Earnings Call: Q3 2014

Nov 20, 2014

Good day, everyone, and welcome to the GameStop Corporation's Third Quarter 2014 Earnings Conference. At the conclusion of the 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 the 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, Chief Executive Officer of GameStop. Please go ahead, sir. Thank you, operator, and welcome to the Q3 earnings call for GameStop. As always, we start by thanking our associates around the world for full time after my recent illness. During my 3 month medical leave, I received excellent care at the Tisch Brain Center at the Duke University Hospital in North Carolina as well as the Baylor Salmons Cancer Center here in Dallas. The doctors, nurses and staff in both facilities are outstanding and I am grateful to them for their efforts. My treatments have gone very well and I am blessed to say that I had excellent results on my follow-up visit to Duke and Baylor last week. I have a great health prognosis and look forward to many future conversations with you. It is also great to return to the business and see the outstanding work done by our team and associates. We have developed a deep bench over the past few years and it is great to see their success in my absence. Our Board has supported extensive talent development and succession planning and it pays off in a situation like the one we just experienced. Joining me today on our call are Rob Lloyd, Chief Financial Officer Tony Bartel, President Mike Mahler, Executive Vice President of International Mike Hogan, Executive Vice President of Strategic Business and Matt Hodges, our Vice President of Investor Relations. We will be closed on Thanksgiving Day next week in the United States out of respect for our associates and their families. To all our associates on this call, you know that the phrase protect the family means a lot to us. Sometimes we have to move aggressively into new businesses to protect the family and sometimes we have to not let the pressure from other retailers distract us from our values. A few themes to keep in mind as we turn the corner past Black Friday and into holiday. First of all, the shift of Assassin's Creed by a week impacted our quarter by $0.05 per share. And the overlap of Grand Theft Auto represented a large comp impact. GameStop's 2 year comp for the 3rd quarter is 18% among the highest in retail. 2nd, digital growth was 52%. So the growth of digital downloads is providing a nice tailwind to GameStop as well as many publishers. 3rd, our technology brands unit is growing aggressively and we expect solid growth in 2015 from the AT and T relationship and the new cycle of Apple products. We may also acquire new technology brands in the future. 4th, we launched a PowerUp credit card in the quarter. And the approved credit on the portfolio is over $140,000,000 and likely to be used heavily at Holiday in unique ways as we market the PowerUp base in both video games and technology brands. Lastly, our buyback was aggressive in the quarter as we continue to believe our shares are undervalued. Our recent debt offering was oversubscribed indicating that we can be flexible with our capital strategy. In the spirit of keeping our remarks brief and allowing you to ask more questions, I will now hand the call over to Rob and Tony. But feel free to also ask Mike Mahler, Mike Hogan and Matt Hodges questions at the end of our prepared remarks. Rob? Thank you, Paul. It's great to have you back. Good afternoon, everyone. I'd like to start with a brief overview of the Q3 and guidance for the Q4. Overall, the majority of our product categories performed well during the Q3. However, our results were impacted by 2 primary factors. The first was that Assassin's Creed moved out of our Q3 and into our Q4 after we gave guidance. The second was that the AAA titles launched during the quarter like Destiny and Super Smash Brothers faced a very tough comparison to the powerful AAA titles in Q3 of last year, including GTA V, Pokemon X and Y, Battlefield 4 and Assassin's Creed 4 Black Flag. Our consolidated sales were $2,090,000,000 down 0.7% from the prior year quarter with a comp decrease of 2.3%. Consolidated net earnings for the 3rd quarter, excluding divestiture costs related to Spain, were $64,300,000 a decrease of 6.3% from last year. Adjusted diluted earnings per share for the quarter were $0.57 We estimate that the impact of the movement of Assassin's Creed had a comp impact of over 2% and an EPS impact of at least $0.05 given the sales we had in the 1st 5 days after launch. We are forecasting same store sales for the 4th ranging from negative 5% to plus 2%, given that we are comping the launch of the next gen consoles from last November. We expect the full year comps to come in plus 2% to plus 4%. We expect diluted earnings per share to range from $2.08 to $2.24 for the Q4, an increase from $1.89 last year. We are revising our previous full year 2014 earnings per share guidance of $3.40 to 3.70 to a new range of 3 point $4.0 to $3.55 excluding divestiture costs, up from $2.99 last year. The decline in prior gen software sales due to the transition to next gen consoles has been steeper than expected and titles that moved out of 2014 will both have an impact on our results this year. We are closely monitoring we are also closely the West Coast port situation. Turning back to a more detailed review of the Q3. International comps were +3.1 percent with a positive comp of 8.4 percent in Australia and New Zealand. The U. S. Comp was down 4.8 percent. New hardware sales increased 147.4 percent based on the continued strength of the next gen console adoption. The adoption rate continues to grow on a monthly basis as we measure sales compared to the same point in the last cycle. We outperformed the U. S. Market leading to a hardware share gain of 3.90 basis points. The primary reason for the decline in new software sales of 34.4 percent was this the comparison of this quarter's hit titles to those of the Q3 of last year, as I mentioned earlier. We achieved over 47 percent software market share in the quarter, our 2nd highest quarterly share ever behind only last year's Q3. Pre owned sales increased 2.6% compared to the prior year quarter. The U. S. Was up 2.2% and international was up 5.2% or 9.8% excluding FX impact. This marks the 3rd consecutive quarter that pre owned business has grown and we expect this trend to continue throughout 2015 as value oriented consumers find great deals in Xbox 360s and PlayStation 3s and in pre owned next gen consoles and software. Our digital receipts were $210,000,000 a 52% increase over the Q3 of last year with over 80% growth in international, driven by console digital sales associated with Destiny and FIFA. Globally, we attached DLC subscriptions to over 30 percent of Destiny sales during its launch. GAAP revenues totaled $54,900,000 and increased 19%. We are on track to achieve a 15% increase in digital receipts for the full year to over $830,000,000 Our mobile revenues increased 125% from the Q3 of last year to $126,000,000 primarily from the $85,000,000 delivered by our Technology Brands businesses. Since the end of last year, we've added 190 Technology Brands stores. Through 3 quarters, these businesses have contributed 2 $16,000,000 in top line and approximately $23,000,000 in operating profit, with an operating margin over 11% for the 3rd quarter. Overall, consolidated gross margins for the quarter were 29.7%, an increase of 130 basis points from 28.4% in the Q3 of last year. The increase was primarily due to the addition of the Technology Brands businesses. Gross margins on hardware were 10.8% and gross margins on software were 23.2% this quarter. Both rates are in line with guidance we gave earlier this year. Gross margins on pre owned improved over 300 basis points over the prior year quarter to 47.6% as we were less promotional compared to last year when we were driving trades towards next gen consoles. We continue to monitor our stores and have not seen an impact on pre owned trades or sales due to other retail competition. Digital gross profit grew 10.3 percent to 35,200,000 dollars and the digital margin rate was 64%. Mobile gross margins of 40.1% were driven by the growth in Tech brand. The continued success of the next program from AT and T is having a dramatic impact on margins in our Spring Mobile business. SG and A expenses were 23.6 percent of sales this quarter compared to 21.3 percent of sales in the Q3 of last year. Total SG and A expense dollars increased $45,800,000 due primarily to the addition of Technology Brands, which accounted for $33,900,000 of the increase. In addition, we had charges of $6,900,000 included in SG and A related to the shutdown of Spain. The total charge for the sale and shutdown of our business in Spain was 13,900,000 dollars The $6,900,000 in SG and A was for severance and lease liabilities and another $7,000,000 was in cost of sales for inventory write downs. We sold 45 stores to Game Digital PLC and closed another 56. Our focus was on a smooth transition for customers, honoring commitments to our landlords and vendors and treating our associates as fairly as possible. While we no longer operate stores in Spain, we are in the process of shutting down our office and distribution center and we expect that we will have approximately $1,000,000 in costs in the Q4. We expect to fully complete the process, including the financial impacts by the end of our fiscal year. Following the exit, we can concentrate our international efforts in markets with leading performance and opportunities for growth. We ended the quarter with 6,664 stores, 4,183 U. S. Video game stores, 2,073 international video game stores and four zero 8 technology brand stores, which include 311 AT and T branded stores operated by Spring Mobile, 51 Cricket stores and 46 Simply Mac stores. We opened 5 video game stores and closed 19 in the U. S. And opened 11 and closed 120 internationally, which includes the changes in Spain. We added 55 Tech brand stores through acquisitions and opened 34 more. During the Q3, we repurchased 144,000,000 of our stock with 3.6 1,000,000 shares at an average price of $40.25 Year to date, we've repurchased 6,800,000 shares at an average of 39.90 for a total of $271,700,000 Our guidance for the year was to buyback between 250 $300,000,000 Life to date, we've repurchased 67,400,000 shares at an average price of 24.36 dollars for a total of $1,640,000,000 We've reduced our outstanding share count to less than 110,000,000 and as a result $0.01 per share is now equivalent to only $1,100,000 in net income. As we indicated last week through an 8 ks, our Board of Directors approved a new $500,000,000 share repurchase plan and authorized the 4th quarter dividend of $0.33 per share to be paid on December 16. Now I'll provide a little more color on the 4th quarter outlook. We've launched most of the AAA titles for the Q4. And as I mentioned earlier, we expect diluted earnings per share to range from $2.08 to 2 point $4 which represents growth of between 10% and 18.5 percent from last year's 4th quarter. We're using weighted average fully diluted shares outstanding of 110,000,000 following buybacks through the Q3. The full year 2014 earnings per share guidance of $3.40 to 3.55 of $113,500,000 following buybacks through the Q3. Full year EPS growth is forecast to range from 13.5 percent to 18.5%. We expect Technology Brands to contribute another strong number in operating earnings in the 4th quarter, bringing the 1st full year of Tech Brands' contribution to over 5% of our projected operating earnings. We expect to end the year with approximately 500 Tech Brands stores. The projected 2015 operating profit on that year ending store count is in excess of $50,000,000 and we expect to grow the Tech Brands store count by another 300 stores next year. We are very pleased with how these new businesses have added to our revenues and profits in the year since we acquired them. We are positioned as the leader of the next gen console business as we approach the holidays in 2015. The titles that moved out of 2014 and our new Technology Brands businesses set us up nicely as we move into 20 15. Now I'll turn it over to Tony for his comments. Thanks, Rob, and good evening, everyone. Hit an all time high at 56% for the quarter. Hit an all time high at 56% for the quarter. In addition, our hardware share on Xbox 1 and PS4 is at all time highs. As the installed base on this generation of consoles continues to grow, we are poised to continue our market up 24% over the prior launch. For GameStop, we are up 157% and 102% for hardware and software respectively. The Q3 of 2013 had some big titles to overlap. But November has had several strong releases leading us into the holiday. New titles are driving the installed base and we are pleased with the recent launches of Activision's Call of Advanced Warfare, Take 2's GTA V for the new generations, Microsoft's Halo Master Chief Collection, Ubisoft's Assassin's Creed Unity and Far Cry 4 and EA's Inquisition. All of these titles met our launch expectations and many of our sales are being funded with trade currency and have strong digital attach. We are also excited about tonight's launch of Super Smash Bros. For the Wii U and Pokemon Omega Ruby and Alphabet Sapphire as well as Amiibo. We expect these games to be strong system sellers. The recent price decrease on the Xbox 1 has significantly increased sales of that platform and we expect consoles to be in high demand this holiday season. We will be ready at 12:0:1 a. M. On Black Friday with great deals on both new and pre owned gifts, and we are happy that our associates can spend Thanksgiving Day with their family and friends. Affordability of all of the great titles and consoles will be a key concern for our customers and we are thrilled to be offering 2 forms of unique currency. 1st, our simplified trade pricing has made it easier for customers to understand the value that they are getting for their unused games. And we have seen an increase in trade penetration as result of this initiative. We expect to generate over $250,000,000 of trade credit in the 4th quarter and over 70% of these credits directly fund the purchase of new consoles and software. Also, we introduced our PowerUp Rewards private label credit card to all PowerUp Rewards customers this quarter. This card is a third party program with Alliance Data Systems and provides qualified reward customers up to $2,000 in credit to be spent at GameStop stores along with special financing offers through the end of 2014. To date, we have granted 235,000 members $145,000,000 of credit and we expect over $100,000,000 of that credit to be spent in the next few weeks before holiday. PowerUp Rewards credit card customers have a transaction size double that of our average customer, are 6 times more likely to purchase an Xbox 1 or PS4 and are 50% more likely to purchase digital content. Globally, our loyalty programs now reach over 40,000,000 people with 29,500,000 members in the U. S. And 11,000,000 members internationally. Our pre owned sales grew 2.6% during the quarter. This was fueled by strong trade growth as well as 36 $1,000,000 of value merchandise that we purchased during the quarter. So far this year, we have improved our market share by 2 30 basis points in the value category. Multi channel grew 20% during the quarter, led by 91% growth in our pickup at store program where customers can hold a product online and conveniently pick it up at a local store. Mobile transactions increased by 79% and 69% of our online traffic is now coming from a mobile phone or tablet. We released a major upgrade to the GameStop mobile app and with over 6,100,000 installs, this app makes it easier to research products, find local stores, track preorders and manage your PowerUp Rewards account and game library. We also recently launched our Holiday Hub and Trade Center, which provides holiday shoppers with great gift ideas and deals and also allows customers to easily find the value of their unused games, consoles and electronics. In addition, we are continuing to evolve our customer our GameStop Technology Institute is working with 23 partners including AT and T, IBM, Microsoft and Texas A and M Center For Retailing Studies to test employee advocacy technology that promotes and recommends localized products, events and promotions on social media location based messaging on consumers' mobile devices beacon technology that provides interactive offers and a mobile app to tie all of these technologies into a seamless consumer experience. In technology brands, the iPhone 6 launch in September resulted in our largest ever mobile product launch. Consumers were excited by the form factor and screen size changes delivered by Apple, evidenced by a record level of preorders and a large increase in retail store traffic. The demand for the iPhone has remained high after the launch period and we expect it to remain high through the holiday season. In addition to the iPhone driven demand, AT and T made a series of changes to its rate plan offerings, which are also exciting to consumers. These include the price adjustments to their mobile share value plans in association with the next device financing options. Our transaction close rate is also at an all time high in the retail stores as consumers are seeing the value of the AT and T network, the mobile share value plan pricing and the NEX program. Turning to digital. Our 52% growth is higher than the growth reported in the most recent quarter by our 4 largest publishing partners. Year to date, our digital growth is also higher than this group. Our console digital growth alone is 72% as we continue to play a vital role in the discovery and affordability of digital content. A couple of interesting data points taken from recent research with gamers indicate that the average price being paid by a customer for a full game AAA download is $22 When asked what price a gamer expected to pay a recently released full game digital download, the answer in these surveys was approximately $35 Our buy sell trade model has enabled video game customers to purchase a full game physical disc for full price, believing that they have a $20 residual value for that game. Since this residual value is 100% funded by GameStop, publishers benefit by maintaining the higher retail price and are able to remain financially viable. It is important to note that, like the industry, much of our full game digital content was given away at no cost to the consumer with a hardware bundle. In fact, year to date, we estimate that over $100,000,000 worth of games have been digitally delivered for free in hardware bundles. We want to help ensure that our industry does not make the same mistake as other entertainment categories by driving the perceived value of digital goods significantly below that of a physical gain. When the free digital token programs end, we believe that the industry will need to work together to continue to price goods in a way that sustains profitability and encourages the great innovation that this category needs. In addition to console digital, we are also continuing to grow in mobile publishing. Congregate again doubled its business over last year growing 98% during the App Store and 12 games in the Google Play Store. Looking at the holiday quarter, we are excited about having the hottest consumer electronics products in our stores. We have a great new financing option for our qualified PowerUp Award customers and we have launched new mobile and in store technology to make shopping at GameStop the most simple and affordable way to find the best consumer electronic gifts for this holiday season. With that, I will now open the call up for questions. And we'll go first to Mike Olson with Piper Jaffray. Hey, good afternoon. Good afternoon. Couple of quick ones here. If you lost $0.05 from Assassin's in the quarter, that mean that you're gaining $0.05 from Assassin's in Q4? And if so, is the rest of the weaker guidance for Q4 kind of all related to cautiousness around legacy Gen Software? Or is there any reason you kind of just talked about this, but is there any reason to believe full game downloads are kind of impacting the new software category? Okay. You had a couple of questions. Did you have another question as well? Sure. The second question is, should we expect pre owned gross margins to come down from elevated level? Or do you think that's sustainable? Okay. Rob, I'll address the first and then kick it over to you. And then Mike, if you want to talk about pre owned margins staying at this level when we're done. What happened, yes, the answer is that it will go into the 4th quarter. So the reason for the 4th quarter guidance moving down is the fact that the impact of the decline in 360 and PS3 is offsetting a very strong business and outperforming business on the Xbox 1 and PS4. So that's what's taking place in the Q4 and that's what's reflected in our forecast. And Rob, do you want to add to that? There's not much to that. I think you covered it. Mike, you do have the port factor that is not clear to us yet, but Rob mentioned it in his remarks as well. And Mike, you want to talk about the pre owned? Sure. As far as the pre owned business, I think we're very happy with the performance of the business. One of the things that I think we should point out is, we're very competitive in our pricing. We monitor every day. You can see that in a quarter in which the new software declined pretty substantially, we actually had positive growth in our pre owned business in addition to being to expand the margin. As far as the outlook for margin going forward, I'll turn that over to Rob. Yes. We had guided to a pretty broad range 42% to 48 percent earlier in the year when we introduced the value concept. I think we're pleased with the inroads we've made so far on the value side of the business and it's allowing us to address many of the out of stock positions that we had in our stores in some of our better selling pre owned titles. And we're pleased with the margin rates we've been able to achieve thus far. I'd say at this point, we're pretty comfortable with where the margin rates have been. And while we'll I won't alter that broad range going forward, I think if you look at what we've done since we introduced value, again, we've been able to hold our margin rate. What did you guys buy? We bought $26,000,000 you said? $36,000,000 $36,000,000 in value. So the only thing I would say there too Mike is we probably have not bought as much as we thought we would when we started this. The good news is you're getting a much better margin rate. The less good news is that we're not growing as fast as we'd like to although 2.5%, 2.7% is a pretty nice number on a big basis. Let me also just go back and clarify the 360 and PS3 decline. Year to date in the U. S, Xbox 360 and PS3 software and hardware are down 57.8% on a dollar basis. That's clearly significantly more than we anticipated at the beginning of the year. And so that's what we factored into our Q4 forecast. Thank you. And we'll go next to Colin Sebastian with Robert Baird. Great. Thanks. Good afternoon. By the way, welcome back, Paul. Thank you very much, Colin. And I forgot to mention this earlier, but many of you have sent me very nice notes. Thank you very much for your thoughts and prayers. Well, first off, just given the pressure coming from the legacy platforms, I wonder if there's any data to suggest that those consumers moving away from those older consoles are eventually planning to step up to the next gen as opposed to migrating away from those platforms altogether? And secondly and perhaps related, it's pretty clear at least to me that price cuts are needed on these older platforms. I'm wondering if you had already expected that by now. And since we haven't seen that, is that something we should expect either still this year or we're going to have to wait till next year? Sure. I'll answer that. This is Tony. Well, the 73% increase that we've seen in the units, especially in the hardware units, we're actually very excited about Xbox 1 and PS4. And like I said, that's outperforming our expectations. So we do see quicker adoption in that category than what we had anticipated. As to price cuts, we think that it would be excellent and definitely would increase the sell through rate on the old generation consoles. We definitely think that would help, but we have not factored anything into our forecast at this point. Okay. And then maybe as a follow-up to the question around the EPS, the $0.05 we know from the shift of the title into Q4. I wonder how much of the remainder of the sales impact and what EPS impact there was the shortfall on the legacy platforms. And given that EPS plus the $0.05 would have been kind of in line with your guidance and consensus. The shortfall in the older platforms was that more hardware or more software? Rob, you want to take that question? Sure. I can't say that we dissected the data to specifically see what the shortfall impact on the prior gen software might have been. But I'd say that the biggest area where we're feeling it is in prior gen software sales, but prior gen hardware sales have also been on a steeper trajectory down this year than we expected. Our next question comes from Tony Whipple with Janney Capital Markets. Hi, Tony. Sorry about that, Paul. I was saying welcome back. It's great to have you on the call. Thank you, Tony. That said, what could you guys tell us about the launch of the iPhone? You guys have now had the tech stores for a very short period of time. Would you anticipate seeing a little bit more business? Or how does kind of a new iPhone filter through all the different parts of GameStop kind of the core store to simply Mac the spring? And then also real bluntly, when do you think that 7th gen headwind starts to shift? What are the specific catalysts you think that are out there needed to cause that? Let me first talk about the iPhone launch. I mean, clearly, we sold every single iPhone that we could get our hands on in both Mac and in our Spring Mobile divisions. We also benefited from the iPhone 6 in all of those locations by taking back trades. We also so we took the trades of all of the old phones into all of our GameStop stores and to Simply Mac stores and obviously into Spring Mobile stores. So it benefited dramatically. We also worked with AT and T with their direct fulfill program, which gave us even additional capacity. So we had strong demand and it benefited not only the direct sales, but also the trade in of inventory that we have. Tony, the other point I would make is that, if you go back to our initial discussions on Technology Brands, I guess, Rob, it's a year and change since we started talking to these guys. It was clear to us that Apple had a significant product pipeline now. Some people believed them, some people didn't. But I think if you look at what's unfolded and Rob mentioned, we're very pleased with what's going on in Technology Brands in general. It's clear that that was a pretty good bet. Now the question is going to be can we get enough product? Can we keep the pipeline flowing? But I think that's been very successful. As far as trades, Tony, you got anything to say on trades at GameStop stores? Sure. Trades went up significantly as we went through the iPhone 6 launch, which and they met our expectations and we continue to take trades in all of our GameStop stores. Great. As far as the 7th gen headwind, Rob talked about a couple of titles that have moved out into the Q1 of next year. Some are actually behind that. So we feel very confident given where we're at in the cycle and given our strong performance with this growth and given the outperformance of Xbox 1 and PS4 that we're very close. Next year, we're expecting a very strong Q1. Rob, do you have any other thoughts on the next when the headwinds may? Yes. We had been saying that we think that the intersection of prior gen, the decline curve and then the acceleration of the next gen in sort of a way that would hold for the future, we think is in the Q1 of next year. Got it. And just to clear up on the mobile. The mobile revenues per store, I think if I did my math correctly, were down about 9% sequentially. I assume that's just a timing issue with when you added those new stores since there is such a sizable base there? I'm sorry, can you Mobile revenues per store revenue of the next? Yes. I think that has to do with the timing of the store count and when during the quarter I mentioned that we added, I think it was 55 stores through acquisition and a lot of that had to do with the timing of when those stores got added. Great. Just wanted to confirm that. Thank you. Thanks, Tim. And we'll go next to Seth Sigman with Credit Suisse. Okay. Thanks and welcome back, Paul. I just wanted to follow-up on the guidance for the 4th quarter. And I was hoping maybe you could give a little more color on the specific category assumptions and whether any of the other assumptions change such as hardware? Because it just seems like the sales reduction seems a little bit worse than the EPS. So I'm just trying to reconcile that. I'm sorry, can you run back through that for me? Well, maybe you could just give a little bit more color on specific category assumptions for the Q4 hardware, software used, how to think about them and if there were any other guidance around particular categories, but I will say that we see software growth in the 4th quarter. Next gen that hit right around this time in November of last year. I will tell you that we gave guidance earlier in the year on the categories on the margin rates for the individual categories and we see those margin rates. With the exception of mobile, we see those margin rates continuing or within those guidelines that we gave. Mobile obviously has been running higher than the guidance that we gave and that's because of the impact of the next program within the Spring Mobile stores. Tony anything on allocation or Mike anything on allocation you guys are concerned about? The only thing that we are concerned about is what you've already mentioned, what Rob already mentioned and that's the fact that the West Coast work stop or slowdown that's currently happening. We monitor that daily to make sure that our product flow will be here. So that could impact hardware. And aside from that, Mike, I don't know I mean, we expect demand for hardware to be very, very strong. And historically, that second Christmas after you have a new launch there can be spotty allocation issues. Hopefully enough will be manufactured, but we believe the demand is going to be there. Got you. Okay. That's helpful. And then I guess the second question as you think about your used inventory today, can you give us a sense of how much of that used inventory is last generation versus the current generation? And I'm just trying to understand that if demand is weaker for the last generation and you still have a lot of product there, does that have implications for the used business at least in the near term until next generation can really pick up the slack? It's an interesting question, right? Because and Mike, you have to answer the inventory questions. I think if you availability of current gen or old gen going forward is directly tied to performance of your used inventory. So that's going to be an interesting debate. Now overall, I mean, used inventory is up going into the Q4, but I don't know breaks down by category. What I can tell you is that historically, almost regardless of the amount of pre owned inventory that we have going into November, the same percentage of that inventory is going to sell through by the end of the the is that we want to have as much pre owned inventory as we can going into November. So we feel pretty good about the amount of inventory we have and we're not particularly concerned about what generation it's tied to. Okay. Thanks the color. Appreciate it. Our next question comes from David Magee with SunTrust Robinson Humphrey. Yeah. Hi, everybody. Paul, great to have you back. Thank you, David. So just if I were to sort of rank the impacts of the Q4 in terms of concerns, it's the prior gen software being number 1, number 2 being delays of next gen to next year and then 3 being the port cost risk I guess. Is that that's sort of the order priority of those three factors? That would be correct. Yes. The port risk is the slowdown that's going on in terms of the bringing in of goods. Hardware. Cost is not a hardware concern. So you're not paying higher costs now? Some retailers I think are have already incurred some higher costs around that issue? No. We are not. It's more of an availability issue, David. Okay. Are you seeing anything different with regard to full game downloads either what you're hearing in the sector or with your own experience outside of that of those games being attached to the consoles? Well, David, what we can say is that our digital continues to grow very quick like we talked about with 52% digital growth. We're clearly driving this market forward. And 9.5% of our total sales were represented by our digital receipts. They represent 9.5% of our sales. And with 56% market share on the new comps on the at every launch around midnight. They're walking up and down the lines, helping people discover the great DLC content. Again, over 60% of that content is or a large portion of that content is funded by non credit card types of currency. So really what we do in the digital space, we do a great job of helping people discover and afford this digital content. The interesting thing David is and Tony had a couple of paragraphs on this. What we're seeing is a tremendous amount of free giveaways on full game downloads. And that's driving a pretty confusing set of numbers coming from our publisher partners in that some will say delivered digitally, some will say downloaded, some will say our numbers are very clean. It's what we take payment for from the customer. There's going to be a turning point in the road here on this gaming business where the sustainability of giving away full games is going to be tough. We're in the publishing business at at congregate. And one of the great advantages there is that we have we don't have a console maker. We do have a platform owner, but we don't have a console maker between us and the customer. The Apple relationship and the Google relationship is a lot simpler for the consumer to navigate free to play. So the console relationship somewhere in here it's going to be tough for everyone to make money. So I think that's what we look at and that's what we think. That's why we think our buy sell trade business ironically is tied to the success of full game digital downloads rather than fair case of us disappearing over it is really not the case. And it actually enables investment in the category, which is vitally needed. Yes. All right. And thank you. And then lastly, the has your thinking changed with regards to the market model for 2015 in terms of the potential growth next year just given imaginations we've seen in recent months? Mike, do you want to give an update on where we're at on 2015? Sure. I would say no. I would say we're still projecting a strong growth for the console games category for 20 15. One of the things that we continue to monitor on a quarterly basis is the percentage of power members who are intending to purchase next generation consoles. And the last as of the last iteration of that study that number is still north of 50%. So I would say that combined with some strong software including some titles that have gotten pushed from 2014 into 2015 keeps us pretty bullish on the growth prospects for the console category of 2015. Do you think the overall sector grows faster than this year? Not sure if we looked at it that way. Software versus hardware would be 2 different words. Yes. I think that'd be yes, that's a fair point. On the software side, probably, yes. On the hardware side, that's probably a question mark. Yes. The other challenge is that what we've seen so far with NPD is I think the growth rate year to date for the category physical has been around 7%. And our market model typically incorporates the digital and not as much is known on what's happening in digital as we move through the year on a month to month basis. At the end of the year, when Mike is going through the process of updating the market model for us to talk about it, which we typically do in the March timeframe, more is maybe known on a look back as to what the actual impact was. So tough to draw a conclusion in November. Fair to say though, Rob, that our digital revenues at $800,000,000 plus ish is at expectation with a 15% growth. I think Tony mentioned that. Yes. So that part of our business is executing as per the market model. Yes. And if you would take the console category, which one is console hardware, console software, console digital, we're still expecting the full year there to be in 2019. Yes. Yes. Okay, great. Thanks and good luck. Thank you. And we have time for two more questions. We'll go next to Brian Nagel with Oppenheimer and Company. Hi, good evening. First off, welcome back Paul. It's great to hear you on the call. Thank you very much. The question I have and look I mean as you know there's very much has been and remains a negative thesis where it continues to cloud your stock and that thesis centers on digital downloads and such. As we look at the data in the Q3 release and I appreciate all the color commentary here. It's clear what you're saying. There were some again some transitory factors comparisons delayed of games and such. But what can you tell us that basically gets us comfortable that digital down full game downloads are not in some significant way disrupting the cycle or weighing upon and again, we have the market share data, but weighing upon sales of new generation software at GameStop? Well, I think that like we said, first of all, it's just our digital growth is significantly outpacing the category. So that's definitely one piece. And then we talked about the economics of digital. I mean, when you factor in all of these games that are given away free, based on the research that we've driven, it drives the price point down to $22 which is clearly an unsustainable price point for a game that physically is at $60 So I think the economic question that is starting to emerge is a key question that we have. And so we're outpacing the rest of the publishing community on our digital growth. We are driving that. We think it's because of what we add to the digital experience in terms of discovery and affordability. And also our strong market share that we are using to attach digital content, Again, a lot of digital content that is being sold for real money, as Paul talks about, is downloadable content that is attached to a physical product. That is a growing category. That is a big category. And that is a profitable category for the entire ecosystem. It is also true though Brian that the broadband speeds that we've been talking about broadband speeds for years. The broadband speeds are still a challenge for a full game download. And while I don't think there's a huge business there yet, there could be some day we'll be in it, but I just don't know if we can download enough, right, games fast enough for people to I think I know that's the barefoot. But I think the real story is quite different as Tony describes it. And it is frustrating as Paul said not to have information good information and everyone seems to be reporting it in a different manner. But like he said, we're reporting it based on dollars that go through the TIL. So it's a really important part of our business. Go ahead. Go ahead. Go ahead. Go ahead. Go ahead. I appreciate your comments. Just beyond that, the problem you got is you're going to have digital bears who are going to be digital bears, right? And they're going to be tough to convince other than we have to keep posting great growth in digital numbers. And there's really not a proxy Brian for an industry that has gone through a digital transition when you have a player like a GameStop establishing such a strong residual value on the physical side, that is a that's a barrier that you have to get over once you move digital. And that's why those price points in all of the studies that we're seeing and that we're doing ourselves are saying a $20 to $25 reduction is what's expected by the consumer. That's a huge hurdle that you have to get over to believe that the industry is going to move digital. So as we think about this cycle versus last cycle and you talked a bit about the hardware the bundling so to say of new gen hardware with the downloaded gain. Is that in and of itself a new factor versus the prior cycle? Is that something that could be weighing upon at least initially new generation sales of software? You're talking about the token that's bundled that's packed into? Right. What's interesting about that, I think that it could be Brian in the again, we think it's a short term phenomenon, because if it is being paid for, it's expensive to someone in the ecosystem. And so we think it's an expensive phenomenon. But when we look at the attach rates, when you look at the physical attach rate of this new generation and you add in GameStop's perspective and you add our digital attach rate, what you see is we are identical with the attach rate of the last launch. And so there is a shift that has taken place where there's more that is digital today in part due to some of these free giveaways, but what you're seeing is still a full attach rate when you include digital in both of those equations. Some of that takes the form of downloadable content. A lot of it does. As I go along at the launch of the surgical game. The other thing Brian when you talk to publishers about the launch and I remember Titanfall. In many ways these tokens that are bundled in are really a marketing expense for the launch of the console. And every console maker wants to have a high install base the 1st year or so. So that's why we believe some of these are going to be temporary items because people are going to get tired of giving away digital full games at some point. Okay. That's helpful. Thank you. Thank you. And our final question comes from Scott Tillman with B. Riley. Thanks. Good evening. I'll echo everyone else's sentiments Paul and say it's good to hear your voice. Thank you. I have a few questions and let me lay them out upfront since a couple are quick. But first off, on the trade credits, I'm wondering how soon you think you'll be able to or whether you want to be able to offer the credits across the brands as you build out the technology buyback program, last year the program wasn't quite as robust as you would have liked and you lost out on some opportunity. Wondering what you've done to perhaps change that this holiday season? And then the third question I had for you is really around publisher support for trade ins. That's been a key component in the background in the past that you've had support especially on some of the sequel releases. Wondering if that support has changed at all? And related to that, what if any support you're getting from them if you work toward trying to build a digital secondary market? Sure. Let me take 13 and then Rob I'll shift buybacks over to you. In terms of trade credits, we're taking that today. Scott in all of our look at in crickets except trades, our Simply Macs except trades, Spring Mobile accepts trades and GameStop obviously accepts trades. So we're already generating trade credits in all four of those cases, they can be, but not in all cases. No, they can't. What's missing Scott is the use of the PowerUp program across all platforms and that is something we're working on. Yes. And then on the publisher support for the trade credit, I mean they what they see is they definitely see our trade credit as a form of unfunded discount. And from their perspective, we fund that. So it obviously creates a strong sell through of games, which is what's driving our strong market share. So when you look at our 56% frontline market share of Xbox 1 and PS4 games, as we said several times, much of that is driven by the fact that we have very strong trade credit performance on our the Xbox 1 and PS4 platforms. In fact, it's higher than what we've had historically. So there's not a lot of discussion that we have right now with our publishing partners around the buy sell or trade because we're driving significant market share. And Rob, you want to talk about the bottom line? I think his question was more toward how are publishers participating in trade programs. Right. Historically, there's been some support when you've had relaunch or I should say launches of sequel type titles. Just wondering if that support has changed at all? And also what if any conversations you've had that you can share on the secondary market for digital that you've discussed previously? Let me touch on the trade support first. I think what we've seen is an increasing support from the publishers on the Assassin's Creed, Call of Duty, Shadows of Mordor, Dragon Age, you'd have to be a very Assassin's Creed, Call of Duty, Shadows of Mordor, Dragon Age. You'd have to be a very wealthy gamer to be able to play all those and the publishers recognize that. So the ability for a gamer to buy one game, play it for a week or 2, trade it in, buy the next game and so on and so on is important to the gamers, important to the publishers and obviously important to us as well. So we're seeing actually increasing support in that area. Absolutely. So there's definitely support that comes on various games. And like you said, it's on some of the platform changes or transitions and they're definitely supporting us on that. And then on digital trades, we have no comment, top secret. So I can't say anything. Fair enough. And Rob, your last on the buyback. All right. We have been more aggressive this year in terms of making sure that our buyback plans take advantage of when the price moves down. And I don't see any reason why that would change in the Q4. As we used to say at Home Depot, we're not market timers, right Rob? That's what you guys do for a living. So we're just trying to buy shares, right? And if I recall correctly, your blackout window is typically about 24 hours after an event like this? Typically 48. Oh, 48. Thank you. Right. Well, thank you everyone. We appreciate your support and look forward to speaking with you soon. Bye bye.