GameStop Corp. (GME) Q3 2016 Earnings Report, Transcript and Summary

Good day and welcome to GameStop Corporation Third Quarter 2016 Earnings Conference Call. A supplemental slide presentation is available at investor.gamestop.com. At the conclusion of the announcement a question-and-answer session will be conducted electronically. [Operator Instructions]. I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop’s public documents and is the property of GameStop. It is not for rebroadcast or use by any other party without the prior written consent of GameStop. At this time I would like to turn the call over to Paul Raines. Please go ahead.

Thank you. Good afternoon and welcome to the GameStop earnings call. I want to first thank our family of associates for their efforts and ask them to make this the best holiday seasonal ever for our family of companies. Speaking with me today are Rob Lloyd and Tony Bartel and available in the room to answer your questions are Mike Hogan, Mike Mauler, Mike Buskey, Jason Ellis and Matt Hodges. Our third quarter played out along the lines of the guidance revision we issued on November 2nd. Video game hardware and software came in below our forecast and caused us to reduce our original guidance. Hardware sales declined by double-digits and new software and pre-owned value sales declined mid-single-digits. Most of our miss related to the weak pick-up rate on a few key titles and related hardware bundles. There has been a lot of discussion about the rate of change in digital penetration. But the truth is that in the console business only Sony and Microsoft know the exact numbers of the entire ecosystem. We are comfortable with the digital transition of our console business at 5% per year, as outlined in our investor day document. As we think about what our cash flow generation looks like across several potential scenarios regarding digital penetration, we feel very confident in our ability to transform our business, appropriately manage our variable versus fixed costs and ultimately drive strong long-term free cash flow. Which will support our balance approach to capital allocation, including a commitment to repurchase activity and our strong dividend. Further, we have prepared for this digital migration through an innovative diversification of our business and a full half of our profit came from these new ventures in this last quarter. We also expect lift from three new consoles plus virtual reality next year, but more on that later. Moving onto our growth businesses, they all had very good quarters. Our digital business grew 13.2% with particular strengths coming from our mobile segment including Animation Throwdown. Also remember that we are linked to the growth in console digital gaming through our sale of digital currency for the PlayStation network and Xbox Live, as well as downloadable content. We have a 35% to 40% market share of those digital currency products and this portion of our digital business grew 26% during the quarter. Collectable grew 37.3% led by hot intellectual property such as Pokemon, Five Nights at Freddie’s and Harry Potter. We expect continued growth in this category as we continue to integrate our GameStop branded stores, ThinkGeek.com and our ThinkGeek and Zing standalone stories. We will also benefit as we globally maximize supply chain and merchandising efficiencies. Technology brand had a strong quarter as we integrated our largest acquisition, weathered through the Samsung recall and still manage to deliver a whopping 262% increase in operating earnings for the quarter, strong performance and we recognized Jason Ellis and his team in Salt Lake City for another good quarter. Our capital allocation policy remains unchanged. As we continue to pay our dividend and buyback shares in line with our previous guidance. So you see the GME team continues to be optimistic and energize. We foresaw the cyclical downturn of the console industry, as well as the digital migration and we strategically and proactively have been preparing for it by diversifying the company. Unfortunately last month, some key titles underperformed our expectation, but that happened from time-to-time in a hit driven category. Our job is to improve our ability to forecast those titles and mitigate risks. Our operating earnings were up 9% over last year, but our overall earnings were hampered by debt costs related to the recent AT&T dealer acquisitions. Those dealer acquisitions are highly accretive to us and we are excited to be working with such a great partner. We are cautiously optimistic on the future video gaming. The arrival of virtual reality in larger qualities creates an opportunity for us. In Nintendo switch, which I played at Nintendo a few weeks ago, we believe could be another game changer that will expand the audience for gaming and the new PlayStation and Microsoft Scorpio consoles will also provide innovation to the category. Our digital business will continue as we ride the growth of DLC, gaming currency, Indi titles and our Kongregate mobile game publisher. The collectible business is big and getting bigger. Managing the fast growth of the category with the variety of omni-channel and standalone formats, we used for distribution is complex, but it’s in our wheel house. We saw strong growth in the early days of video game, so we are prepared for it on the collectible side. Lastly, our Technology brands is one of the most exciting growth units we have and our partnership with AT&T will continue to bring us greater opportunities. The foundation for all these businesses continues to be our PowerUp Rewards program. At roughly 50 million members worldwide, the CRM program brings us many advantages. First, it brings us deep consumer insights, as we execute weekly and monthly consumer survey panel to understand their behavior in gaming, collectibles, mobile and other products. As an example, we discovered through our PowerUp Rewards catalog that our gaming consumers really like the ThinkGeek items for the use of their points which led us ultimately to the acquisition of that innovative website called ThinkGeek.com. Another advantage is that we are also able to pinpoint with specific collectable item consumers want with the video game like statue or a T-shirt. PowerUp also allows us to have tailored communication directly with members via e-mail or their PowerUp phone app. As an example, we can identify which consumers have the heaviest trade inventory at home to provide incentives for them to come in and trade towards a new title. Another example of this power is the promotion we stealthily launched today to provide for a $1 purchase of Call of Duty: Infinite Warfare with selected trade. We are only beginning to scratch the surface of the potential of this program. In summary, we entered holiday season with optimism. Our strategy for the last few years has been to diversify the business and we are seeing solid signs of progress on that front. The fact that our operating earnings increased this quarter in the face of negative physical video games is an indicator with that progress. Another indicator of progress is the fact that this quarter 50% of our earnings came from businesses other than physical gaming. Now the fourth quarter is all about execution and delighting our customers in our stores and websites. We hope to do so and expect to report solid results in our January update. And with that, I will now turn the call over to Rob.

Thanks, Paul. Hello everyone. As you can see in the release with separated Tech Brands out into own category due to its rapid growing materiality to our overall business. It was previously included in mobile and consumer electronics. Starting now we will report the mobile and consumer electronic sales that occur in the GameStop branded stores in the other category. With that, let’s dive right in the results of the quarter. Total sales were $1.96 billion, a decrease of 2.8% compared to the prior year quarter. Comparable store sales decreased 6.5% driven by 20.6% decline in hardware and 8.6% in software. The U.S. comp was down 8.4% and international comps were down 2.3%. Pre-owned sales declined 6.4% during the quarter, but continue to outperformed hardware and software. Hardware margins increased from the prior year quarter due to warranty sales, software margins were comparable to last year. Pre-owned margin for the quarter was 46.1%, up slightly from Q3, 2015. Digital receipts increased 13.2% driven by DLC and console digital currency. GAAP digital revenues increased 11.8%, led by the contribution from Animation Throwdown, our new FOX game on Kongregate. GAAP digital gross profit was 35 million, up 11% from Q3 last year with the margin rate reaching 78.3%, comparable to Q3 2015, but down from Q2 due to the mix of growth versus net sales recognition within the category. Tech Brands revenues grew 54.4% to 216.3 million and Tech Brands operating earnings were 23.5 million, an increase as Paul said 262% compared to Q3 last year. Year-to-date, Tech Brands has delivered 56 million of operating earnings, a 456% increased from 10.1 million last year. The operating margin for the quarter was 10.9% and year-to-date was 10.1%. Collectible revenues grew 37.3% compared to the prior year quarter. This is the first quarter with ThinkGeek results included in both periods. Our collectible margin rate was 36.3%, down slightly from Q3 of last year. Third-party fulfillment costs for ThinkGeek will continue to impact the category margin rates until we complete the move of the ThinkGeek distribution operations in early 2017. On the strength of our new higher margin businesses, consolidated gross margins were 36.1%, up 360 basis points from last year. Year-to-date, gross margins are up 390 basis points. The expansion of gross margin and the growth in gross profit comes from the shift in sales mix from hardware and software, the higher margin sales categories like Tech Brands, collectibles and digital. One-third of our gross profit in the quarter came from our diversified businesses, up from 23% in the year ago quarter. SG&A increased 41.6 million or 8% due to the growth of Technology brand. SG&A as a percentage of sales increased from 26.1% in the prior year quarter to 28.9% for this year’s third quarter. The increase was due to the decline in sales overall and the growth of Tech Brands. SG&A in the video game brand segments declined 11.1 million. To date, we’ve made good progress on our $30 million cost reduction goal reducing by 26.7 million through nine months. Despite the softness in video game sales, our operating earnings grew 9% to 98.8 million. Note that 50% of operating earnings in the quarter came from sources other than physical games, a trend that we called out during our Investor Day earlier this year. As a reminder, in fiscal 2015, 25% of our earnings came from non-physical gaming and we expect that number to reach 30% or more for fiscal 2016. Interest expense increased by 8.3 million year-over-year due to the issuance of additional senior notes and borrowings on our line of credit. Our tax rate at 39.5% was higher than Q3 of last year due to return of provision adjustments recorded in the quarter. Net income decreased 5.1 million from 55.9 million in the third quarter of last year. Our EPS came in at $0.49, the high-end of the revise guidance, we issued on November 22nd. Let me shift now to store counts. We closed the net of 9 video game stores and now have 3,940 in the U.S. and 2,008 internationally. Year-to-date, we’ve closed the net of 98 video game stores. We now have 1,569 technology brand stores including 1,429 AT&T branded stores. We now have 69 collectible stores 15 ThinkGeek in the U.S. and 54 Zing stores and other parts of the world. Our free cash flow through July was down compared to the same period last year, due to the timing of inventory purchases and subsequent payment which resulted in 200 million more in inventory which is already paid for going into Q3 this year. This unlevered inventory was sold through in the third quarter. That coupled with inventory purchases and accounts payable timing in quarter Q3 resulted in year-to-date free cash flow of approximately 31 million, which is comparable for 54.7 million through nine months last year. We are on pace to exceed 400 million in free cash flow for the year within our cash flow guidance. Our Board approved our quarterly dividend of $0.37 per share payable on December 13th. By the end of this fiscal year, we will have paid out closed to 700 million in dividend since we initiated the program in February 2012. During the quarter, we brought back 1.35 million shares at an average price of $26.63 for a total of 36 million. Since the end of the quarter, we’ve continued to buy back shares under a preexisting 10b5-1 plan. Since inception, our buybacks have totaled 1.94 billion, coupled with dividend, we’ve returned more than 2.6 billion to shareholders in the past seven years while also making investments to diversify the business. Now I’ll move on to fourth quarter guidance. Global revenues are forecasted to range between down 10% and down 5% with same-store sales ranging from 12% to down 7%. Both hardware and software sales are expected to decline approximately 15% to 20%. This forecasted decline is based on comparisons to last year’s title slate and known title launch and hardware results so far. As we think about the cadence of the quarter for the total industry, we expect November to be down over 20%, December to be down double-digits and January to be near flat to the prior year. We’re forecasting pre-owned revenues were down approximately 2% to 4% in Q4 versus the prior year quarter. We expect collectible sales for the full year to come in closer to the high-end of $450 million to $500 million range. Tech Brands sales are expected to grow more than 35% in the fourth quarter, we expect operating earnings from Tech Brands to be 30 million or more for the quarter. We are reaffirming our Investor Day guidance of operating earnings of 85 million or more for Tech Brands in fiscal 2016. We expect earnings per share for the fourth quarter to be in a range between $2.23 and $2.38 per share. And for the full year, we’re maintaining EPS range we gave on November 2nd, $3.65 to $3.80 per share. I'll now turn it over to Tony his comments.

Thanks, Rob. Our third quarter underscored the importance of the strategic vision laid out during our Investor Day back in the spring. While the traditional video game market continues to transform itself; we have taken decisive and proactive steps to offset the expected decline in games and digital, Technology brands and collectibles. One of the key takeaways for our investors is that these newer businesses have historically stronger margin and growth rates which is allowing us to expand the profitability profile of our overall business. Our new innovation drove share gains for us in October and flat share for the quarter, consoles and video games underperformed our expectations, particularly those that were launched in late October and while we expected to see continued erosion in videogames in the fourth quarter as Rob shared, we also expect to gain additional share as we have more title launching. There were some bright spots to note. First, we're seeing strong demand for new consoles, the PS4 Pro is off to a strong start and VR is generally on the shelves for less than10 days. According to NPD, we dominated the VR launch with 40% market share on VR software and hardware during the quarter. Pokemon Sun & Moon were the largest launch of the year and we expect to see strong demand throughout the holiday period for these titles. We're also seeing solid consumer interest for the upcoming launch Switch from Nintendo. The Switch uses physical media and Nintendo products has historically had a low digital download rate, so we expect this to be a console that drives strong sales of physical product along with the console. This plays to our strength as our attach rate on physical games is twice the rest of the industry when we sell new hardware. As we think about 2017 we're growing more confident about the quality and breadth of the upcoming console refresh cycle. As of previous launches PowerUp Rewards gives us a strong competitive advantage and next year’s launches will also play to our strength. For instance we know that 27% of our PowerUp Rewards customers who are aware of the Nintendo Switch plan to purchase its console. This prelaunch metric is in line with the purchase intent for the Xbox One at the same point in time. As a reminder over three quarters of our sales come from our 50 million PowerUp Reward members. Over the last 12 months we've grown this powerful program by 10% globally. This strong and loyal group remained a critical competitive advantage for us and has allowed us to grow our share over the last few years despite the transformation that is happening on the gaming side of the business. Our decline in pre-owned sales reflected the slow new game sales during the second quarter. We continue to seek out next generation product to meet demand. Year-to-date pre-owned sales growth is 6.4 points higher than new software growth and we expect to end the year with a double-digit spread as we’re seeing strong trades come in with recent launches. We're working closely with our publishing partners to bolster new game sales and you can see one of those programs in our stores today as we're selling Activision's Call of Duty: Infinite Warfare, standard edition for $1 plus the trade of one of 30 select games. This provides great value that will shift new game sales forward in Black Friday by leveraging our PowerUp Rewards database as well as our buy/sell/trade program. I also want to make sure that highlights the strength of our digital business, which grew 13%. Key drivers of our growth were our mobile games, console currency and downloadable content. Kongregate launched its two most successful games ever during the quarter. Animation Throwdown featuring popular Fox IP [ph] and Peter Molyneux’s The Trail. Animation Throwdown has 5 million installs on the iOS and Android platforms, and was the number one game on the Android and the number two game on our iOS at launch. It remains the top 50 grossing game in dozens of countries. Peter Molyneux’s The Trail is an Apple Editor’s choice and has reached 4 million installs in less than two weeks. This beautiful and innovative game was number one in iOS and number five on Android in its launch. This game is already a tough 50 grossing game in 40 countries. We expect both of these games to have long revenue producing tales and we encourage you to download them on your mobile devices. We also driving our Indi business based on the successful launch of our Song of the [indiscernible] title, we now have dedicated space in each of our U.S. GameStop branded stores for top steam games. This allows us to use our marketing expertise and buy/sell/trade model along with PowerUp awards to drive additional digital sales outside of the console ecosystem. Turning to technology brands, we finished a very successful quarter in-spite a significant headwinds. During the quarter, we seamlessly integrated 436 stores into our technology brands business through strong coordination with our AT&T partners, we integrated all of these stores, while maintaining best in class customer service. Even more impressive is the fact that we continued to improve efficiency in our acquired stores. Including the most recent acquisitions, we continued to improve store productivity by over 30% and are significantly exceeding our 20% IRR hurdle. We also continue to add annuity like subscriber management fees with each acquisition. For the quarter, Tech Brands grew operating profit nearly fourfold in spite of strong product headwinds. As many of you know, the Samsung Note 7 was projected to be an innovative driver of the business. However, its massive recall coupled with the low supply if iPhone 7s impacted profitability in our stores. We did see resilient flat comp traffic in our stores, but our comp gross profit per store fell by 9.5% due to product shortages. We mitigate some of the product outages with the sale of fast growth ancillary products such as DIRECTV and high speed Internet. As an example, DIRECTV sales were up 12% on a comp store basis over the second quarter. This demonstrates the power of choosing the right partner as AT&T continues to bring us new innovative products that drive traffic and profits. We are on track to deliver our previously announced guidance of $85 million to $100 million of operating profit from Technology brand this year, more than tripling last year performance. Our operating margin rate will exceed 10% for the year. Collectibles also continued their strong growth trajectory as we added 22 dedicated stores globally and increased square footage inside our GameStop branded stores during the quarter. We expect to end the year with over 10% of our square footage dedicated to this exciting growth category. We see collectibles as a strong category with a rich and long history, as well as a very predictable launch schedule. As a reminder, our addressable category in the U.S. alone is $11 billion. We believe this market will grow to $16 billion by 2019, which would make it larger than physical video games by that time. Details on this category are shown on Slide 11. We've also included a calendar of notable releases and events through 2017 on Slide 12. This illustrates the consistent launch driven nature of this business. In addition we also show projected launches of major movie IPs through 2020 on Slide 13. Please note that these are four IPs with over $25 billion of box office receipts that are planning on launching dozens of movies in the next four years. We're actively working to partner with all major IP holders, many of whom we do business with today. Mike Hogan and Mike Mauler are leading our global licensing efforts and recently procured agreements with several key IP holders to provide exclusive global products through our collectibles ecosystem. Also we're leveraging PowerUp Rewards and thinkgeek.com to drive our product development and discovery of this category in our stores, we're also leveraging the strong ThinkGeek name globally. We expect to end the year with over 60% annual collectibles revenue growth and expect to continue strong growth in 2017. In summary while the videogame market continues to transform, our diversification efforts are working. They have accelerated and they are keeping us on track for the 2019 goal that we shared at Investor Day. With that I'll turn the call back over to Paul.

Great, thank Tony. Operator I think now we'll move into the Q&A session of the call.

Thank you. [Operator Instructions] We'll go first to Brian Nagel with Oppenheimer. Go ahead please.

A couple of questions here, first off on the pre-owned or the used business. I guess you addressed the [indiscernible] in your comments, my question is as we look at the weakness there, at this point of cycle, is it more of a you think supply or demand driven softness in sales? And then the second question on that as the guidance you laid out for the fourth quarter did assume -- it seemed like a bit of an improvement from what we saw in fiscal Q3, not significantly -- what should we think about the drivers there for that modest strength in [indiscernible]? And then I'll follow-up with another question.

Brian I'll let -- probably Tony is probably right guy to answer, but just remember in the old days at GameStop pre-owned was the high margin category, remember that was [technical difficulty] go to and then when hardware would come out, our market would decline and then when hardware would age margins would go up, as pre-owned had a higher penetration. What's interesting is we have created the strategy that diversifies our company so that pre-owned is not the only high margin category, in fact I would say probably a little higher margin than collectibles, but certainly Tech Brands and digital are much higher margin the pre-owned. So, we have to keep that in mind. Tony do you want to talk about the trade issues?

Sure, to answer you directly Brian, it is a supply issue at this point. We had low new game sales in Q2. So, it takes about 90 to 120 days for that to cycle through. So there is a lot of demand for the product especially the next gen product that we have, and so that's why programs like the $1 trade program that we have today are so vital because we're bringing in a lot of that product that people want. So that's how we're going to be able to drive that supply, we’re seeing plenty of demand.

Rob do you want to talk about the guidance assumed in Q4 versus Q3?

So, Tony talked about that it is a little bit of a lag time between when the new titles that launch drive the trade in activity in the stores and then we can turn around and sell that. And so sequentially with Q3 driving more trade activities in Q2 it sets us up for a better performance on a related basis in Q4.

Okay. Secondly if I could follow up, to ask a question on the collectibles business as well. Looking at my model the growth did slow down year-on-year in the third quarter, because you mentioned that was a [indiscernible]. How should we -- within our model, how should we think about the year-on-year growth in the collectibles business. Is there a kind of plan you can give us for that?

In terms of like 2017?

Yes.

I mean as Tony talk about, I think Tony you said 60%, [multiple speakers] over 60%, for the full year of ’16. I think it’s too early to give you guidance on ’17. You can think about a roadmap thought that takes us from, both Tony and I talk about the sales being closure to the high-end of the guidance range we gave you for this year, so that’s 500 million on our way to a billion dollars by the end of ’19. So obviously you’ve got to grow every year in order to achieve that and we have a lot of confidence in our ability to do that.

The strategy is to diversify the company into accretive margin categories. So when you here Tony talking about Mike Hogan and Mike Mauler working on licensing for example, the idea of that is that we do bigger deals and have more exclusive licensing to help us keep growing that collectible business. Maybe you guys want to talk about that?

Sure. Mike Hogan and myself have spent a lot of time working with the IP holders to expand our relationships outside of video games, in fact we’ve made really good progress with that over the last few months. And these IP holders are really looking for partners that can create a broad range of innovative products to maintain the excitement around their IP and at the same time to partner with somebody that can help maintain the excitement on their IP between their washes. So with Batman having one movie every two years, they want to maintain excitement around the Batman IP between those movies. And GameStop represents a perfect partner to be able to do that, through our video game stores, collectible stores, ThinkGeek solutions and our 50 million royalty number. We represent a very good partner for them. Mike, you want to add to that?

Yes. I would just add that to my Mike’s point, I think for our perspective we believe that this is a huge category as we talk with our video game partners, I think what they see in this, here is a category that’s almost as big as physical video gaming and the perspective for our business to grow with them on the collectible size close to what it is on the video game side, is a big opportunity. And as Mike said, our global footprint and all the various channels from which we bring this to life and there are things that only GameStop can uniquely doing in terms of attaching physical plus digital, in terms of attaching the right collectible to the right video game property with the targeted consumer through PowerUp reward. So we think there is some unique opportunities there that don’t exist anywhere else in the market.

So we looked for fragmented marketplace, that’s what we did with Technology brand as Jason and his team rolled up a bunch of small dealers. If you look at collectibles, we rolled a bunch of smaller business formats into our GameStop stores and that’s what these guys are going to try to do on licensing, so more to come on that.

Well, thank you. Good luck for the holiday.

Thank you, Brian.

Next to Brian [indiscernible] of Consumer Edge Research. Go ahead.

Hi guys. Thanks for taking the call. Can you just guys help me understand the Switch demand metric that you guys mentioned, the 27% which kind of suggests there could be a similar number of units to the Xbox One sold and then kind of walk us through if we get a similar number of Switch units as Xbox One unit sold, what happens to that longer term guidance that you mentioned?

Mike do you want to take that?

Sure, so I guess the best way to answer that question is to go back several years. So if you go back several years ago prior to the launch of the Xbox One and PS4 we started tracking this and we'll track it with our PowerUp members and also with a broad sample and so what we're looking at first of all is awareness, people who're aware of the product and what they know about is, and second is purchase interest. So purchase interest essentially means the number of people who say yes I'm interested in this product, obviously not necessarily every one of those people is necessarily going to buy a product, but it's a good benchmark because you can compare it cycle-over-cycle. And the point Tony was making is that as we tracked the PS4 and Xbox One overtime we saw, obviously, both of those curves we build, and when we were a similar time less than six months out from launch, that 27% purchase interest was the number that we saw on the Xbox One and it's absolutely true we're seeing similar purchase interest in the Nintendo Switch. So what that -- I think it's fair to say that that bodes well for the launch and the success of this product, keeping in mind that we don't even have specific details and price points on the market. I think we're going to be doing the survey again in the January after all the details are out and I think we'll have a much better read on it at that time. But right now everything we're seeing is very-very encouraging.

And remember, the other thing that's important to understand, if you think back to when we launched the PS4 which seems like a long time ago, I don't think it was -- but it seems like a long time ago. When we launched that item, a full 46%-47% Tony, of the transaction during the launch cycle had a trade associated with them and a full 24%-25% were paid for in full with trade credits. So that's the reason we dominated the launch of that console and I think that's the reason we’ll dominate this Nintendo Switch launch, but we'll know more in January once they announce specifics.

And just a quick follow-up, since you're having this demand for the Switch and all this new hardware is coming out and being talked about in the news, are you guys able to quantify any impact from delays of sales simply due to these new harbor announcements?

I think it's early for us to plan that out, but we don't have a lot of knowledge yet. Just to share a little bit of what we did, we were at Nintendo with a group of us maybe three or four weeks ago and they've historically struggled on delivery of product and so forth, they appear to be more focused on planning the launch, but I don't think we'll know until we know in January. So, and we can quantify a lot of things, but I think it's too early and maybe premature.

There was definitely a slowdown in the sales of PS4 prior to PS4 Pro, that was definitely but the PS4 Pro once launched too right back off again, so that was clear.

The next, Colin Sebastian with Robert Baird. Go ahead please.

A couple of follow-ups, first off, and then longer term question. On the current videogame environment it sounds like you're expecting more or less ongoing soft self-insurance to the balance of the holiday period. So I'm wondering how much do you think consumers may just be conditioned to wait for bigger discounts on products from the Black Friday period onward. And then can you clarify on some of the discounts we're seeing now such as Call of Duty for $1, how much that and other discounts from the channel are being funded by retail or by the publishers understanding that there is cooperation from both sides this time of the year?

I’ll Tony take those but we don’t -- you’ve seen our financial, we don’t do a lot of funded. So Tony you want to take the current video game environment.

Sure. Well Colin, we expect it to be just as competitive as it has been from the discounted standpoint. And so we definitely expect that during the holiday -- you seen everybody’s Friday ads including ours. Interesting though in our Black Friday ads you’ll see a lot of the IP that we’ve talked about, a lot of collectibles in there, which differentiates us from the pack. Its exclusive content that you can only get at GameStop as oppose to just price, although we’re very price very competitive as well. As expect that you will continue to see a level of promotions that’s similar to what we’ve seen in the past during the holiday season and I do believe that there is some waiting until Black Friday, which is why we wanted to start $1 promotion to pull some of that forward to be able to take some of that demand off of our stores on Friday. So that is definitely out. And the second question has to do with the funding [multiple speakers]. So definitely like Paul said, we worked very closely with all of our partners. And so the beauty of the buy/sell/trade program is basically the value of the trade is a non-funded discount to the publisher, which is sort of trade credit that’s something that we take into inventory. And so that part obviously we take and then the rest of that, obviously we work very closely with our publishing partner.

And our view Colin is that we operate thousands of stores around the world. We are the market share leader, we fund payroll, we pay our occupancy, we pay the light bill and we let you work with our PowerUp pro team [ph] to create specific targeted promotions. And so that’s a significant amount of funding, it’s hard to get that from anybody else.

Okay, thanks. And then looking a little bit longer term. I guess the question is on the transformation both inside the story and through the diversification, it sounds like you’re on track with the three year outlook for the non-gaming segments. But I guess wondering if recent trends in the video game category would change your view or strategy on the pace of investments and the pace of roll out of these newer businesses?

Colin, I think that and I’ll let maybe Mike Hogan can also comment on this. But I think that our strategy was set for transformation and diversification of our business in light of what we’ve seen in cycle. I think that’s still true, I think it’s early, but there is a significant modeling that goes on here and I’m not sure we’re ready to really get off of our original mode. But Mike do you want to --?

Yes. I would say that we don’t see any huge change, I think two points are worth mentioning. One is our diversification efforts are growing very well and you’ve seen the stronger in collectibles against in Tech Brands. And of course as we’ve said, we’re all -- we’re continuing to look for additional opportunities and we’ll see growth there. The other thing that’s important to mention and we really haven’t touched on it, is that there is a lot of growth coming potentially in the console category as well. I mean, we’ve got really three or four significant new innovations now that are hitting over the next year between VR and innovation from Microsoft and Sony, as well as Nintendo. So I think it would be too early to suggest that there is not some positive growth out there and various external -- although we have an issue to forecast for, various sources out there have given multi-billion dollar forecast for each of these, including VR and new consoles.

And the other point that needs to be made I think and there needs to be more discussion on is, this debate on the full game download versus weak title debate. It goes back to last year, remember Star Wars Battlefront, we just didn’t sell as many at launch as we had hoped and that happened this year as well or partners tend to migrate towards the digital as it’s taking over. We have a model it includes the significant amount of full game downloads 25 to 30, going up five a year. We still stick to that model, we think it makes sense. As we said nobody but Sony and Microsoft really knows what's happening in the full game downloads segment, so you have to be careful with that but as Mike said I think we see optimism for next year.

Thanks again.

And next is Mike Olson with Piper Jaffray.

This came up a bit on the question on promotional activity, but you describe some weakness in titles launched at the end of October obviously. How would you describe how that titles in November have performed so far versus your expectations?

Tony, you want to take that?

Yes, I would say that I think, Rob hit on it, but I would say that Pokemon Sun & Moon like I shared with you was the large response title. It was -- we have more pre-orders than we’ve had the five years, so it was a fantastic launch for us. Call of Duty underperformed our expectations and the last few games have launched recently have been pretty well at our expectations.

Okay, and then you talked about Nintendo Switch as potentially having strong demand, is it your expectation that the switch will expand the market to some degree like we saw with the Wii or will it take share from the two major platforms? Thanks.

Yes, the Switch is a very interesting device and I'm -- I debated with our guys on whether I needed to go on this trip and so forth, by the way I did not see any other retail CEOs there. So I was privileged to be there, I guess, but Nintendo Switch has the potential to expand I think incrementally the audience, the reasons are, the IP is more compelling for family than the other types of IPs. So Mario, all those things, a movement related game is more fun for kids taken those accessories off the I figure what they call the wing and then the master controller, you can really do a lot of interesting things with that in the gameplay. And then the last thing I would say is they've got a unique portability to them. If you watched that video, that's all they’ve put out. I think they have that unique portability so you can play it as a console at home, but you take it out and take it with you wherever you are going and kids can play it and it’s the right size. So I think it's really got tremendous potential as a game changers. So we’ll have to wait and see like everything else in this industry the consumers will vote with their dollars and I think it's interesting Mike, you want to talk about back in the day of Nintendo Wii and I mean there is a lot of different consumers right --.

If you look if you go back and you takes the category all the way back to 2008 and you look at where the category is today, frankly the biggest decline you’ve seen in the category is really a lot of those people who came in because it’s things like Nintendo Wii and to some extent things like Guitar Hero. And we do think there is an opportunity which is back. Tony’s talked about the research earlier and one of the things that we have the ability to do is of course is to go with survey the market including people who are more hardcore gamers and people who are more sort of broad market family gamers and it's fair to say that we're seeing a strong interest amongst the broad group of consumers here, so we are very optimistic about possibilities.

Thank you.

And next is Seth Sigman with Credit Suisse. Go ahead please.

Hey, Seth I wanted to follow up on the decline in pre-own sales is that more a function of unit declines or are you seeing a decline in average selling prices as well?

More a decline in units.

It is still healthy average selling price pretty.

And as you can tell we didn’t report on it this quarter, but we continue to outperform new games with our pre-own games, so that continues to be a healthy growth differentials. So ASPs are fine, it’s strong demand and we're chasing titles at this point.

Got it, okay, and then a question on Tech Brands. The operating profit improvement is obviously very encouraging, can you give us a sense of what's actually driving that and how we should be modeling that going forward?

Yes, Jason Ellis is here, Jason you want to take that question?

You bet, so Seth thanks for the question, we're obviously driving incremental productivity out of the retail stores. We feel like we have a really unique system that allows us to do that and we've done it 35 times now. So on average we're improving the productivity by about 30% and that’s good for AT&T because we're generating a lot of new revenue for them and a lot of new revenue for us. This quarter may be a little more difficult because in terms of modeling, because of some of the headwind we saw with the Samsung Note recall, but outside of that I think you can take a look at the baseline business in the second quarter of this year and move it across a much broader footprint of retail stores and that should get you a nice model at least for the next two years.

So when I look at the last few quarters, sales per store have been down pretty meaningfully year over year. How do I reconcile that with the productivity improvements that you're seeing as you acquire these stores? Are they just coming off a little lower base are they less productive initially or is that the recalls, or is there something that would be causing that.

I think Seth, one of the things that we have laid out even at Investor Day is we use gross profit in this format instead of sales just because of some of the accounting treatment and the way that the commission modeling moves around with AT&T. I think that if you looked at what's happening in the gross margin part of the business and the profit per store category you're going to see the type of improvement that you'd like to see, and there's no question that as we grow with the scale that we've grown we're going to get some fixed cost leverage out of the business which will draw more to the bottom line. We're also going to get better at this business as we intake what has been you know 800,900 retail stores in less than a year. So expect that we're going to get better at selling and closing in the stores, margin, close rate, all of that stuff should get better. We're also very excited about the new products that AT&T has continued to innovate, so I think if you look at their roadmap and where they're making their investments, arguably some of the biggest investments in our country right now and we're going to be right at the forefront of selling those products to customers. We're pretty excited about that.

Seth this is Rob. To back up Jason's point there, if you look at the margin rates in the Tech Brands category across the quarters from the beginning of '15 till now, they've crept up from the low 50%s to over 70%. So that really speaks to that it's the gross profit and the gross margin that are more important indicators than the revenue line is.

So Rob what is the right way to think about gross profit comps going forward?

In terms of the staff, we've been giving out the gross profit comp on the stores that we've owned and operated for a year, gave some guidance on that earlier this year, the third quarter was difficult relative to that because of the things that Tony talked about, supply and the Note problem. I think that you should probably think about the fourth quarter as being similar to slightly improved and then we'll talk about 2017 when we give out guidance in the spring.

And we've time for two more questions, we'll take the first question of those two by Ben Schachter with Macquarie go ahead please.

I've got a few for you, on the Call of Duty underperformance, can you help quantify that versus last year and also the $1 promotion, can you put that in context versus previous discounting and overall how is that Call of Duty, that particular title impacting the overall business given how it's big it's been in the past? And then Paul just given where the stock is, are you guys still thinking about acquisitions or should we expect you to focus on buying back your own stock before looking at other acquisitions?

Okay that’s a lot Ben, let me see if I've got all them done here. Alright let me start with the capital allocation and so forth and then Tony maybe you can take, what are we going to do with the Call of Duty. Yes, I mean our strategy remember is to create a diversified business. We've got Technology brands, we've got digital business and collectible business and we're actively seeking other formats to extend our business. We talked about licensing, that's an organic growth vehicle for us and we think it's very productive, it's not going to require a lot of CapEx, but it does leverage our assets that we acquired with ThinkGeek.com. So I would not say that we're actively looking for acquisitions today. I think we want to try to fill in what we've got and digest it as Jason said and of course we're very focused on buybacks, I mean I think it's $1.9 billion we’ve bought back, we expect to continue buying back, we follow the plan, we have guidance for this year, Rob. What's our guidance on the buy back side?

75 to 125.

So, you can expect us to meet that by the end of the fiscal year. So I don't think any of that has changed. Of course if something were to pop up, we would attack it opportunistically, things like cricket inside our GameStop stores, those are kind of no brainers and they've been successful for us but no, we don't see anything looming on the horizon. Tony do you want to talk about Call of Duty?

Sure, so we don't give -- we're not going to talk about specific title performance other than what underperformed and although that far, I think you can look and realize that when we have an announced performance to the extent that we did on Pokemon and November sales down 20% that Rob talked about, I think you can kind of judge the magnitude of where Call of Duty came out, so that's all I want to say. And then the $1 question again. It's a -- for us that's kind of a taking advantage of two things, we're taking advantage of some aggressive offers, that Activision is offering, but also our buy/sell/trade program which is very lucrative and again, it's an unfunded discount to the publishers. So we partner with publisher to get the discounts and we give them the unfunded discount and it ends up between a $1. So it's a great deal for the customer, it's a great deal for us because it's margin neutral for us or margin or it's the same margin that we would get otherwise and we partner with Activision to sell lot of their games, so it's really a win-win-win.

And it's highly differentiated for our PowerUp members, because they're the only ones getting the deal. So it brings Black Friday right into Tuesday, Wednesday, so that's been very favorable for our PowerUp community.

We'll go next to David Magee with SunTrust. Go ahead please.

Just a couple of questions here, one is on the comment that November might be down 20%, which I’m guessing is a sector comment, is that a number that includes the downloaded titles?

Rob, do you want to take?

I was speaking of November in terms of what we expected for the industry. The industry measurement that we're typically talking about is NPD, which is physical. So I would say no, just to clarify that.

Okay. And then when you talk about the sector shift going on 5 points a year, 2 download. If you change your thinking about what that -- at what level does the number stabilizes?

What do you think Mike?

I would say our thinking hasn’t really change, I mean. All the information that we have access to suggests that the numbers are pretty close to what we model and we’ve modeled scenarios in which it gets a pretty high number, higher than we would even think it will get to.

The other point here David that’s important is that. We’ve model a lot of scenarios including some that are highly unlikely, but the good news is through all those scenarios we’re pretty safe from a free cash flow and an earnings perspective. So I think we’re safe with that. We have a point of view that says it will unfold along the lines of what we saw in the last year or two and we’ll continue to diversify the business just to ensure ourselves.

Okay. And just lastly, maybe Rob, any thoughts about what real estate might do next year in terms of square footage growth or contraction I should say for ’17 at this point?

Well absence of guidance that we’ll give you in March, I’ll say how I’ve been answering that question when it come from investors across this year is that, you can think about it in the same sort of 2% to 3% decline in video game storage that we’ve been demonstrating across I think the past six years. So that’s about optimizing the footprint and using the PowerUp Rewards program to drive to sales down the road and one of those things that we’ve talked about in the past. Probably a little early to talk about what we expect to see in terms of store growth from either the Tech Brands division or the collectible only stores. And I will say that, we have laid out the longer roadmap on Technology brands increasing the store count and at this point I’d say that looks similar to what we have done for 2016 in other words it will be a mix of opening stores and still some other retailer acquisitions, we can continue to do, but no specific numbers yet.

And David again, and you know this because you followed us. But I mean that’s another power of our PowerUp Rewards program, we can close right there in Atlanta, we can close the Lenox Square store and consolidate all of the customer based over to the market Boulevard Store and have a greater profitability in one store than we had previously in the combined footprint. So those kinds of opportunity are still out there for us and we’ll continue to pursue them.

Great. Thanks guys. And happy Thanksgiving to you.

Okay, operator, I guess we are ready to wrap up. I would like to thank all of you for your support and for following us. We’ve got a host of promotional activity starting Saturday, last Saturday and then going all the way through the holiday season. We hope that everyone has a tremendous enjoyable Thanksgiving holiday with your families, we will not be open so don’t shop us on Thanksgiving Day. We want our Associates to be at home, but please come see us on Black Friday and we look forward to talk to you on the next call. Good bye.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation.