sales mix from hardware and software, to higher margin sales categories like Tech Brands, Collectibles and Digital. 1 third of our gross profit in the quarter came from our diversified businesses, up from 23% in the year ago quarter. SG and A increased $41,600,000 or 8% due to the growth in technology brands. SG and A as a percentage of sales increased from 26.1% in the prior year quarter to 28.9% for this year's Q3. The increase was due to the decline in sales overall and the growth of Tech Brands. SG and A in the video game brand segments declined 11,100,000 dollars To date, we've made good progress on our $30,000,000 cost reduction goal reducing by $26,700,000 through 9 months. Despite the softness in video game sales, our operating earnings grew 9% to $98,800,000 Note that 50% of operating earnings in the quarter came from sources other than physical games, a trend that we called out during our Investor Day earlier this year. As a reminder, in fiscal 2015, 25% of our earnings came from non physical gaming and we expect that number to reach 30% or more for fiscal 2016. Interest expense increased by $8,300,000 year over year due to the issuance of additional senior notes and borrowings on our line of credit. Our tax rate at 39.5% was higher than Q3 of last year due to return to provision adjustments recorded in the quarter. Net income decreased $5,100,000 from $55,900,000 in the 3rd quarter of last year. Our EPS came in at $0.49 the high end of the revised guidance we issued on November 2. Let me shift now to store counts. We closed a net of 9 video game stores and now have 3,940 in the U. S. And 2,008 internationally. Year to date, we've closed a net of 98 video game stores. We now have 1569 technology brand stores, including 1429 AT and T branded stores. We now have 69 collectible stores, 15 ThinkGeek in the U. S. And 54 Xyng stores in other parts of the world. Our free cash flow through July was down compared to the same period last year due to the timing of inventory purchases and subsequent payments, which resulted in $200,000,000 more in inventory, which is already paid for going into Q3 this year. This unlevered inventory was sold through in the 3rd quarter. That coupled with inventory purchases and accounts payable timing in Q3 resulted in year to date free cash flow of approximately $31,000,000 which is comparable to $54,700,000 through 9 months last year. We are on pace to exceed $400,000,000 in free cash flow for the year within our cash flow guidance. Our board approved our quarterly dividend of $0.37 per share payable on December 13. By the end of this fiscal year, we will have paid out close to $700,000,000 in dividends since we initiated the program in February 2012. During the quarter, we bought back 1,350,000 shares at an average price of $26.63 for a total of $36,000,000 Since the end of the quarter, totaled 1,940,000,000 dollars Coupled with dividends, we've returned more than $2,600,000,000 to shareholders in the past 7 years, while also making investments to diversify the business. Now I'll move on to 4th quarter guidance. Global revenues are forecast to range between down 10% and down 5%, with same store sales ranging from down 12% to down 7%. Both hardware and software sales are expected to decline approximately 15% to 20%. This forecasted decline is based on comparisons to last year's title slate and known title launch and hardware results so far. As we think about the cadence of the quarter for the total industry, we expect November to be down over 20%, December to be down double digits and January to be near flat to the prior year. We're forecasting pre owned revenues to be down approximately 2% to 4% in Q4 versus the prior year quarter. We expect collectible sales for the full year to come in closer to the high end of our $450,000,000 to $500,000,000 range. Tech Brands sales are expected to grow more than 35% in the 4th quarter. We expect operating earnings from Tech Brands to be $30,000,000 or more for the quarter. We are reaffirming our Investor Day guidance of operating earnings of $85,000,000 or more for Tech Brands in fiscal 2016. We expect earnings per share for the 4th quarter to be in a range between $2.23 $2.38 per share. And for the full year, we're maintaining the EPS range we gave $3.65 to $3.80 per share. I'll now turn it over to Tony for his comments. Thanks, Rob. Our Q3 underscores the importance of the strategic vision we laid out during our Investor Day back in the spring. While the traditional video game market continues to transform itself, we have taken decisive and proactive steps to offset the expected decline with gains in digital, technology brands and collectibles. One of the key takeaways for our investors is that newer businesses have historically stronger margin and growth rates, which is allowing us to expand the profitability profile of our overall business. While new innovation drove share gains for us in October and flat share for the quarter, consoles and video games underperformed our expectations, particularly those that were launched in late October. And while we expected to see continued erosion in video games in the Q4 as Rob shared, we also expect to gain additional share as we have more titles launching. There were some bright spots to note. First, we are seeing strong demand for new consoles. The PS4 Pro is off to a strong start and VR is generally on the shelves for less than 10 days. According to NPD, we dominated the VR launch with 40% market share on VR software and hardware during the quarter. Pokemon Sun and Moon were the largest launch of the year and we expect to see strong demand throughout the holiday period for these titles. We're also seeing solid consumer interest for the upcoming launch of Switch from Nintendo. The Switch uses physical media and Nintendo products had historically had a low digital download rate. So we expect this to be a console that drives strong sales of physical products along with the console. This plays to our strength as our attach rate on physical games is twice the rest of the industry when we sell new hardware. As we think about 2017, we're growing more confident about the quality and breadth of the upcoming console refresh cycle. As with previous launches, PowerUp Rewards gives us a strong competitive advantage and next year's launches will also play to our strengths. For instance, we know that 27% of our PowerUp Rewards customers who are aware of the Nintendo Switch plan to purchase its console. This pre launch metric is in line with the purchase intent for the Xbox 1 at the same point in time. As a reminder, over 3 quarters of our sales come from our 50,000,000 PowerUp Award members. Over the last 12 months, we have grown this powerful program by 10 percent globally. This strong and loyal group remains a critical competitive advantage for us and has allowed us to grow our share over the last few years despite the transformation that is happening on the gaming side of the business. Our decline in pre owned sales reflect the slow new game sales during the Q2. We continue to seek out next generation product to meet demand. Year to date, pre owned sales growth is 6 point 4 points higher than new software growth, and we expect to end the year with a double digit spread as we've seen strong trades come in with recent launches. We are working closely with our publishing partners to bolster new game sales. And you can see one of those programs in our stores today as we are selling Activision's Call of Duty: Infinite Warfare Standard Edition for $1 plus the trade of 1 of 30 select games. This provides great value that will shift new game sales forward from Black Friday by leveraging our powerful worth database as well as our buy sell trade program. I also want to make sure that I highlight the strength of our digital business, which grew 13%. Key drivers of our growth were our mobile games, console currency and downloadable content. Kongregate launched its 2 most successful games ever during the quarter: Animation Throwdown featuring popular Fox IP and Peter Mollinu's The Trail. Animation Throwdown has 5,000,000 installs on the iOS and Android platforms and was the number one game on Android and the number 2 game on iOS at launch. It remains the top 50 grossing games in dozens of countries. Peter Mollinu's The Trail is an Apple Editor's Choice and has reached 4,000,000 installs in less than 2 weeks. This beautiful and innovative game was number 1 on iOS and number 5 on Android in its launch week. This game is already a top 50 grossing game in 40 countries. We expect both of these games to have long revenue producing tails and we encourage you to download them on your mobile devices. We are also driving our indie business. Based on the successful launch of our Song of the Need title, we now have dedicated space in each of our U. S. GameStop branded stores for top Steam games. This allows us to use our marketing and buy sell trade model along with power of awards to drive additional digital sales outside of the console ecosystem. Turning to Technology Brands, we finished a very successful quarter in spite of significant headwinds. During the quarter, we seamlessly integrated 436 stores into our Technology Brands business. Through strong coordination with our AT and T partners, we integrated all of these stores while maintaining best in class customer service. Even more impressive is the fact that we continue to improve efficiency in our acquired stores. Including the most recent acquisitions, we continue to improve store productivity by over 30% and are significantly exceeding our 20% IRR hurdle. We also continue to add annuity like subscriber management fees with each acquisition. For the quarter, Tech Brands grew operating profit nearly fourfold in spite of strong product headwinds. As many of you know, the Samsung Note 7 was projected to be an innovative driver of the business. However, its massive recall, coupled with a low supply of iPhone 7s impacted profitability in our stores. We did see resilient flat comp traffic in our stores, but our comp gross profit per store fell by 9.5% due to product shortages. We mitigate some of the product outages with the sale of fast growth ancillary products such as DIRECTV and high speed Internet. As an example, DIRECTV sales were up 12% on a comp store basis over the 2nd quarter. This demonstrates the power of choosing the right partner as AT and T continues to bring us new innovative products that drive traffic and profits. We are on track to deliver our previously announced guidance of $85,000,000 to $100,000,000 of operating profit from Technology Brands this year, more than tripling last year's performance. Our operating margin rate will exceed 10% for the year. Collectibles also continued their strong growth trajectory as we added 22 dedicated stores globally and increased square footage inside our GameStop branded stores during the quarter. We expect to end the year with over 10% of our square footage dedicated to this exciting growth category. We see collectibles as a strong category with a rich and long history as well as a very predictable launch schedule. As a reminder, our addressable category in the U. S. Alone is $11,000,000,000 We believe this market grow to $16,000,000,000 by 2019, which would make it larger than physical video games by that time. Details on this category are shown on Slide 11. We've also included a calendar of notable releases and events through 2017 on Slide 12. This illustrates the consistent launch driven nature of this business. In addition, we also show projected launches of major movie IP through 2020 on Slide 13. Please note that these are 4 IPs with over $25,000,000,000 of box office receipts that are planning on launching dozens of movies in the next 4 years. We are actively working to partner with all major IP holders, many of whom we do business with today. Mike Hogan and Mike Mahler are leading our global licensing efforts and recently procured agreements with several key IP holders to provide exclusive global products for our collectibles ecosystem. Also, we are leveraging PowerUp Rewards and Thinkgeek dotcom to drive our product development and discovery of this category in our stores. We are also leveraging the strong ThinkGeek name globally. We expect to end the year with over 60% annual collectibles revenue growth and expect to continue strong growth in 2017. In summary, while the video game market continues to transform, our diversification efforts are working. They have accelerated and they are keeping us on track towards the 2019 goals that we shared at Investment Day. With that, I'll turn the call back over to Sol. Great. Thank you, Tony. Operator, I think now we'll move into the Q and A session of the call. We go first to Brian Nagel with Oppenheimer. Go ahead please. Hi, good afternoon. Hey, Brian. A couple of questions here. First off, on the pre owned or the used business, I guess the and you addressed a lot of it in the prepared comments. My question is, as we look at the weakness there at this point in the cycle, is it more of a, do you think, supply or demand driven softness in sales? And then the second question on that is, is the guidance you laid out for the 4th quarter did assume it seemed like a bit of an improvement from what we saw in fiscal Q3, not significantly. But nonetheless, what should we think about as drivers there for that modest strength in the years? And then I'll follow-up with another question. Yes, Brian, I'll let probably Tony is probably the right guy to end. But just remember, in the old days at GameStop, pre owned was the high margin category. Remember that? That was where we could go to. And then when hardware would come out, our margins would decline. And then when hardware would age, margins would go up as pre owned had a higher penetration. What's interesting is we have created this strategy that diversifies our company so that pre owned is not the only high margin category. In fact, I would say probably little higher margin than collectibles, but certainly tech brands and digital are much higher margin than pre owned. So we have to keep that in mind. Tony, you want to talk about the trade issues? Sure. To answer you directly, Brian, it is a supply issue at this point. We had a low new game sales in Q2. So it takes about 90 to 120 days for that to cycle through. So there's a lot of demand for the product, especially the next gen product that we have. So that's why programs like the $1 trade program that we have today are so vital because they're bringing in a lot of that product that people want. So that's how we're going to be able to drive that supply. We see plenty of demand. Rob, you want to talk about the guidance that you've assumed in Q4 versus Q3? So Tony talked about that it is a little bit of a lag time between when the new titles that launch drive the trade in activity in the stores and then we can turn around and sell that. And so sequentially with Q3 driving more trade activity than Q2, it sets us up for better performance on a relative basis in Q4. Okay. Got it. And then secondly, if I could follow-up, I wanted to ask a question on the collectibles business as well. If you look into my model, the growth did slow down year on year in the Q3, but as you mentioned, that was a lap. I think based on the lab, I think, you sounded positive going forward. But how should we if we think about our models, how should we think about the year on year growth in the collectibles business? Is there kind of parameters you can give us for that? In terms of like 2017? Yes. As Tony talked about, I think, Tony, you said 60% for the full year 2016. I think it's too early to give you guidance on 2017. You can think about a roadmap though that takes us from both Tony and I talked about the sales being closer to the high end of the guidance range we gave you for this year. So that's 500,000,000 dollars on our way to $1,000,000,000 by the end of 2019. So obviously you've got to grow every year in order to achieve that and we have a lot of confidence in our ability to do that. The strategy is diversify the company into accretive margin categories. So when you hear Tony talking about Mike Hogan and Mike Mahler working on licensing, for example, the idea of that is that we do bigger deals and have more exclusive licensing to help us keep growing that collectibles business. Maybe you guys want to talk about Sure. Mike Hogan and myself have spent a lot of time working with the IP holders to expand our relationships outside of video games. In fact, we've made really good progress with that over the last few months. And these IP holders are really looking for partners that can create a broad range of innovative products to maintain the excitement around their IP and at the same time to partner with somebody that can help maintain the excitement on their IP between their launches. So with Batman having one movie every 2 years, they want to maintain excitement around the Batman IP between those movies. And GameStop represents a perfect partner to be able to do that through our video game stores, collectible stores, ThinkGeek solutions and our 50,000,000 loyalty members. So we represent a very good partner for them. Mike, do you want to add to that? Yes. I would just add that to Mike's point, I think for our perspective, we believe that this is a huge category. As we talk with our video game partners, I think what they see in this is, here's a category that's almost as big as physical video gaming and the perspective for our business to grow with them on the collectible side, close to what it is on the video game side is a big opportunity. And as Mike said, our global footprint and all the various channels in which we bring this to life. And there are things that only GameStop can uniquely do in terms of attaching physical plus digital, in terms of attaching the right collectible to the right video game property with a targeted consumer through PowerUp Rewards. So we think there's some unique opportunities there that don't exist anywhere else in the market. So we look for fragmented marketplaces. That's what we did with Technology Brands as Jason and his team rolled up a bunch of small dealers. If you look at collectibles, we rolled up a bunch of smaller business formats into our Game Stop stores and that's what these guys are going to try to do on licensing. So more to come on that. Well, thank you. Good luck for the holidays. Thank you, Brian. Next to Brian Stonko of Consumer Edge Research. Go ahead. Hi, guys. Thanks for taking the call. Can you guys just help me understand the switch demand metric that you guys mentioned of 27%, which kind of suggests there could be a similar number of units to the Xbox 1 sold, which and then kind of walk us through if we get a similar number of Switch units as Xbox 1 units sold, what happens to that longer term guidance that you mentioned? Mike, you want to take that? Sure. So, I guess the best way to answer that question is to go back several years, right? So if you go back several years ago prior to the launch of the Xbox 1 and the PS4, we start tracking this and we will track it with our PowerUp members and also with the broad sample. And so what we're looking at first of all is awareness, people who are aware of the product and what they know about it. And second is purchase interest. So purchase interest essentially means the number of people who say, yes, I'm interested in this product. Obviously, not necessarily every one of those people is necessarily going to buy a product, but it's a good benchmark because you can compare it cycle over cycle. And I think the point Tony was making is that as we tracked the PS4 and the Xbox 1 over time, we saw obviously those both of those curves would build. And when we were a similar time less than 6 months out from launch that 27% purchase interest a number that we saw on the Xbox 1 and it's absolutely true we're seeing similar purchase interest in the Nintendo Switch. So I think it's fair to say that that bodes well for the launch and the success of this product, keeping in mind that we don't even have specific details and price points on the market. I think we're going to be doing the survey again in mid January after all the details are out. And I think we'll have a much better read on it at that time. But for right now, everything we're seeing is very, very encouraging. And remember, Ray, the other thing important to understand, if you think back to when we launched the PS4, which seems like a long time ago, I don't think it was, but seems like a long time ago. When we launched that item, a full 46%, 47% Tony of the transactions that during the launch cycle had a trade associated with them and a full 24%, 25% were paid for in full with trade credits. So that's the reason we dominated the launch of that console. I think that's the same reason we'll dominate this Nintendo Switch launch. But we'll know more in January once they announce specifics. That's great. And just a quick follow-up, Since you are having this demand for the switch and all this new hardware is coming out and being talked about in the news, are you guys able to quantify any impact from delays of sales simply due to these new hardware announcements? I think it's early for us to plan that out, but we don't have a lot of knowledge yet. I've just to share a little bit of what we did, we were at Nintendo with a group of us maybe 3 or 4 weeks ago. And they've historically struggled, right guys, on delivery of product and so forth. They appear to be more focused on planning the launch, but I don't think we'll know till we know in January. So we wouldn't quantify a lot of things, but I think it's too early and maybe premature. There was definitely a slowdown in the sale of the PS4 prior to the PS4 Pro. That was definitely but the PS4 Pro once launched took right back off again. So that was clear. Great. Thanks so much guys. Thank you. And next to Collyn Sebastian with Robert Baird. Go ahead please. Thanks guys. Couple of follow ups first off and then longer term question. On the current video game environment, it sounds like you're expecting more or less ongoing soft selling trends for the balance of the holiday period. So I'm wondering how much you think consumers may just be conditioned to wait for bigger discounts on products from the Black Friday period onward? And then can you clarify on some of the discounts we're seeing now such as Call of Duty for $1 How much of that in of the discounts in the channel are being funded by retail or by the publishers understanding that there is cooperation from both sides at this time of year? I'll let Tony take those, but we don't you've seen our financials. We don't do a lot of funding. So, Tom, do you want to take the current video game environment? Sure. Well, Collyn, we expect it to be just as competitive as it has been from a discounting standpoint. And so we definitely expect during the holiday you've seen everybody's Black Friday ads including ours. Interesting though, in our Black Friday ad, you'll see a lot of the IP that we've talked about, a lot of collectibles in there, which differentiates us from the package. It's exclusive content that you can only get at GameStop as opposed to just price, although we are very price competitive as well. I suspect that you will continue to see a level of promotion that's similar to what we've seen in the past during the holiday season. And I do believe that there's some waiting until Black Friday, which is why we launched our $1 promotion to pull some of that forward to be able to take some of that demand off of our stores on Friday. So that is definitely out there. And the second question had to do with the funding. So definitely like Paul said, we work very closely with all of our partners. And so the beauty of the buy sell trade program is basically the value of the trade is an unfunded discount to the publisher, which is so the trade credit is something that we make into inventory. And so that part obviously we take and then the rest of that obviously we work very closely with our publishing partners. And our view Colin is that we operate thousands of stores around the world. We are the market share leader. We fund payroll. We pay our occupancy. We pay the light bill and we let you work with our PowerUp Pro team to create specific targeted promotions. And so that's a significant amount of funding and it's hard to get that from anybody else. Okay, thanks. And then looking a little bit longer term, I guess the question is on the transformation both inside the store and through the diversification. It sounds like you're on track with the 3 year outlook for the non gaming segments. But I guess wondering if recent trends in the video game category would change your view or strategy on the pace of investment and the pace of rollout of these newer businesses? Thanks. Collyn, I think that and I'll let maybe Mike Hogan can also comment on this, but I think that our strategy was set for transformation and diversification of our business in light of what we've seen in cycle. I think that's still true. I think it's early, but there is a significant modeling that goes on here and I'm not sure we're ready to really get off of our original model. But Mike, you want to? Yes. I would say that we don't see any huge change. I think 2 points I think are worth mentioning. 1 is, our diversification efforts are going very well and you've seen the strong growth in collectibles and in Tech Brands. And of course, as we've said, we are continuing to look for additional opportunities and we'll see growth there. The other thing that's important to mention and we really haven't touched on it is there's a lot of growth coming potentially in the console category as well. I mean, we've got really 3 or 4 significant new innovations now that are hitting over the next year between VR and innovation from Microsoft and Sony as well as Nintendo. So I think it would be too early to suggest that there's not some positive growth out there in various external, although we have an issue to forecast for it, various sources out there have given multibillion dollar forecasts for each of these from including VR and new consoles. And the other point that needs to be made, I think, and there needs to be more discussion on is this debate over the full game download versus weak title debate. It goes back to last year, if you remember Star Wars Battlefront, we just didn't sell as many at launch as we had hoped and that happened this year as well. Our partners tend to migrate towards the digital is taking over. We have a model. It includes a significant amount of full game downloads, 25 to 30 going up 5 a year. We still stick to that model. We think it makes sense. As we said, nobody but Sony and Microsoft really knows what's happening in the full game download segment. So you got to be careful with that. But as Mike said, I think we see optimism for next year. Thanks, guys. Thanks, Colin. We'll next to Mike Olson with Piper Jaffray. Hey, good afternoon. This came up a bit in the question on promotional activity, but you described some weakness in titles launched at the end of October, obviously. How would you describe how the titles in November performed so far versus your expectations? Sonya, you want to take it? Yes. I would say that I think Rob hit on it, but I would say that Pokemon Sun and Moon, like shared with you, was the largest launch title. It was we had more preorders than we've had in 5 years. It was a fantastic launch for us. Call of Duty underperformed our expectations and the last few games we've launched recently have been pretty well at our expectations. Okay. And then you talked about Nintendo Switch as potentially having strong demand. Is it your expectation that the Switch will Yes. Yes. The Switch is a very interesting device and I debated with our guys on whether I needed to go on this trip and so forth. By the way, I did not see any other retail CEOs there. So I was privileged to be there, I guess. But Nintendo Switch has the potential to expand, I think, incrementally the audience. The reasons are, the IP is more compelling for family than the other types of IP. So Mario, all those things, a movement related game is more fun for kids, taking those accessories off the I forgot what they call them, the wings and then the master controller. You can really do a lot of interesting things with that and gameplay. And then the last thing I will say is they've got a unique portability to them. If you watch that video, that's all they put out, I think, is they have that unique portability. So you can play it as a console at home, but you take it out and take it with you wherever you're going and kids can play it and it's the right size. So I think it's really got tremendous potential as a game changer. So we'll have to wait and see like everything else in this industry, the consumers will vote with their dollars. I think it's interesting. Mike, you want to talk about back in the day of Nintendo, I mean, there's a lot of different consumers, right? Yes. If you go back and you take the category all the way back to 2,008 and you look at where the category is today, frankly, the biggest decline you've seen in the category is really a lot of those people who came in because of things like Nintendo, Wii and to some extent things like Guitar Hero. And we do think there's an opportunity to get this back. Tony talked about the research earlier. And one of the things that we have the ability to do is, of course, just to go and survey the market, including people who are more hardcore gamers and people who are more sort of broad market family gamers. And it's fair to say that we're seeing a strong interest amongst a broad group of consumers here. So we're very optimistic about the possibilities. Thank you. Thanks, Mike. Next is Seth Sigman with Credit Suisse. Go ahead please. Thanks. Good afternoon. Hey Seth. I wanted to follow-up on the decline in pre owned sales. Is that more a function of unit declines? Or are you seeing a decline in average selling prices as well? More a decline in units. Yes. ASPs, I mean, they're still healthy. Average selling price is pretty healthy. And as you can tell, we didn't report on this quarter, but we continue to outperform new games with our pre owned games. So that continues to be healthy growth differential. So ASPs are fine. It's strong demand, and we're chasing titles at this point. Got it. Okay. And then a question on Tech Brands. The operating profit improvement is obviously very encouraging. Can you give us a sense of what's actually driving that and how we should be modeling that going forward? Yes. Jason Ellis is here. Jason, you want to take that question? You bet. So Seth, thanks for the question. We're obviously driving incremental productivity out of the retail stores. We feel like we have a really unique system that allows us to do that and we've done it 35 times now. So on average we're improving the productivity by about 30% and that's good for AT and T because we're generating a lot of new revenue for them and a lot of new revenue for us. This quarter may be a little more difficult because in terms of modeling because of some of the headwind we saw with the Samsung Note recall. But outside of that, I think you can take a look at the baseline business in the Q2 of this year and move it across a much broader footprint of retail stores and that should get you a nice model at least for the next 2 years. So when I look at the last few quarters, sales per store have been down pretty meaningfully year over year. How do I reconcile that with the productivity improvements that you're seeing as you acquire these stores? Are they just coming off of a lower base? Are they less productive initially? Or is that the recalls? Or is there something else that would be causing that? Yes. And I think, Seth, one of the things that we have laid out even at Investor Day is we use gross profit in this format instead of sales just because of some of the accounting treatment and the way that the commission modeling moves around with AT and T. I think that if you look at what's happening in the gross margin part of the business and the profit per store category, you're going to see the type of improvement that you'd like to see. And there's no question that as we grow with the scale that we've grown, we're going to get some fixed cost leverage out of the business, which will draw more to the bottom line. We're also going to get better at this business as we intake what has been 800, 900 retail stores in less than a year. So expect that we're going to get better at selling and closing in the stores, margin, close rate, all of that stuff should get better. We're also very excited about the new products that AT and T has continued to innovate. So I think if you look at their roadmap and where they're making their investments, arguably some of the biggest investments in our country right now and we're going to be right at the forefront of selling those products to customers. We're pretty excited about that. Seth, this is Rob. To back up Jason's point there, If you look at the margin rates in the Tech Brands category across the quarters from the beginning of 2015 till now, they've crept up from the low 50s to over 70%. So that really speaks to that it's the gross profit and the gross margin that are more important indicators than the revenue line is. So Rob, what is the right way to think about gross profit comps going forward? In terms of the stat we've been giving out, the gross profit comp on the stores that we've owned and operated for a year, we gave some guidance on that earlier this year. The Q3 was difficult relative to that because of the things that Tony talked about supply and the note problem. I think that you should probably think about the Q4 as being similar to slightly improved. And then we'll talk about 2017 when we give out guidance in the spring. Okay. Thank you. Thank you, Seth. And we have time for 2 more questions. We'll take the first question of those 2 by Ben Schachter with Macquarie. Go ahead please. Hey guys, a few for you. On the Call of Duty underperformance, can you help quantify that versus last year? And also the dollar promotion, can you put that in context versus previous discounting? And overall, how is that Call of Duty, that particular title impacting the overall business given how big it's been in the past? And then Paul, just given where the stock is, are you guys still thinking about acquisitions? Or should we expect you to focus on buying back your own stock before looking at other acquisitions? Thanks. Wow, okay. That's a lot, Ben. Let me see if I got them all down here, man. All right. Let me start the capital allocation and so forth. And then Tony, maybe you can take what are we going to do with Call of Duty. Yes, I mean, our strategy, remember, is to create a diversified business. We've got technology brands, we've got a digital business and a collective business and we're actively seeking other formats to extend our business. We talked about licensing. That's an organic growth vehicle for us and we think it's very productive. It's not going to require a lot of CapEx, but it does leverage our assets that we acquired with thinkinc.com. So I would not say that we're actively looking for acquisitions today. I think we want to try to fill in what we've got and digest it as Jason said. And of course, we're very focused on buybacks. I mean, I think it's $1,900,000,000 we bought back. We expect to continue buying back. We filed a plan. We have guidance for this year. Rob, what's our guidance on the buyback side? 75 So you can expect us to meet that by the end of the fiscal year. So I don't think any of that has changed. Of course, if something were to pop up, we would attack it. Opportunistically, things like cricket inside our GameStop stores, those are kind of no brainers and they've been successful for us. But no, we see anything looming on the horizon. Tony, you want to talk about Call of Duty? Sure. So we don't give we're not going to talk about specific title performance. I was asked what underperformed and I'll go that far. I think you can look and realize that when we had an outperformance to the extent that we did on Pokemon and November is still down 20% that Rob talked about, I think you can kind of judge the magnitude where Call of Duty came out. So that's all I want to say on that. And then to the dollar question again, I'd say for us that's kind of taking advantage of 2 things. We're taking advantage of some aggressive offers that Activision is offering, but also our buy sell trade program, which is very lucrative. And again, it's an unfunded discount to the publishers. We partner with the publisher to get the discount and we give them the unfunded discount and it ends up being $1 So it's a great deal for the customer. It's a great deal for us because it's margin neutral for us or margin. It's the same margin that we would get otherwise and we partner with Activision, sell a lot of their games. So it's really a win win win. And it's highly differentiated for our PowerUp members because they're the only ones getting this deal. So it brings Black Friday right into Tuesday, Wednesday. So that's been very favorable for our PowerUp community. Still there, operator? Yes, I am. And we'll go next to David. Thank you, Ben. We'll go next to David Maggi with SunTrust. Go ahead, please. Yes. Hi, everybody. Good afternoon. Hi, David. Hey, Just a couple of questions here. One is on the comment that November might be down 20%, which I'm guessing is a sector comment. Is that a number that includes the downloaded titles? Rob, that? I was speaking of November in terms of what we expected for the industry. The industry measurement that we're typically talking about is NPD, which is physical. So I would say no, just to clarify that. Okay. And then, when you talk about the sector shift going on 5 points a year, 2 downloads, Have you changed your thinking about what that at what level the number sort of stabilizes? What do you think, I would say our thinking hasn't really changed. I mean, all the information that we have access to suggest that the numbers are pretty close to what we modeled and we've modeled scenarios in which it gets to a pretty high number, higher than we would even think it would get to. Yes. The other point here, David, that's important is that, we've modeled a lot of scenarios, including some that are highly unlikely. But the good news is through all those scenarios we're pretty safe from a free cash flow and an earnings perspective. So I think we're safe with that. We have a point of view that says it will unfold along the lines of what we've seen in the last year or 2 and we'll continue to diversify the business just to ensure ourselves. Great. And just lastly, maybe Rob, any thoughts about what real estate might do next year in terms of square footage growth or contraction, I should say, for 2017 at this point? Well, absent the guidance that we'll give you in March, I'll say how I've been answering that question when it comes from investors across this year is that you can think about it in the same sort of 2% to 3% decline in video game stores that we've been demonstrating across, I think, the past 6 years. So that's about optimizing the footprint and using the Power of Rewards program to drive the sales down the road and those things that we've talked about in the past. Probably a little early to talk about what we expect to see in terms of store growth from either the Tech Brands division or the collectibles only stores. I will say that we have laid out the longer roadmap on technology brands, increasing the store count. And at this point, I'd say that looks similar to what we have done for 2016. In other words, it will be a mix of opening stores and still some other retailer acquisitions we can continue to do, but no specific numbers yet. And David, again, and you know this because you've followed us, but I mean that's another power of our PowerUp Rewards program. We can close right there in Atlanta. We can close the Lenox Square store and consolidate all that customer base over to the Sydney Marcus Boulevard store and have greater Great Great. Thanks guys and happy Thanksgiving to you. Thank you, David. Okay, operator, I guess we're ready to wrap up. I would like to thank all of you for your support and for following us. We've got a host of promotional activity starting Saturday, last Saturday and then going all the way through the holiday season. We hope that everyone has a tremendous enjoyable Thanksgiving holiday with your families. We will not be open, so don't shop us on Thanksgiving Day. We want our associates to be at home, but please come see us on Black Friday and we'll look forward to talking to you on the next call. Goodbye. Ladies and gentlemen, this concludes today's conference. Thank you for your participation.