Earnings Call: Q3 2012

Nov 15, 2012

Good morning. Welcome to the GameStop Corporation's 3rd Quarter 2012 Earnings 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 the GameStop's public document and is the property of GameStop. It is not for rebroadcast or use by any other party without the written prior consent of GameStop. At this time, I would like to turn the conference over to Mr. Paul Raines, CEO of GameStop Corporation. Please go ahead, sir. Thank you for joining the Q3 GameStop earnings call. Before we begin our remarks, I want to thank our 30,000 hardworking associates in 15 countries around the world, who day in and day out are providing the finest customer service to gamers in stores, online and on digital platforms. I particularly want to recognize our heroic teams along the Mid Atlantic Coast and in the Northeast who have worked passionately to reopen our stores damaged as a result of Hurricane Sandy. We are happy to report that all of our associates and their families are safe and our gamer fund charitable foundation is working to provide those most affected with the support they need. As you saw in this morning's release, the quarter played out within our guidance on top line and ahead on earnings by $0.06 over consensus. The GameStop formula continues to show strong resilience in the face of challenging category headwinds. And the new categories of digital and mobile are creating new profit pools that we are exploiting aggressively. Rob Lloyd will give you more detail on how the earnings were achieved in the quarter. New software declined at a rate slower than the market, driving another unprecedented 3 20 basis points of market share growth. Our business model is more dominant than ever on new titles. And although the category has declined this year, we are excited about the new titles coming now and in the near future. Tony Bartel will share some insight with you on how we see the software outlook improving now and into 2013. With just a few days left until the Wii U launch, our consumers' appetite for innovation is very high. We encourage you to come to 1 of our 3,000 stores with the new interactives and experience for yourself the fresh and unique gameplay the Wii U provides. It is clear to us that a new console launch has never in history benefited from the kind of holistic strategy we are deploying and we expect to have significant share growth from the last Wii launch. We are bullish on this new console. Antonio will give you some color on our work with Nintendo on the Wii U coming on November 18. Once again, we produced very strong margin expansion during the quarter, up 200 basis points year over year and 2 60 basis points in 2 years. As we have shared on previous calls, we are transforming the business model towards richer margins through the creation of the new categories of digital and mobile to supplement our pre owned and new software and hardware. DLC for consoles, casual game platforms, PC downloads and pre owned smartphones and tablets are all good profit models where GameStop is uniquely positioned to leverage its assets. Although we have a great deal to learn in these areas still, we are satisfied that we are delivering that we saw in these segments a couple of years ago. We continue to execute our transformational strategy with success through the end of the current console cycle. Turning to factors that are directly within our control. Expense management is rooted in GameStop's DNA and remains a very high priority going forward. We have begun to overlap the large CapEx investments we made during 2010 2011 in business transformation. Those investments are showing results that you are seeing in market share growth, digital and mobile profitability and strong positioning of the company as we enter the next console cycle. We are committed to SG and A reduction while maintaining a high rate of technology innovation. On the international front, our teams around the world continue to pursue their markets with tenacity around cost reduction and a flare for innovation. During the quarter, all of our international segments had store comps comparable to the United States and our ability to replicate the best practices we develop accelerating. Loyalty rollouts, websites, digital sales and mobile sales are all ideas developed in only the last 3 years and they are playing a key role in our success in all of our overseas markets. GameStop is a leading global retail innovator and Mike Mahler will give you further color on our efforts. Mike Hogan is joining the call today and his responsibilities now include marketing, pre owned video games, gamestop.comcongregate.com and strategic planning. We are proud of the work Mike and his team have done in reinventing our marketing approach in the last few years and he will share with you some insights on how PowerUp Rewards is migrating to a dominant consumer platform and how we will leverage the tool at Holiday. In terms of capital allocation, we continue to execute the strategy we committed to in 2010. Our buyback execution has been disciplined and we have grown our dividend over the past year. Our commitment to investors is for continued return of cash flows to you plain and simple. As we think about the past few years, it has been a challenging time for most players in the video game business as well as consumer electronics retailing. We have said on various occasions that we believe we have to drive a higher rate of internal change than the rate of external change around us to be a viable player in the future. The video game industry has struggled with reduced visibility to the next console cycle over the past year. As you look at our new profit pools and the margin expansion they are driving, GameStop has at the very least demonstrated a knack for finding business opportunities in the console downturn. As we now shift into an environment where console launches launches will again drive innovation in the minds of consumers, the Wii U is the beginning of the next generation and demonstrates the potential of the complete GameStop business we are building. New video game hardware and software, pre owned hardware and software, digital gaming of all kinds, pre owned smartphones and tablets and new tablets all come together in a rich mix for a global specialty retailer. In addition to these categories, we have built the fast growing PowerUp Rewards customer platform and we are disciplined capital allocators. Looking forward, we are confident we have the right strategies in place and are executing them effectively. As we move into the 2012 holiday season with a new gaming console and look to 2013, we relish the opportunities and challenges we face. With that, I will now turn the call over to Rob Lloyd. Thanks, Paul. Good morning. I'd like to start by reviewing the results of the goodwill impairment testing we discussed on our Q2 earnings call. As a brief reminder, we initiated an interim impairment test of our goodwill and other intangible assets as required under ASC 350 of generally accepted accounting principles due to a temporary decline in our stock price during the Q2. As a result of the completion of this impairment test, the company recorded a charge to goodwill of $627,000,000 and a charge to intangible and other assets of $51,800,000 or $44,500,000 net of tax. These are non cash charges, which do not affect our future operations, cash flows or liquidity position. The charges primarily relate to our International reporting segments, with charges of $101,000,000 $107,000,000 relating to goodwill recorded in Australia and Canada respectively upon the merger with Electronics Boutique in 2,005. The charges for Europe were $420,000,000 for goodwill and $47,000,000 in other assets and were largely due to the goodwill and other assets recorded from the merger with EB and the acquisition of Micromania in 2,008. Now, I'll discuss the quarter. During the Q3, our consolidated global sales were $1,770,000,000 down 8.9% from last year with comps down 8.3%. Comps were down 9% in the U. S. And down 7% internationally. Our same store sales were within the range we forecasted in last quarter's call. There were a few strong titles launched during the quarter, such as Madden 13 and Borderlands 2, but due to comparisons to last year's title lineup and declines in hardware at the end of the cycle, we saw a decline in comps. On a category by category basis, new software sales declined 12% compared to a 19% decrease in the U. S. Market. Pre owned sales during the quarter were down 8.8%. The U. S. Was down 6.3% and international declined 10.5%, excluding the effects of currency fluctuation. The pre owned business again outperformed our new software and hardware results and outperformed the U. S. Market by 17%. Sales in the other category grew 31%. Digital sales increased 32% over the Q3 of last year with strong growth in PC Digital. Our digital receipts or non GAAP revenue totaled 127 dollars with GAAP revenues totaling $15,800,000 PC software sales grew in the quarter due to Guild Wars and World of Warcraft Mists of Pandaria. Mobile sales grew 50% from the 2nd quarter from $28,800,000 to 43 $200,000 this quarter. Consolidated global net earnings, excluding impairment $6 and the high end of our guidance by 0 point 0 $2 by $0.06 and the high end of our guidance by $0.02 The earnings were the result of continued margin expansion and expense control. Gross margins for the quarter were 31.4 percent, up 200 basis points from last year as our digital and mobile businesses continued to grow and our sales mix skewed towards the other category. Margins in new hardware, new software and the pre owned business each increased when compared to 2011. The margin rate in the other category was 38.5%, down from 43% last year due to the growth of the mobile business with margins of approximately 30% and the strength of PC software sales with margins around 20%. Other as a percentage of sales grew from 12.6 percent to 18.2%. The dollar increase in gross profit for the other category was $18,200,000 with the growth coming from digital and mobile businesses. Mobile gross margin dollars were $12,700,000 in the quarter. Digital gross margin dollars grew 23 percent to $30,300,000 Total SG and A expense dollars declined 1% this quarter from last year as we've continued to focus on controlling our SG and A. Depreciation and amortization was also about 7% less than last Excluding our GameStop Kids stores, we ended the quarter with 6,650 stores. We opened 34 and closed 11 in the U. S. And opened 11 and closed 12 internationally. We've reduced store count by 33 net stores this year and still expect to reduce our store base by about 1% total for this year. In recent meetings with investors, we've been telling you that we'll provide greater clarity on the profitability of our store portfolio. As of the end of Q3, 2% of our U. S. Stores and 5% of our international stores did not produce positive cash flow in the trailing 12 months. In total, only 3% of our stores are not cash flow positive. As part of our plan to reduce store square footage by 1%, we will close over 200 stores during fiscal 2012. In an effort to maximize store level efficiency and profitability, we continually analyze the U. S. Store portfolio using our PowerUp database to determine where our sales transfer process can be applied. We continue to experience sales transfers of at least 40% in our closed stores, resulting in 20% or more in increased combined profits. Recent comp history and potential new consoles in the next 18 months present conflicting opportunities for our stores. However, you can rest assured that we will remain vigilant in our analysis of closure opportunities and in managing our store portfolio. We plan to provide guidance on 2013 store count in January as we progress in our 2013 planning process. During the quarter, we repurchased 3,700,000 shares at an average price of $20.59 for a total of 76,800,000 dollars The effect of buybacks done during the quarter did not impact our EPS results as EPS using the guided share count was still $0.38 Our share buyback now totals more than $1,000,000,000 since January 2010 with 51,100,000 shares purchased at an average price of 20 point $2.9 The $241,000,000 repurchase authorization has now been replaced by a new $500,000,000 repurchase authorization. The company also declared our quarterly dividend of $0.25 per share to be payable on December 12. Now for the Q4 outlook. We forecast same store sales to range from down 7% to up 1%. The upcoming Wii U launch and the strong consumer demand we've seen from the AAA titles released in November give us optimism about the quarter, but we're cautious in our outlook given the struggles of the game industry thus far in 2012. We expect pre owned sales to decline from last year as fewer new title sales this year have led to a lower inventory build than we typically have going into the holiday season. Diluted earnings per share are forecasted to range from 2.07 $7 to $2.27 using weighted average fully diluted shares outstanding of approximately 122,000,000 which incorporates buybacks through the Q3. We expect our full year comparable store sales guidance to range from down 6% to down 9%. We are reiterating our previously announced full year 2012 EPS guidance as a range from $3.10 to 3.30 dollars using weighted average fully diluted shares outstanding of $127,000,000 which also incorporates buybacks through the Q3. Our earnings guidance does not include the effect of any 4th quarter buybacks. The guidance range reflects the continued expansion of our margin rate and our ability to control costs in a difficult sales environment. Now I'll turn it over to Tony for his comments. Thank you, Rob. Although the industry had another difficult quarter, we continue to outperform the rest of the market as our competitors saw 24% software declines, while we only had a 12% software decline, increasing our Q3 software market share to 44% in the U. S. In addition, our digital revenues grew 32% over Q3 of last year, with PC digital growing at 55% and console digital growing at 20%. As mentioned earlier, we have shared the success of launching DLC at the day of launch that we had with Activision's Call of Duty: Modern Warfare 3: Elite. And most major titles are now launching with day 1 season passes. For instance, we attached 13% of the season pass to Ubisoft's Assassin's Creed 3 27% of the Halo 4 map pass to Microsoft's Halo 4 at launch. Finally, we are attaching double digits to the Black Ops 2 season pass on Activision's Call of Duty: Black Ops 2. It is important to note that we are now the only retailer that is selling Microsoft game specific DLC and we deliver it to PowerUp Rewards customers at the time of purchase, so that they can begin to download to their Xbox 360 before they leave our store. Even though our digital receipts outgrew the software category by 51 basis points in the Q3. The decline in the gaming category has negatively impacted our console DLC and POSE cards, resulting in a lower growth rate than we anticipated. Although Q4 is expected to be significantly higher than our year to date digital growth rate, we anticipate that we will end the year between 30% 40 percent overall digital growth or $590,000,000 to $635,000,000 of digital receipts. We now offer over 2,000 downloadable games in our stores and on gamestop.com and we saw our PC digital download sales nearly tripled during the quarter. We've also expanded the ability to fund Steam wallets in nearly all of our stores globally and we are seeing this drive PC customers into our stores and into our loyalty programs. Congregate grew 29% during the quarter as we now have 240 games that monetize through in game transactions. Revenue from in game transactions grew 77% during the quarter. Game Informer digital subscriptions grew 140% during the quarter and we now stand at 8,000,000 total subscriptions and 2,700,000 digital subscriptions. Moving now to our mobile segment. Our mobile business grew to $43,000,000 and is on track to deliver our full year goal of $150,000,000 to $200,000,000 at a greater than 30% margin rate that we have previously communicated. We sell new Android based tablets in over 1600 stores domestically and 800 internationally. We are also utilizing our recently launched web and store technology to allow for all U. S. Stores to sell tablets as well as any other items that may not be available in the store at that time and have them shipped free of charge to our customers' homes. GameStop has a rich heritage of trading and selling hardware and software. And we have expanded our expertise to smartphones, media players and tablets that we accept and trade in all of our U. S. Stores. These trades are fueling the sale of pre owned CE devices, new tablets and new and pre owned hardware and software. Trades of mobile devices represented over 10% of trades we received during the quarter and have been increasing weekly. Based on the success that we have seen with our efforts in pre owned mobile devices, we have converted 268 stores to an expanded selection of pre owned and new mobile devices and related accessories. These stores have an average of 15 linear feet dedicated to mobile devices and early results show a sales lift of approximately 7% in the converted stores. After the holiday, we will solidify our plans to convert additional stores next year. Looking forward, we are excited to be in the Q4 where we are seeing major releases meeting our high expectations. The last 3 weeks have been exciting as we've hit new record launch levels for the Assassin's Creed and Halo franchises. And based on early trends, Call of Duty: Black Ops 2 is on its way to being our largest selling game ever. Also with nearly 500 1,000 customers on our Wii U reservation and waitlist worldwide, we are excited about the demand for Wii U. The Wii U waitlist is another example of how we are integrating PowerUp Rewards into all areas of our business. Wii U software is also reserving very strong with over 1.2 1000000 reserved titles worldwide. The reservation of Wii U games to reserved consoles is more than double that of the original Wii launch. Top reserving Wii U titles are Ubisoft Zombie U and Assassin's Creed 3, Activision's Call of Duty: Black Ops 2, Warner's Scribblenauts and Nintendo's Super Mario Bros. While we remain very excited about Wii U's potential, we also caution that we have limited knowledge of supply and we may not be able to satisfy the strong demand during our Q4. Additionally, in order to take advantage of the growth category of children's toys and games, we've opened up 82 GameStop kids stores and malls across the nation. These stores have an expanded selection of kids games, toys, action figures, plush toys, clothing and accessories that cater to our younger audience and gift givers. These stores are helping us to drive sales of popular titles such as Activision's Skylander Giants, which is growing 5.5 times over the same launch window last year. Finally, we are very excited about the 1st 2 quarters of 2013 as they look very strong. With announced titles including Konami's Metal Gear Solid Rising, Sony's God of War Ascension, Microsoft's Gears of War: Judgment, EA's Dead Space 3 and Crysis 3, Square Enix: Tomb Raider, Take 2's BioShock Infinite, Ubisoft's Splinter Cell Blacklist and Take 2's Grand Theft Auto V. We entered 2013 with record high share levels and we expect a strong 2013 release schedule to generate significant trades to fuel our pre owned business. With that, I'll turn the call over to Mike Mullen. Thanks, Tony. Good morning, everyone. As Paul mentioned, our international operations exceeded expectations in the Q3. Excluding impairment charges, all three segments individually improved profitability versus Q3 of 2011 and in total increased operating earnings by 34%. Despite overall comparable store sales of minus 7% during the quarter, focus on cost control and a 2 40 basis point increase in gross margin percent drove the improvement in operating earnings with the most significant improvements generated by our German and Australian businesses. As a reminder, over the last 12 months, restructured our businesses in Spain and Northern Europe where we consolidated operations in Ireland, resulting in significant reductions in SG and A. During this time, we have continued to focus on driving profitability in the pre owned business. And I'm pleased to say that during the Q3, international pre owned margin rates 500 basis points over prior year and are now in line with U. S. Pre owned margin rates. During the quarter, we continued to make progress with our strategic initiatives. International e Commerce grew 35% during the quarter. Digital sales grew at greater than 30 percent and our mobile product sales increased 55% versus Q2 as these new product lines were rolled out to countries. Finally, our loyalty program continues to expand with Australia's loyalty program reaching 1,300,000 members or 6% of the country's population and we continue the expansion this month to new markets in Germany, Austria, Switzerland and Italy. Our strong focus on managing the basics of our business and the rapid execution of GameStop's strategic transformation is driving profitability not only during the bottom of the current cycle, but will ensure that GameStop International is the international leader as we enter the next new console cycle. And I will turn it over to Mike Hogan for his comments. Thanks Mike. I have a brief update on PowerUp Rewards. Our PowerUp membership continues to grow. Today we have over 21,000,000 U. S. Members. By way of comparison last year at this time heading into holiday, we had only about 14,000,000 members. Year to date, roughly 75% of GameStop U. S. Sales are attached to a PowerUp member that is up significantly versus this time last year. And our PowerUp Pro renewal rates are increasing, now running in the high 50s. Year to date, that puts us at around 40% Pro members overall. Our database of customer transactions also continues to grow and we now have over 360,000,000 games in the customer game library, which as you know we use for a multitude of purposes in a challenging category. The physical games category is down more in a challenging category. The physical games category is down more than 20% year to date according to NPD. GameStop sales performance is considerably better than both the category and total GameStop sales. There are a number of reasons for this. We've seen real in our ability to drive increased spend in ShareUp Wallet through better communication and through targeted offers like the buy 2 get 1 coupon that's exclusive to Pro members, exclusives like the Modern Warfare 3 Prestige token and value promotions like 50% off selected Sony titles. The purchase metrics continue to be extremely strong with members still spending about 5 times as much as non members. We recently rolled out a program to communicate to our members the full value of their PowerUp Pro membership. As you know, the program costs 14.99 dollars per year, but we found that the average Pro member was many times that amount in annual value between the savings, the bonuses, subscriptions, buy 2 get 1 and other offers and that does not even include game exclusives. The initial response has been extremely positive and we expect it to help lift renewal rates. Finally, PowerUp Rewards is cost effectively driving our new products and categories. One of the major barriers for any new business is the cost of customer acquisition. PowerUp Rewards allows us to leverage our current heavy spenders in new products and new categories at an extremely affordable cost. For example, we introduced members to the opportunity to to buy DLC at GameStop. This is done through targeted e mail, but also through point of sale integration. This program has been extremely effective to driving our DLC business. A new category example would be our re commerce business. We're introducing PowerUp members to this new product category. PowerUp members are driving the success of this business and already contributing more than 65% of our We will take our first question from the line of Brian Karamzad from Goldman Sachs. Please go ahead sir. Hi, good morning. I guess first one is on the assumptions you have baked in for the Q4 comp outlook, what range of supply scenarios do you have baked in there for that Wii U launch? Rob? I'm not sure that we're comfortable stating exactly what the units are that we're looking at. But we did bake in a pretty wide range just given what we know from past Nintendo launches as well as what we have visibility to at this time. We are confident in the consumer demand. The supply side is what's the unknown for us. Brian, part of what's happening here too is we are approaching this launch very differently from every other competitor and from our own historical and we think that influences decision making as well. So we're going to be very cautious with that. Okay. And then any reason the margin progress we've seen in the new and used software businesses this year won't hold for the foreseeable future? Well, clearly what's going to be an impact on the margin rate in the Q4 overall and particularly in the hardware area will be the Wii U launch. When new hardware consoles launch, they typically have a more like a mid single digit a mid single digit margin rate attached to them as opposed to the rate that we've seen particularly in the Q3 overall. So that will be an impact. You'll certainly see mix effects. The precision though of what these teams are doing you heard Tony and talk about what's happening with pre owned. And I mean these the tools that we're using here aren't going to change. Mix definitely will change. I guess what I'm getting at is on the software side specifically, I mean, the gains you've seen have been a result of actions you've taken and there's some that are released in that quarter. And so I can't tell you that I've examined the impact of the 3 titles we've seen so far versus the titles that are coming from Nintendo. But generally, I would expect that Okay. And Okay. And then just quickly on the buyback. It slowed down a bit in the quarter and it looks like it was a bit front end loaded, although it's a pretty strong quarter for you on cash. Anything to share there on your philosophy? Well, if you look at the second and third quarters combined, we bought back $213,000,000 worth of shares. Comparing that to the second and third quarters in 20 1011, we were in the range of $75,000,000 to $100,000,000 So what we're trying to do is be more spread the buyback out throughout the year and then take advantage of opportunities where we see that the price is not where we want it to be. So clearly in the second quarter and early part of Q3, the price was suffering. And as a result, we were able to buy more heavily in that timeframe. Okay. Thank you. Thank you. And our next question comes from the side of Seth Sigman from Credit Suisse. Please go ahead, sir. Okay. Thank you. A question on the mobile business. It seems to be ramping nicely. It looks like in your guidance you imply a big pickup in the Q4. Obviously, there's some holiday seasonality there. But how should we think about the drivers of that growth? Any metrics on per door economics that maybe you can share that would be improving in the Q4? And any early thoughts on how that business should play out in 2013? Thanks. Seth, Tony will answer some of this on the store model or trades and some of the other things. I would say to me when we talk about the small business, first of all, the consumers' appetite for this as a holiday gifting item is clearly going to be pretty strong. I mean it's a great area. We've expanded the assortment and we've expanded linear footage. Tony maybe you want to share some of that some color on that. Sure. Clearly as I talked about the stores that we've actually expanded linear footage on we are just completing that. So that's clearly going to contribute to it. So you have a couple of other factors that are going to take place. Seasonality is definitely one of these. One of these, we did have a good sample last year of stores and so we have modeled similar seasonality in the Q4. The other thing is that we are still rolling out internationally with the sale of re commerce. And so you're also going to see international play a large part in contributing to the growth and the expansion in the Q4. It's a very good web business as well. Yes, that's the other thing. It's consumers, particularly at Holiday, go to the web shop for these items. Our web and store technology now opens thousands of storefronts that weren't there before. So there's lots of tailwinds on this. We've also used the By Mitronics acquisition to identify additional SKUs that are very popular with consumers. And so we are using that to actually expand the amount of SKUs that we accept in all of our stores and therefore sell in all of our stores. So that's another contributing factor. Okay. Thanks. And just a quick question on expenses. As you start to plan out for sales growth going forward, I mean, how do you think about the operating leverage in the model in Q4 and into next year? Are there any areas where you still need to increase spending? Or you're pretty lean at this stage? Let me start it off Rob and you can comment on planning. I mean if you go back Seth, we were very focused on driving operating margin targets of this year. And I think we gave a guidance of 7%, I think it was 7% to 7.3% was our guidance beginning of the year. So we've been very focused on operating margin. If we can reach this range, we are very close to GameStop's all time highs in operating margin. So that's a big priority for us. Rob, maybe you want to talk about what we're doing around the planning around the scenarios for 2013 based on launches etcetera? Well, going into 2013 and in this Q4 even, you have the opportunity with the top line being driven by hardware sales to really gain some leverage on the cost side. And so steps we've taken in the past have not only protected the ability as we've gone through 2012, but they set us up for what can then be further leveraged as we go forward. So we remain focused on our cost structure and cost control and reducing costs where possible. All right. Thank you. Thank you. Our next question comes from the side of Colin Sebastian from Robert Baird. Please go ahead. Thanks. I guess, first of all, looking out beyond the holiday period, I'm curious what we should expect in terms of current gen software pricing just given the aging cycle what your expectations are there? And related to that, how you're seeing currently pricing hold up on used software? And then secondly, on the mobile question, I guess, as a follow-up, I'm curious if you're refining your strategy at all in terms of providing unique game centric platforms where you've loaded up games on devices? Or is this shifting more towards GameStop becoming a tablet retailer? Obviously, you've done very well with Nexus 7 and that presumably gives you some ammunition to sell other popular platforms? Thanks. There's a lot there. Why don't we start with the pricing? Tony, you got any comments on current gen pricing? Yes, Colin. I have received no information to lead me to believe the current gen software pricing will be going down and as a result of the follow-up question. So given the fact that we anticipate that it will stay very consistent, I would think that our pre owned pricing will also stay very consistent as well. So there's no indication that I am receiving that there will be a reduction in the current gen software. Yes. Software. Yes. As far as the mobile, it is a challenge, right? Colin, we've got into this mobile business because we had game we saw it as a gaming platform. Customers were asking for it. What we've discovered is there is room for a buy sell trade electronics player. And so we have inside our stores this growth vehicle that we're trying to manage appropriately etcetera. Tony maybe you want to talk about some of the plans around mobile as far as gaming goes? Sure. Clearly, we see mobile as a growth category, tablets in particular. And we started by putting games actually pre loading games onto the tablets. You will see us continue to be game centric in our tablet selection. The highest attaching accessory that we have to our tablets is our proprietary Bluetooth controller. Now others are coming onto the market. Obviously, we see people using tablets a lot for gameplay. So you'll see us continue to be game centric as we sell tablets, although consumer demand is really going to lead us. So as we see other devices in the mobile space that consumers are looking for, our buy sell trade model allows those products to be very affordable. And so we think that we can actually go beyond games. So far it's been very game centric. I think you'll see us expand that. The other thing Colin that we should discuss and I'll ask Mike Hogben to give us his thoughts on this is one of the things we're finding is PowerUp Rewards is making us an extremely strong customer acquisition platform. And so we have a lot of people coming to meet with us who want to launch their product in stores. Mike, maybe talk about how you use PowerUp Rewards to drive the Google Nexus success as we've had and so forth. Sure. One of the things I think we're finding is that the cost of customer acquisition of course is very high and there's and that applies not only to our business, but to other businesses as well. And I think you saw you've seen some of the successes we've had around DLC, for example, taking current heavy users and introducing them to a postsyn product category. To Tony's point, we think that the tablet business is pretty good in iDevice and such is very close into our current business as well. So what we've been able to do is a number of things. 1 is the segment consumers and identifying by their preferences. We've been able to take consumers once they've been introduced to the new product and cross sell a number of accessories, games and time cards and things that go with it. So we have a we feel a pretty full pipeline in terms of ways to do that. In addition, we're feeding information back at the store level, because one of the things that we found is even more powerful than the e mail connection is taking the right information about the consumer and their preferences and what they purchased in the past and making it available at the point of sale. So that when the consumer is in the store, the associate can suggestively sell the right device to the consumer. All right. Great. Thanks, Mike. And I guess, Rob, just lastly, in terms of capital allocation, any planned uses of cash or liquidity needs that might prevent the Board from considering a higher dividend down the road? Thanks. I would say that there isn't anything that's planned at this time. We continue to look at opportunities out there for us to invest in, but we don't see anything on the horizon that would deviate us from the share buyback and the dividend plan that we're on. And we have spoken about our desire to continue to have a dividend that increases over time and that there's room in the formula line of Thanks very much. Thank you. And our next question comes from the line of Arvind Dabhatia from Stern Gerge. Please go ahead. Okay. Thank you guys and congratulations on the quarter. I wanted to talk about your long term goals with respect to the mobile business. I think you had given us some long range plans dollars, margins, etcetera. I wonder how you feel about them after you've had a chance to run this business for some time now. Recalling I think a $650,000,000 type number, do you see the market opportunity any differently today larger, about the same? Any color there long term would be helpful. I guess I'll start it off and maybe Mike Hogan can talk about what we see in sort of the size of the market and that kind of thing. I think Arvind we got into this because it was adjacent to gaming. And consumers were coming to us with iPhones trying to trade them in Samsung products and wanting to trade to buy a gaming product. We also saw consumers playing games on tablets. So that's how we got into it. We did a pilot. It went extremely well. We discovered that our competencies around refurbishment work very well in this space. So now we're in it. I think the thing that is going to be interesting for us is we continue to see this buy sell trade competency as being a very unique and differentiated capability for GameStop. So while we have tremendous expertise in gaming, the buy sell trade impact to electronics is enormous. And if you look at buymytronics.com, they're able to handle literally thousands of SKUs that we don't carry in our stores. So we think this and we're not ready to give you revisions to the market size etcetera probably till next year. We certainly feel pretty good about our estimates for this year and think it's been a very exciting profit pool. So Mike maybe you can talk a little bit about what you think the size of this market just general numbers is in the U. S. And around the world? Sure. So we have a pretty detailed model that we use in terms of projecting the video games market. We also have a model that we built to take a look at the re commerce market. And we're we would say the market in the U. S. Was over $1,000,000,000 last year in 2011 and continues to grow in the double digits this year. We would think that this category is going to be between $2,500,000,000 to $3,000,000,000 in the U. S. By 2015. So we continue to see a lot of growth in the category. And I think to Paul's point, things that we've learned about the category is retail footprint is very important. A lot of players we see struggling with growth because they don't have stores, places where consumers can come and actually get cash for their or trade credit for their products and also the buy sell expertise. So we feel very good in terms of our positioning for our growth within the category, but we're very bullish on the overall category growth. And we'll have details for you in the New Year on how we plan to manage that in our various platforms and stores and brands. Okay. One question on 13. I know we're not talking about guidance here, but you gave us some really good color on some of the titles that are in the first in the early part of 2013. But I wondered if you can give us some of your views on just the year itself. If we assume additional console launches in 2013, is that a transition year as people sort of the people anticipate a new console and maybe there is some slowdown some times prior to that. Are you looking at it that way? Or are you looking at this to be a different type of transition where it's pretty gradual and you don't really see much change? And like you said the tri titles in the early part of the year are very strong. So just some general color on the year would be very helpful. Tony, you got the crystal ball out. You uncharted waters kind of thing? Yeah. I got the crystal ball out. I mean, I think Arvind we clearly we don't have announcements from 2 of the major platform holders, but there is a lot of speculation about the launches. I think it is important to note that we do go into 2013 as I said at record share levels. I mean we're more than double market share versus when we went into these console launches last time. So I think that's really important to note as we move into these console launches. But that's the console launch in general whenever it may occur. I'll let Rob pull out his crystal ball and talk to you about 2013. Yes. The market share is important because we continue to demonstrate our ability to gain share as we launch new titles. Tony talked about the title releases that we see coming up. The big unknown for 2013 is the base from which we're starting, which is an industry that's been down 20% to 25% this year. So you can put some strong titles in there. We put the unknown of the consoles in there and it's very difficult for us to form a picture at this point. But in the past when we've seen this sort of year running up to big console launches, it is a bit of a transition year. But the other thing Arvind that's not been discussed is we believe we can change the cadence and schedule of this transition, because we're using PowerUp Rewards in a way that's never been done. We can tell console makers how many people want a particular feature on their console. And we can share with software manufacturers what type of games do people want to play on a new console. And we think that our mission here is to use PowerUp Rewards to shape the schedule and shape what comes out in the future. So that's I think that's the work that has to be done. Very helpful. Last quick one is the impact of Sandy. I know it's hard to quantify, but any early thoughts on numbers? Tony, you want to talk about Sandy? Well, clearly having a major storm hit on the launch date of one of your largest titles is not what we would have predicted. However, we had heroic efforts on the parts of our associates. We had hundreds of stores that were out on the day. And we did have literally have people on the ground on the Island of Manhattan touching every single store the very next day. We were open before our competitors. And so as a result, we were able to minimize the loss significantly. So it's really been a very minimal event for us. Like I shared earlier, we had record launches for Assassin's Creed III. They met our expectations. So clearly, it did not impact us dramatically. I cannot tell you how proud I am of the team on the East Coast. I have heroic story after heroic story of things that people did. But the ability for us to get up, we only have 6 stores that are down at the current time. And so within 2 days, we had nearly every one of our stores that were impacted back up again, far outpacing our the ability of our competitors to bring their stores up. So to a certain extent, we really mitigated what could have been a very disastrous event and it really had no impact on our sales. By the way Arvind, I don't want to miss the opportunity to fill the analyst community, investor community in on something interesting. We created in September here at GameStop a charitable foundation we call the gamer fund. And it's funded by internal donations by employees etcetera. That charitable foundation has been very active in the community in Sandy and we've been able to assist many of our associates who've lost homes, who had all their belongings destroyed, etcetera. We would welcome donations from the analyst community. So I'll ask our IR team and Matt to send you all envelopes if you want to support the GameRefund here through Sandy. That's great guys. Appreciate that and good luck for the quarter. Thank you. Thanks, Arvind. Our next question comes from Bill Armstrong from C. L. King and Associates. Good morning. Just a question on the gross margin in the other category. I know you talked about the mix shift causing the decrease. Were there any other dynamics going on during the quarter perhaps movement in margins within some of the subcategories? Well, I think the one thing that we maybe didn't mention was that the video game accessories are in that category. That's a relatively high margin product set for us and that was impacted by the overall NPD type data that you see around the category. So that's really the only other thing I might call out. So the margins within accessories didn't change? It was just that accessory volumes are down? Yes. Again, the mix. Yes. Okay. Actually, all my other questions have been answered. So thanks. Thank you, Bill. Our next question comes from Tony Weibel from Janney Capital Markets. Please go ahead. Hi. A couple of questions. First is what kind of inventory allocation did you get in 2,006 on the Wii? I don't know if you could share kind of the number of units. And secondly on the iDevice business, what's been the average transaction size you guys have been running on that? And now that you guys have had it up and running for a bit, can you kind of describe where the mix of trade in versus kind of demand for units is coming from? Is it touches, phones, tablets, etcetera? Rob, you got any data on the we may have to get you got a lot of numbers in your head. You got the Wii? I don't have the initial Wii allocations from 2006 in any sort of accessible memory bank unfortunately. But what we looked at in terms of forecasting this quarter is where our share sits with Nintendo, how we performed on recent launches. Clearly, our reservation list and the power of that wait list that we created with the power of customers in September has been a factor in what we have visibility into skis. I just would make a point with you that it's really very much a smartphone and tablet business now. We take Android SKUs. Amazon Kindle is becoming one of our emerging fast growth SKUs. So it's gone beyond sort of just an iDevice business into a very much a smartphone. Ted, you want to talk about the hot SKUs, Tom? Sure. And we don't give out details on our average transaction size, so I can't answer that question. But given the fact that we do set both the price the trade price and the sales price, we really have the opportunity to manage inventory. So we're constantly we literally deal with that on an hour by hour, by hour day by day basis. So really the demand the supply that comes in from a trade perspective is exactly what we need to meet the demand that we're seeing. So we manage that very closely. So that fluctuates. For instance, when you have a iPhone 5 launch, clearly, one of the SKU that comes in is the iPhone 4 and the iPhone 4S. And so we did a lot of that. And we're able to fluctuate. That's the beauty of this business. We fluctuate the trade price and the retail price to ensure our inventory levels match demand. Interesting thing is our online Mike Hogan talked about the online competitors. One of the big advantages when you have a storefront is you have great connection with the consumer to get trades. The struggle the online players in this space have is customers just there's a lot of friction in shipping you a product that doesn't even have a price agreed to on etcetera. So we're seeing advantages from that. Got you. And going back to the inventory question, I guess, another way if I wanted to allocation would be double? Or because I know Nintendo might be a little bit more ambivalent, but I also guess that Amazon it doesn't look like it's going to be carrying it out of the gate. That's unfortunate. Well, you can buy one for $1200 from somebody else. I don't recall Tony what our allocation was at the time. I don't know what the initial important point that we can't we really don important point that we can't we really don't have visibility full visibility to the quarter from Nintendo. And as you said, that's a common place to be during the launch with Nintendo. I think what we do know differently this year than in 2006 is we have a really good read on demand. We know exactly where the customers are who want this product. So we are in constant communication through our PowerUp Rewards team with these customers. So we are offering a true service here. When we get our allocation, we immediately are notifying the customer. So you don't have to chase a UPS truck. You don't have to go store to store. We'll tell you when you're going to get this. That clearly is a superior customer experience than anyone else can offer. And we've talked with Nintendo at length about that process. Clearly, they understand the benefit that we're giving to the customer. And the software reserves kind of reflect that. Mike, you had something to add on that? Yes. There's one other additional difference this time with the Wii U versus the Wii. This time Nintendo is doing a worldwide launch in a span of only about 3 weeks. With the Wii, it was spread over several months. So the allocation strategy and the numbers on the Wii probably are not real predictive of what we'll see. Yes. That's a great point too. Got you. Great. Thank you. And we have one last question from the side of David Nagy from SunTrust. Thank you and good morning and good quarter. Thanks, Dave. I just had a question regarding a comment you had made during the remarks about the majority of your products being sold now to PowerUp members. Did I hear 75% is the number there? Mike Hogan? That is correct year to date this year 75% of our U. S. Sales are attached to a product number. So I'm curious how does that number change going into December closer to the holiday when you've got perhaps more casual shoppers? And what maybe gives you an advantage this year that you maybe haven't had in the past to help the visibility of that transaction? Sure. Yes. So the answer is, yes, the number will decline a little bit as of on the holiday, because you have a much broader set of customers that comes into our stores during that time frame. At the same time, it's also a great opportunity for us to sign up new members. We signed up I believe we signed up over 1,000,000 PowerUp members during December of last year. So it's a great opportunity for us to do that. And also, as we look at the holiday, we empower gives us a big advantage as we think about things like for example, Wii U. Consumers not only a wait list, but an opportunity to know what's available, when it's available, when they're going to get it with direct communication with us. We've also found that it's a great opportunity to communicate our key value messages over the holidays to consumers who represent the majority of our purchases. So you can imagine even though the number is going to drop a little below 75%, it's still the vast majority of our sales. And it's extremely cost efficient from a marketing perspective way for us to communicate to people not only the titles that are launching, but the hot deals at Christmas. We can take all of our external marketing like our FSIs, we can replicate that out to our members. Our iDevice sales, we've had great success there. We had Paul mentioned that will be a great gift idea for Christmas. So we have a really full lineup that we're going to and PowerUp is really the core of our marketing program for the holiday season. Thank you and good luck. Thank you. Thanks very much. With that, I will wrap us up. Thanks very much for your support of GameStop and we look forward to talking to you on the next call. And please come down to our store