Good day, and welcome to GameStop Corporation's third quarter 2013 earnings conference call. 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 pound key. 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 Corporation. Please go ahead, sir.
Thank you, operator, and welcome to the third quarter earnings call for GameStop. As is our custom, we first want to recognize all the members of the GameStop family who are delivering the largest console launch in history around the world. They are the lifeblood of our company, and we thank them for their hard work and service of our customers. We also want to welcome all the new members to the family we have recently added. We are also pleased to announce that we will be closed on Thanksgiving Day next week in the U.S. out of respect for our associates and their families. We will welcome customers starting at midnight for our Black Friday events.
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. What a quarter. The console video game market returned to growth during the third quarter, and as we forecasted, is one of the most exciting categories in retail headed into the holiday season. Our comp growth of over 20% is the highest quarterly comp growth since May of 2008, and our earnings per share of $0.58 exceeded our guidance and grew by 52.6%. As we look at the business, a few key themes are emerging. The first is that GameStop is focused like a laser beam on the console launches. We have been working on these launches for over a year.
Our team has gone through intensive training on the features of the new consoles, and our in-store experience reflects that knowledge level. Our supply chain has been tailored to fit the needs of our console partners and positions us well for holiday. Tony Bartel and Mike Mauler will share some color around our strategy for success on console launches. As we like to say around the office, "It's the console, stupid." Another theme that is clear is that we will use our buy-sell trade model to grow our share. Console launches offer a once in a seven-year opportunity to reward customers with high value on their trades towards new hardware and software. We know from PowerUp Rewards that if a customer buys their first console from us, it is very likely that they will continue buying software and accessories from us far into the future.
For that reason, we were aggressive this quarter on trade promotional activity to bring customers into our ecosystem with console launches. GameStop trade credits in video games and mobile devices totaled nearly $300 million during the quarter, and most of that currency was used to buy new hardware and software. Going forward, we believe trades will be the key to enabling consumer buying during holiday, and we are finding new ways to use them to our competitive advantage. Rob Lloyd will give you some more color on our pre-owned margin and how we expect it to return to normalized levels in his remarks. On the digital and mobile front, we saw slower growth in the quarter as our core gamers spend heavily on console software and hardware. A final theme we are seeing is very strong growth in our omni-channel businesses.
We have developed a unique hybrid of physical and digital sales with online, mobile, and store channels working seamlessly to meet customers' needs. When coupled with our leading CRM programs and our Game Informer magazine, it is a powerful mix for holiday in the U.S. and internationally. Mike Hogan will provide some color in his remarks. A few thoughts on strategy. As many of you know, we began a strategic review of GameStop in early 2009 that identified the foundational elements of our current strategy. Those elements include best-in-class console execution and share, creation of an integrated CRM program, development of digital content sales at retail, mobile recommerce, real estate excellence, and capital discipline. As we sit on the cusp of a new console cycle, we continue to look forward and position GameStop for the next 20 years.
In the past, we have made acquisitions in the gaming space and successfully integrated them to drive new digital revenues. We have also been active in the mobile space through our GameStop stores. As part of our continuing strategic work, we have spent time in the past year studying the ways in which technology products are distributed to consumers outside the gaming space. We believe synergies exist with our model, and it is clear to us that we have developed a platform of transferable core competencies for technology retailing at GameStop. Our real estate group manages and understands thousands of zip codes across America with deep landlord relationships and leverage, particularly in secondary or white space markets. Our human resources function is able to create hiring and training events in any geography.
Our refurbishment operations position us to be leaders in buy, sell, trade in video games, electronics, and mobile devices. Our global PowerUp Rewards loyalty program gives us deep data and insight around over 33 million consumers of technology products in stores and online. Lastly, our capital process allows us to evaluate investments in specialty retail with precision and velocity. As part of GameStop's continuing evolution, I'm pleased to announce today that we recently acquired Spring Mobile, a Salt Lake City-based exclusive dealer of AT&T services. Spring Mobile owns and operates 152 stores in 14 states and is one of the largest authorized dealers in the AT&T network. This acquisition provides GameStop an entry into the $170 billion wireless market with one of the nation's fastest-growing operators.
It also allows us to leverage our real estate hiring, buy-sell trade, and loyalty skill sets while adding significant executive talent in the mobile field to the GameStop team. We will provide more details on Spring Mobile in 2014. We are also pleased to announce that we are carrying out a test of prepaid Aio Wireless stores in support of AT&T in several markets and will give you color on those post-holiday. Through our broad partnerships, we believe that our gaming brands can be supplemented with a group of technology brands that will leverage our strength in physical and digital retailing. We also see that these emerging brands give investors earnings potential that will be accretive to our core gaming brands. I am pleased to welcome the associates of Spring Mobile and Aio to the GameStop family. I will now turn the call over to Rob.
Thank you, Paul. Good morning, everyone. Let's dive right into the exciting third quarter results. GameStop's consolidated global sales were $2.1 billion, an increase of 19% from the prior year quarter with a comp increase of 20.5%. Our same-store sales significantly outperformed our forecast, beating the high end of the range by 550 basis points, and were driven by the strength of the major releases in the quarter led by Grand Theft Auto V. Our U.S. comps were 23.1% and our international comps were 15.5%, led by Canada at 33.3%. New software sales increased 43.1%, including 47% in the U.S., compared to a 31% increase in the U.S. market. Overall, we gained 550 basis points of new software market share in the quarter. Our hardware sales grew 15.3% due to strength in the 3DS products. We outperformed the U.S. market, leading to a hardware share gain of 690 basis points.
Pre-owned sales decreased 2% compared to the prior year quarter. The U.S. was down 3.7% and international was up 3.1%. Our pre-owned business lagged the overall video game market, which is typical when a massive title launches during a non-holiday quarter. Other sales decreased 5.2%, primarily due to comparing against the launch of two strong PC titles in the prior year quarter. Our digital business increased 8.6% over the third quarter of last year, with over 40% growth in international. Our digital receipts or non-GAAP revenue totaled $137.9 million, with GAAP revenues totaling $46.5 million. Our mobile revenues grew 14.4% from the third quarter of last year to $49.9 million. We are on track to meet our growth targets for mobile in the year. Consolidated global net earnings were $68.6 million, an increase of 45.3% from last year.
Diluted earnings per share for the quarter were $0.58, up 52.6% from last year and exceeding our guidance range by $0.03. Overall, consolidated global gross margins for the quarter were 28.4% compared to 31.4% in the third quarter of last year. The primary reason for the decline was the shift in mix into new software. Gross margins on pre-owned declined from the same quarter of last year to 44.5% due to promotional offers made during the last few months to incent trades towards next-gen consoles. We were aggressive in our trade offers for pre-owned video game products and mobile devices as we sought to provide customers with the trade currency they needed in order to make new consoles affordable and drive our share of the new console launches.
While our share gains in the past few years positioned us well for initial allocations, our goal is to grow share despite our retail competitors reentering an energized console market. Tony will share more about our successes on trades toward new consoles and the launches. Our year-to-date pre-owned margin is 46.5%, and we expect to be in our normal range for the full year. Gross margin on the other category was comparable to the prior year quarter. Digital gross profit grew 16% to $32.5 million. Mobile gross margins of 25.2% were also impacted by our aggressive trade programs over the past few months. In addition to driving trades toward new consoles, we were also aggressive about driving trades of mobile devices in a variety of conditions in an effort to increase awareness of our mobile device trade programs. Sell-through of poor condition inventory impacted the margin rate for this quarter.
SG&A expenses were 21.3% of sales this quarter compared to 24.7% of sales in the third quarter of last year as we leveraged the strong software sales in the quarter. Total SG&A expense dollars increased 2% this quarter from last year's quarter as we increased same-store sales by over 20%. Depreciation and amortization was also down about $3.1 million or 7% less than the prior year quarter. We ended the quarter with 6,488 stores. We opened nine and closed 27 in the U.S. and opened 12 and closed 11 internationally. We still expect to reduce our store base by about 2% this year. Inventory was up 4.3% as we head into the fourth quarter and launched new titles. As we've said in the past, the timing of new release software affects our AP leverage, which has returned to normalized levels.
We repurchased 1.8 million shares in the third quarter at an average price of $51.37 for a total of $94.4 million. Year-to-date, we've repurchased 5.2 million shares at an average of $39.81 for a total of $208.8 million. Life to date, we've repurchased 59.5 million shares at an average price of $22.17 for a total of $1.32 billion. Since we implemented our aggressive and disciplined capital allocation program in January 2010, in less than four years, we have paid out over $2 billion in share repurchases, dividends, and debt repayments. As we indicated in the earnings release, our board of directors raised our buyback authorization limits to $500 million and authorized the fourth quarter dividend of $0.275 per share to be paid on December 19th. Now we'll look at the fourth quarter outlook.
For the second quarter in a row, we're pleased to be forecasting positive same-store sales ranging from +2% to +9%. We're very excited about the console launches based on the strong sell-through last week of Sony's PS4 and the anticipation around tonight's launch of the Xbox One. We expect diluted earnings per share to range from $1.97 to $2.14. We're using weighted average fully diluted shares outstanding of 118 million following buybacks through the third quarter. We expect margin rates for the fourth quarter to be down 200 to 300 basis points because of increased sales of hardware. Based on our better-than-expected third-quarter results and strong console demand, we're increasing our full-year comparable store sales guidance from -3.5% to +1.5% to a new range of +1.5% to +4.5%.
We're also revising our previous full-year 2013 earnings per share guidance of $3-$3.20 to a new range of $3.08-$3.25, using weighted average fully diluted shares outstanding of 119 million following buyback through the third quarter. Just a reminder to consider the $0.08 per share impact of the 53rd week last year. I'll turn it over to Tony for his comments.
Thanks, Rob. As Paul shared, we are laser-focused on selling new consoles and related games and accessories this holiday season. After months of working closely with customers, platform holders, and publishers, we are thrilled to be in the midst of the launch of the most innovative consumer electronics products this holiday season. The excitement around both consoles is strong, as shown by both the sold-out launch of Sony's PS4 and the high anticipation of tonight's Xbox One launch. We enter the console launch at our highest U.S. market share ever for software, as we sold 52% of all 360 and PS3 software titles during the quarter. During the third quarter, we also attached software at a rate that is 2.2 times greater than that of our competition, we are well-poised to ensure a large and profitable new console launch.
We invested heavily in our associates during the third quarter, including taking every one of them through a three-hour certification process on the two consoles. We know that they are the most prepared staff in all of retail to help consumers make a well-informed console decision and to make sure that they have all of the games and related accessories to have a great gaming experience. We had and are having midnight events in nearly all of our stores globally, we are seeing strong consumer demand. In addition to selling through all of our reservations and some additional allocation that we've received from Sony, we still have over 2.3 million customers on the First to Know list, which indicates continued demand for months to come.
A survey of our PowerUp Rewards members shows that two-thirds of those surveyed expect to own a PS4 or Xbox One within the next 12 months. According to our PowerUp Rewards customers, the number one concern around the console launch is affordability. We've offered several unique trade-in programs to ensure that we are the most affordable place to buy the consoles and next-generation games. Prior to the launch events, we hosted Sunday console days in all of our U.S. stores to allow customers to play the new systems, talk about them with our associates, and bring in their old devices for trades. Consumers responded well to this approach, as 43% of the new consoles were entirely paid off prior to launch, with over 20% of the reservation payments funded with trade credits.
On average, new products are 14% funded by trade credits, our unique buy-sell-trade model is solving the affordability question for our customers. With each console launching with over 20 new games, we are also the most affordable place for software as well. Working with Microsoft and our publishing partners, we are offering a $9.99 trade-up offer to our PowerUp Rewards members who purchase a previous version game from us. We're also working with Sony to allow consumers to trade up to a digital version of the next-generation game for $9.99. How were the results? We have sold through all of our PS4 reservations and the additional allocation from Sony.
Although we won't reveal the total amount of units for competitive reasons, our share was higher than on any previous console launch, and our sell-through since launch was 80% higher than the total amount of PS3s that we sold in our 2006 fiscal year. Let me repeat that. Our sell-through since launch was 80% higher than the total amount of PS3s that we sold in our 2006 fiscal year. We are also pleased with the product flow that we are seeing through the balance of our fiscal year. As you are aware, Jack Tretton recently announced that there will be 3 million units sold in North America by the end of December, and we expect to sell a large portion of that.
We are running the same playbook with the Xbox One launch tonight, the value of our reservations and additional allocation is 15% higher than the amount of Xbox 360s that we sold during our entire 2005 fiscal year. We are poised for a powerful launch. As new product is available from the platform holders, we will be contacting the people on our First to Know list to give them the first chance to purchase the new product. Finally, several of our competitors have mentioned that they expect that there will be significant price discounting this holiday. While that may be true in other categories, we are confident that this will have a minimal impact on us because of the following reasons. First, we believe that demand for the new consoles will outstrip supply for months to come, so we do not expect price discounting on the new platforms.
Second, we have intentionally increased our market share and related PowerUp Rewards members to peak levels so we are better able to communicate our unique knowledge and value proposition and secure more allocated product. Finally, we have unique trade promotions against the new consoles and new games, making us the most affordable and profitable retailer to sell the new consoles. We're excited to have the most innovative consumer electronic products for the holiday season, the most knowledgeable associates, and the unique deals to make the new consoles affordable. We look forward to a strong holiday season. With that, I'll turn it over to Mike Mauler.
Thanks, Tony. Good morning, everyone. GameStop's international businesses had a very strong third quarter. Driven by major new releases such as Grand Theft Auto V, solid digital growth, and increasing pre-owned sales, we saw same-store sales increase 15.5% versus the prior year. This positive top-line growth, combined with tight cost controls, led to a 95% increase in operating earnings versus Q3 2012 to $39 million. I'm pleased to say that this was the most profitable third quarter for the international business in our history. A significant increase in new release reservations was a key driver of third-quarter sales, which were secured through the combination of exclusive content, unique collector's editions, and the value of our buy-sell trade model. Providing customers with the opportunity to trade in games, used hardware, and mobile devices has also made the next generation of consoles much more affordable to our customers.
During the third quarter, trade-ins increased 19% versus 2012, as customers took advantage of the opportunity to trade up to the next generation of upcoming new consoles. This increase in trades provides us with a healthy inventory position needed to support pre-owned sales during the holiday season. Our investments in technology, CRM, and improved vendor collaboration increased international digital receipts 42.6% in Q3 compared to the prior year quarter. This was driven by strong growth in console DLC, the increase in sales of Steam wallet cards in all markets, and the expansion of Digital Game Informer subscription sales in Europe. The improved collaboration with our publishing partners continues to positively impact DLC sales. The most recent example is Warner's successful new release, Batman, in October, where our international businesses drove an over 30% attach rate on the digital season pass, with several markets surpassing a 40% attach rate.
During the third quarter, we accelerated our customer engagement investments in loyalty, e-commerce, and Digital Game Informer. Our global loyalty program was rolled out to customers in Canada, Austria, Switzerland, and Ireland. GameStop's powerful loyalty initiative now includes over 7 million members outside of the United States and will continue to expand rapidly in 2014. This growing database of passionate members provides us with the perfect resource to interact with our customers, drive revenue, increase reservations, and facilitate interaction through a growing number of channels. As an example, in the third quarter, our international e-commerce business increased 51% versus the prior year. Our global loyalty program is the catalyst to engage our customers through a variety of channels, including social media, CRM emails, online forums, e-commerce, Game Informer magazine, and now Digital Game Informer.
With over 3 million subscriptions in the United States and a growing 430,000 subscribers internationally, Digital Game Informer is the largest digital magazine in the world and provides us with a unique opportunity to engage, inform, and excite our customers worldwide. As of two hours ago, the Xbox One launched in Australia and New Zealand, and in six hours, the next-generation Xbox will kick off in Europe, with the PS4 to come next week. With more reservations than any previous console launch, we are very excited about the incredible opportunities over the next several years to grow the industry and our international businesses. With the transformational investments made in recent years in best practice implementation, omni-channel technology, and customer engagement, GameStop's international businesses are strategically positioned to leverage our leading market share as we launch the next generation of consoles.
I will turn it over to Mike Hogan for his comments.
Thanks, Mike. I will give a quick update this morning on GameStop's omni-channel business, Game Informer, and PowerUp Rewards. Omni-channel has a very significant impact on GameStop's total business, with over 60% of our customers going to GameStop on the web or mobile prior to making a purchase in our stores. In fact, for every $1 of online sales, web and mobile are influencing more than 10 times that amount in store. Omni-channel sales continue to be a positive driver of total company growth, posting 55% growth year-over-year in the third quarter. One key factor in this performance is the continued growth of the GameStop websites, which according to Comscore, rank in the top 20 retail websites in terms of total traffic. We are seeing double-digit traffic growth year-over-year. The second key factor is the growth of our web and store business.
When a product is not in stock or not available in a given store, consumers can still purchase the product from that store via gamestop.com with free home delivery. This essentially provides enterprise-wide inventory and prevents out-of-stocks. It also allows us to offer a broad variety of complementary items that are not practical to stock in all stores. Web in store was introduced in late 2012 and will represent nearly 25% of our total omni-channel business for 2013. We are experiencing explosive growth in mobile. We are seeing 67% year-over-year growth in mobile traffic. We know omni-channel is driving total GameStop sales. 26% of gamestop.com visitors who do not buy online make a purchase in store within 48 hours of their online visit. 80% of surveyed customers said they plan on visiting a store to purchase an item they saw on gamestop.com.
I want to transition briefly now to Game Informer and PowerUp Rewards. As you know, a significant component of our PowerUp Rewards Pro membership is the subscription to Game Informer Magazine. Game Informer Digital has become a key component of that customer experience. The digital version makes possible a greatly enhanced experience for the U.S. consumer with embedded video and other digital features, but it has also made possible international expansion. As Mike Mauler mentioned, we now have digital Game Informer in 12 additional countries outside the U.S. This would not have been possible with the physical magazine alone. With nearly three million digital subscribers in the U.S., Game Informer digital circulation is nearly as large as the next 24 U.S. magazines combined. That is according to Advertising Age Magazine.
Our PowerUp Rewards membership continues to grow and just recently passed the 26 million member mark in the U.S. This base of consumers now represents roughly one-third of all software sold in the total category in the U.S. As you may recall, through our PowerUp Rewards consumer panel, we are able to monitor key consumer trends such as purchase interest of the new consoles. As of September, as Tony mentioned, over two-thirds of PowerUp members surveyed indicated they expect to be playing on a PS4 or Xbox One within the next 12 to 18 months. This number continues to increase over time and reinforces our market model growth projections for 2014 and 2015. I will now turn it back over to Paul.
Great. Thank you, Mike. Before we turn the call over to Q&A, I just want to extend an invitation to all of our New York-based investors and analysts to our Xbox One launch event tonight at our Union Square store at 32 East 14th Street in Manhattan. We would love to show you what an authentic console launch experience looks like at GameStop, so please join us. With that, operator, we will turn the call over for question and answer.
At this time, if you'd like to ask a question, please press star one on your touch tone telephone. You may withdraw your question at any time by pressing the pound key. Once again, to ask a question, press star and one on your touch tone phone. We'll take our first question from Brian Nagel with Oppenheimer. Please go ahead. Your line is open.
Hi, good morning.
Hey, Brian.
My first question, I just want to dive a little deeper into the used margin in the quarter. You gave some commentary in your prepared remarks, but just so we understand the mechanics, the pressure of the used margin, does that come as you're actually taking these trade-ins, or does it come and you subsequently sell that product? The decision to get more aggressive on, I guess, in the trade-in effort, was that planned ahead of time, or was it potentially a response to maybe something you'd see in the competitive environment?
Let me start off with sort of the plans. Rob should go through some of the math on used margin rate. Tony may have comments for you, Brian. One of the things that's very important to us is to have high share on these consoles. Our company has been through several of these. We know the importance of the cycle. Going back over a year, we have wanted to maximize trying to get more allocation every day from the console makers. For that reason, we have been focused on trade promotion for quite a while here, trying to get people into our reservation file and our First to Know list.
I would say this has been something we've been going at a while. As share data becomes more apparent, we have to let Sony and Microsoft lead on that, but I think investors will see how dominant GameStop truly is on these launches. That's really been going on for a while. A reaction, really not much of a reaction here. You really can't react short term, Tony, is that what you're saying?
No, I would clearly say that this was a calculated effort for us to go and to get market share ahead of a launch period, which is exactly what we did.
The world sort of forgot about consoles for a long time, but we haven't. Rob, you want to go through sort of the math on the used margin rate?
The consoles were formally announced at E3 at the beginning of June, at which point GameStop started to take reservations.
That's an earlier process than we've ever had before in terms of reservations toward new consoles. We've never had that much lead time. We were, as Paul and Tony said, aggressive about our trade program. What you start to see is the inflow of inventory with the trade offers that we were making, then over the course of time through the third quarter, you start to see that inventory turn around and flow out, in terms of sales. That impacts the margin rate. The margin rate in and of itself would not change based upon what flows in and is in our inventory. It's when it starts to sell through that you see that. It's not, again, just something that we started this quarter. It wasn't started in reaction to what we were seeing in terms of trends.
We went out of the gates very aggressive, in terms of driving reservations on the consoles. The trade-in program was a big part of that process. We continued through the last five months to be aggressive on driving reservations because we want that allocation from the console makers.
Got it. As a follow-up to that, Rob, you mentioned in the prepared comments that we, I think, correct me if I'm wrong, you said in the fourth quarter, you should see that used margin snap back to the more, the normal levels. Does that then suggest that you're changing the prices which you take trade-ins, or if you work through the inventory, or basically how should we think about the puts and takes of that?
Well, again, as we've always said about our pre-owned inventory program, we have control of the buy side and the sell side pricing on that. As far as what we do going forward, it'll be a combination of both of those levers, if you will, that will have us return more to the normal range that we've always had.
Holiday traffic, Brian, plays a role in this, and we anticipate to have a fairly healthy traffic given the new consoles and so forth.
I'm just going to have one more question, then I'll turn it over to someone else.
Sure.
You've taken a lot of trade-ins on the pre-owned machines in anticipation of the launches of the new machines. How should we think about that in conjunction with kind of the weaker sales and used then?
Maybe you want to say, we certainly have a lot of faith in the used business in a new console cycle. Maybe Mike Hogan, do you want to share what the history tells us about pre-owned in a new cycle?
Sure. I think one of the things we've seen in the past is that with each introduction of a new console, pre-owned growth actually accelerates post that. One of the reasons is because it provides great value, right? These are going to be very attractively priced systems and attractively priced games. In anticipation of that growth, we think that the opportunity to get some additional inventory is a great thing. We think that will help feed the growth coming.
As the category re-emerges as an innovation category, that makes the audience bigger, and it draws people into gaming who have forgotten about it, maybe were thinking about tablets or something else. Those folks, not all of them can afford a brand-new console, and they will buy used to participate in the category.
Okay. Well, thank you.
We'll take our next question from Colin Sebastian with Robert W. Baird. Go ahead, your line is open.
Great. Thanks very much. Quick follow-up on the pre-owned margin questions. It sounds like there's a cyclical element to this, and I think I asked about this on the last call, but why wouldn't it be logical to assume that the pre-owned margins remain a bit lower for a period of time at least, just given the mix shift to higher value next gen software, where maybe that having both sides of the trade, it doesn't give you as much flexibility. Secondly, Paul, back to the comments on technology retail and leveraging your assets. That brings up the point of Simply Mac, which I don't think you mentioned in the script, but I'm curious if there's any interest in acquiring the remainder of that company.
More broadly, if you can talk about synergies beyond the back office between GameStop, Spring, Aio, and Simply Mac, perhaps sharing footprint or floor space, anything like that. Thanks.
Maybe, Rob, do you want to, or you and Mike want to talk about the cyclicality of the margin rate? The one comment I would make on it, Colin, is it's all about the consumer size. It's not a fixed consumer base. People come into the category as it drives innovation, that plays a big role. Anything you want to add to that?
Yeah. Colin, what happens within the pre-owned margin categories, if you will, or the pre-owned categories, is that the newer stuff tends to have a slightly lower margin rate on it than the older stuff does. You're going to see that the newer stuff is going to, by that I mean these consoles that are just now launching and the related software. You're going to see that that business is going to grow over time, but predominantly it's going to be driven by what's already happening, what trades are coming in on the last gen PlayStation 3 and Xbox 360. We're not giving guidance for 2014 yet, but based on history, we still expect to operate pre-owned within the parameters of what we always have.
As far as Simply Mac, Colin, yeah, we're pleased to announce that we did complete our transaction and we own 100% of Simply Mac, and in fact, Steven Bain and the team from Simply opened up their 19th and 20th stores this week. I think it's Missoula, Montana and Lubbock, Texas. Any investors who are based in those cities, you'll have a beautiful Simply Mac store to go shop. As far as synergies, we mentioned them. We see ourselves as having built this platform that includes real estate, talent management and training, buy, sell, trade, PowerUp Rewards and capital, and many others. As far as the real estate synergies, there are multiple synergies. Mark Robinson, our Senior VP of Real Estate, has identified a real long list of targets and locations where we have adjacent opportunities on the same pad, in the same mall.
If you go to Shreveport today, you'll see that the GameStop and Simply Mac are very close. If you go to some of our other locations, you'll see that we're leveraging our landlord relationships. It's very early, and yes, there is a significant real estate opportunity between the Aio, Spring Mobile, and Simply Mac businesses with GameStop.
Okay, thanks.
We'll go next to the line of Michael Olson with Piper Jaffray. Go ahead, your line's open.
All right, thanks. There was some discussion earlier about the relationship between new and used sales at the beginning of a console cycle, I think in the last cycle you saw pre-owned sales increase by something like more than 20% in the first couple years of the cycle. Is there anything different about this cycle or anything you can say about what we should expect for pre-owned growth as we look into 2014 and 2015?
let's let Mike take you through some of his thoughts on that because he's done a lot of modeling. I would also encourage you to remember that PowerUp Rewards is a bit of a game changer on this, and it's demonstrated some really different behaviors in terms of our ability to gain share of wallet. Mike, you want to talk about that?
Sure. I think we've talked about this before. If you look at the last several launches, we had a situation where obviously as consumers trade into the new console, they're trading in their old games. I don't know if we see cyclicality in margin rates, but we certainly see cyclicality in terms of demand. What we would be expecting is a fairly large quantity of consoles and games flowing in as consumers trade up to new. We think that provides a great opportunity for us to offer a great value for new consumers. As Paul mentioned earlier, who are trading up to a 360 or to a PS3. Although I don't think we've given out any sort of specific numbers-
Not yet, no
We certainly feel very optimistic about the opportunity to draw more consumers into the category with pre-owned. We think there's great opportunity to offer great value, and we would expect to see an acceleration of growth.
Yeah, remember that we've always said the used business is an opening price point business. Because video gaming has this mapped pricing, we often don't think of it as an assortment of good, better, best because there's just one price on new software. What GameStop created years ago is the opening price point business. There are consumers who will emerge who are opening price point consumers who love the idea of console gaming but don't have the money for a brand-new copy and a brand-new console. That's the dynamic that will play out over the next couple of years.
Okay. Are you experiencing more mobile competition that could impact that business? I know there continues to be some new entrants in the space from time to time. Were you pressured to do more aggressive promotions there, which may have impacted mobile margins because of more competition in the space? Were you just doing them to kind of drive share gains?
I'll let Tony runs that business for us. One comment I would make about the mobile business is, we were early in that. There are a lot of new entrants into it, we continue to be uniquely positioned in terms of our retail footprint and our refurbishment capabilities. Our play is, how do we continue to leverage that and bundle it with video game promotions. Tony, you want to talk about mobile promotions and trades and so forth?
Yeah, absolutely. I think the number 1 issue that we continue to face is awareness of that. New entrants actually drive awareness of the overall business, that's a very positive thing for GameStop. We did not see any increased amount of discounting in that. We did, as Rob mentioned earlier, we were very aggressive on the trade side of the business. We see it as a very complementary business. We see it does bring in some new customers, a lot of the customers that do come in and buy mobile are the same customers that are coming in. Obviously, we wanted to build inventory for the large amount of holiday traffic that we expect as we sell a lot of new consoles this holiday season. We feel like we're well poised for that.
Okay, thank you.
We'll take our next question from Arvind Bhatia with Sterne Agee. Go ahead please, your line's open.
Thank you very much. Just a couple of questions here, guys. One, I wanted to see if you could give us a sense of what you're seeing in tie ratios for the PlayStation 4 so far, and maybe compare that to what you saw early on, either for the 360 or the PlayStation 3. Then also, the 20%-30% industry growth guidance you guys, or not guidance, but how you guys think about the industry for next year. Is there any change in your thought process? Are you guys more comfortable with that kind of number as you now have more visibility? I have a follow-up.
Rob, you want to take the tie ratio question?
Yeah, I think it's a little bit early for us to talk about tie ratios. I think we're pleased with what we see so far. It's just been a week on the Sony side, and of course, Xbox tonight. I think we'll have more color around that when we release our holiday results, I think.
One thing, Arvind, too, I'll ask Tony to share some color with you, but one thing to look at, we've been saying for a while that these consoles will include a lot more digital content than any previous console. That's played out with PlayStation. If you were in our stores the other night for the PS4 launch, you saw that we were aggressively marketing a lot of digital content and network access. That's going to be a big part of Sony's future. That network is going to grow significantly. Tony, any color you want to add to that?
Sure, we're working very closely with Sony to make sure that we partner with them and giving them the consumer feedback and working closely to make sure that we have a great product there. Our associates, part of their training was to make sure that when people open that product up or as people went to use it, they had a great experience. What we saw is that when you look at all of the PlayStation Plus subscriptions that we've sold in our lifetime as a company, we've been selling them for years. A full one-third of all subscriptions we've sold in our lifetime were sold in the last seven days.
At GameStop. That shows you the strength of attach that was in there. Over a third of the products went out with attach on that's growing daily as we have customers coming back into our stores on a daily basis to pick up PlayStation Plus.
Attaching digital content is a big part of this as well as software. Mike, the model, category model, anything you want to add to that?
Sure. As you know, we have the category model that we updated periodically. The last iteration we had, we were projecting between 20%-30% console category growth in the U.S. for next year, for 2014. The model's built from a number of different sources, takes into account a lot of different variables. What I will say is that the limited amount of data that we have here, because it hasn't been very long, is certainly positive and consistent with what our expectations are. At the time we built the model, we had projected a new console cycle that's slightly smaller than the last one. We were being conservative to account for things like the effect that the Wii had in the last cycle. It doesn't include things like handhelds and pre-owned and so on.
Our category model right now, we'll probably be updating it sometime after the first of the year, but all the data we have right now is pretty consistent with what our expectations were a few months ago.
Arvind, you had a follow-up?
We'd heard some stories where some of the recent big launches like Call of Duty, et cetera, Battlefield, they were trending initially down as, I think it was assumed that consumers were delaying purchases for the next-gen. I just wanted to see if you guys have any thoughts on how you see the full picture for the quarter, meaning, you have the $999 upgrade program. When we combine existing-gen and next-gen sales of some of the big properties this holiday quarter, how you see the trend.
Tony will talk a little bit about what he's doing with trades and all. I would just say that there's a lot of noise in the business right now. We're launching Xbox One tonight. There's a lot of customers. I talk to a lot of gamers, a lot of gamers trying to make decisions. They have so many options. There's a little bit of noise in the system. Tony, what do you want to add to that?
Sure. We knew that coming in, that's why we have the $999 trade offers, those have been very successful for us, it's a unique way for us to sell, we'll continue to do that. I would echo Paul's thought. There is dissonance on exactly which console they're going to play it on, I think that's going to sort itself out in the next couple of weeks as people see the flow of consoles and see how strong the demand is for these two consoles.
One thing's for sure, Arvind, if you're playing your PS4 like we are.
I mean, it's a spectacular.
Yeah
device. Xbox One will be spectacular as well, when I can read LeBron's tats and see the wrinkles in his jersey as well as I can with all the social features, these devices are going to have tremendous demand and tremendous consumer innovation.
Great. Thank you, guys.
We'll take our next question from Curtis Nagle with Bank of America Merrill Lynch. Go ahead, your line is open.
Good morning, guys, and thanks for taking my question. Just one question and a quick follow-up. Frankly, I was pretty surprised by the amount of leverage you guys got on the quarter. Of course, sales were quite good, but just on a dollar basis, they virtually were unchanged given a very big increase in sales. Just was wondering what the puts and takes were, and how we should think about leverage going into 4Q. Just a follow-up. I was curious why digital sales weren't stronger, just given the number of AAA titles, particularly GTA that sold and the high attach rates that go with them. If you could comment on that, it'd be very much appreciated.
Why don't we start with Tony? Why don't you take the digital question first?
Sure. On the digital sales, you even mentioned GTA V, which was by far the largest title in the quarter. GTA V did not actually have a day-and-date digital component to it, which we clearly had anticipated when we last spoke that would. That's really deferred because we clearly anticipate that digital content will come out on that, and we'll participate in that. That's more deferred revenue, and I would say that was probably one of the stronger elements of the lower digital growth that took place. Like we said, the new consoles, we do anticipate that they will be more digital, and we feel like our digital sales will expand as we launch the new consoles.
DLC for us is all driven by the availability of day and date.
Right.
As titles come through that don't have that, it winds up impacting that growth rate. Rob, leverage?
Yeah. We've said all along that you get a great opportunity to leverage your cost base when you're in a console launch. Same thing applies, although to a slightly lesser extent, on a title launch when you think of something like the magnitude of a Grand Theft Auto. You're not going to staff the store exactly the same as you would on a normal Wednesday, but you're going to staff to make sure the customer experience is appropriate when you're open for midnight. You start to think about the flow-through of the hundreds of people in line at a store to get a Grand Theft Auto, the number of people that are in line at a store to get these launches that we're going through right now, you really have a fantastic opportunity to leverage the cost structure. I'm glad you noticed that.
We work very hard to make sure that we're positioned to get the best that we can out of the leverage when we have these opportunities.
Great. Thanks so much. Appreciate the commentary.
Thank you, Curtis.
We have time for two more questions, we'll go next to Anthony Chukumba with BB&T Capital Markets. Go ahead, your line's open.
Good morning. Just wanted to probe a little bit into the Q4 guidance because it just struck me as very conservative. Particularly on the comp 2%-9%, you're going to be selling a ton of these PlayStation 4 and Xbox One at $300, $400. I guess I'm just trying to dig a little bit into that because like I said, I definitely get the mix in terms of the margins, and obviously the consoles are significantly lower margin. I guess that just struck me as conservative, particularly from a comp perspective.
Yeah, Rob will give you some detail. The fourth quarter, there's lots of movement. There's some title shifts. There's 53/52 week. We did launch a Wii U last year that was a pretty successful launch. There's a few things there, Rob, maybe you want to give him some detail, Anthony, some detail on how you modeled Q4.
We're very confident, Anthony, in how we've launched the PS4 so far, what we have on tap for tonight with Xbox One. We know exactly what's sitting in our stores, but the visibility into what our allocations are going to be for the rest of the quarter, that's pretty cloudy right now. We wanted to make sure that we had a comp range to start with that reflected the unknown surrounding that. We wanted to make sure that we weren't overreaching in the expectation that we put on the console makers for what they're able to deliver to the system and specifically to us.
Okay, great. That's helpful. Just one quick follow-up, sort of related. Just to clarify, you're assuming 118 million diluted shares outstanding for Q4, that essentially assumes that you don't repurchase any stock in Q4. Is that correct?
As is typical, when we give guidance, we base it on the share count that calculates off the quarter we just completed. That's consistent, yes.
Okay. Just based on the fact you just re-upped your share repurchase program, there's no reason to think that you wouldn't buy back stock in Q4. Is there?
Well, no, we're committed to the buyback program. Re-upping the authorization is obviously a symbol of that. However, as we go into a quarter, given what the price might do, and there's been some volatility in it this year, it's tough for us to predict exactly what we might buy in terms of share count. Our practice has been, over the course of the past three years, just to base it on what we know has been completed.
Yeah, that's a standard practice Rob and the team take. I would also point out that we've been very consistent and are very committed to the share buyback program. Rob bought back a whole bunch of shares this quarter, and we like the characteristics of our program so far.
Okay, that's very helpful. Thanks a lot.
Thank you, Anthony.
We'll take our last question from David Magee with SunTrust Robinson Humphrey. Go ahead, your line is open.
Good morning, congrats on the good numbers, guys.
Hey, we got a congratulations. Thank you, Dave.
Somebody had to give it to you.
Highest comp since May of 2008, man. All right.
The interest in the new consoles is very encouraging. I guess the discounts that we all sort of attached to it versus the last cycle launch may not have been warranted. I'm curious, as you look out six to nine months from now, when you get through this initial gamer-centric demand, how do you feel about the visibility of the console demand at that point in time, past the initial rush? Are you feeling better about that at this point, or is this hard to say?
Mike's going to give you some modeling sort of stuff. I would just tell you, playing the PS4, you can't help but think about the innovation level in that device as being around for a long time. Just all the social features, Ustream, PlayStation Live, all that stuff is really compelling. Mike, that's just an anecdotal, qualitative kind of thing. Mike, what do you want to share with about the
I think to that point, we've actually modeled the PS4 and the Xbox One. Yes, in our model, they were modeled less than last time, but pretty close. I think one of the reasons why the total number was down had more to do with the performance of the Wii. Everything we're seeing to this point is very positive. I think we made the point earlier, what PowerUp Rewards does is it allows us to go inside and see what the consumers are doing. Obviously, it would be a mistake to take the number of PowerUp members and literally multiply it by the percentage.
Anytime you're seeing a base of 25, 26 million people, and you're seeing a very high percentage, two-thirds of them indicating very positive purchase interest, what it says to us is that the demand is very strong, and it's going to take a long time for the supply to catch up with that demand. I think everything we're seeing suggests very strong demand, not only now, but for a very long period of time. Keep in mind that 26 million people in the program, a lot of those people are not just core gamers, right?
Right.
We have a very broad segment of the population in there. Then I think another point that Tony mentioned earlier is value. One of the things that we think is going to be a big deal is our ability to make the systems through our trade programs affordable for millions of people who couldn't otherwise afford them. Between the demand, the ability to provide value, and hopefully a strong line of new titles coming out next year, we think there's a number of things that could continue to make the console demand strong for the foreseeable future.
There's a lot of data that says if we sell you that console and get you into the GameStop ecosystem, that you'll be back, and that's something we've been focused on quite a bit.
Great. Thank you, and good luck this season.
Thank you, David.
Thank you.
Okay, with that, I believe we are at our time limit. We'll wrap that up. Thank you for your support of GameStop. We look forward to seeing everyone in our stores at holiday. Power to the players.
This concludes today's program. We thank you for your participation. You may now disconnect at any time.