Welcome to the GameStop Corp.'s First Quarter 2017 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. Pipeline I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop's public documents and is 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 Mr. Paul Raines, CEO. Please go ahead, sir.

Thank you, operator and good afternoon and welcome to the GameStop earnings call. I want to start by thanking our worldwide team for another great effort in the first quarter in delivering outstanding customer service. We have our usual cast here today, Rob Lloyd, Tony Bartel, Mike Mauler, Mike Hogan, Mike Buskey, Matt Hodges and Jason Ellis, our Senior Vice President of Technology Brands as well. I want to brief -- I want to be brief today to allow more time for my colleagues to share good news about our performance this quarter. I am very pleased to report that we returned to growth this quarter. On the video game side, we set records with our Switch launch around the world, returning vibrancy to the physical video game category. As the world's largest video game retailer, we expect to take full advantage of this exciting new product by working diligently to deliver as many units as possible to our customers all year long. One example of how we're succeeding is that we had 93% growth in our global omnichannel revenues. Our digital business showed some growth, mostly in the Kongregate mobile game publishing inside. Our PowerUp Rewards loyalty program is at an all-time high of membership around the world and we continue to add incremental paid members. Continuing to build our loyalty program helps us improve our per customer profitability and positively impacts key areas of our business such as pre-owned and collectibles. Our Tech Brands division performed as expected and delivered 21.5% sales growth. You will hear how we're in a transition in that business, moving from a purely wireless business to an integrated communications and media retailer. This transition is going to drive some additional training at our associate level and it will take a few quarters to…

Thank you, Paul. Good afternoon. We had a stronger-than-expected first quarter based on the success of the Nintendo Switch. Our allocation and rapid sell-through led to outperformance in sales comps and earnings. Highlights include consolidated sales comps of 2.3%, including negative 2.4% in the U.S. and plus 17.1% internationally; total sales growth of 3.8%, including hardware sales, up 24.6% and Tech Brands, up 21.5%; growth in our Collectibles business is 39.1% to $114.5 million in sales. Consolidated gross margins were 34.3%, flat to last year despite the strong hardware growth as margin rates in pre-owned and Tech Brands both expanded. 36.1% of our operating earnings in the quarter came from sources other than physical gaming. We continue to expect 40% or more of our fiscal 2017 operating earnings to come from nonphysical gaming. Now for a little more depth. Switch was the driver of the increase in hardware sales. Consumer demand has been very strong and we've consistently and quickly sold out of our allocations. Our market share was very strong in all our markets around the world. As expected, new software sales declined 8.2% driven by difficult comparisons to the division last year. The bright spots within software was that we sold more than one copy of the Switch version of Zelda for every Switch console we sold, indicating that consumers are coming to GameStop for additional games and accessories. Pre-owned sales declined 6.2% during the quarter, slightly outperforming new software. Digital receipts decreased 9% due to declines in the sale of hardware bundled with digital games. GAAP digital revenues increased 3.0% primarily due to growth in Kongregate. As I mentioned, Collectibles grew nearly 40% in the quarter with growth in gross profit dollars of 23.1% and a margin rate of 30.7%. The lower than usual margin rate is…

Thank you, Rob. Today, I will discuss our Technology Brands first quarter results and give some color on where we're focused for the rest of 2017. As many of you know, over the past 3 years, we have experienced tremendous growth in revenue and store count. Today, we have 1,508 retail stores and remain both the largest wireless dealer in America and the largest Apple premier partner in America. Our most significant relationship continues to be with AT&T and it is clear that AT&T is transforming to become an integrated communications and media company. During the first quarter of this year, AT&T increased the focus on entertainment products and sales in our retail stores, specifically emphasizing DIRECTV and DIRECTV NOW products. As we continue to align with our most important partner, we're transitioning the core of our business to be focused on entertainment first which is a shift from our wireless history. We will continue to build entertainment competencies into our retail sales teams. We believe the opportunity is tremendous once we're firing on all cylinders. In the first quarter, we experienced triple-digit year-over-year growth in DIRECTV sales which we believe are early signs that the transition is working. Tony mentioned on the last earnings call that we successfully launched a business division focused on serving the needs of small to medium-sized businesses. We intend to leverage our retail store footprint and traffic to bring new wireless products and services to an underserved business community. We have also earned triple-digit growth in our business sales year-over-year and that will remain a focus for 2017. While we have seen great results on our entertainment and business sales efforts, the quarter did not come without its challenges, most notably, lower-than-expected upgrade customers visiting the retail stores. This is a macro trend that…

Thanks, Jason. Good afternoon, everyone. Today, I'm going to provide some color on our performance in the GameStop-branded stores and our omnichannel platform. I'm also going to provide more details on the Collectibles category and our growing leadership, both through our stores and our ThinkGeek site. Finally, I'll update you on the success that we're having driving customer engagement with our growing PowerUp Rewards program. Our GameStop-branded stores generated a 2.3% comp during the quarter as growth in Collectibles and Switch more than offset a weaker launch calendar. Beginning with physical video games, we're pleased with our market-leading share of Switch product and related software and accessory attach. We presell most of our Switch hardware before it hits our warehouse through our Web in Store process that allows customers to ship the product to their home while still using trade currency to fund their purchase. This means that the product is selling out even before we receive it. We're attaching nearly 6 pieces of software and accessories to each Switch unit sold. This attachment rate is nearly double that of the rest of the industry and it also means that we're 50% more profitable than the rest of the industry for each Switch unit that we sell. When you factor in the revenue that we get from related trades, this number increases to 75% more profit per transaction than the rest of the industry. During the launch period, we were heavily allocated on Switch product and allocated at a level below our typical next-gen market share. As a result, we lost market share during the quarter. The Switch is off to a very strong start. To put this into perspective, it has outpaced the Wii launch by 10% in the first 2 months. We continue to partner with Nintendo and…

Thanks, Tony. Good afternoon, everyone. GameStop's international businesses had a very strong first quarter, exceeding expectations with good market share and a 17.1% increase in same-store sales. All international segments generated double-digit comp growth led by Australia with 18.2% which drove a significant increase in international operating earnings versus Q1 2016. During the quarter, outstanding hardware, accessories and collectibles performance were the significant contributors to growth versus prior year. The successful launch of the Nintendo Switch in all markets was a major driver of hardware growth, followed by a double-digit increase in PS4 hardware sales versus prior year. The Switch hardware performance along with the solid attach rate of accessories and software driven by our knowledgeable store associates, resulted in one of the strongest hardware launches of all time. Based on current consumer demand, we believe the Switch could be a real catalyst for the video game industry and great for GameStop. While the industry is typically focused on the top software launches such as Zelda, Breath of the Wild or Mass Effect, actually, there were approximately 100 new software titles launched in the first quarter and many of these titles performed very well for GameStop, such as Nioh, Persona 5 and, of course, Game Trust's Has-Been Heroes for the Switch. As the global leader in video games, we're focused on having the greatest selection of titles and expanding the breadth of available software by working with our publishing partners to bring even more titles to market. By curating these titles based on our extensive loyalty data combined with compelling trade-in promotions, we continue to provide differentiating value for our customers. Outside of the video game category, the acceleration of collectibles sales in the international businesses continued with 65% sales growth versus prior year. This rapid growth was driven by…

Thank you, Mike. And at this point, operator, I will turn it over for questions and answers with the audience.

[Operator Instructions]. And our first question comes from Brian Nagel with Oppenheimer.

So a couple of questions here. I mean, first off, maybe a simple one, but a pretty significant spread between comp store sales growth domestically and international. Mike, you talked a lot about this what drove international comps. But is there anything we should think -- is there -- should we take something away from that, just the overall performance of the 2 businesses? And I have a follow-up.

Yes, sure. Same-store sales really vary by quarter, by region on a lot of different factors, the types of products that are launching; the competition differences; and lately, also some macroeconomic differences as the economies in Europe seem to be picking up a little bit. In the first quarter, I would say internationally, we've had higher -- typically higher Nintendo market share in quite a few of our markets and so I think that played a role in terms of the Switch launch. We also saw, like I had mentioned, double-digit strong PS4 hardware sales. For us, Sony had a lot more market share than -- internationally, especially in Europe, than in the U.S. And finally, the 65% collectibles growth, I think, had an impact on same-store sales as well. And so you kind of put all that together and we saw a very strong quarter.

We've also got to get Mike and his international team some credit, Brian. They've done a great job of focusing on the fundamentals. You remember this call just 2, 3 years ago, we would talk about how international margins on pre-owned were 10 points lower. They're now matching. They've got a reservations process that are sophisticated like the U.S. So there's been a lot of good fundamental work done in the international markets.

Got it, that's great. And then the second question I have just with regard to the Switch. Obviously, both domestically and internationally, a great start here. And GameStop is clearly benefiting from the demand. As we think about this product going forward and the GameStop model, should it work similar to the Sony and the Microsoft hardware in that it plays into just kind of a razor and razor blade type strategy that there will be more and more software sales for the device, it's going to lend to pre-owned? And then any type on full game downloads or add-on content for these games?

Yes, I'm going to let Tony answer that. Just one observation I would say because we're all veterans of the Wii launch. The fact that this is ahead of the Wii launch for us is very significant. Tony, do you want to talk about Switch?

Sure. As Rob talked about, Zelda was a good example where we actually sold more games than units that we had sold. So that's a good example. I'll also mention that we have a 6 attached ratio which is close to double that of the whole rest of the category. So we tend to do very well at Gamestop with the razor-razorblade strategy. And I also mentioned, we had a 19% increase in hardware trades towards us, so it lends itself very well. Also, the form factor of the games lends itself very well to a trade-in model. So we anticipate that there will be a high percentage of trade-ins of these games. We're already seeing that trades are a major part of funding for this project -- for this product. And we see very, very strong demand for the games that are launched. And so we see this as operating actually very consistent with the Sony and the Microsoft offerings, if not slightly better from a GameStop perspective.

Another observation, Brian, is that if Sony and Microsoft full game downloads were at, I think, we forecast 35% this year, our share is probably 5%, so we're at a disadvantage there. I would say Nintendo has very, very low full game download penetration, so we don't see that as a real threat.

And just one final. Is it a different customer that's buying the Nintendo machine? Or is it someone kind of adding the Nintendo machine to their digital library where they already have a Sony or a Microsoft machine?

I mean I think it's a very different customer in its moms, it's casual game play, it's more kids. Those -- or many of those Sony and Microsoft customers, Mike Hogan, fair to say, are sort of the leading-edge rocket ship kind of players.

I think a couple of thoughts there. One is we continue to see really strong and broad interest for the Switch across both the core gamer and the expanded audience. Because it's so early on, a very high percentage of the purchases that we see today are PowerUp members. So as you would expect, we have a lot of -- the early adopters are there, but we're seeing a very broad interest. And you would see the same thing historically with Nintendo in [indiscernible] as well. Our hope is -- and we also see, by the way, this is the second or third console for a lot of people. So there's a lot of people who own an Xbox or own a PS4 but are adding this to their collection. They've been waiting for Zelda or some other hardware-driving name to come out. And then finally, we have big hopes that with the success of this console launch over the next year, that it will continue to expand the category. Much as we saw back in sort of 2007, 2008, 2009, I think there's a great potential for it as well.

Our next question comes from Ben Schachter with Macquarie.

A couple of questions on Red Dead and a few on pre-owned. On Red Dead, how much did it change the guidance you presented today versus what it would've been if it were still in the year? And do you expect other publishers to potentially shift their release dates around that, that might benefit you? And then on the pre-owned, could you just talk a little bit more about what drove the gross margin increase? And are the pre-owned hardware gross margins higher or lower than software? And then anything if you can add to guidance on how we should be thinking about pre-owned for 2Q in the year.

Thank you, Ben. That's a few questions. I think we got them all. Rob, do you want to take the guidance change or no change on Red Dead?

Yes, Red dead was a factor as we talked about. So when you get a game like Red Dead or what Red Dead was expected to do in the fall, it's going to suck some dollars away from some of the other games. So it's not an entire impact when it moves. You'll get some of the buyers that would have bought Red Dead buying Call of Duty or some of the other games, Destiny, some of the other things that come out. So the impact is not complete. The other factor that we noted with respect to the annual guidance was that we don't have great visibility into what the supply of the Switch is going to be. And I'd say those 2 factors kept us with the same guidance.

I also think that E3, for those of you that will go to E3, you'll see some excitement around some of the games that we have that will help to share with you why we felt comfortable keeping it there. As the pre-owned, the margin question, Ben, is very comparable on pre-owned hardware and pre-owned software, so it's very comparable. And we have slightly less discounting during the quarter which is what drove the margin increase. But again, it's going to fluctuate between that 46% to 49% range for the year.

Fair to say, Rob, we've been pretty conservative so far on our outlooks because we've learned that it's better to be conservative and not be surprised so that's where we're at. By the way, Ben, we also didn't spend a lot of time talking about VR. We're still very focused on VR. PlayStation VR continues to be our #1 product, but we're kind of waiting for E3 on that one, so more news to come.

Our next question comes from David Schick with Consumer Edge Research.

This is Ray on for Dave. A bigger picture question here. New software SKUs carried in your store have certainly fallen over the past several years and we see what you're doing with Game Trust. Where do you see new software SKUs going, I guess, this year, next year and maybe over the next 5 years? If you can kind of give us a sense for that.

Let me start that up. I think the industry is producing less big titles. But as Mike pointed out, there's a lot of small titles that need support that maybe aren't getting it and that's where we're trying to step in. Tony, I don't know if you want to talk about sort of new software trends?

Look, we have seen a reduction in new software trends. We've kind of hit -- it feels like we've hit a point where we have a kind of punch stasis where there's not a lot of reduction taking place now. And now with the Switch, we're seeing new games come out. With VR, we just saw Farpoint come out. So we do have some new platforms that are coming out with some new games and driving some new IPs as well. So you'll see ARMS sort of just coming out and that's a new IP. So I'd say the Switch, just like the Wii did, is driving a lot of new innovations. So I would expect in the next year, you'll actually see an increase in the number of games. And then as Mike and Paul both said, we also see a trend where we have a lot of these smaller games that we're able to bring to market and really bring some new people into.

There's an indie games opportunity that we see that Game Trust is just a part of it. It's really not the biggest strategy there, but we're actively in discussions with a lot of our publishing partners or even developers who don't have a publishing partner who give them big title treatment in exchange for margin profitability. So there's a lot of that going on. I think you'll see more of that. Indie games is a real trend in the console space.

That's great. And then a quick follow-up. You called out Kongregate as a good driver this quarter, I think we've seen a little bit in our data. How should we think about that within your business going forward? And is there any way that, that can be a needle-mover when it comes to your earnings over the next couple of years?

Yes, I would say that Kongregate has been an interesting -- has been a good business for us. We continue to be interested in the mobile gaming category. I think it's just -- the way to think about it, it's part of our overall strategy and overall commitment to digital. So whether it's mobile games or whether it's full game downloads or whether it's in-game content or whatever, we continue to remain committed across that. I think that it's also fair to say that we've gained some experience via Kongregate in terms of publishing games which we started probably 3 years ago, that's now manifesting itself on the console side with Game Trust. And I think as Paul mentioned a minute ago, I think we're excited about the opportunity to participate in bringing new IP to market regardless of what the platform is and so we'll continue to develop those relationships. And then the last thing is it's also helped us, I think, just on the IP relationship side. We -- for example, we have a good relationship with POS around games that we launched with [indiscernible] last year. There's a lot of IP out there that's owned by people other than video game publishers that we have relationships with, we think it will really useful on the collectibles side.

Kongregate is a really important asset for us, but it also brings us great partnerships, as Mike said. That's an interesting opportunity for us and we try to maximize it in any way we can.

Our next question comes from San Phan with Mizuho.

So you mentioned the Nintendo Switch allocation. When do you expect to hear from Nintendo on your new Switch allocations? And is this time frame similar to what you've seen in prior console launches?

That's a great question. When are we going to hear from Nintendo?

Daily would be the answer to that question, San. I think you're asking for long -- I think the real question you're asking is when will we be out of allocation? And that is very hard to predict at this point. We see -- like I shared, we're selling -- literally, we have the products sold before they hit our warehouse which is a good cash flow position to be in, but we haven't seen supply even come close to catching demand at this point. So I'm not sure exactly when it's going to be.

Yes, San. I mean, look, if -- this Switch allocation discussion, there is an open -- war is not the right word -- but there is a contest among all the retailers online and store with our good friends at Nintendo. We've been working on the Switch launch for, Tony, 1.5 years?

Yes.

We've been mining our 53 million members around the world, seeing who wants Switch, who wants what features, testing price points. We take that data to Nintendo, we talk about it and negotiate it. And so our favorable allocations of the product took 1.5 years' worth of negotiation. Going forward, I think our assets, tools and weapons around the world are better positioned than anyone else. So we expect to continue to be a significant player on Switch allocation.

Okay. And did I hear you correctly when you said you have lowered the typical hardware allocation from the Switch launch, given that's early and you don't want to spread the wealth of it?

Yes.

That it immediately impacted both your hardware and software market share? Or was it just the hardware?

Yes, we were lower than our -- what we would call, our average next-gen market share. So -- and that's typical when you have a highly allocated product, it would take an incredibly bold company to allocate us at our normal market share. The calls they would get from our competitors would be -- I can't imagine. So it would be a very bold move and it has never happened. So this is typical when there's a launch of a heavily allocated product. And even though we were able, like Rob shared, to sell more Zelda than we sold the units, people are going to buy some of the software when they buy the hardware, so we were slightly down. We were more down on hardware than we were on software share.

Remember, that our share of Sony and Microsoft is close to 50% on the consoles.

This launch was a great share for us of the Nintendo products, better than any console from Nintendo that we've seen in the past. So while it doesn't mirror what we do with Sony and Microsoft, it was very successful for us.

Okay, that's really helpful. So is that something we can just expect to continue until the product is no longer sold out everywhere?

Yes.

Yes, that's probably a fair assumption.

And then I'm just curious, like, can you tell us a bit more what customers are trading in when they pick up Switch products?

Well, they're trading in a lot of hardware like we talked about. As Mike shared, we have a lot of people that have 3 consoles. So it's a little bit across the board, but some of it is the -- a lot of it, the majority of it is next-gen hardware that is coming in. We have obviously a lot of Wiis -- I'm sorry, Wii Us coming in and that is predominant console that has traded in towards it.

Mike, do you want to add anything for international?

No, I'd say that's exactly right. We're seeing a lot of Wii Us getting traded in. Former Nintendo fans that maybe weren't that satisfied with Wii U were looking really forward with some new titles like Zelda and Mario Kart 8 for the Switch. And we're seeing them transitioning as soon as we did inventory and stock

We also take phones and tablets, by the way, on trade, obviously, in a few of those.

Our next question comes from the David Magee with SunTrust Robinson Humphrey.

My question is on Tech Brands. If Tech Brands is sort of flat in the first half of the year, it's going to require a pretty strong second half to make that EBIT number. And I just want to just sort of test your confidence level in that and maybe talk about new products. It seems like that you sort of rationalized getting involved with this, in the mobile business, just given the tactile nature of phones and need for stores there. But it seems like some of these newer products that you're selling, people just buy off the web and -- so anyway, any color there will be helpful.

I'm going to let Jason answer that. But just one observation, Dave, is that AT&T is the largest and most successful network in the United States. The speed that they are moving to transform themselves into something much more than a wireless carrier is pretty breathtaking. And when they sit in our office and talk to us about that, we can't help but really get excited about the opportunity. So I would just say it is an exciting space to be in, in spite of whatever transitional costs we've got. Do you want to talk about products and transitions?

Yes. The second half of the year has both the highly anticipated iPhone 8 which we believe will drive a lot of demand. We think there's a lot of customers that have held on to the 5 and 6 and they're waiting for new innovation. And I think in my script, I called this a super cycle that we're anticipating. We also have some pent-up demand for Samsung's Note product based off of the challenges of the Note7 last year. So there are customers that are really hopeful that the new Note 8 will be robust and innovative. And then in terms of online, I mean, really, one of the things that's great about the category that we're in is it's been incredibly resilient to online activation. And so we're not seeing across the board much growth at all in any of the carriers' business online and we expect those customers will come buy the new innovation, they'll want to see it and transact in our retail stores.

Dave, I'd add a couple of points, this is Rob. The first is that the result and the profitability in the first quarter was expected. We're on the path to the $120 million of operating profit that we guided to previously. That path or that amount of operating profit holds us within our aggregate model for the money we've invested in Tech Brands to the 20% IRR that we were shooting for. And then I'd say that we reviewed at a very detailed level what the ramp is in terms of the small business emphasis that Jason talked about as well as the sales of entertainment products and we've gotten comfort around what that looks like throughout the quarters this year in order to help us achieve our goals.

Our next question comes from Curtis Nagle with Bank of America Merrill Lynch.

So not to belabor a point and I understand what drove such relatively good comp results internationally. But could you dig a little more into what drove a negative 2.4% comp given what hardware did? And yes, I mean, really just what were the more detailed drivers there because I'm not sure I still understand.

Sure. I mean, look, the overlaps are something and I'll let Tony talk about this stuff. But the overlaps, we got to take into consideration and the size of our market. Do you want to talk about it?

Sure, I think there's a couple of things. Again, we're heavily allocated on the Switch. So as Mike said, there was a higher share provided internationally than there was domestically which drove it. And to be honest with you, the Collectibles business has grown faster on the international side. By its nature, the Collectibles business is a difficult business to scale. And when you're talking about close to 4,000, 3,900 stores in the U.S. scaling out that business, we're behind where the international teams have been, both in terms of our ability to get product, the number of SKUs that they're able to get at scale and the ability to expand within our stores. So I think as I look at the business and even to reference an earlier question about this, the U.S. is going very quickly and very rapidly. They are expanding the amount of linear footage in the stores to drive that Collectibles business and move it up to the international average. And so that is a strong growth provider for us in the future. And in order to do with that, we're developing and -- we have developed and are developing a very robust collectibles merchandising team that can buy this at scale. That is a -- there is a ramp-up curve to that, I feel like we're coming off of that ramp-up curve and that's why you're seeing some strong growth. But we grew at half the rate that international did this quarter and that's what drove a large portion of that comp difference.

This is Rob. I'll add that the way that the titles lined up benefited the international markets as well. Mike talked about that the international markets had a much stronger weighting towards PlayStations than does the U.S. You have a PlayStation-only title that helped with the software internationally as well in some of the international markets like Mike said, you have a -- that share impact we talked about with respect to Nintendo is not as dramatic as it is internationally.

And then just one quick follow-up, if I could. What exactly were the paid Pro member numbers and how did that compare to last year?

Yes. Who wants to -- are we -- do we want to disclose that? Did we disclose that in the past, guys?

It's been a while since we disclosed what our paid membership was, but I'll say that it's about, call it, 16%, 17% higher than it was a year ago.

And those Pro members pay $14.99 a year, so it's an interesting format with -- as loyalty programs go, it's an interesting one where you have a segment of it is nonpaid and another segment is paid with different benefits for each. And so you can imagine, we look at that all the time and go, can we go higher with the paid segment? So we're testing some of that. Can we offer some different benefits? And Collectibles still don't have any benefits. So there's a lot of activity going on in that space.

And we'll take that question from Seth Sigman from Crédit Suisse.

I'll get a couple in here. If I could just start with the Tech Brands business. Can you just update us on the growth strategy at this point? How many stores are planned for this year organic versus acquisitions? And I guess, just in general, what are you seeing as sort of the incremental growth opportunities from a store perspective?

We have talked about at the beginning of the year, there might be 50 of the whitespace stores. We also talked about the opportunity for continued expansion through acquisitions of other AT&T retailers. The transition that we're going to -- through with respect to the entertainment products has us on pause a little bit with respect to the whitespace store growth as it does on the retailer acquisitions as well. Obviously, what impact it has will affect the valuations in the retailer space and we want to make sure that we've had adequate time to understand what's the right amount to be paying as we have acquisition opportunities.

And just given your size today relative to a couple of years ago, are there any limitations from a growth perspective? How many AT&T stores you can have?

I think that if you'd asked the question 3 years ago, even 1 year ago, we would have told you that we weren't sure that AT&T would give -- allow us to get to the size that we're. And we believe that as long as we continue to be their best-performing partner, they're going to continue to provide more opportunities for us and with us. So we're actually bullish still that there's room for us to grow in this space. We just need to do a better job of executing on our entertainment business.

Seth, the AT&T team, their strategy is to continue to grow into integrated media and entertainment. If they get through this, when they get through this, they will have a ton of properties. I think they have a serious appetite for divesting some of their own stores at some point down the road. So I mean I think there's still a lot of growth here. We just need to understand. First of all, we got to get it under control. I mean these guys have gone from 70 stores to 1,500 stores in 2.5 years, so it's not a light challenge. But I do think we believe -- we continue to be very bullish in our ability to grow that business.

Got it. Can you just help us reconcile the 7% decline in Tech Brands traffic with the 19% decline in, I think, it was gross profit comps? Is that a conversion issue? Or is that a change in the economics of the individual transactions? How should we be thinking about that?

I think there's two components to it. One is the upgrade cycle that Jason talked about. You get traffic in the stores to help deal with phones that people aren't ready to trade in. Maybe they need a repair on it, they need something with respect to it, a new case or whatever. So the traffic is impacted some, but the lack of upgrade transaction impacts the gross profit as well as what AT&T is doing in terms of the underlying compensation plans and how they pay us and transitioning to the sales of the entertainment products. Obviously, based upon history, we're doing a lot more in terms of straight wireless transactions than we're in entertainment and so we're working to, as we said, train the sales staff to shift that and drive the traffic to support that.

And the improvement embedded for the second half of the year in Tech Brands reflects an improving mix of those ancillary services or a combination of that and also the iPhone? Or how should we be thinking about that improvement?

Well, you should think about it in terms of the iPhone and other products that can drive the traffic and drive that upgrade cycle as well as our sales proficiency with respect to the entertainment products.

That concludes the question-and-answer session. Mr. Paul Raines, at this time, I'd like to turn the call back over to you for any additional or closing remarks.

Okay. Thank you, Operator. We thank you for your support, especially, I know it's ahead of the Memorial Day weekend, so thank you for being on the call and we'll look forward to seeing you in the future. Bye-bye.

And ladies and gentlemen, that does conclude today's presentation. Thank you for your participation. You may now disconnect.