The end of the physical console cycle resulted in a 26 percent decline in console sales. Both hardware and software sales declined as a result of the end of the cycle. Traffic also declined during the quarter. However, GameStop grew share in the console category by 173 basis points in Q2 as a result of exclusive content, informed associates and its buy-sell model.
While there were strong sales of Max Payne 3, Diablo III and Ghost Recon in May, there were very few major software releases in June and July. Accordingly, new software sales declined by 21 percent. However, GameStop gained 340 basis points of new software share in Q2 and its 21 percent decline was less than the 31 percent decline from its competitors.
Digital and mobile sales are now 10 percent of sales. Digital increased by 27 percent in Q2, which was less than expected, even when considering a strong quarter last year. PC digital and international console digital had strong growth. GameStop has simplified the way for its PowerUp Reward members to download content for the Xbox. It now offers 1700 digital titles and recently launched the ability to fund Steam Wallet in its stores. Its ability now to have downloadable content (DLC) on the launch date of the title should provide a significantly higher attach rate in Q4. It believes it will have 50 percent growth in digital for the year.
Mobile sales doubled their sequential run rate from Q1. GameStop now sells Android-based tablets in over 1,600 stores domestically and 800 internationally. The Google Nexus 7 tablet spurred sales in Q2, and GameStop was the first retailer to accept pre-orders for the tablet. The tablet has strong demand and limited supply, but more supply should be coming in the second half of the year.
Pre-owned sales declined by 11 percent. Pre-owned sales had a tough comparison to the prior year, which had very strong sales and there was new software in the quarter. Most of the weakness was in pre-owned older generation hardware. The Wii U launch should have a positive impact on pre-owned software during the holidays. GameStop is now taking the Kindle Fire and 43 Android devices in trade.
The "other" category grew from 13.5 percent of sales to 21.3 percent of sales. Growth came from the digital and mobile business and the sale of the Diablo III and Skylanders toys.
PowerUp Rewards has driven pre-owned sales and the program has approximately 20 million members in the United States and 24 million members globally. PowerUp Reward members constitute 74 percent of sales so far this year and have 5 times as many transactions as non-members. Transaction frequency is once every 47 days.
International sales outperformed domestic sales in Q2 and results internationally varied by country. GameStop is seeing good results in countries where competitors have exited, such as Australia, where Game Group exited. In Europe, GameStop has exited Portugal and closed some centers and stores in various countries, including Sweden and Spain.
GameStop expects to see accelerated revenue and earnings growth when the next generation of gaming consoles enter the market at the end of 2012 and into 2013-2014. It is cautious in projecting sales of Wii U. Although it is getting a good shares of the allocation, it cannot control the total amount released on the market. Some key title launches over the next 3 quarters are reserving better than their predecessors, leading GameStop to anticipate that the next few quarters will be better than the most recent ones.
At the end of Q2, GameStop had 6,628 stores. It opened 28 stores and closed 14 in the U.S., and opened and closed 8 internationally. It expects to reduce its stores by 1 percent this year.
Financials.
Sales decreased by 11 percent and comp store sales declined by 9.3 percent. Comp stores sales declined by 9.6 percent in the United States and 8.8 percent internationally. Both the number of transactions and the average transaction declined by 5 percent. In Q3, it expects same store sales to decline by 5 to 10 percent and to decline between 2 and 10 percent for the full year.
Gross margins were 33.5 percent. Margins in Q2 expanded by 230 basis points due to expansion of the pre-owned video game business and and contribution of GameStop's digital and mobile business. Gamestop has expanded margins every quarter since Q2/2011 at an average rate of 202 basis points per quarter. Further, more sales shifted to the "Other" category, which has a higher margin.
Diluted earnings per share in Q2 were $.16. GameStop expects diluted EPS in Q3 to be $.28 to $.36 in Q4 and $3.10 to $3.30 for full year 2012.
GameStop plans to return over $2 billion to shareholders in the next 4 years. It repurchased 7.6 million shares in Q2 at an average price of $17.96 for a total of $136.4 million. It has $300 million remaining in the share repurchase program and it recently raised its dividend by 67 percent.
The transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/812571-gamestop-management-discusses-q2-2012-results-earnings-call-transcript?part=single
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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