Earnings Call: Q2 2013

Aug 22, 2013

Good morning, and welcome to the GameStop Corporation's GameStop Second Quarter 2013 Earnings Conference Call. At the conclusion of the announcement, a question and answer session will be conducted electronically. I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop's public documents and its property of Game Stop. It is not for rebroadcast or use by any party with the prior written consent of GameStop. At this time, I would like to turn the call over to Mr. Paul Raines, Chief welcome to the Q2 earnings call for GameStop. As always, we are grateful to our associates around the world for their performance and dedication to customers this quarter. They are the secret to GameStop's success. Joining me today on our call are Rob Lloyd, Chief Financial Officer Tony Bartel, President Mike Mahler, Executive Vice President of Strategic Business and Matt Hodges, our Vice President of Investor Relations. The 2nd quarter exceeded expectations with earnings per share beating the high end of our guidance by $0.02 We also produced another strong quarter of margin expansion of 130 basis points. GameStop has now grown margin rate for 9 consecutive quarters, reflecting ongoing strength of the new businesses we are building. Comparable sales came in better than our guidance, but still challenging as we close out the current console cycle. Although the 2nd quarter is the lowest volume quarter of the year, we set aggressive execution goals for our teams around the world and I am pleased to say the team delivered. The hard work of controlling costs and managing expenses is just as important as the exciting work of driving sales, especially at the end of a console cycle. Rob Lloyd will share details of our performance in his remarks. We continued to gain market share this quarter and our digital and mobile businesses continued to perform well. We are positioned well for the upcoming console launches and expect to be the dominant player during this cycle. The unique value of the buy sell trade model has been reaffirmed by our partners and will bring over $1,000,000,000 per year of trade currency to consumers for their new console purchases. Tony Bartel will share some of the highlights of our U. S. Performance with you later on the call, as well as giving you some insight on how we will execute what will be the largest console launch in history. On the international front, we also saw dramatic growth in digital and mobile, while experiencing negative comps, particularly in Europe. We continue to see improved execution in the international area on our core processes, while also rolling out digital and mobile businesses. Mike Mahler will share with you some color on the international business this quarter. We have asked Mike Hogan to touch on a couple of strategic subjects for investors on this call. As console launch visibility has improved, we have some greater detail to share with you on our market model. Mike will also provide an update on PowerUp Rewards. Reflecting on our recent history, we have navigated through 9 consecutive quarters of negative comps, as our industry has declined 38% since 2008. During that same time period, GameStop sales and operating earnings were relatively flat and earnings per share increased 33%. These results were accomplished with a formula of innovative change, strong execution and capital discipline. Our new businesses of digital and mobile have provided consumers with fresh and exciting ways to engage with their favorite GameStop store or digital platform, while providing us richer margins. We have taken share through strong execution and innovative marketing. The launch of PowerUp Rewards in 2010 has now added 25,000,000 members in the United States and 6,000,000 members in Europe and Australia, who see us as their trusted game advisor. Lastly, we have dedicated ourselves to returning free cash flow back to investors, buying back $1,200,000,000 of our shares at a large discount to today's market price, while eliminating debt and launching a dividend. In the past quarter alone, we repurchased almost $89,000,000 of our shares, reaffirming our commitment to shareholders. While we have a lot of work ahead of us, we are proud of the transformation we have gone undergone in recent years and are excited about the future of GameStop. We believe that we are a unique case study of evolution from a pure physical store footprint to a hybrid digital and physical retailer operating globally in the electronics and technology space. Our commitments to investors remain steadfast. We will drive a high rate of internal change to keep GameStop ahead of the curve. We will continue to execute at a best in class level to serve our customers and we will return free cash flow to shareholders. I will now turn the call over to Rob. Thanks, Paul. Good morning. I'd like to begin by reviewing our 2nd quarter results. Global sales were $1,380,000,000 down 10.7% from the prior year quarter, with comps also down 10.7 percent, down 10.2% in the U. S. And down 11.6% internationally. Our same store sales were better the high end of the range we outlined in last quarter's call. We stated in May that there were a few major releases in the quarter. We were very pleased with our performance on The Last of Us, which was the best selling title during the quarter. As a result, new software sales declined 9.3% compared to a 19.4% decrease in the U. S. Market. Overall, we gained 2 90 basis points of new software market share in the quarter. Outperformed the U. S. Market leading to a hardware share gain of 3.80 basis points. Pre owned sales decreased 6% compared to the prior year quarter. The U. S. Was down 7.7% and international was down 1.5%, excluding currency movement. Our pre owned business outperformed the overall video game market, which declined more than 19% in the U. S. Our digital business increased 18% over the Q2 of last year with growth in PC digital and international console digital. Our digital receipts or non GAAP revenue totaled $158,000,000 with GAAP revenues totaling 50,000,000 dollars Tony will have more color on digital growth. Our mobile revenues grew 121 percent to $55,000,000 from 24,900,000 dollars in the Q2 of last year. Our trade traffic continues to accelerate and we continue the international rollout of stores selling re commerce products and tablets. Consolidated global net earnings were $10,500,000 and diluted earnings per share for the quarter were $0.09 exceeding our guidance range. Gross margins for the quarter were 34.8%, up 130 basis points from Q2 last year, driven by the growth in digital and mobile businesses and a shift in sales from new hardware to pre owned. Gross margins in new hardware and new software each increased slightly when compared to the Q2 of 2012. Gross margins on pre owned declined slightly from the same quarter of last year. The margin rate in the other category increased from 38% in Q2 last year to 42% this quarter. We had growth in digital margin, which drove 140 basis points of the improvement. But the main driver was that last year during Q2, we were selling Diablo 3 on PC, which has a lower margin than other products in this category. Other as a percentage of sales declined from 21.3% to 20 percent also due to the impact of Diablo III last year. Digital gross margin grew 14% to $34,800,000 Mobile gross margins were $16,000,000 at 29%. Total SG and A expense dollars declined 4.4% this quarter from last year and were down 3% on a per store basis as we continue to focus on controlling our SG and A. Depreciation and amortization was also about 7% less than the prior year quarter. We ended the quarter with 6,505 stores. We opened 7 and closed 46 in the U. S. And opened 6 and closed 6 internationally. We still expect to reduce our store base by about 2% this year. Inventory was up slightly, reflecting an increase of 25% in pre owned and mobile inventory, while our AP leverage declined. Remember that pre owned and mobile re commerce inventory carry no payables and therefore affect our AP leverage. The timing of new release software also affects our AP leverage and as we shared last quarter will return to more normalized levels next quarter. As we indicated in the earnings release, our Board of Directors authorized a dividend of 0.275 dollars per share for this quarter to be paid on September 19. We repurchased 2,400,000 shares in the 2nd quarter at an average price of $37.21 for a total of $88,900,000 Life to date, we repurchased 57,700,000 shares at an average price of $21.25 for a total of 1,230,000,000 have approximately $311,000,000 remaining on our current buyback authorization. Now for the 3rd quarter outlook. We're pleased to be forecasting positive same store sales ranging from +11 percent to +15%. We are excited about the Q3 title lineup including Grand Theft Auto V, Battlefield 4, Assassin's Creed Black Flag and others that Tony will discuss. Please note that Assassin's Creed releases in the Q3 this year and not the 4th. We expect diluted earnings per share to range from $0.50 to $0.55 an increase of 31% to 45% compared to $0.38 for the Q3 last year. We are using weighted average fully diluted shares outstanding of 120,000,000 following buybacks through the 2nd quarter. Based on our better than expected second quarter results as well as positive trends in new console preorders and higher launch quantity allocation than we originally forecasted, we're increasing our full year comparable sales guidance from negative 5% to plus 1% to now range from down 3.5% to up 1.5%. We're also revising our previous full year 2013 earnings per share guidance of $2.90 to $3.15 to a new range of $3 to 3 $0.20 using weighted average fully diluted shares outstanding of 120,500,000 following buybacks through the Q2. Earnings guidance does not include the effect of additional buybacks. I'd like to point out that our 3rd quarter earnings guidance range is much higher than the current consensus estimate and that the consensus estimate for the 4th quarter is much higher our implied guidance. We believe there's a disconnect due to the timing of new releases and that some of the 4th quarter difference may be due to comparisons to last year that do not consider the $0.08 per share impact of the 53rd week last year. With that, I'll turn it over to Tony for his comments. Thanks, Rob, and good morning, everyone. Today, I'm going to provide you with color on the upcoming console and title launches and update you on our digital and mobile second quarter performance and full year forecast. We are optimistic and ready for the upcoming console launches and the strong software lineup. The software slate is as strong as it has been in years and the launch of the new consoles is seeing strong consumer demand. Key launch titles in Q3 are Electronic Arts Madden 25, FIFA 14 and Battlefield 4 Disney's Infinity, which is off to a very strong start exceeding our expectations Take 2's Grand Theft Auto V, Activision Skylanders: Swap Force, Nintendo's Pokemon X and Y, Warner's Batman Arkham Origins and Ubisoft's Assassin's Creed Black Flag. Our software market share grew 290 basis points during Q2 and we are at record highs on both PS3 and Xbox 360 software share. So we are launching these strong new titles at our peak. Our deep and long standing relationships with the publishers allows us to offer intriguing and unique exclusive digital and physical content with each launch. This along with the close customer relationships that we have with our 31,000,000 PowerUp reward members and through our knowledgeable associates provides us with the ability to maximize physical, digital and ancillary revenue at the time of launch. For instance, in the recent Disney Infinity launch, we offered customers the opportunity to pre order and purchase over $400 worth of characters in a single transaction. Similarly, on the upcoming launch of Grand Theft Auto V, we are the only U. S. Retailer to sell the exclusive $150 collector's edition. Our buy sell trade model continues to make us the most affordable place to buy games, systems, digital content, consumer electronics and accessories. Along with having trade in deals on both new consoles, we now have 2 ways for PowerUp Rewards members to buy new games for $9.99 either by trading in 2 recent current create unique ways to drive value that can only be found at GameStop. For the console launches, our allocations from both Microsoft and Sony are much stronger than last launch. While we cannot disclose actual launch quantities for competitive reasons, we expect a significant increase in launch day quantities versus the last console launch. To put the launch efforts into perspective, we have increased our launch period supply chain capacity by 60% through the use of contracted distribution centers. By utilizing our reservation information and PowerUp Rewards 1st to Know list, we will be able to pinpoint these unprecedented launch quantities to the right locations and to drive logistics savings as well. After completing our reservation programs for both consoles, we still have 1,500,000 of PowerUp Rewards customers on the Sony First to Know list and 700,000 PowerUp Rewards customers on the Microsoft First to Know list. Next week, all 4,400 of our U. S. Store managers will have hands on training on all of the new games and on the new consoles. So we will continue to be the most knowledgeable source for buying a new console and related games and accessories. Also, we will have over 4,000 of our customers attend our GameStop Expo in Las Vegas next week, where they too will receive hands on experience with some of the new games and the 2 new consoles. Turning to mobile. Our business continues its strong performance, generating $55,000,000 of global revenue, more than doubling over Q2 of last year. Our margin on our mobile business was 29% in the second quarter. We are now accepting over we recently launched the new Nexus 7 tablet and our exclusive Sophix 8 inches tablet and both are seeing strong demand. We will also be adding the Samsung Galaxy Tab 3 line later this month. We fully expect our mobile sales to benefit from the large increase in traffic that we expect in our stores during the 3rd Q4. And so we are reconfirming our full year growth targets of between 30% to 40% over 2012. Digital revenue increased 18% during the quarter as expected with the U. S. Digital business growing 12% and the international digital business growing 43%. International growth was driven by the rollout of Digital Game Informer, Steam Wallet and DLC into additional markets. By segment, console digital grew 5%, outpacing physical software growth by 25 points during the quarter and PC digital grew 38% as we rolled over the successful launch of Minecraft in the Q2 of 2012. As nearly every major launch title during the back half of the year is launching with DLC, we expect to continue to outpace the significant software growth that we will see in the back half of the year and we are reconfirming our full year guidance of 25% to 35%. Kongregate continued its impressive growth streak with 50% growth. In addition, they launched their first two mobile games, Pirate and Sheep Happens on the iOS platform and have many more games in their publishing pipeline as as Steam Wallet sales continued their strong trajectory, tripling globally during the quarter as we have now completed our global rollout of this service. Even in the U. S, Steam Wallet revenues nearly doubled over last year's Q2. And Game Informer is the largest digital magazine in the world with 3,300,000 subscribers. Based on our forecast, we will have a combined mobile and digital business that exceeds $1,000,000,000 on a non GAAP basis in 2013. I would like to remind you that these are businesses that we were not in 3 years ago. In short, we are ready and excited for the software, digital, mobile and console launches that lay in front of that in front of us. With that, I'll turn the call over to Mike Moll. Thanks, Tony. Good morning, everyone. In the Q2, our international same store sales declined 11.6% versus Q2 of 2012 with results varying by segment. While sales were challenging, we saw a major increase in pre order activity during the quarter. International reservations increased significantly over the Q2 of 2012, driven by consumer excitement around the upcoming console launches and outstanding new releases. This reservation growth was a direct result of Game Stop's global merchandising teams coordinating with our publishing partners to develop exciting exclusive content and create innovative trade in promotions, which helped drive the significant increase in reservations for the back half of twenty thirteen. The success of these efforts was a 14% increase in trades during the quarter as customers took advantage of GameStop's buy sell trade model to secure reservations at an unprecedented rate. This increase in trades provides us with significantly more pre owned inventory heading into Q3. During the quarter, we continued to expand and improve the flexibility of our buy sell trade model. We expanded our multichannel capabilities, introducing web and store to new markets and launching GameStop's digital wallet in Italy and Germany. Through our loyalty program, the GameStop digital wallet gives our loyalty members the flexibility to use their trade credits both in store and online to make e commerce purchases of games, systems, digital content and accessories. This functionality will be expanded to additional markets in the back half of twenty Our efforts to increase customer engagement continue to take hold with loyalty members in Europe now topping 4,000,000 and Australia above 2,000,000 members. The increase in loyalty membership in new markets has also driven the global expansion of Digital Game Informer, where in Europe we now have close to 300,000 subscribers. Our powerful loyalty programs combined with an active social media plan allows us to be closer to and engage our customers more effectively than ever before. The impact of these increased engagement can be clearly seen for example in our Australian market, where our Consumer Show this October in Sydney will draw over 30,000 passionate customers to experience the exciting new releases and new consoles that are coming this fall. Finally, our investments in technology and improved vendor collaboration increased international digital sales 43% in Q2 compared to the prior year quarter. This was driven by strong growth in console DLC, the continued increase in the sale of Steam Wallet Cards in all markets and the initiation of Digital Game Informer subscription sales in Europe. The improved collaboration with our publishing partners has had a significant impact on our DLC sales. As can be seen with Sony's successful June release The Last of Us where our international businesses drove an approximate 30% attach rate on the digital season pass at launch. Working globally with our partners, we have developed powerful launch promotions for the PS4 and Xbox 1 and all of the outstanding software to be released this fall. These partnerships as well as our expanded multi channel capabilities, strong customer engagement and dominant market share in 13 countries have GameStop well poised to make the upcoming launch of next generation consoles a tremendous success. And I will turn it over to Mike Hogan for his comments. Thanks, Mike. My first topic this morning is updated look at the GameStop market model. This is GameStop's proprietary forecast model for the North American new console gaming category. Console gaming includes console hardware, console software and console digital. The modeled inputs include external research, information from video game publishers, console manufacturers and our own internal data. In total over 20 external sources are used. Key factors that drive the model include new console price points, hardware adoption relative to last cycle, software attach rates based on current trends and the prior cycle, historical growth curves for console launches, digital content availability plus attach rates and subscriptions, and projections of the future sales of the existing consoles. Over the past few months, we've a significant amount of additional information regarding the new consoles and their likely impact on the category. We know there will be 2 new consoles launched in 2013, exact details on launch dates, available inventory and new titles are still pending, but the fact of 2 launches in 20 console manufacturers might attempt to limit consumers' ability to share, trade or resell games. And our research demonstrated that that would seriously limit purchase interest in the new consoles. This has since been clearly resolved in favor of the consumer, which is a significant positive for new console demand. Through our PowerUp Rewards consumer panel, we continue to monitor consumer awareness and purchase interest for the new consoles. Among PowerUp Rewards members, awareness of the PS4 and Xbox 1 continues to build and is now over 90%. Interest has also risen considerably since the spring. This high level of interest is further supported by the over 2,000,000 PowerUp Rewards members that Tony mentioned who has signed up for the PS4 and Xbox 1 First to Know list through PowerUp Rewards. In fact, in our panel research, 66% of Power Up Rewards members indicate that they expect to be playing on a next generation console within the next 12 to 18 months. This also is up significantly from the spring. With this and other information, including year to date category performance, we have updated our market model through 2015. Our projections for 2013 are unchanged. We still see category growth in the back half with the full year showing a decline for 2013 versus 2012. For 2014, the model's projections have increased slightly since the spring. Based upon this, we reiterate our projected category growth range of +20 percent to +30 percent console category growth for 2014. The major positive factors are greater detail around the 2 console launches and the growing consumer excitement. Given that both the PlayStation 4 and Xbox 1 will launch in 2013, both will have a full year impact in 2014. Please note that 20% to 30% growth is still potentially conservative. In the 1st full year of the PS3, which was 2,007, Sony hardware and software grew plus 31%. And in the 1st full year of the Xbox 360, which was 2,006, Microsoft hardware and software grew 59%. The growth continues in 2015. The model projects a 2nd consecutive year of positive growth for the console category in the range of +10 percent to +15%. This too is consistent with what we saw in the prior generation launches. By 2015, console digital will be nearing $4,000,000,000 much of which will be sold in stores. We've been asked a number of times about the performance of the Wii U and how that factors into the model projections. In previous versions of the model, we assumed the success rate for the new 2013 consoles, the Sony and Microsoft consoles at 80% to 85% of prior generation. Based upon what we do at the time, however, we had modeled the Wii U at a much lower multiple of prior generation sales for both hardware and software. Thus, we already had very conservative assumptions for the Wii U. And at launch, the Wii U exceeded those expectations. Sales since then have been softer, but the key will be holiday 2013 performance. It is worth noting that in our PowerUp Rewards consumer research, the number one reason consumers give for not yet purchasing the Wii U is a limited number of new games for this console. Post E3, we are excited E3, we are excited about the number of new games from Nintendo and we do see the potential for significantly improved performance One is history. We saw in the previous cycle, One is history. We saw in the previous cycle introduction of new consoles, particularly consoles that are not backward compatible drives a whole new cycle of consumer trades. Following the prior cycle, GameStop pre owned business grew plus 20 percent in 2,007 and +27 percent in 2,008. 2nd factor is value. Our PowerUp Rewards panel consumer research shows that the greatest single barrier to consumers for buying the new consoles is affordability. We believe the value that GameStop will offer via our trade in programs will make the new consoles accessible to millions more consumers than would otherwise be possible. In fact, our PowerUp consumer panel research showed that consumers will not only trade in their existing consoles and games, they also plan to trade in a broad array of electronics including smartphones, tablets and music players to purchase their new consoles. GameStop's expanded buy sell trade program will provide many new ways for consumers to fund their new console purchases. In summary, we anticipate the console category will show positive growth in the back half, but still negative for the year, Even with somewhat conservative assumptions around the success of new Sony and Microsoft consoles, the console category should deliver very strong growth of +20 percent to 30% in 2014 followed by strong growth again in 2015. GameStop stores will additionally benefit from increased sales of console digital in our stores. 2nd topic I want to cover today is a brief update on PowerUp Rewards. PowerUp Rewards continues to grow and recently passed the 25,000,000 member mark in the U. S. This date of PowerUp customers now represents nearly 1 third of all software sold in the total category in the U. S. PowerUp continues to attract the heaviest spenders in the category with an average annual spend of over $300 which is more than 3x the category average. And our database of member libraries continues to grow and we now have an accurate record of over 453,000,000 products across the membership base. This is an increase of 36% versus the prior year. We're leveraging this data to drive both current and new businesses in a number of ways. I will now turn it back over to Paul. Thank you, Mike. These are exciting times at GameStop. As you can hear, we know we have lots of work to do between now and the console launches in the fall. We will now open up the call for questions. Thank And we'll take our first question from Anthony Chukumba with DB and P Capital Markets. I had a couple of questions. For the first one, I'm very interested in the fact that you now are projecting positive comps for the 3rd quarter. This will be the 1st positive comp in 9 quarters as you said. Obviously, a lot of this is driven by the strong title lineup. But I guess I have two questions. One, how much of that is Grand Theft Auto V? Because a lot of it I mean, I guess the majority of the titles you make are anniversarying year over year. And I guess the exceptions being Disney Infinity and Assassin's Creed Black Friday. I was just wondering how much of that being driven by Grand Theft Auto V? And then related to that, does that give you even more confidence in the next generation of consoles given that people are still very excited about buying tentpole titles in for this generation. Thanks, Anthony. Thank you for recognizing 9 quarters of negative comps. It is a remarkable industry and it's been a remarkable story for us. It has been a very tough cycle as everybody knows. Rob, you want to start that off and then go to Tony? Yes, sure. Anthony, I can't clarify exactly what the impact on the comp is of Grand Theft Auto V, but obviously, it's going to be a huge title. I think one other thing I'll note in there is that Battlefield 4 is an every other year title from EA and performs much more strongly than the off year title which is Medal of Honor. I'll let Tony talk a little bit more about some of the others that we're seeing that are also driving that comp. Sure. In addition to the 3 that you mentioned in Battlefield 4, you have SWAT Force which is we see strong reservations for that product. And you have from Warner, you have Batman: Arkham Origins, which is which does not have rollover. So you have really what we consider to be 6 very strong titles that really have no rollover components and then you add in the Assassin's Creed flip from our Q4 to our Q3 gives us strong confidence in the comp guidance. Okay. And then the second part of that question is just does this give you even more confidence about the next generation? I mean, typically, this late in the cycle, I mean, sales usually just kind of fall off a cliff, right, because everybody's sort of saving the money for the next console. So I guess, I'm just wondering does this make you even more confident? I think guys and maybe Tony can add to this. Anthony, the thing that we talk a lot about here is innovation. And there's a big focus on technology, which is important. Innovation is really what drives the consumer in. And so I mean, I look at things like just Infinity last weekend. We were all in stores on Sunday, new customers who haven't been in our stores in a long time coming in to look at new IP. So I think it does give us confidence. The level of innovation entering reentering the category is pretty exciting. Fair to say, Tony? Fair to say. And again, we've got 2,200,000 people that are still not that we haven't been able to satisfy with announcement that you could upgrade put out the announcement that you could upgrade from Xbox 360 to Xbox 1 at $9.99 we saw a significant acceleration in some of those tentpole titles, which indicates that people are very much planning to buy them for Xbox 1. And now we've made it simple to go ahead and buy the Xbox 360 version. So you're seeing an increase in reservation. So I think there is tremendous demand for the tent tiles. And we there's some great ones coming like Titanfall and Destiny as well that are ahead of us. Okay. That's all very helpful. Congratulations and good luck with the remainder of the year. Thank you. Thank you, Anthony. We'll take our next question from Colin Sebastian with Robert Baird. Thanks guys. Another nice job this quarter. First off on the next gen console supplies, is the better visibility on the launch related to overall hardware production and and availability? Or is this more specifically around your allocation? Because I know there's been some concern about other retailers focusing back on the games category this holiday. With the ramp of the next gen, do you end up spending a with the ramp of the next gen, do you end up spending a little bit more on marketing and other perhaps store related costs? Thanks. One thing Tony and Mike Mahler are close they're talking daily practically with console makers. But one thing I would point out to investors quantities. We've been at this now through PowerUp Rewards, through our international programs. We've been at this now for well over a year planning this launch and communicating privately with consumers. So these guys will tell you a little bit about what they see on quantities. But what I like about this is we're deeply involved with consumers on an individual level, thanks to our loyalty programs well in advance of these launches. Tony? Yes. And I don't have visibility to what the obviously to what the retailers are getting. So I can't determine what our share is of the allocated quantities. And I really don't want to share for competitive reasons what our increases are. But suffice it to say that we as Rob said earlier, it is above what we had originally forecasted. So clearly, they're exceeding our expectations from a launch standpoint. And I think they also understand that launching at GameStop you have the affordability of buy sell trade, which is why you're seeing some of those programs come out. And they also understand that our attach rate of titles and accessories is going to be higher than our competition. You want to talk about the international? Sure. I think internationally, we are seeing much stronger reservations as well compared to the last cycle. And it's really driven by a couple of factors. The excitement around the councils itself, but also really strong usage of our loyalty programs in the markets where we have a loyalty program and we have a large number of members, but also very strong trade in promotions. And we saw customers take advantage of that in Q2, taking the ability to trade in their old games or old consoles and be able to afford the next gen console. And that drove a lot of reservations for us. Rob, do you want to add that second piece? Sure. We continue to focus on how we're spending money. And as we talked about earlier, we were able to reduce our SG and A in the Q2 from last year. And I think as we look ahead, we'll continue to focus on it. We'll continue to come up with new programs that allow us to do that. But as we've said before, there is no better time to leverage your SG and A than during the console launch cycle. The amount of hardware that you move through the store and the size of the transaction really allows us to leverage off the payroll costs and the fixed costs in the stores. One of the things Colin and you know this and many investors who followed us for a while know this, we had to make a series of foundational investments through 2010 early 2011. Top among those was PowerUp Rewards. We had to build out technology, all of the things we did. In many ways that asset now is going to be leveraged across these launches, just as it was leveraged in the launch of the mobile business, the launch of the DLC business. All of these are acquiring customers via that big asset that we spent the money on. So as we said, I think it was a couple of years ago on our year ending call, the goal was to build those assets and then hold SG and A and lever them across the future launches. So that's what you're seeing I think. Paul, maybe as one quick follow-up then. You announced this Simply Mac investment. Is there a plan there to make incremental investments in that business? Or is this something perhaps where you can convert some of the GameStop stores that you close into another format? Or how should we think about that investment going forward? Yes. It's a good question, Colin. I think we have a high rate of sort of intellectual curiosity. We're trying to drive a high rate of change. Simply Mac is a premier authorized reseller of Apple products and services with 12 or 13 stores in Utah, Colorado, Wyoming and now in Texas. And the goal here, we met them and became acquainted with them and we're a minority owner of that business. Steve Bain is the President, CEO and Founder of that business. And Steve and his team in Salt Lake City do a great job of providing an Apple experience with great support from Apple in secondary markets. So towns like we just opened in Midland, Texas. We're open now in Tyler, Texas, Fort Collins, Colorado and different towns of that kind of secondary markets that don't have great access to that high quality Apple service. That's where Simply Mac is. If you look at what we bring to the party, we bring common platforms. Real estate, we are a we're one of the it's certainly especially retail, we're one of the strongest teams in the United States. If you look at our talent sourcing organization in the human resources area, we have tremendous access to talent and staffing. And of course, buy sell trade, we bring significant capacity. So I think you're right. I think if you look at the things we do, we also have that By Mitronic store here in Dallas and in the Bronx that is a similar case where we're leveraging. So the idea is that we have built common platforms and competencies and what other electronics categories can bring to them. And that's what Simply Mac is all about and we're very happy with where we're at there. Thanks, guys. And we'll take our next question from Curtis Nagle with Bank of America Merrill Lynch. Good morning and congrats again on a very nice quarter. Just a couple of quick questions. I was just wondering what kind of demand you guys were seeing for accessories for the new consoles in the pre order the pre orders that you've gotten to date? And if you could elaborate on that a little bit? Yes. Tony, you want to talk about accessories? Sure. We have a high attach rate of the accessories we know about, but they are rolling out. So I we'll continue to roll out accessories. Here's the beauty though of our system. Curtis says every time that we take a reservation, typically it's with PowerUp Rewards members, so we already have a relationship or we even if it's not we have a way of contacting them. So as these come out in real time, we're talking to our customers about them. And these new systems are very innovative and they are going to require additional accessories. So there's our people next week are going to go through one day of training each on the Xbox 1 and the PS4, so they know exactly how to guide customers. They hear everything you are going to need to put underneath the tree or to play immediately so that you have a great experience. I think one of the things that is an emerging trend for us Curtis is that we have a very significant web in store capability now. And because of our small footprint, because of our limited ability to stock a lot of inventory, you see us offering accessories more and more through a web in store process. That is becoming very meaningful for us. And Tony and Mike and Bob Poussaint who runs our merchandising and Michael Vandenberg who runs the international merchandising, when they sit down with a publisher, they're able to bring the publisher more and more ideas around accessories, right? And these are accessories that we don't have to push through our supply chain. We can offer them in store visually or add them at POS and ship directly to the consumer. So that whole world of accessories is going to get is going to change significantly in this platform launch. Great. That's very helpful. Thank you. And then just the other question I had was, I was just curious how you guys are thinking about the current generations of systems, the Xbox 360 and the PS3 kind of going after I guess launch of the new consoles? And how do you see GameStop positioned with them kind of versus peers? I think Mike Hogan had some data on that. Mike, you want to share that on the last consoles? Yes, sure. So your question is what happens to the existing systems once the new systems are launched? Yes. We certainly expect Sony and Microsoft to continue production, much like with Sony and the PS2, the best piece of data I can give you here is that 61% of the PS2 units that were sold, life to date were sold after the PS3 was announced. So we would expect that there would that clarification. Thank you, Curtis. And we'll take our next question from Brian Nagel with Oppenheimer. Hi, good morning. Congratulations on a nice quarter. Thank you, Brian. Good. First question I have, maybe go back to one of the it's going to be a follow on to one of the prior questions. But just wanted to understand better this current demand dynamics. You look at so Q3 you indicated sales should tick up significantly on sales on better sales of software to existing devices. But at the same time, we've seen really strong initial demand for the new console. So the question I have, as you look at your PowerUp Rewards data and the customers have signed up for both these softwares and hardwares, is it 2 distinct groups of gamers? Or is it indications that maybe the gaming community is going to operate on both the older systems and the newer systems going forward? Mike, what kind of insights do you have on that? Do you have any data surrounding sort of people's multi console behavior? Yes. I mean, there's a lot of things we could you. First is that, well over half of the people that we have in our database are multi console owners today. And we certainly expect that as people look to new console, obviously some of those people are going to trade in the existing console, but that also means that there's other people that are going to come into the category through the pre owned business, particularly as it becomes a really affordable option. I think I would also take you back to Tony's comments about the first to know list and the demand that we're seeing today for the consoles. I mean our biggest challenge is going to be getting enough product to keep up with the demand that's market is still going to be people who are still in the existing consoles to be people who are still in the existing consoles and we'll have a tremendous amount of people coming and buying games for those consoles. And Brian, the other issue that was in remarks or Mike's remarks was the affordability issue. GameStop is just uniquely positioned on this affordability dimension. We compete on the value dimension. We compete based off trades. We don't compete based off discounting. And our ability and this is one of the reasons frankly that we expanded the universe of trade and re commerce into electronics a couple of years ago, because we saw consoles coming a couple of years out and said, how do we create more value for consumers so we can take smartphones and tablets and so forth. So this innovation versus affordability question I think is what will play out here and define how much consumer adoption we get on the consoles. Got it. Got it. That's helpful. And then maybe and that could work through a decent segue into kind of a follow-up question I had. As you've been talking, it looks like the so you mentioned the allocations of the new hardware devices in your press release and your comments today. It seems like production numbers, I'm referring maybe could be a little higher than in prior cycles. So if you're talking to the Sonys and Microsofts of the world, is there any indication you're getting that maybe not just only at the initial launch, but through that 1st year you're going to see much better shipment type numbers? I think there's a lot of optimism that that will be the case. That being said, it's very early in the production cycle. And so I think that we're getting definite desire from the publishers that would be the or the platform holders that that would be the case. And I think it all depends on the yields as they begin to produce these products. So but again based on Rob's comments earlier, what we have received in terms of allocations from the launch quantity and we would assume through the balance of at least our fiscal, they did exceed our expectations. Thank you. Thank you, Brian. And we'll take our next question from Arvind Bahika with Serna Ghee. Thank you. I'd like to add my congratulations guys. Question on the market model, the plus 20% to plus 30% in 2014, I was hoping you could maybe provide a little bit more color how that kind of breaks down between hardware and software even if it's very general or directional? And then also, I want to be sure I got this right that in 2015, you have increased your growth assumptions to 10% to 15% and previously it was 8% to 12%. Are those apples to apples numbers? Thank you. Mike? Sure. So as far as the total model the 20% 30%, what's included in that number is the console hardware, console software, console digital. And I don't believe we've broken that down by component within that. As far as your question about 2015, the numbers that we showed last time, the 10% to 12% was the number that was just included console hardware and software. We expect console digital to grow at a higher rate of that and that's what drives the higher range here. So the range we're giving you there is apples to apples with 14. It's the console category including console hardware, console software and console digital. Okay. And then just a small question, I guess on the hardware margins this quarter being higher than normal. Is there anything going on there that we should be aware of? Rob? I think it was like 10 point almost 11%. Usually it's around 8%. Anything unique there? Yes. Hardware margins software margins as well can move around from quarter to quarter based upon what we're doing in terms of selling extended warranties. It also has to do with the kind of cooperative advertising dollars we're getting from our publishing and console partners. And so I wouldn't say there's anything more going on there than what's normal. Okay. And then last quick one for me. You're seeing a lot of success with Infinity. You've done really well with titles like Skylanders. I assume that you're going come back with the GameStop kids store concept again this holiday. And if yes, what are the plans in terms of how many you'll be opening? Well, Arvind, we don't disclose those kinds of things. As you know, competitors are eager to know what our plans are. We are excited about Infinity and kids and Tony knows exactly which SKUs he needs to go order more of, right Tony? We know exactly on Infinity. We know we have a lot of insight. I think we're still planning what we do here Arvind in terms of holidays. So nothing to disclose at this time. Rest assured that it will be given more space in our stores during the holidays. So there will be kids sections in every one of our stores. Yes. The intersection, we had I think 2, 3 calls ago. The intersection of toys and software and toys and games is an interesting space for us. Our challenge of course is the physical space in the stores. That's what the battle we fight every day is that one. Our service levels are superior to everybody else, but our challenge is always space. So that's the battle we fight and that's why you see us do things like the GameStop Kids last year. And the biggest thing that we offer on Infinity is instead of having people having to run all over town trying to figure out where the characters are, we allow them to reserve all of the characters at our stores and come pick them up, which is a great benefit and which is the main reason why we were able to exceed our expectations on that launch. That's great. Thank you, guys. Appreciate it. Arvind. And we'll take our last question from Seth Sigman with Credit Suisse. Okay. Thank you. There was a comment earlier that pre owned trade activity has started to increase and there may be better pre owned inventory now hitting the shelves. What's been the consumers' response that used game customer? What's been their response? And would you be expecting used game sales to accelerate at some point? I guess it makes sense that consumers will trade in their old stuff, but just trying to understand the level of confidence that there's a segment of the market that still may be interested in those last generation used products? Thanks. Maybe Mike Hogan you can start that and then Mike Mahler had some comments on that. Yes, sure. Yeah, I think that again the best data we can give you here is history from the last console cycle. Certainly, we do expect to see an increase in trades, because not only do you have the innovation of new consoles, but there are consoles which won't be backward compatible. We've got some obviously some great value offers for consumers to trade up whether they're buying the current generation and going to the next one. If you look at the history we had last time, the pre owned business grew dramatically in the 1st 2 years following the launch of the PS3 and the Wii. It grew 20% followed by 27%. So we are being very aggressive about trades. We always like to increase our pre owned inventory. And that's because we would have very high expectations for our pre owned business next year following the launch of the consoles. Mike Mummer? Sure. I think one of the drivers Seth was what we saw in Europe was this year this time versus the last console cycle, we have very strong promotions on the reservation programs for the new councils and some of the key new releases. So what we saw in the second quarter was a 14% increase in traded product in, in order to secure those new council reservations. And so that does have us ending Q2 with higher used inventory than we did last time last year. Okay. Thank you. That's helpful. And just a follow-up question on the gross margins. I guess first, how do you think about the margin profile of some of the next generation products? And then related to that from a mix perspective, I know in the first couple of years you typically see some overall margin compression, but you have some other drivers there today between digital and just greater use penetration than maybe few years ago. So I mean how do you think about margins and how those drivers can maybe offset the mix of hardware? Thanks. Seth, this is Rob. We're very proud of the fact that we've expanded our gross margins by 400 basis points since the peak of the business in 2000 and 8. And a part of that is the mix of product that you sell while the console cycle is on a downward trend. So the expectation would be that you're going to sell a lot more hardware, you're going to put some pressure on those margins. So we've talked about them being comparable for 2013. But as we move into 2014, I think that you can expect the margin rate to come down a bit. The good news is the businesses that we've built in digital and mobile and the rollout of best practices on pre owned throughout the world and the improvements we've seen there will prevent it from With that, we will wrap up the call. And I want to thank all of you for joining the call. Thank you for your support of GameStop. We believe that ours continues to be a compelling story and a great investment. Goodbye. And that does conclude our conference. Thank you for your participation.