Please stand by. 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. Anyone wishing to ask a question may signal us by pressing the star key, followed by the digit 1. If you find your question has been asked, you may remove yourself by pressing the star key, followed by the digit 2. 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 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 third quarter earnings call for GameStop. As always, we start by thanking our associates around the world for their outstanding customer service on behalf of our valued customers. I am very pleased to be back at work full time after my recent illness. During my three-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 Sammons 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 Mauler, 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 things 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 two-year comp for the third quarter is 18%, among the highest in retail. Second, digital growth was 52%, so the growth of digital downloads is providing a nice tailwind to GameStop as well as many publishers. Third, our technology brands unit is growing aggressively, and we expect solid growth in 2015 from the AT&T relationship and the new cycle of Apple products.
We may also acquire new technology brands in the future. Fourth, we launched a PowerUp credit card in the quarter, and the approved credit on the portfolio is over $140 million 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. Feel free to also ask Mike Mauler, 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 third quarter and guidance for the fourth quarter. Overall, the majority of our product categories performed well during the third quarter. However, our results were impacted by two primary factors. The first was that Assassin's Creed moved out of our third quarter and into our fourth quarter after we gave guidance. The second was that the AAA titles launched during the quarter, like Destiny and Super Smash Bros., faced a very tough comparison to the powerful AAA titles in Q3 of last year, including GTA V, Pokémon X and Y, Battlefield 4, and Assassin's Creed IV: Black Flag. Our consolidated sales were $2.09 billion, down 0.7% from the prior year quarter, with a comp decrease of 2.3%.
Consolidated net earnings for the third quarter, excluding divestiture costs related to Spain, were $64.3 million, 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 first five days after launch. We are forecasting same-store sales for the fourth quarter, ranging from negative 5% to +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 +2% to +4%. We expect diluted earnings per share to range from $2.08 to $2.24 for the fourth quarter, 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 $3.40 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 also closely monitoring the West Coast port situation. Turning back to a more detailed review of the third quarter, international comps were +3.1%, with a positive comp of 8.4% in Australia and New Zealand. The U.S. comp was down 4.8%. New hardware sales increased 147.4%, 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 390 basis points. The primary reason for the decline in new software sales of 34.4% was the comparison of this quarter's hit titles to those of the third quarter of last year, as I mentioned earlier. We achieved over 47% software market share in the quarter, our second highest quarterly share ever, behind only last year's third quarter. 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 third 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 million, a 52% increase over the third quarter 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% of Destiny sales during its launch. GAAP revenues totaled $54.9 million and increased 19%. We are on track to achieve a 15% increase in digital receipts for the full year to over $830 million. Our mobile revenues increased 125% from the third quarter of last year to $126 million, primarily from the $85 million delivered by our Technology Brands businesses. Since the end of last year, we've added 190 Technology Brands stores. Through three quarters, these businesses have contributed $216 million in top line and approximately $23 million in operating profit, with an operating margin over 11% for the third quarter.
Overall, consolidated gross margins for the quarter were 29.7%, an increase of 130 basis points from 28.4% in the third quarter 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% to $35.2 million, and the digital margin rate was 64%. Mobile gross margins of 40.1% were driven by the growth in Technology Brands.
The continued success of the AT&T Next program from AT&T is having a dramatic impact on margins in our Spring Mobile business. SG&A expenses were 23.6% of sales this quarter, compared to 21.3% of sales in the third quarter of last year. Total SG&A expense dollars increased $45.8 million, due primarily to the addition of Technology Brands, which accounted for $33.9 million of the increase. In addition, we had charges of $6.9 million included in SG&A related to the shutdown of Spain. The total charge for the sale and shutdown of our business in Spain was $13.9 million. The $6.9 million in SG&A was for severance and lease liabilities, and another $7 million 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 million in costs in the fourth quarter. 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 408 Technology Brands stores, which include 311 AT&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 third quarter, we repurchased $144 million of our stock with 3.6 million shares at an average price of $40.25.
Year-to-date, we've repurchased 6.8 million shares at an average of $39.90 for a total of $271.7 million. Our guidance for the year was to buy back between $250 million and $300 million. Life-to-date, we've repurchased 67.4 million shares at an average price of $24.36 for a total of $1.64 billion. We've reduced our outstanding share count to less than 110 million, and as a result, $0.01 per share is now equivalent to only $1.1 million in net income. As we indicated last week through an 8-K, our board of directors approved a new $500 million share repurchase plan and authorized the fourth quarter dividend of $0.33 per share to be paid on December 16th.
I'll provide a little more color on the fourth quarter outlook. We've launched most of the AAA titles for the fourth quarter, and as I mentioned earlier, we expect diluted earnings per share to range from $2.08-$2.24, which represents growth of between 10% and 18.5% from last year's fourth quarter. We're using weighted average fully diluted shares outstanding of 110 million, following buybacks through the third quarter. The full year 2014 earnings per share guidance of $3.40-$3.55 uses weighted average fully diluted shares outstanding of 113.5 million, following buybacks through the third quarter. Full year EPS growth is forecast to range from 13.5%-18.5%.
We expect Technology Brands to contribute another strong number in operating earnings in the fourth quarter, bringing the first full year of Tech Brands' contribution to over 5% of our projected operating earnings. We expect to end the year with approximately 500 Tech Brand stores. The projected 2015 operating profit on that year-ending store count is in excess of $50 million, and we expect to grow the Tech Brand 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 2015.
Now I'll turn it over to Tony for his comments.
Thanks, Rob, and good evening, everyone. We continue to successfully execute against our goal of winning the new console launch. Our software market share on Xbox One and PS4 hit an all-time high at 56% for the quarter. In addition, our hardware share on Xbox One and PS4 is at all-time highs. As the install base on this generation of consoles continues to grow, we are poised to continue our market share increases. This launch continues to outperform the previous cycle, with hardware units up 73% and software units up 24% over the prior launch. For GameStop, we are up 157% and 102% for hardware and software, respectively. The third quarter of 2013 had some big titles to overlap. November has had several strong releases leading us into the holiday.
New titles are driving the install base. We are pleased with the recent launches of Activision's "Call of Duty: Advanced Warfare," Take-Two'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 "Dragon Age: Inquisition." All of these titles met our launch expectations. 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 "Pokémon Omega Ruby" and "Alpha Sapphire," as well as amiibo. We expect these games to be strong system sellers. The recent price decrease on the Xbox One has significantly increased sales of that platform. We expect consoles to be in high demand this holiday season.
We will be ready at 12:01 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 two forms of unique currency. First, our simplified trade pricing has made it easier for customers to understand the value that they are getting for their unused games. We have seen an increase in trade penetration as a result of this initiative. We expect to generate over $250 million of trade credit in the fourth quarter, and over 70% of these credits directly fund the purchase of new consoles and software. 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 PowerUp Rewards 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 million of credit, and we expect over $100 million 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 six times more likely to purchase an Xbox One or PS4, and are 50% more likely to purchase digital content. Globally, our loyalty programs now reach over 40 million people, with 29.5 million members in the U.S. and 11 million members internationally. Our pre-owned sales grew 2.6% during the quarter.
This was fueled by strong trade growth as well as $36 million of value merchandise that we purchased during the quarter. So far this year, we have improved our market share by 230 basis points in the value category. Multi-channel grew 20% during the quarter, led by 91% growth in our Pickup In 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 6.1 million installs, this app makes it easier to research products, find local stores, track pre-orders, 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 experience with our GameStop Technology Institute that is testing cutting-edge retail technology in 36 stores in the Austin, Texas area. GameStop Technology Institute is working with 23 partners, including AT&T, IBM, Microsoft, and Texas A&M's 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 consumer messaging on key product offerings, the use of ultra-high speed-enabled tablets to provide our associates with relevant consumer 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 pre-orders 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&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 AT&T 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&T network, the Mobile Share value rate plan pricing, and the AT&T Next program.
Turning to digital, our 52% growth is higher than the growth reported in the most recent quarter by our four 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 indicates 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 for 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 a 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 million 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 game. 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. Kongregate again doubled its business over last year, growing 98% during the quarter. We remain a top 10 third-party mobile publisher with nearly 30 million installs of our 14 games on 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 Rewards customers. 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.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you find that your question has been answered, you may remove yourself from the queue by pressing the star key followed by the digit 2. Once again, that is star one if you have a question. We'll go first to Mike Olson with Piper Jaffray.
Hey, good afternoon.
Good afternoon, Mike.
A couple of quick ones here. If you lost $0.05 from Assassin in the quarter, does that mean that you're gaining $0.05 from Assassin in Q4? If so, is the rest of the weaker guidance for Q4 kind of all related to cautiousness around legacy-gen software? 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 said that you had a couple questions. Did you have another question as well? We'll address them.
Sure. The second question is, should we expect pre-owned gross margins to come down from this 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 fourth quarter. The reason for the fourth quarter guidance moving down is the fact that the impact of the decline in 360 and PS3 is offsetting a very strong business, an outperforming business on the Xbox One and PS4. That's what's taking place in the fourth quarter, and that's what's reflected in our forecast. Rob, do you want to add to that?
There's not much to add to that, Tony.
Okay.
I think you covered it very well.
Mike, you do have the port factor that is not clear to us yet, but Rob mentioned it in his remarks as well.
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 and 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 able to expand the margin. As far as the outlook for margin going forward, I'll turn that over to Rob.
Yeah. We had guided to a pretty broad range, 42%-48% 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. 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. While 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 rates.
What did you guys buy? We bought $26 million, you said?
$36 million.
$36 million in value. 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 base.
Mike, let me also just go back and clarify the Xbox 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. That's what we factored into our fourth quarter forecast.
Thank you.
We'll go next to Colin Sebastian with Robert W. Baird.
Great. Thanks. Good afternoon. By the way, welcome back, Paul.
Thank you very much, Colin. I forgot to mention this earlier, 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. Secondly, 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, since we haven't seen that, is that something we should expect either still this year, or are we 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 One and PS4, like I said, that's outperforming our expectations. We do see quicker adoption in that category than what we had anticipated. As to price cuts, we think it would be excellent and definitely would increase the sell-through rate on the old generation consoles. We definitely think that would help, we have not factored anything into our forecast at this point.
Okay. 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 from the shortfall on the legacy platforms. Given that EPS plus the $0.05 would've 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. I'd say that the biggest area where we're feeling it is in prior gen software sales, prior gen hardware sales have also been on a steeper trajectory down this year than we expected.
Okay. Thanks, guys.
Thanks, Colin.
Our next question comes from Tony Wible with Janney Montgomery Scott.
Hi, Tony.
Hi, Tony.
Sorry about that, Paul. I was saying welcome back. It is 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 have anticipated seeing a little bit more business, or how does a new iPhone filter through all the different parts of GameStop, kind of the core store to Simply Mac, Spring Mobile? And then also, real bluntly, when do you think that seventh-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. Clearly, we sold every single iPhone that we could get our hands on in both Simply Mac and in our Spring Mobile divisions. We also benefited from the iPhone 6 in all of those locations by taking back trades. We took the trades of all of the old phones into all of our GameStop stores, into Simply Mac stores, and obviously into Spring Mobile stores. It benefited dramatically. We also worked with AT&T with their direct fulfill program, which gave us even additional capacity. We had strong demand, and it benefited not only the direct sales but also the trade-in of inventory that we had.
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. Some people believed them, some people didn't. 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. The question is going to be, can we get enough product? Can we keep the pipeline flowing? 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.
Right.
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 first quarter of next year. Some are actually behind that. 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 One and PlayStation 4, that we're very close. Next year, we're expecting a very strong first quarter. Rob, do you have any other thoughts on the headwinds, maybe?
Yeah. 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 first quarter of next year.
Got it. 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 are down 9%.
Store revenues per store are down 9%.
That's just a function of adding the stores or was there anything else behind that drop-
Feels like a timing.
besides the iPhone launch.
Acquisition in the next.
Oh, yeah. 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, Tony.
We'll go next to Seth Sigman with Credit Suisse.
Okay, thanks, welcome back, Paul.
You bet.
I just wanted to follow up on the guidance for the fourth quarter, and I was just 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? It just seems like the sales reduction seems a little bit worse than the EPS. I'm just trying to reconcile that.
Can you run back through that for me?
Well, maybe you could just give a little bit more color on the specific category assumptions for the fourth quarter, hardware, software, or used, how to think about them, and if there were any other factors that changed incrementally relative to your initial guidance besides software.
Well, we don't give a lot of guidance around particular categories, but I will say that we see software growth in the fourth quarter. The hard part of the comp is obviously that we're launching the 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 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 AT&T 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 about 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. That could impact hardware. Aside from that, Mike can-
We expect demand for hardware to be very strong, historically, that second Christmas after you have a new launch, there can be those spotty allocation issues.
Yep.
Hopefully enough will be manufactured, we believe the demand is going to be there.
Absolutely.
Got you. Okay, that's helpful. 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? 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?
An interesting question, right? Mike, you have to answer the inventory questions. I think availability of current gen or old gen going forward is directly tied to performance of your used inventory. That's going to be an interesting debate.
Overall, the used inventory is up going into the fourth quarter.
Yeah.
I don't have a breakdown by category.
Yeah.
What I can tell you is that historically, almost regardless of the amount of pre-owned inventory that we have going into November.
Right
The same percentage of that inventory is going to sell through by the end of the holiday season. What we have found through the years in this business, whether it's going through new cycles or in the depths of a cycle, is that we want to have as much pre-owned inventory as we can going into November. 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 for the color. Appreciate it.
Yes, sir.
Our next question comes from David Magee with SunTrust Robinson Humphrey.
Yeah. Hi, everybody. Paul, great to have you back.
Thank you, David.
Just if I were to sort of rank the impacts of the fourth quarter in terms of concerns, it's the prior gen software being number one, number two being delays of next gen to next year, and then three being the port cost risk, I guess. Is that sort of the order priority of those three factors?
That would be correct.
Yeah. The port risk is the slowdown that's going on in terms of the bringing in of goods-
Of hardware
because cost is a secondary concern.
Yeah.
You're not paying higher costs now? Some retailers I think have already incurred some higher costs around that issue.
No.
I wouldn't say that 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 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. 9.5% of our total sales were represented by our digital receipts. They represented 9.5% of our sales. With 56% market share on the new console, on the physical, our folks are attaching a lot of DLC. If you've been to our launches, what you see is our associates walking up and down the lines 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, or a large portion of that content is funded by non-credit card types of currency. 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, 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. Our numbers are very clean. It's what we take payment for from the customer.
Yeah.
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 Kongregate, and one of the great advantages there is that 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. The console relationship somewhere in here, it's going to be tough for everyone to make money. I think that's what we look at, and that's why we think our buy-sell trade business ironically is tied to the success of full game digital downloads rather than bear case of us disappearing over it is really not the case.
It actually enables investment in the category, which is vitally needed.
Yeah.
Thank you. Lastly, has your thinking changed with regards to the market model for 2015 in terms of the central growth next year, just given the machinations we've seen in recent months?
Mike, 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 2015. One of the things that we continue to monitor on a quarterly basis is the percentage of our members who are intending to purchase next generation consoles. As of the last iteration of that study, that number is still north of 50%. 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 for 2015.
Do you think the overall sector grows faster than this year?
Not sure if we've looked at it that way .
Software versus hardware, it'd be two different worlds.
Yeah, I think that's a fair point. On the software side, probably yes. On the hardware side, that's probably a question mark.
Yeah.
The other challenge is that, what we've seen so far with NPD Group is I think the growth rate year-to-date for the category physical has been around 7%.
Yeah. Our market model typically incorporates the digital. 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. Tough to draw a conclusion in November.
Fair to say though, Rob, that our digital revenues at $800 million plus-ish, is at expectation with a 15% growth. I think Tony mentioned that. That part of our business is executing as per the market model.
Yeah. 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 the high teens.
Yeah.
Okay, great. Thanks and good luck.
Thank you.
We have time for two more questions. We'll go next to Brian Nagel with Oppenheimer & Co..
Hi, good evening. First off, welcome back, Paul. It's great to hear you on the call.
Thank you.
Thank you very much.
The question I have, look, as you know, there very much has been and remains a negative thesis where it continues to cloud your stock. That thesis centers on digital downloads and such. As we look at the data in the third quarter release, I appreciate all the color commentary here, it's clear what you're saying. There were, again, some transitory factors, comparisons, delay of games and such, what can you tell us that basically gets us comfortable that full game downloads are not, in some significant way, disrupting the cycle or weighing upon, again, we have the market share data, weighing upon sales of new generation software at GameStop?
I think that like we said, first of all, it's just our digital growth is significantly outpacing the category. That's definitely one piece. Then we talked about the economics of digital. 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.
I think the economic question that is starting to emerge is a key question that we have. 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. Also our strong market share that we are using to attach digital content.
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 speed, and we've been talking about broadband speeds for years. The broadband speeds are still a challenge for a full game download. While I don't think there's a huge business there yet, there could be someday. We'll be in it, but I just don't know if we can download enough games fast enough for people to I know that's the bear case, but I think the real story is quite different as Tony describes it.
Yeah. It is frustrating, as Paul said, not to have good information, and everyone seems to be reporting it in a different manner. Like you said, we're reporting it based on dollars that go through the till.
Yeah. It's a really important part of our business. J ust beyond that, the problem you got is you're going to have digital bears who are going to be digital bears. They're going to be tough to convince other than we have to keep posting great growth in digital numbers.
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's a barrier that you have to get over once you move digital. That's why those price points in all of the studies that we're seeing and that we're doing ourselves are saying that $20-$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.
Yeah. 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 a downloaded game. Is that in and of itself a new factor versus the prior cycle? Is that something that could be weighed upon, at least initially, new generation sales of software?
You're talking about the token that's bundled, that's packed in for free? What's interesting about that, I think that it could be, Brian. Again, we think it's a short-term phenomenon, because if it is being paid for, it's expensive to someone in the ecosystem. We think it's an expensive phenomenon.
When we look at the attach rates, when you look at the physical attach rate of this new generation, and 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. 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. 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 physical game. The other thing, Brian, when you talk to publishers about the launch, I remember Titanfall. In many ways, these tokens that are bundled in are really a marketing expense for the launch of the console.
Right.
Every console maker wants to have a high install base the first year or 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.
Our final question comes from Scott Tilghman 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, Scott.
I have a few questions. Let me lay them out upfront since a couple are quick. 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 brands. Second, on the 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. 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 as you work toward trying to build a digital secondary market.
Sure. Let me take one and three. Rob, I'll shift buybacks over to you. In terms of trade credits, we're taking that today, Scott, in all of our locations. Cricket accepts trades, our Simply Mac accepts trades, Spring Mobile accepts trades, and GameStop obviously accepts trades. We're already generating trade credits in all four of those brands. That's happening now.
Can they be used across brands?
Currently, in some cases, they can be, but not in all cases.
No, they can't. What's missing, Scott, is the use of the PowerUp Rewards across all platforms, That is something we're working on.
Yes. On the publisher support for the trade credit, what they see is they definitely see our trade credit as a form of unfunded discount. From their perspective, we fund that. It obviously creates a strong sell-through of games, which is what's driving our strong market shares. When you look at our 56% frontline market share of Xbox One 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 the Xbox One and PS4 platforms. In fact, it's higher than what we've had historically. 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. Rob, you want to talk about the buybacks?
I think his question was more toward how are publishers participating.
Yeah
in trade programs.
Right. Historically, there's been some support when you've had relaunches, or I should say, launches of sequel-type titles. I'm 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 trades tied to new releases. If you look at this fall, for example, in a four-week period, you got Grand Theft Auto, Far Cry, Assassin's Creed, Call of Duty, Shadow of Mordor, Dragon Age, you'd have to be a very wealthy gamer to be able to play all of those, and the publishers recognize that. The ability for a gamer to buy one game, play it for a week or two, trade it in, buy the next game, and so on and so on, is important to the gamer, it's important to the publishers, and obviously important to us as well. We're seeing actually increasing support in that area.
Absolutely. There's definitely support that comes on various games, and like you said, on some of the platform changes or transitions, and they're definitely supporting us on that.
On digital trades, we have no comment. Top secret. Can't say anything about it.
Fair enough. Rob, you're 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 fourth quarter. As we used to say at Home Depot, we're not market timers. Right, Rob? That's what you guys do for a living. We're just trying to buy shares. Right.
If I recall correctly, your blackout window is typically about 24 hours after an event like this?
Typically 48.
Oh, 48. Thank you.
Ready for me? Okay. All right. Well, thank you everyone. We appreciate your support, and look forward to speaking with you soon. Bye-bye.