Good day. Welcome to GameStop Corporation's third quarter 2015 earnings conference call. A supplemental slide presentation is available at investor.gamestop.com. At the conclusion of the announcement, a question and answer session will be conducted electronically. Anyone wishing to ask a question may signal us by pressing the star key, followed by the digit one. If you find your question has been asked, you may remove yourself by pressing the star key followed by the digit two. I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop's public documents and is the property of GameStop. It is not for rebroadcast or use by any other party without the prior written consent of GameStop. At this time, I'd like to turn the call over to Mr. Paul Raines. Please go ahead, sir.
Thank you, operator. Welcome to the third quarter earnings call for GameStop. We thank our associates around the world for their efforts this quarter, especially want to recognize our associates at Micromania in France for the challenges they are facing. All of GameStop stands with you. We are watching events in France and Europe carefully. We will react as events unfold. Joining me today on our call are Rob Lloyd, Chief Financial Officer, Tony Bartel, Chief Operating Officer, Mike Mauler, President of International, Mik Hogan, Executive Vice President of Strategic Business, Mike Buskey, President of U.S. Stores, and Matt Hodges, our Vice President of Public and Investor Relations. While diluted earnings per share was within our range, the quarter was challenging due to underperformance of Halo and Assassin's Creed late in the quarter and lack of sales acceleration from hardware price cuts during the quarter.
There has been some discussion of Halo being a large full game download title. Our research indicates it performed at about the same level as other titles. Tony will reconcile that data in his remarks. On a more positive note, our pre-owned business had another good growth quarter at 4.9%, well ahead of overall software growth. In constant currency, this marks the seventh consecutive quarter of positive growth for pre-owned. We expect pre-owned to be as planned this year with solid growth in the fourth quarter. Our digital business grew 13.8% in constant currency and is on track to achieve over $1 billion in receipts this year. Our collectibles or Loot business also had nice growth, on track for reaching $300 million in sales this year and expanding our gross margin rate by 150 basis points in the other category.
We also now have 22 Loot stores open around the world and two ThinkGeek stores in the U.S., one in Orlando, Florida and one in Palisades, New York. A third ThinkGeek store will open soon right here in Texas. Tech Brands continues to expand rapidly as we invest to build toward our goal of $1.5 billion in revenues by 2019. During the quarter, sales grew 64% and helped drive gross profit dollar growth of 81% in the mobile and consumer electronics segment. We acquired 21 AT&T reseller stores during this quarter. Another 87 at the beginning of the fourth quarter. Reseller acquisitions for the year totaled 239 stores for $112 million. We continue to seize opportunities to grow this business by reinvesting into more acquisitions in the highly fragmented dealer space. Our relationships with AT&T and Apple are strong.
Overall, we believe GameStop's redeployment of cash flows from our Video Games businesses into adjacent retailing categories is the right strategy. This strategy builds on our core competencies in real estate, human talent, ability to deploy capital effectively, buy, sell, trade, and PowerUp Rewards. In total, revenues from non-physical gaming now comprise 17% of sales and 26% of gross profit, up from 23% last quarter, and these areas continue to grow rapidly. Over the last couple of weeks, we have seen some disruption in our shares, but we encourage investors to stay the course. GameStop achieved record third quarter gross profit, and we expanded our gross margin 280 basis points on the strength of non-video game categories. Since November 2013, our overall gross margin rate has expanded by 400 basis points.
GameStop continues to have dominant share in the video game space, and we are focused on continuing to generate positive returns through diversification into other attractive segments. We have reconfirmed guidance for the fourth quarter and are fully prepared for the upcoming holiday season. I will now turn the call over to Rob.
Thank you, Paul. Good morning. We're in the room here getting a lot of air conditioner noise or heating noise. If that's coming through, I apologize for that. I'll start today by covering the results of the third quarter. Sales decreased 3.6% in the quarter but grew 1.2% excluding FX. Comparable store sales decreased 1.1% due primarily to slower-than-expected hardware sales. Gross margins expanded 280 basis points on the strength of growth and margin expansion in mobile and collectibles. SG&A, as a percentage of sales, increased from 23.6% in the prior year quarter to 26.1% due to investments supporting Tech Brands expansion. I'll provide more color on that shortly. Interest expense increased $3.4 million because the $350 million in debt was outstanding for the entire quarter this year versus a few weeks last year.
Adjusted net income decreased 11.4% and adjusted EPS decreased 5.3% due to the decrease in sales and gross profit in the Video Game segments and due to investments supporting Tech Brands expansion. Foreign currency movement reduced sales by approximately $100 million and reduced EPS by $0.02 when compared to last year. Now, I'll recap sales and margin during the quarter for some of the categories. Hardware sales decreased 20.4%, or 15.4% excluding FX, because of the reduction in price on the PS4 in October and the Xbox One late last year, and because of the overlap of the Destiny bundle, which drove a 147% increase in new hardware in Q3 2014. Software sales declined 9.3%, or 4.2% excluding FX, because of the overlap of Destiny. Pre-owned revenue grew 0.6%, or plus 4.9% excluding FX, as we saw continued growth in next-gen pre-owned hardware and software.
Pre-owned margin rates were 46.0% at the high end of the guidance we gave on our last call. Digital receipts on a non-GAAP basis grew 8.7%, or 13.8% excluding FX, to $228.6 million for the quarter. As we said in the release, growth was led by sales of digital content for Destiny: The Taken King. GAAP digital revenues declined 27.1% year-over-year due to FX impact and because of accounting for Kongregate on a net commission basis. We will overlap that change in accounting for Kongregate in the fourth quarter. Mobile revenues increased 31.1%, driven by a 64.2% growth in our Tech Brands revenues to $140.1 million. Gross margins increased from 40.1% in Q3 last year to 55.4% as Tech Brands becomes a greater portion of the mix in this category and as margin rates in the Tech Brands business continue to expand.
We continue to invest in Tech Brands store growth. During the third quarter, we incurred $5.9 million in pre-opening costs for the 79 stores opened and the 40 or so stores to be opened during the fourth quarter. The RadioShack and GameStop conversions are taking longer than we anticipated to open, and the payroll carrying costs, pre-opening rent, and normal ramp to store profitability are impacting our Tech Brands results. As a result, the $6.5 million of operating income generated was less than we expected, an EPS impact of $0.02-$0.03. We expect significant profit growth from Tech Brands in the fourth quarter as the bulk of the openings and conversions are behind us. Revenues in the other category increased 60.8% to $138.3 million, driven by sales of interactive toys and the growth of our collectibles business. Some other data points are as follows.
We closed a net of 19 video game stores around the world. We opened 8 collectible stores during the quarter. We repurchased $44.9 million in stock in the quarter or 1.02 million shares at an average price of $43.85. Let's move on to fourth quarter guidance. As stated in our earnings release, we expect same-store sales to range from -1% to +6% and revenue growth to range from flat to +6%. Changes in foreign currency rates are expected to negatively impact revenues by $120 million when compared to the fourth quarter of last year and will negatively impact EPS by approximately $0.02-$0.03 more than we planned earlier this year. We expect to continue to expand gross margins compared to the prior year quarter as our mobile and collectibles businesses continue to grow.
As I stated earlier, operating earnings for Tech Brands are expected to grow significantly in the fourth quarter. We are guiding EPS for the fourth quarter to range from $2.12-$2.32 per share and reiterating our full year guidance of $3.66-$3.86 per share. You should model 106 million shares outstanding for the fourth quarter and 107 million for the full year based on buybacks through the end of the third quarter. For the full year, total revenues are now expected to range from flat to +3%, and same-store sales are now expected to range from +2% to +6%. I'll now turn it over to Tony for his comments.
Thank you, Rob. As Paul mentioned, new hardware sales slowed in the final month of the quarter, causing us to miss our comp guidance. We have seen that rebound in the weeks since, as consumers waited for key games such as Activision's Call of Duty: Black Ops III, Bethesda's Fallout 4, and EA's Star Wars Battlefront to purchase their hardware. Sales of Microsoft's Xbox One and Sony's PlayStation 4 are up 31% during the first two weeks of November. We continue to dominate the new console cycle, selling over one half of all Xbox One and PS4 software, generating a 53% share during the quarter. However, Halo 5 and Assassin's Creed Syndicate fell short of our expectations. The recent launches of Activision's Call of Duty: Black Ops III and Bethesda's Fallout 4 met our initial expectations, while EA's Star Wars Battlefront fell short of expectations.
Our pre-owned sales grew 4.9% during the quarter before the impact of FX, outpacing overall sales by 3.7 points and new software sales by 9.1 points. In addition, we accomplished this growth with minimal promotional activity, generating a higher-than-expected 46% margin rate for our pre-owned business. We have provided Slide 15 in our investor packet, which shows the variance in growth rates of the new and pre-owned U.S. segments for next-generation and current-generation software. As you can see, pre-owned sales growth on next-generation software of 88% outpaced new software growth of 38%. Likewise, the sales decline in current-generation pre-owned software of 27% was less than the decline in new software of 65%. Consumers are using our trade promotions to fund their purchases of new software and hardware, providing us with a strong inventory position of in-demand games and hardware.
Our PS4 and Xbox One pre-owned inventory has grown 44% compared to where it was this time last year. This gives us the opportunity to provide more value through promotions in the fourth quarter. We expect to end the year with pre-owned growth in the mid-single digits before FX for the full year. Our non-GAAP digital receipts grew 13.8% prior to FX and 8.7% after FX, and we remain on track to deliver $1 billion of digital receipts for the full year. Downloadable content of Destiny: The Taken King and Steam Wallet revenues provided the majority of the growth during the quarter. The Microsoft announcement that they had sold $400 million of Halo 5, coupled with an NPD report that only reported $119 million of U.S. Halo merchandise, has caused some to posit that digital sales were much higher on this title than on other previous launches.
We are in constant discussion with all publishers and platform holders, we believe that all major full game titles launched in this quarter were in line with previously announced digital download levels. The variance to NPD is reconciled by global sales not reported by NPD, a broader inclusion of SKUs beyond those tracked by NPD, two additional days of sales in Microsoft's announcement period versus NPD's reporting period, and sales that were reported by publishers but not reported by retailers. I will now share some data and color about the performance of our non-gaming segments. Our high-growth categories such as digital, Loot, and Tech Brands grew convincingly during the quarter and now represent more than one-quarter of our Q3 gross margin dollars. In the quarter, Loot was our fastest-growing sales category, with global sales increasing by 384% versus the prior year.
Loot also helped drive an increase in store traffic, customer basket size, and gross margin rate. We expect this category to grow to $300 million in sales for the fiscal year. This rapid growth is being driven by leveraging our newly acquired ThinkGeek business, securing a growing number of exclusive products, and having a broad assortment of well-known IPs such as "Star Wars," "Call of Duty," and "Fallout" that have strong appeal with our customer base. During the quarter, we made great strides in integrating ThinkGeek's capabilities into GameStop's growing omni-channel business, and we continue to expand Zing stores internationally and in the U.S. under the ThinkGeek brand name, ending the quarter with 22 stores, including one in the U.S. We expect to end fiscal 2015 with approximately 37 stores worldwide. Our Technology Brands stores are offering the hottest technology this holiday season and providing great service.
In addition to our rapid growth, we continue to be the most productive AT&T dealer, as well as a top-performing authorized Apple reseller. As of the end of the third quarter, we had 834 Technology Brands stores, an increase of 104% over Q3 of 2014. Including two acquisitions that we closed on November 1st, we've opened 193 new stores consisting of RadioShack conversions, GameStop conversions, and greenfield stores, and acquired 239 stores year to date. Given the constantly changing nature of compensation programs from our partners, the best way to understand growth in the Technology Brands segment is to look at gross profit dollars. During Q3, Tech Brands drove the 81% gross profit dollar growth in the mobile and CE categories. We expect for gross profit dollars to increase between 85% and 95% in the fourth quarter.
In closing, we see solid demand for our video game products during the fourth quarter. Our digital, Loot, and Technology Brands businesses will provide sales and profit growth, giving us confidence to achieve our fourth-quarter guidance and to provide strong growth for 2016 as well. With that, I'll turn the call back to you, Paul.
Thank you, Tony. With that, operator, I would say let's open up the call to questions and answers.
Thank you. If you wish to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal time to reach our equipment. Once again, that is star one to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions. First question comes from Mike Olson with Piper Jaffray.
Hey, good morning.
Good morning, Mike.
Just one quick question, really. You mentioned some weakness for certain titles versus other titles kind of coming in plan so far. Could you specifically quantify the weakness of the Star Wars launch relative to your expectations? At least kind of qualitatively, was it materially below what you were expecting or just slightly below what you were expecting?
Sure. Tony?
Mike, we're not going to quantify it in actual numbers, but we had high expectations that diminished somewhat as it got closer, and then it failed to hit those lowered expectations.
Okay. Got it. Then, I guess, while I have you, just on the digital front, it sounds like what you're saying is Halo, those numbers that we were hearing of maybe 50% of the game coming in digital may not be accurate. Then you mentioned that you think it's coming in more with what we've seen average for other titles. By average, are you talking about kind of the 20% or 25%-ish numbers that we've been hearing for some of the other titles?
Yeah, I think that would be very similar to what we've heard in the other titles. Tony's got some information on this that I think you ought to hear as well.
Yeah, I have more information than I can share, but let me reiterate that we constantly talk with platform holders and with publishers, and we have a very good read and understanding of all titles at launch. We can't share that specific information. Here's what I would say, though. In the past, we know that certain publishers and platform holders have reported sell-in, and some have even reported sell-in at retail. I'm not saying that that's happened in this case, but that has happened in the past. I think I would definitely go back and talk to Microsoft about their announcement, as they're the only ones who can comment on that. Second, they definitely understand exactly what their digital percentage was. They know exactly what they sold, and they know exactly what was sold digitally.
Again, I would encourage you to go back and ask Microsoft to disclose that number. Again, we talk with platform holders and publishers constantly. We have again this quarter, and we are in full understanding and in full belief that there is no game that was launched this quarter that was materially above a normal digital % at launch.
Thank you.
Next question comes from Arvind Bhatia with Sterne Agee.
Okay, thank you very much. I guess, taking that line of thinking a little bit further, what do you think is your market share in digital downloads? How do you become more of a destination place for digital downloads, just as you have in so many other categories over the years, particularly in downloadable content, you guys have done so well. How do you convert that success into digital downloads? Also looking further out to 2016, again, maybe this is for Tony, how do we think about the titles that are coming out? What are your thoughts on hardware to the industry in general? Also tying it back to the digital question, how do you see that progressing? Thank you.
Let me start us off here, Arvind. This is Paul. I would say that, remember that we are a player in digital downloads. You don't do $228 million of digital receipts without having technologies, APIs, relationships, and all those things that you need to sell digital downloads. Tony, maybe you want to talk about some of the intelligence you have from DFC.
Sure.
on this subject.
Yeah, let me share some of that, Arvind. We don't give out specific market share of digital downloads or digital receipts, simply because it's really difficult to find that information out. Let me give you some information from DFC, which we've quoted before, and we find it to be one of the most credible sources when we go to look at digital share. According to DFC, in the third quarter, digital AAA sales for $60 game releases increased 6% over last year. 6% in total, and it represented only 9% of the total AAA sales mix. That's coming from a source that we find very credible. It grew 6% off of a very small base. That's some of the information that we see.
We don't have our market share specifically, but again, we do have a good understanding from talking with the publishers and the platform holders, and that seems to be in line with this information.
The difficulty, of course, here is that digital is a complex animal, and every publisher measures it in slightly different ways, et cetera. Rob, you have something you want to add on this?
2016.
The 2016 titles, right.
I can talk about this. The titles that are coming up, we've got very excited about Street Fighter V and The Division, Uncharted 4. Those are some that we're very excited about. We've got Star Fox Zero coming out as well. Those are the ones that we can kind of see and are pretty well locked. Very excited about that. We anticipate that digital is going to continue to grow, and remember that we grew 14% before FX, which is right in line with where the publishers grew. We continue to see our digital continue to march forward at about the same rate that the publishers are seeing their digital grow.
One last one from me. As you looked at your full-year guidance, given some of the weakness you cited on the titles, I was wondering what went into your thinking in not giving yourself some more room and maybe tightening up the guidance a little bit now that we're a week away from Thanksgiving, I guess, and you have a fairly good idea of the traffic trends, et cetera. Just wondering, the confidence level in the forecast for Q4.
Just to clarify, first of all, Arvind, we mentioned two titles that met our expectations and one that fell below. I would not say that we feel like there's general weakness in the titles. I'll let Rob comment on the guidance.
I think it's important to remember that the results of the third quarter, while $0.05 below consensus, really for us amounts to about $5 million. With 60% or so of our earnings to be made in the fourth quarter, we believe it's not that difficult to make up that $5 million. That's, I think, the principal reason behind the guidance range we gave.
Okay, great. Thank you, guys, and all the best.
Thank you, Arvind.
Thank you.
Next question comes from Seth Sigman with Credit Suisse.
Okay, thanks for taking the question. A couple questions here, mostly focused on the investments you're making as you try to diversify the business. I guess one, just trying to understand the core SG&A growth this quarter, how to think about that over the medium term. When I look at SG&A this quarter, it was up over 9%. What would that look like if you exclude Tech Brands and ThinkGeek?
It's a good question, you can imagine, Seth, for us, a company that's in a transformation of the kind we're in, it's a trade-off every day. How do we disinvest in the core as the core becomes a smaller part of our business, and how do we invest in these new businesses? We've had our struggles on some of these and Rob, I don't know if you want to take that, but that's a key question for us, and we're attacking it very aggressively. Rob?
Well, let me put it to you this way. The growth in SG&A year-over-year is almost solely attributed to Tech Brands. Ex that, Tech Brands is the bulk of that addition, as we indicated, there are costs that we invested into the openings that impacted the overall Tech Brands number. I would say that the bulk of those costs are behind us. We would not expect to go into next year with the type of store opening cadence that we talked about. Tony mentioned 190 plus stores that were opened this year. We would not expect to see the same level of investment necessary next year.
Of course, with the store base that we now have as we move forward, whatever investments we do make come on a much larger base.
Rob, just so you know, Seth, one of Rob's primary missions for this budget season is to tighten up our core SG&A, separate from all the new stuff. How do we tighten up the core Video Games business that we know very well, have been at a long time, understand all the different metrics? We've just got to tighten that up a little harder than we have in the past, given the fact that it's less a part of our business than it has been.
Okay.
I think we can do that.
To follow up on Tech Brands, is there a way to elaborate on the performance on some of the more mature stores? It's kind of hard to see, just given all the noise with the investments. If you just simply look at sales per store, it is down year-over-year. I'm not sure that tells the whole story. Anything else you can talk about maybe from a comp perspective or overall EBITDA on some of the more mature stores to give investors comfort that you are starting to see a return on some of those more mature stores?
Yeah, we watch the Tech Brands performance in several categories, including the core stores that we acquired, stores that were added as white space or conversion stores by type of store, meaning the RadioShack versus other white space versus GameStop conversions. We analyze those by year of opening. We analyze each of the acquisitions individually against the pro formas that were created behind them. Other than the store opening cadence being slower than we had anticipated and the conversion cadence, we're very pleased with the base stores. We're very pleased with the white space stores that were opened in late 2013 and in 2014. We're pleased with the performance of the stores we've opened in 2015, it's just that they're going slower than we expected. We remain very pleased with the performance of the acquisitions that we've made as well.
When we acquire a reseller, we can typically increase the productivity by 30%+, that continues as we move forward.
Tony, you may want to share with Seth some of the exciting stuff that AT&T is doing, because that's a big part of our growth here, is our DirecTV plan.
Yeah, sure. First of all, we are selling all of the hot new products. Like you'll get the iPad Pro in all of our Tech Brands stores right now. We've got the Apple Watch in all of our Simply Mac stores. With AT&T, we're selling DirecTV in all of our Spring Mobile stores as well, which has been an added source of revenue. All of these programs that AT&T is rolling out and all of the hot new tech that is going to be very popular this holiday season, we're selling that both in our Simply Mac stores as well as our Spring Mobile stores.
Okay. Just one final question, just following up on Arvind's before. Rob, you talked about making up that $5 million shortfall in the fourth quarter. Where do you think you get that back? You also talked about FX being more impactful and a couple other minor drivers there. Where do you think you can make that up in the fourth quarter?
Well, I think we can see it inside the Video Games business with demand through the holiday season. We definitely see it in the Loot category, as you know, with the launch of the Star Wars game and movie. Star Wars collectibles products are pretty hot right now, as well as performance within our Tech Brands segment.
Thank you.
Our next question comes from Colin Sebastian with Robert Baird.
Thanks. I have a couple of questions, mostly as follow-ups, but first, maybe to try to put a finer point on some of the concerns around console downloads. I wonder if you could talk about your observations of GameStop customers, specifically in terms of their purchases of physical games, maybe attach rates. Secondly, whether you're actively adjusting trade-in values to keep this group loyal to the physical product. I have one follow-up.
Colin. Hi, Colin. How are you? I think this is something we look at almost every day, Tony, do you want to take that on?
Sure. In terms of attach, we're seeing strong attach. We're well outpaced, and we're about double the rest of the industry in terms of attach rates of physical games to our consoles, and we're seeing that. When you look at the entire launch, when you add back our digital attach plus our physical attach, we're roughly in line with previous launches. There's no doubt that our digital attach is much higher than last time that we launched, when we launched 360 and PS3. Combined, we're at similar levels to what we were at this time in the cycle last launch. In terms of trade-in pricing, no, actually, what we're finding that we do not need to increase our trade-in pricing. We have been promotional, but it's within our trade pricing. I think what you're seeing is that consumers are finding those trade prices.
We're using PowerUp Rewards in a very powerful way to make sure that people are aware of that. We've had some very successful promotions that have gotten us flush with in-demand Xbox One and PS4 inventory for the fourth quarter. We're excited that we were able to do that without increasing trade-in prices.
Okay, thanks. Rob, I hate to keep pestering you on this, but just given some of the questions we're getting, to put the Q4 guidance into further context, would you say that it's appropriately conservative given some of the moving parts that Tony talked about, or is there still some risk to those numbers if Star Wars does not improve?
We expect Star Wars to be one of the strongest titles for the holiday season. Sort of move beyond launch and think about Star Wars as a brand with the movie coming out. We expect it to get back towards or on track for our expectations. We think as we talked about the guidance internally as a team prior to issuing the release, Excuse me, we're getting some feedback. We think the guidance is appropriate.
Okay, thank you.
Thanks, Colin.
Next question comes from Brian Nagel with Oppenheimer.
Hi, good morning.
Hey, Brian.
My question, and I think it's very much going to be a follow-up to some of the prior questions, but with respect to the new software sales, if we look at the results today and even the trends for a while now at GameStop and step back, I guess one of the concerns out there that weighs upon the sentiment with your stock is that at this point in this product cycle, I guess one would think that software sales would be much more robust. At time of launch, these games would sell a lot better.
The question I have, and maybe you could apply this on that thought, but also as we look into the holiday, and given your history in the Video Game business, given your history at this point in cycles, what gives you the confidence that names that, like This is a follow-up to the previous, prior question. A Star Wars name, that there will be a re-acceleration, a further acceleration in sales, even some of the other titles that have not performed quite as well as one would thought from the onset.
Yeah, I think in terms of new software sales, we're surprised a little bit by it too. As you know, we expect growth in that category. Holiday behaves very differently. We've got to understand. We've been at this a long time. We know that there are certain things. Tony, you want to-
Sure. I think when it comes to Star Wars, let me reiterate what Rob said. I think Star Wars, while it got off to a slow start, we anticipate, given the buzz around the movie, we anticipate that this game is going to be a very strong game when the movie launches in mid-December. Not to mention the fact that we have it prominently displayed in our Black Friday ads. In fact, we're the only retailer that has it with a significant discount, which is also going to drive sales. While Star Wars is off to a bit of a slow start, we do think that it is going to rally very strong as we get closer to the movie. I think from a holiday perspective, our Black Friday ad has been out there. We've got a lot of exclusive content.
Loot gives us a whole new way to bring in new customers. We're excited about the holiday season.
The other thing, too, is that the install base on hardware is so much greater than it has been. You got to believe there's going to be people chasing software for that install base. They can't all be streaming Netflix, right? There's got to be some people playing video games on all those consoles. That gives us a little bit of optimism. I will point out, too, that our Black Friday ad leaked before the launch of Star Wars. Given the pricing that we've got in the Black Friday ad, we're really not clear as to what impact that may have had on our results during the launch.
Mm-hmm. Okay, somewhat of a follow-up to that. You mentioned your Black Friday ads. A lot of other retailers have already discussed or put out their Black Friday specials. Are you seeing anything in the environment this year that would suggest that retailers other than GameStop maybe taking a more aggressive tack, aggressive stance towards the video gaming category, or even in some cases, in pricing?
No, Brian, we're not. There's obviously always discounting during the holiday. We actually view that our Black Friday ad is one of the most competitive out there this year.
Okay. If I could just sneak one more in on a different topic. Margins. To some extent, you addressed this in your prepared comments. We saw nice margin growth in the business, driven by, I think it was largely the Tech Brands and newer categories to the stores. Just quickly, how do we think about the sustainability of that going forward?
We think that's a product, Brian, of the diversification of the business, right? Remember, GameStop historically was a lower margin business. We've increased, I think I said it in my remarks, we've increased it 400 basis points in three or four years. We think that's very sustainable because it's a contribution of these new categories, which are richer categories. The real question you should be asking is, can we reel in the SG&A costs in a way that we can bring more of that margin dollar to the bottom line? Fair to say, Rob?
Yes, I think that is fair to say. It's also, I think, it's probably fair to say that within the Tech Brands, we are seeing continued margin expansion. That's as a result of the, I'll say, the overlap of the NEXT program. As it's continued to increase as a percentage of the activity within the store, it is beneficial to margins.
It's important to do The reason we're in these categories, if you go back to our strategic work, the reason we're in these categories is because they are higher margin than video gaming. It would be hard to find categories, by the way, that are lower margin than video gaming by the time you add in the hardware. Tech Brands, Apple, and AT&T, as well as Loot, are additive to our gross margin. That's going to create more profitability. Our issue is we've got to control costs on these transitions. That's really the biggest part of it. Companies in transformation, we've studied a lot of cases. Companies in transformation go through short-term cost pressures like this.
Well, thank you.
Thanks, Brian.
We do have time for two more questions. Our next question comes from Curtis Nagle with Bank of America.
Good morning. Thanks for taking the call.
Hi, Curtis.
Hey, Paul. How are you doing?
Good.
Just, I guess not to pick on gross margin too much. In terms of the Tech Brands, understood, like you said, it's coming from NEXT in a bigger proportion, but is there anything else that's contributing to it? Perhaps help from vendors? It was just such a big acceleration, at least on a rate basis, quarter-over-quarter.
I probably should have clarified that if you look at the store counts quarter-over-quarter-over-quarter, where the growth is coming from is in the AT&T store base. Cricket and Simply Mac are relatively steady state for us. The AT&T stores drive the highest margin. Those grow as a percentage of the Tech Brands category that is also having a dramatic impact.
Great. Okay. Just, I don't know, maybe somewhat of a philosophical question, but just thinking about software, understood what's already been said about digital. Do you think maybe what's going on here is just a transition in terms of franchises where you have some very big ones plateauing or winding down. The ones that you have coming in just aren't big enough, and could that be a big, I guess, part of the weakness that we're seeing right now?
Yeah. Tony, what do you think?
What I think is that we have some very strong performance in the franchises that are coming out. What is different this release or this console cycle versus last console cycle is the fact that old gen, or what we call current gen now, 360 and PS3, are significantly down more than what we had anticipated when we did our original market model. That's really the change. It's not that the new games are not producing as much as we anticipated that they were. The difference is that the older generation has eroded more quickly.
Yeah.
Many of these titles are not available on the older generation.
Okay, thanks very much.
Our final question comes from David Magee with SunTrust.
Yeah. Hi, good morning, everybody.
Hey, David.
Just one question, sort of on the back of that last question. Old gen is sort of winding down, and I think that next year gets to be a lot smaller as a % of the overall sector total. Just thinking about that and how hardware has reacted to recent price cuts and sort of the software attach rates, at this point in time, are you prepared to say that we'll see growth next year net net in the Video Game business in 2016?
It's hard to say at this point, David. We're doing a lot of modeling. I don't think we're prepared for saying anything about 2016 yet, guys.
Yeah, I think the holiday season's important.
Yeah
as a data set to incorporate into our modeling, and we'll be prepared to talk about that, I think, as spring rolls around.
Okay, great. Thank you. Have a good holiday.
By the way, David, I will say this. I'll say telecommunications, Loot, and digital will grow very aggressively in 2016. I would say that's not going to change. You'll continue to see that. Our business that we're trying to manage is the core Video Game business, trying to understand it, because it is, as you know, fairly volatile.
Right. Great. Thanks, guys.
Thank you.
Okay. Well, thank you for your support of GameStop. We appreciate you dialing in today, and we look forward to speaking with you soon. Thanks.
Ladies and gentlemen, that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.