Please standby, we’re about to begin. Thank you, and welcome to GameStop’s Fourth Quarter Fiscal 2017 Earnings Conference Call. This conference call will include forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Any such statement should be considered in conjunction with cautionary statements in the earnings release and risk factors discussed in reports filed with the SEC. GameStop assumes no obligation to update any of these forward-looking statements or information. A reconciliation and other information regarding non-GAAP financial measures discussed on the call can be found in the company’s earnings release issued earlier today, as well as in the Investor section of the company’s website. Now, I would like to turn the call over to the company’s CEO, Mike Mauler. Please go ahead, sir.

Good afternoon, and welcome to GameStop’s fourth quarter 2017 earnings call. With me today is Rob Lloyd, our CFO; Dan Kaufman, our EVP and Chief Legal and Administrative Officer; Troy Crawford, our SVP and Chief Accounting Officer; and Jason Ellis, our President of Technology Brands. It’s great to be with you today and we appreciate you taking the time to join us as we discuss our fourth quarter and full-year results and objectives for 2018. This is my first time to address you on an earnings call as GameStop CEO, and I’m honored by the support and confidence the Board of Directors and our associates have placed in me and look forward to leading GameStop into the future. This company has tremendous - a tremendous legacy of continually evolving to meet the needs of our global customer base and changing industry dynamics. And I expect to build on that by leveraging the innovative thinking and resourcefulness of our culture that I’ve experienced firsthand during my 16 years with the company. Before we discuss the results, I would like to start by addressing the passing of a good friend, Paul Raines. As you know, Paul stepped away from the business in November of 2017 to focus on his family and health. We had hoped that Paul would be able to rejoin the GameStop family, but unfortunately, his battle proved to be too much. He was an integral part of our company in a truly inspirational and compassionate leader. I hope those of you on the call today are some of the many people with Paul touched during his life’s journey and are saddened by his loss and mourn with us. Now I would like to transition to our results for 2017 and our outlook for 2018. Our fourth quarter revenues increased…

Thank you, Mike. Good afternoon. I’ll start today by taking you through a review of our fourth quarter and full-year 2017 results, and then share with you our outlook for 2018. Looking back on the year, total sales exceeded the guidance we issued coming into the year and we delivered adjusted earnings per diluted share near the high-end of the annual guidance range we provided at the start of the year and maintained throughout the year. From a top line perspective for the quarter, total sales increased 15% and we delivered a 12% increase in comp sales. In the U.S., comps increased 14% and international comps increased 8%. For fiscal 2017, total sales increased 7% and we delivered a nearly 6% increase in comps. In the U.S., comps increased 4%, while international comps increased 9%. Fiscal 2017 contained a 53rd-week, which accounted for approximately $143 million in sales. Our video game business was strong in the fourth quarter and throughout the year, largely driven by the success of the Nintendo Switch. This innovative console was the largest contributor to our comp sales growth and drove a 45% increase in hardware sales for the quarter and a 28% increase for the year. Software sales increased 12% in the quarter and nearly 4% for the year. Call of Duty was an increase of more than 36% over 2016, was the best selling title for both the quarter and the year. Star Wars Battlefront II was the second best seller for the quarter, while Nintendo Switch titles were also strong and contributed to the growth throughout the year. Our pre-owned business performed in line with our expectations declining nearly 3% in the quarter and 5% for the full-year. Given the relative newness of the Nintendo Switch, it’s important to point out that it…

[Operator Instructions] Our first question will come from Colin Sebastian with Robert W. Baird.

Thanks for taking my questions and Mike, glad to have you.

Thank you.

So I guess, first off, in your commentary on focus and operational excellence, I wonder if you could identify or go into more detail, I guess, into some of the specific areas of opportunity that you see for the company that show improvement over the year? And then secondly, on - maybe this is Rob, maybe on the gross margins for pre-owned. You talked about greater or more focus on advertising there. I assume promotion is also and better than that relative to the decline in gross margin expected?. And I have one follow-up. Thanks.

Okay. Yes, in terms of focusing on the fundamentals and we talked about what drove last year’s results and some of the opportunities that we have within all three of our businesses, we need to expand our customer demographics. And when we stretch - when we develop that strategy, we need to change the shopability of our stores to be more at a better value proposition to moms and families, for example. We need to expand our range of cool and relevant products and the type of merchandise we sell. So when we bring in these new customers that we can - once we get them into the GameStop ecosystem that we can market other products to them. And tied along with that, when you do a better job at the value proposition from our loyalty program, right now it’s very focused on video games and there’s an opportunity for us to have that more focused on collectibles and these new customer demographics. On the pre-owned side, I mentioned a number of things that we’re focused on in terms of increasing trade penetration. It’s amazing like 30% of our customers are actually trade-in games. And so we’ve got a market to those customers aren’t trading in games and we’ve got to improve our - and making it top of mind in the stores, we are sales associates, which has to do with training them better on pre-owned sales and trades, and also making sure we have the right KPIs to make that happen. We’d like to make more investments in our omnichannel business experience. So that we can drive more sales online, as well as different channels like order online, pick up in store or order in store and have it sent to your house. And finally, it’s really around the circle of life performance. I think, there’s a number of things we can do to drive the increases in new release reservations and have that tied to trade and promotions to drive pre-owned sales making that more visible in our marketing. And finally, a better attach rate. Once we get these new customers into our stores and expand that demographic making sure that we’re increasing average transaction value through warranties an accessories. So those are just some examples of the areas that we would want to focus on.

Colin, in terms of the gross margin on pre-owned, I think, part of what you will see is that, we’ll have more promotional activity designed to incent, not only the existing power of customers that we’ve traditionally reached through our marketing efforts to bring their trades in and buy pre-owned, but that expanded customer base that Mike just talked about the moms and the families how do we get them? One, aware of the fact that we take trades. And then two, how do we get them participating in the process. So we do expect to be more promotional as well.

Thank you. And my follow-up, I guess is, since you’re not planning to accelerate the pace of sort of the store rationalization. I wonder, if you foresee a change in the format within the stores, for example, in Europe having a half of the store proportionate to collectibles and the other remainder to the games. If there’s some vision you have in terms of stores looking like that, any details would be appreciated? Thanks.

Sure. Converting our stores where appropriate to hybrids and the new model, we’ve gotten a lot of feedback outside of the core gamers that our stores can be a little disorganized or confusing for somebody that really doesn’t normally purchase video games or collectibles. And so what we’ve done in Europe, we talked about in the past, and in Australia, is convert a lot of these stores to be more open, organized, more friendly to that demographic. And so we’re looking at doing the same thing in the U.S. Now there’s a key difference in the execution of that between the different markets. Outside of the U.S., about 90% of our stores are mall-based. And mall-based - the malls are healthy outside of the U.S. and only about 10% of our stores are street stores or strip stores. In the U.S., it’s reverse. So about 90% of our stores are actually strip malls. And so the difference then - the strategy is the same. And what we’re trying to do with that customer base is the same, but the execution of it has to be different. And just to give you an example, if I go into a mall store and change the window and the signage and put collectibles in the front, I have an immediate impact on the traffic in that mall that’s walking by that store. In a strip mall, it’s more of a destination store. So we’ve got to figure out a better way to communicate to these customers that we have a new value proposition. We have new products. It’s relevant, it’s cool and get them into our ecosystem. And so there’s a number of different tests that will be underway this spring to look at different ways of doing that, both in terms of store design and the marketing. And then based on that, we’ll invest in expanding those - in the concept that works.

Colin, let me just address the pace of closures in the stores. What we found is we moved through about six years of actively working to close stores using the power of program, transfer sales to other nearby stores is that, we were operating at about a max level of store profitability of, call it, $50,000 to be a candidate for closure. So anything below $50,000, we would look hard at closing the stores. And as we move through the years and actually maintained profitability in that store base and remarkably well, we’re finding that to close the same rough number of stores or percentage of stores we’d have to drift to that store profitability up to $75,000, and it’s just not as compelling on the economics to do that. So where the opportunities exist to close those marginally profitable stores, we will continue to do so. We just don’t see that that is at a great a level on an annual basis as we’ve seen in the past.

Great. Thanks, guys.

Our next question will come from Brian Nagel with Oppenheimer.

Hi, good afternoon.

Well, Brian.

Congratulations on your new role, Mike.

Thank you.

So I’ve got a couple of questions. First off, with regard to the tech brands and the change you made here, you mentioned the change in compensation structure. Can you just go a little more detail as to what that actually means, and the both the near and the longer-term implications for that business given this change in AT&T? Thanks.

Sure. I just want to start off with, I’ll say it again. The AT&T is a really good partner for us. We have a great relationship, and we’re working closely with them to change the compensation plan, so that it’s a win-win. They would like us to expand. We would like to obviously have a profitable business. And I - so I think, we both have goals that tie together. And I’m confident, we’re going to be able to make some improvements in that area. And maybe, Jason, you could kind of take it from there.

Yes. So Brian, last year, AT&T made some changes to the compensation, how they reward us for activating customers in our retail stores. And I think well intended to move more of that compensation towards the entertainment category, which is obviously where they’ve made some large investments. And quite honestly, whether it was through sales execution or the macro category, we didn’t get the traction in entertainment sales like we would have hoped. So we’re back at the table with AT&T. As Mike has indicated, they want us to be a healthy distribution partner. Obviously, this business has the potential to really provide great returns it has historically with the exception of last year. So we think that we’re optimistic that we’re at the table with them and we’re going to get something that will produce longer-term results.

So, Jason, is there any idea or do you see anything with regard to timing of these negotiations?

Yes, I would say, Brian, they’re active, and we expect that something will happen in 2018 and we’re hopeful that it’ll happen sooner than later. As Rob mentioned, I think, the first quarter will be the toughest for us to comp, but then we’ll get to the back side of that if we can reach some reasonable terms with AT&T then I think the second-half will look really good for us.

Got it. And my second question is Rob, you’d mentioned in your prepared comments, you were talking about the pre-owned business that some - I guess, some efforts you put forth in Europe in success there. So maybe you can elaborate a little bit more on that and how that may translate to what you could do in the United States also in timing around any of those initiatives?

So what we saw in Europe, I’d say that the largest thing that we did was we ran some very targeted PS4 promotions around trading in an old PS4 to get the PS4 Pro. Those were funded in part by Sony to help protect our margins and they were highly, highly successful. We ran them in the spring and they were much more successful than either party anticipated it helped to drive our market share and it kept us pretty well stocked on PS4 inventory on the pre-owned side on the hardware for quite a while. We ran those that kind of promo, again, in the holiday season. I think, both Sony and GameStop were a little more focused on where we were and put the outer limits of the test, again, we were pleased with that. So as we look back on the results across the year for Europe, what we’re seeing is that the hardware pace was different than it was in the U.S. That in turn translated to the software pace as well. There was an investment made in the margin in order to drive that promotion, but it changed the dynamics of that business a bit for us. And so we’re going to look and how we can employ that in other markets as well just recognizing that running the same old playbook that we’ve been doing inside the U.S. hasn’t been working for us as we’ve seen declines in pre-owned overall. So that’s really what we’re talking about.

Got it. Thank you. And then one more if I could slip it in. With regard to the Switch included that was a big - the Switch, it’s always a big sales driver here in 2017. Should we - as we look out and see basically how this Switch, I guess, the switch phenomena continues to evolve? Would it be similar to other platforms where over time you get a better and better attachment rate just because you have this installed base of hardware?

Yes, I think that’s a fair question with Nintendo. I mean, we know kind of what happened with EU. I’d say, this is definitely a whole different platform that we saw in the past. We have visibility to the software. So last year was a tremendous year for the software, as well as hardware between Zelda and Mario Odyssey and all the games that they had really drove a lot of hardware sales, as well as software. I think this year when we look at the slate of titles many of which have been announced yet, this year looks also very, very strong. So I think, at least, for 2018, we’ll continue to see the strong software slate drive additional installed base on the hardware increasing past rate. We don’t have really visibility for 2019 yet, but for 2018 it should play out that way.

Got it. Thank you.

[Operator Instructions] Our next question will come from Curtis Nagle with Bank of America Merrill Lynch.

Great. Thanks very much for taking the question. So I guess, the first one, could you guys if possible talk a little bit about the balance between gross margin SG&A this year? Just kind of looking at recent trends and some of your comments on what I think the segments are going to do this year, I think, it implies that SG&A dollar growth would be fairly minimal. Is that the right way to think about it?

Well, I start with certainly, SG&A reduction is part of our strategy. That was one of the drivers of some of the restructuring we’ve done already this year. And I think, we’ll see additional focus that - we talked about focusing on the fundamentals and the basics. One of the fundamentals is to make sure that you’re controlling and reducing costs. And so that will be an important part of our strategy. I think, maybe Rob, you could probably talk to that in a little more detail.

Yes. So if you look at just the raw dollars year-over-year, we talked about the forecasted decline in revenues and comps. Obviously, that would contribute to a lower gross profit level. But that 53rd-week is a component there, the amount I stated in my script was $43 million of margin from that 53rd-week. So we do expect to see that, we would have a related decline in gross margin. But we would also see through SG&A focus and that 53rd-week, we would expect to see some decline in SG&A as well.

Got it. And then just as a follow-up. Extra week, where did new segment sales trend for 4Q?

We’re going to have to get back to you on that. I don’t have that number in front of me.

Okay. And I’ll just pop maybe one more, just it looks like both inventory and tables were up pretty significantly more or less in balance. Just curious what was going on there?

Well, to a large degree what you saw in the inventory side of the equation was that, we had a pretty sizable increase in our collectible sales for the year. So there was an increase in the collectibles inventory to support that sales growth. We also had increase in the inventory to support hardware and software sales as well. In terms of the accounts payable, that was up basically in greater proportion I believe than the inventory was. Some of the timing with respect to the accounts payable had to do with purchases of hardware. We generally get shorter payment terms on hardware and we were pretty well in stock on a couple of the consoles at the end of the year.

Okay, thanks very much.

Our next question comes from Joe Feldman with Telsey Advisory Group.

Hi. Good afternoon, guys. Thanks for taking the question.

Sure.

I wanted to ask, on the collectibles business, I know you guys mentioned and have been expanding space within a store. Do you have a sense of how much that expanded space without the year-over-year, I guess, if you think about the stores in aggregate?

We’re - I don’t believe is that something we’ll have to get back to you on, I would think, in terms of the exact amount of space increases, I know in Europe, we took quite a few of our stores, maybe more than 50% to a 50-50 model. I think in the U.S., we’re really just starting out with that. And so while we did dosome expansion, it wasn’t there as aggressive and that’s something we’re still continuing to look at for this year.

I believe the overall came in at about an increase from about 8 linear feet in - at the end of 2016 to about 2015 on average across the portfolio.

Got it. Okay, thank you. And then another question, just to stay on the collectibles theme for a minute. What - can you share any maybe the upcoming licenses maybe in 2018 that gives you some confidence in driving the business there? And also wanted to kind of understand if there’s any type of products, I know, within collectibles, there’s a lot of different categories that you guys sell and that people seek out. But is there any trend around a certain category or two, and then also the licenses like I said? Thanks.

Sure. I think, we’re seeing very strong growth with some of the video game licenses. Overwatch is a really good example of that. We’re seeing strong growth with Fortnite. I think Black Panther did well for us globally. The movie was quite a blockbuster and the license merchandise did really, really well. In terms of the categories Funko is - Funko Pop! Vinyls are our most popular category, and we’ve been working very hard with Funko to get good exclusives that other retailers don’t carry. And we’re able to pre-sell those and they drive a lot of traffic when they watch. It’s almost like a new release. .:

That’s great. Thank you and good luck.

This is Rob…

Oh, yes.

Thank you, Joe. In response to that question Curtis asked, I didn’t have a data in front of me, it’s now been placed in front of me. Ex the 53rd-week, pre-owned would have been down 8% in the fourth quarter, 6% for the year, which is in line with the mid single-digit guidance we gave at the beginning of the year.

[Operator Instructions]

Okay. Well, thank you, everybody, for joining us this afternoon on our call. We look forward to speaking with you on our Q1 earnings call in May and providing you with more details on our strategy.