Welcome to GameStop’s Third Quarter 2019 Earnings Call. This call is being recorded and will be made available. I would now like to turn the call over to Eric Cerny, Investor Relations. Please go ahead.

Thank you, and welcome to GameStop’s third quarter fiscal 2019 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 the cautionary statements and the safe harbor statement 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 earnings release issued earlier today, as well as the Investors section of our website. With me today are GameStop’s, Chief Executive Officer, George Sherman; and Chief Financial Officer, Jim Bell. On today's call, George will share insight into our third fiscal quarter performance and updates regarding Gamestop's strategic framework for the future. Jim will then provide more detail on our financial results and expectations for the remainder of the year. Now, I would like to turn the call over to the company’s Chief Executive Officer, George Sherman.

Thank you. Good afternoon everyone, and thank you for joining us today on our third quarter earnings call. I want to begin today's call by first addressing our results during the quarter, their direct impact on our outlook for the remainder of this year and the trend we anticipate carrying into 2020. Simply put our top line results remains softer than original expectations and we believe they are a direct reflection of the overall industry. During the quarter in which NPD cited historically low sales. The near-term headwinds confirming the industry as we enter the final stages of the current Microsoft and Sony console cycles are having an outsized impact in our business given we are the alone specialty retailer in the space. It's important to keep in mind that this is not uniquely a GameStop issue. This is a console issue and consoles are the trigger point for our industry. With Generation nine consoles on the horizon set to bring excitement and significant innovation to the video game space, those anticipated releases in late 2020 are putting pressure on the current generation of consoles and related games, as consumers wait for new technology and publishers address their software delivery plans. NPD recently reported significant double-digit industry declines in new hard work for September and October. And as an industry leader, we're feeling that pressure more directly than others. Jim will get into the details of our results, but our sales of new hardware in the third quarter declined 46% versus the prior year quarter. While these were generally in line with the industry, they were well below our expectations. Looking ahead, we believe this trend will likely carry through our next several quarters until the launch of the next-generation consoles. At this stage, we've entered the commoditization phase of…

Thank you, George and good afternoon everyone. As George mentioned, we are disappointed in our results for the third quarter, which reflect the impact of topline challenges in the video gaming industry, primarily driven by where we are in the console cycle. The decline was more than we originally expected. It's the depth and breadth of the industry-wide slowdown, reflects a highly penetrated console market in earlier than usual announcement of upcoming console launches from manufacturers and the reluctance of OEMs to bring end of cycle discounts to the market. All of these factors are putting significant pressure on the volume of current generation products. There were a few bright spots, however, during the quarter, including solid growth in the Nintendo switch product line as well as continued positive gains within our collectibles business. However, these gains were simply not enough to offset the slowdown in both Sony and Microsoft product suites. As we work through the next several quarters and navigate what we believe is a consumer waiting for the next-generation of consoles, our greatest focus will continue to be on strengthening our business model to ensure we are positioned to optimize profit flow-through, when the next-generation of Microsoft and Sony consoles launched late in 2020. This includes continued focus on expense management through a portfolio optimization, rationalization of underperforming businesses and improved inventory management, all of which we believe will optimize already strong free cash flow. Before I get into our outlook for the year, I want to take a moment to recap the performance for the quarter. At a high level, our bottom line results were affected by noncash taxes in the quarter, which stems primarily from our relatively low level of taxable income, magnifying the volatility of our tax rate. And I'll get into that in…

Thank you. [Operator Instructions] We'll now take our first question from Stephanie Wissink through Jefferies. Please go ahead.

Hi, this is Ashley Helgans on for Stephanie Wissink. Thanks for taking our question. The SG&A ratio remains distorted versus sales even with the cost optimization program in place. How should we think about the phasing of savings going forward?

Yeah, I think -- hi, Ashley this is Jim. I think you can -- as we've talked about the vast majority of the savings you can see it in the third quarter this year versus last year but as it starts to annualize over the course of 2020, you're going to see obviously a better impact on an annualized basis. You're just really seeing a first full quarter of the effect in the third quarter this year.

Okay, great. That's helpful. And then if I could squeeze in one more. Just on the collectible margins were down year-over-year any reason for the change?

Yeah. Ashley it's George. We saw the need to work through some inventory that was not as productive as what's being brought in from a collectible standpoint. So it is the loan category that actually had margin rate go down and it was a very conscious effort on our part to move through some inventory.

I think this is also indicative of how we are focused on the inventory management and being able to take the decisive action on places where it makes sense for us to do it especially as we then manage our pipelines going forward.

Thank you. Thanks for the color. I’ll pass it off to someone else.

We'll now take our next question from Seth Sigman with Credit Suisse. Please go ahead.

Hi, this is Lavesh Hemnani on for Seth Sigman. Our first question is on free cash flow. I mean could you just talk about the components of free cash flow for the year? And how are you thinking about the levers to offset the lower earnings?

Yeah, I think it's very straightforward. I mean, the biggest driver of free cash flow from the perspective of us continuing to generate strong free cash flow is our focus on inventory management. And this is a critical factor as we continue to drive our inventory levels down, manage the way that we're buying inventory, manage way we're turning inventory over, manage the end-to-end life cycle really all the way through initial set, all the way through promo and markdown in terms of the product life cycle. That is how we really view the generation of free cash flow in this business and the main driver.

Got it. Just a follow-up on the cost reduction plans. Do you have any updated views on how the cost restructuring is progressing? And, I mean, are you able to find any incremental opportunities versus your prior plan? And related to that, in the short term, I mean, to what extent do you think this may be win on sales?

Let me start off with your question on cost. I think, we said 40% last time out, at the end of the last quarter and better than 50% of the way they're on the expense reduction side of the $200 million. So roughly half and half, $100 million from cost out and $1 million from things like gross profit expansion. We feel very good about this. I mean, again, it's a moving target. We continue to make progress on the cost that we see full visibility to getting that full $100 million out. And obviously, we understand that that flows straight to the bottom line. So if there's upside to be had, we'll certainly go pursue it.

I mean, are you seeing any impact on sales in the short-term from this?

Impact on the sales?

From the changes you're making. Yes. From the changes you're making within the store and rationalizing SKUs and particularly any other initiative that works for you?

Yes. I think, the best way to think about that is, related to the comments that I made, regarding the margin expansion. And really the impact of having a better foresight, having a better viewpoint in terms of SKU rationalization and the turnover of the inventory has allowed for margin expansion at the category level on virtually all video game categories. And we expect to continue to see that as we go forward, where we're really just starting to see the early fruits of that labor.

Obviously. Thank you.

You bet.

We'll now take our next question from Ray Stochel with Consumer Edge Research. Please go ahead.

Great. Thanks for taking my question. Can you discuss what you all are seeing from publicly available information on the next-gen console announcements? And how you think about that impacting your business in 2020 and beyond? A couple of key topics that we're talking about with investors is the fact that it has a disk drive, not as much of a jump in file size, some of the details around the solid state drives. And then, of course, subscription and even backwards compatibility. Thanks.

Yes. Ray, we know virtually the same thing you do. So we learn from the same basic sources. We're obviously thrilled that there's a disk drive in both consoles going forward. That's certainly very, very meaningful to our business. And I'd say that looking ahead, I mean, all those things combined, having the disc, presumably having a higher price point, although, we don't know that definitively as well, having other offers in place, even having subscription models, which we think we can play a role in, a role in selling, are all positive for us. We remain supremely confident in our bounce back in -- on or about November of next year. And I think there'll be a point next year we can almost name the date. I mean, that is going to have a profound impact on our business. We tend to over-index, early cycle, because the disc requires some level of education to the consumer. There's a choice to be made. There's functionality to explain. There's context to be given and that's where we excel. So that's why we're having good conversations with our vendor base. And certainly, that's why we're very bullish on what's going to happen with this company about 11 months from now.

Got it. Thanks. And then, is there any way that you could comment on the all-digital Xbox offers, how you think that SKU is performing in the market? And to the extent that you guys are talking to Microsoft about that SKU and the trade in deals that they've had around that SKU? Thanks.

Yes. As you know Ray, we brought it into the holiday season. We featured it on Black Friday and we moved the unit pretty well. Our team embraced it. And certainly we believe that we have to embrace digital options. And this is one of them. So, it obviously you can conclude that we found favorable terms to go ahead and pull this into our assortment and we're happy with the way it performed.

Great. Thanks, so much again guys.

Thank you.

We'll now take our next question from Curtis Nagel with Bank of America. Please go ahead.

Good evening. Thanks for taking the question. I guess, just the first one focused on the buyback. And I guess just why buy back so much stock when at the moment there's still so much uncertainty around the business and results continue to disappoint? I guess the point that there's a new cycle coming, but it's a year from now and a lot can happen from then to now or not to then? And why is it not in the best interest of the company to preserve cash?

Yes, Kurt, this is Jim. I think again we constantly evaluate what the optimum utilization of capital is and when we say optimal meaning, optimizing the returns for our shareholders. And that's a balance of maintaining appropriate levels of cash and strength of our balance sheet it involves the management of our debt ratios. It involves ultimately where we think is appropriate in a very metered way today in terms of any potential CapEx in the business but it also involves really being able to return capital to shareholders especially when we see depressed pricing in the marketplace that we've seen in our stock. Simply speaking, I think it's a view to the fact that we believe our stock is undervalued and we think that’s an appropriate and prudent use of capital to return that capital to our shareholders via the buyback. And I'm just going to reemphasize that last point. We buy back stock because we fundamentally believe that our stock is trading at a discount and we're very confident as to where our stock is headed given what's going to happen in 11 months. So we're very, very confident at that bounce back. We're very confident that all the work that's being done right now, around expense structure around margin structure is going to pay off in the form of profit flow-through when sales return and we're certainly going to.

Got it. And then just a follow-up. If you could just go through the parameters on 4Q. First on comps based year-to-date and the new guide, it looks like 4Q is guiding down around some moving over 20%. Is that right? And then the math gets a little funny in terms of profitability and kind of the share count, but I think the implied EBITDA is something around $150 million give or take in EBITDA is that right? And then just one more if I could follow up. What's the bridge between adjusted and non-adjusted free cash flow.

Yes. The primary bridge on this -- let me take the last one first. Everything you're saying in terms of some of your remodel taking in our on the on the call soilless the first part taking in our release and the comments soilless the first part taking in our release and the comments on the call are -- they're directionally accurate. Now, the second part of your question is -- I'm sorry repeat that the second part about...

Yes, just in terms of what's the dollar bridge between adjusted and unadjusted?

Yes we -- and again we've described this in the past. Last year, we had some late inventory that was related to the fourth quarter of 2018. That carried over $400 million of AP that got paid in the first week or two of fiscal 2019 from 2018. So just when we talk about adjusted free cash flow, it's really affecting that. It's was really related to 2018 inventory levels in the inventory buys. That's all. So it's a little over $400 million.

Okay. Terrific. Thanks very much.

You bet.

[Operator Instructions] We'll now take our next question from Joe Feldman with Telsey Advisory Group. Please go ahead.

Yeah. Hi, guys. Thanks for taking the question. I wanted to ask – I know we're talking about profitability improving and I know it's hard when you have sales coming down at this level. But can you – and you said you – I think you're 50% of the way on that cost savings can – where should we see that? I mean, I guess, I'm not quite seeing that in the model yet. And I'm curious as to – can you maybe highlight where that is showing up?

Yeah. The first part of it from a cost structure is really all in the SG&A. And that's – again, we're about 50% of the way there to the $100 million, roughly $100 million that we talked about on the cost side. You're starting to see a little bit in terms of some of the margin expansion components albeit there is some product mix effects in there as well. But this is really starting to – the main impact is in the cost side – the SG&A. And Joe let me add. I think you've got to look at the difference between in year and run rate. So when we talk about getting to $100 million of expense savings as part of our $200 million profit improvement plan that is run rate. So in your savings, you can correctly infer that the majority of what you're going to see in here in 2019 is going to come from some of the structural changes that we made towards the end of the summer. The rest of it's going to be forward-looking run rate contract changes. So it's a – you shouldn't be looking for $40 or $50 million just a subset that's in your savings.

So just to be clear that $200 million was a run rate exiting 2020 into 2021. So we – and that's the accumulation over the course of – of the time frame that we've been working on already, we'll continue to work on it throughout the course of the next handful of quarters.

Got it. Thanks. Okay. And then just a quick follow-up. You know that, I know you guys changed the loyalty program and there's a new tier for the pro. I guess just curious, how the response has been? And maybe with regard to sign-ups or the – and just the feedback you're getting?

Yeah. It's been terrific. Thanks for asking. I mean, the change is really meant to drive frequency of trips into the store. It is really built off the premise of some level of coupon every single month. During the year of membership, we were thrilled with the sign-up rates that we've seen since launching the program. So it's off to a nice start. Certainly, we leverage that over holiday Black Friday weekend. And we've seen very good progress on the program and just a great reception by the customer.

That's great. That's great. Thanks for the update. Thank you guys.

Thank you, Joe.

And there are no further questions. I'd now like to turn the call back over to Mr. George Sherman for closing remarks.

Thank you. Thanks very much for joining us today. We appreciate everyone's continued interest in GameStop. I want to again take the opportunity to thank our teams for their hard work during this -- the hardest season of the year for our teams especially at weekends like Blackfriday, Cyber Monday all the time in the effort they put in. I want to thank them for everything they do to make our year of success for holiday 2019 a success. As a management team, we continue to work with a sense of urgency to improve the business model and position GameStop for long-term success. We appreciate all the support of our stakeholders as we transition to the future. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.