Good morning and welcome to GameStop Corporation's second quarter results conference call. (Operator Instructions) I would like to remind you that this call is being 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 Dick Fontaine, Chairman and Chief Executive Officer of GameStop Corporation. Please go ahead, sir.

Thank you and good morning, and welcome to GameStop's 2007 second quarter conference call. I am Dick Fontaine, GameStop's Chairman and CEO. With me today are Dan DeMatteo, our Vice-Chairman and COO; Steve Morgan, our President; and David Carlson, our Executive VP and Chief Financial Officer. This morning we released our second quarter numbers which were again, very outstanding. In fact, this was the best second quarter we have ever had for GameStop, and together with the strong first quarter previously reported, makes a record for the first half of our company. From a sales, earnings, expense control, inventory control, cash flow, and rapid growth perspective, we are executing the GameStop new and used model better than ever, and we intend to continue to capitalize on the robust trends within the videogame industry worldwide. During our 2006 year end conference call, I stated that we were heading into a cycle within cycles that in total would be wider, deeper and longer than anything the industry had previously experienced. Our second quarter results certainly have reinforced that forecast. The incredible acceptance of the Wii and DS Lite platforms, coupled with the emergence of what could almost be considered a new category – non-game games such as Guitar Hero, SingStar, Boogie, et cetera -- has not only attracted more customers, but we are seeing an increasing number of young girls and women in our demographic as well. It seems like every week there is a news story about video games. One week a Wii story about systems in retirement homes to get the elderly active, another about Wii being used to help certain rehab patients with their physical therapy recovery, and the entertainment pages in the online sites are beginning to profile a growing cadre of faux guitar heroes. Not only is…

Before the market opened today, we released our sales and earnings results for the second quarter of fiscal 2007. GameStop sales for the second quarter increased 39% to $1.34 billion as compared to $963 million in the prior-year quarter. Comparable store sales for the second quarter increased 29.1%, far more than originally anticipated, due to strong industry fundamentals in all geographical regions. Videogame hardware grew 87% during the quarter, and videogame software grew at a surprisingly strong rate of nearly 50%. Pokemon Diamond and Pearl, Guitar Hero II, NCAA Football '08, Mario Party 8, and Forza Motorsport 2 topped the list of best-selling games for the quarter. Net earnings for the quarter grew 586% to $21.8 million, including debt retirement costs of $1.3 million, far exceeding last year's second quarter net earnings of $3.2 million. Diluted earnings per share for the quarter were $0.13, including $0.01 per diluted share of debt retirement costs. These results were $0.06 per share higher than the high end of our guidance issued in mid-May. Gross margins declined year-over-year in the quarter, due primarily to the higher mix of lower-margin hardware related to the strong sell-through of next-generation systems and as we mentioned in the first quarter, to a planned increase in the amount of co-op income that was spent on brand advertising. As Dick said, SG&A leverage improved from the prior-year quarter by 450 basis points. This leverage came primarily from the strong comp sales, continued efficiencies from refining our business model, and to a lesser degree the closing of the EB Games Pennsylvania general office and distribution center in May of last year. As such, we were able to grow operating margins by 110 basis points during the quarter. We also issued updated guidance for both the third quarter of fiscal 2007 and…

Thanks, Dave and good morning. As previously mentioned, the second quarter was a tremendous success and with a wide breadth of products driving our sales. One item I would like to dwell on for a minute is the hardware sales percentage in the quarter, at 22%, a record for a summer quarter. This means that the all-important installed base of players is growing at an all-time high, and given the systems that are selling, the base continues to get even broader. First we have the Nintendo Wii that continues to sell out almost immediately after being received in our stores. Supply still can't match demand, unbelievable nine months after launch. The price reduction on the PS3 has doubled our sales from the prior sales rate, and this sell-through has continued for weeks now. Even in its seventh year, as Dick mentioned, the PS2 continues to grow the installed base of budget- minded consumers. I believe sales in units were only down 17% in the quarter, and that with the new PS3 in the system. On the Xbox front, sales of all three of the consoles including the new Xbox Elite have nearly doubled since Microsoft cut prices. Handheld system sales also had a great quarter led by the Nintendo DS Lite, which is now pretty much in stock. Also our data shows that PSP hardware sales have increased over 50% from last year's second quarter, due to the price reduction. This has caused such demand for the PSP that supply has not caught up. We expect that will abate in September with the introduction of several new PSP SKUs. Repeating what Dave said, new video game software sales were very strong with a lineup that sold to a broad base of players. First, Pokemon Diamond and Pearl for Nintendo DS…

Your first question comes from Arvind Bhatia – Stern Agee. Arvind Bhatia – Stern Agee: First question, you mentioned GTA. I just would like to get some more color on the shift in terms of numbers that might have caused -- you obviously raised your guidance for the year, but just give us some more perspective on how you view the shift into next year. Some would argue that it might actually be a positive given you will have a larger installed base to sell into. So just give us your perspective there, and then just I have a follow-up question.

We really believe that the games that are coming out in the third and fourth quarter will make up the majority of any missed GTA sales. Games like Call of Duty and Mass Effect and Assassin's Creed will probably pick up because of the slip of Grand Theft Auto. In addition to that, I think in our forecast we probably did not originally forecast the strength of the Wii or the DS in the second half, so that will pick up some of it as well. So because of the slip, we did not change our second half forecast at all.

As a matter of fact, one of the things that we were a bit concerned about is that we see a very high overlap in the core gamer segment of 360 users and users also of the Grand Theft Auto 4. So one of our concerns was that with the price points being up there and the out-of-pocket for both of those at the same time, something in the order of $120 to $160, it would be very difficult for those players to come up with both games. By spreading these out, getting one in September of this quarter and another early in '08, I actually think is beneficial to us in the long run. Arvind Bhatia – Stern Agee: Just a quick follow-up on the Wii and the DS. You mentioned that overall the company has continued to gain market share. I was wondering if you can speak to the Nintendo platforms. As you all know, you picked up some share there as well, but give us some perspective on you gaining a disproportionate share on the Wii and DS because that is where it looks like some of the strength is coming from. Because I remember back in the last cycle, you know, the Cube wasn't as much a big deal and the handheld as well for GameStop in particular.

Our market share with Nintendo has continuously increased year over year over year for the last four or five years. I don't know that we are getting a disproportionate share. I think we are getting a fair share given the size of the company we are, and the tie ratios that we produce for Nintendo which, of course, are the best in the country. So I think that we've worked well with them in building our market share, and our market share has continuously increased and we expect that to continue.

Your next question comes from Colin Sebastian - Lazard Capital Markets.

First on the used business, could you talk about how that is trending relative to your expectations in terms of growth and margin, and what we should expect there over the remainder of the year?

First in terms of sales, we had 16% sales increase in the quarter which we consider good, considering that new games grew 50%. As we have often discussed, used video game sales will never increase like new video game sales and are more steady in their growth rates. On the margin rate, our used margin rate in this quarter was impacted by increased spending on refurbishment. We have intentionally been ramping up our capabilities to fix next-generation hardware and handheld systems and instructing our stores to intentionally buy back defective units. As a result, we have doubled our refurbished hardware production over the prior-year quarter. Our used game sales benefited in Q2 and will again benefit in Q3 because of this refurbishment activity. This is intentional on our part because, as you all know, the margins on new video game hardware is very slight, and our margins on refurbished hardware is much greater.

Dick, you mentioned in your comment some of the shift to more casual titles such as Boogie, and I am wondering if you think you will be able to maintain your share of software if more of the market shifts that way? Thank you.

Well that certainly is a very positive challenge that we have. As you know, the business was built predominately serving the core gamers. More and more really over the last two years, we have begun to shift our marketing efforts, our trade efforts and also our display and merchandising efforts to draw in more of the casual customer, the mom-and-pop shopper as well. We will this year be challenged to do even a better job in terms of store layout, merchandising in our stores. As a matter of fact, it is going to be one of the challenges that Steve Morgan, our President, has been taking on. I am very confident that our stores will be set up better than they ever have, which will give us along with the marketing that we intend to do, a very strong position in terms of drawing in that new customer. Steve, you may want to just make a comment or two about what you intend to do.

The stores have been retooled to maximize space and to ensure the ease of shopping and a great customer experience with products larger than they have ever been, leading the way with the Guitar Hero and the Halo 3 Legendary, you can well imagine that the new platforms of Wii and PS3 have been well assimilated into our model layout as well. New higher capacity fixturing, both on wall and floor have been utilized and the store staffing has, in the all-important key holiday period, been increased substantially in order to accommodate the anticipated increase in business. All in all, well set to serve every customer that comes through our doors.

We will also at our upcoming September conference where we will have all of our managers together for really a preholiday kick-off, a large portion of our presentation, our training, our work, will be in making absolutely sure that we are putting the best possible foot forward to attract these new customers and do a better job of serving them. We find that so many of our core customers are very familiar with our people, very familiar with our offerings, and where we really need to spend our time and effort is making sure those new customers get as good an experience in GameStop as our core customers. So it is a great challenge to have. We think we are up to it. If you look at the increasing share that we are getting from the Wii and the Nintendo product as a whole and how we are selling out, the evidence would indicate that more people are finding their way in and indeed they like the GameStop experience.

Your next question comes from Tony Gikas - Piper Jaffray.

It looks like pricing has been holding up very well, consumer acceptance of these higher price points has been terrific and likely will through the end of the year. What are your thoughts on pricing for next year? Second quick one, on Grand Theft Auto, how were the pre-orders tracking? Were they in line with your expectations or could they have been a little soft to begin with?

On the pricing, yes, we think the $59.99 will hold up this year. I haven't given it a whole lot of thought about next year, but I can't imagine if it holds up this year what would be magical about why it wouldn't hold up for quality, A+ titles next year. So, you know, I believe it probably would. On the Grand Theft Auto question, yes, I think reservations were meeting our expectations. Am I correct, Dave?

Right, although our expectations may be lower than what the markets were because of the low installed base we have both on PS3 and on Xbox 360. I think some people think that it would have done as many as the last version and that couldn't possibly happen with the installed bases we are looking at.

Your next question comes from Ben Schachter - UBS.

Longer term, can you give us some ideas of where you think the real leverage drivers are? And then also given your long experience in the industry, what are your thoughts on the idea around potentially softening consumer, some of the macro issues; how has that impacted in the past and any data points in the past, or just from your experience what you think may happen there? Thanks.

Well, let me take on the macro issue. First of all, we don't think that as well as the business is running we necessarily are totally untouched by macroeconomic conditions. But the truth of the matter is we think we are going to be affected far less. A couple of generalities to give you that would point to that, we have taken a very close look at market segments where we do business. Particularly, one of the first things that we thought we might see is a slight softening in our sales in the tertiary markets where the cost of gasoline would have an impact in how frequently you are going to be able to travel into these stores, usually stores that are anchored by a Target or a Costco or a Super Wal-Mart. At least during the quarter and it looks like year-to-date as well, that has not been the case. What we are finding is those stores are holding up very well, and indeed the last quarter on a comp basis we're slightly better than the group as a whole. So not to say we will never have an impact, but it looks in that regard like it is holding up extremely well. The second thing is that historically, going way back to the start of our business and looking at other businesses, if the economy tends to get tight, one of the last things that people tend to give up on is entertainment and particularly, if it is value entertainment in the home, it seems like that segment holds up better than many, many others. Then the third thing that I had mentioned because of the used model that we have, we really deliver outstanding value at lower price points. So I think we are as well-positioned as any company might be. So in that sense, we are not anticipating nor are we forecasting that we are going to take any unusual hits if we continue to get a bit of a rocky economy and some shaky economic news.

On your question on the leverage drivers, I thought of three things that could definitely help us with leverage. In the US as we open more stores, we will be able to leverage both our general office and warehouse facilities as we continue to open stores there. Internationally, you have two really big leverage items. One in Europe as we continue to open stores, we have very immature stores there and we have a plethora of general offices to support those. So as we continue to open stores in Europe, we will get the same leverage as we would in the US. In the used business internationally as well, as the used business continues to grow in each of the international countries and catch up with the used business percentage that we see in the U.S., we will get some leverage there as well. So those are the three I thought of.

Your next question comes from Bill Armstrong - C.L. King & Associates. Bill Armstrong - C.L. King & Associates: Can you talk about the PS3 price cuts and the impact on Q2 sales, and what you see the impact is going forward?

The PS3 price cut, let's see, it doubled our sales from the prior sales rate, and I think that price cut was when, in July?

Yes.

So it was July, and that doubling has maintained through last week. So we have seen roughly a doubling. As I mentioned, we have two key driver titles for the PS3 coming out, both are in September : Lair and Heavenly Sword, and both of those are proprietary to the PS3 platform, and we think that is going to help drive sales on that platform. Bill Armstrong - C.L. King & Associates: When you say they doubled, you are talking about unit volume?

Unit volume doubled, yes. Bill Armstrong - C.L. King & Associates: Could you update us on the name plate conversion going from EB Games to GameStop?

As I mentioned, we're 75% complete. We believe we will be complete in all allowable stores by the end of the third quarter. There are some malls that may not want us to have two GameStops in the same store, so basically, we are saying we are done except for some stragglers by the end of the third quarter. Bill Armstrong - C.L. King & Associates: You will probably recall back, I think it was in the fourth quarter of 2003, both GameStop and Electronics Boutique which was independent at that time did have some definite sales turbulence as consumer spending was kind of slow in that holiday season. It did pick up later on, but there definitely seemed to be some slowdown, especially in the non-core gamers as I recall. Could you just maybe talk about how your business model has evolved since then that would maybe mitigate or completely eliminate any potential impact of another slowdown in general consumer spending?

My memory, Christmas of 2002, I am pretty sure of that and my memory has a shortage of, a severe shortage of the PS2. And if I remember also right, we said that was the Christmas that we moved a lot of consumers from video games to the iPod, because the PS2 was in such short supply that a lot of people went over to that. So I am pretty sure it was a shortage.

2002 also had a contraction in the number of weeks between Thanksgiving and Christmas, which is similar to this year. So that was another factor in 2002, but our memories are probably starting to fade a little bit from that long ago.

The other thing to keep in mind is that so much has really changed within the company over the years is that during the 2002 period, in particular when we were two separate companies, if you will, we were both probably a lot more dependent on mall traffic. The fact of the matter is that as I mentioned in my comments is that we are now very diverse, not only in terms of the countries that we do business but in the strips and the malls and the CDD stores and the like. If there is an economic downturn going into the fourth quarter and the business tends to be relatively soft, it is usually felt in the early weeks of December and it is usually felt in the malls, and then they close very, very strong the last seven to ten days. That is always a possibility, but again this year because of the diversity of where our locations are, we expect that that would impact us less.

Your next question comes from Mike Hickey - Janco Partners.

Just a question on how your used game business for next gen is tracking, and do you expect any sort of transitional issues between prior consoles and next-gen consoles as you look to grow that business? Second question, are you guys going to maintain your gross margin expectations for the year? If I remember right, I think you're looking for a decline of 50 to 100 basis points. The third question, if you would, obviously you've used your cash to reduce a lot of debt. I'm expecting you want to keep some of that on to benefit from the leverage. How do you expect to use your cash moving forward?

Well, let me take the gross margin guidance first. We had said we thought that full year gross margin was going to decrease between 75 and 100 basis points. I believe we said that two quarters ago. At this point, I believe with the hardware selling much better than we had anticipated in all of the categories from Xbox to Wii to PS, I think what we are probably looking at is that our gross margin will decrease between 100 and 125 basis points for the year. That will be picked up by the SG&A leverage, and we probably will end up with an operating margin between 10 and 20 basis points higher than last year. That all fits in with the guidance that we just released.

This is Dan talking about the used business and the next-generation hardware. I can speak to the 360, the 360 because it has been out now this is its second year, almost full second year. We do have good supply of used 360 games. PS3 and Wii we have less of because, of course, it is only six or seven months old and people are still playing many of those games. But I would just say that we are on track for building the use business in the next-gen as we've built businesses in the past.

Your cash, how are you guys going to use that moving forward?

Well, as you know, we have used a lot of cash this year to pay down debt. In addition, we will be paying down $120 million of the notes on October 1st. We also have a $12 million note we will pay back on October 1st, which will pretty much be the use of our cash for this year. Starting next year after Christmas, we will have to start rethinking what exactly we want to do with our excess cash. Obviously, we will want to expand, use it for capital expenditures, potential acquisitions. But after those, we may pay down more debt or we may look at other equity type items, but it is all up for discussion at this point with the board.

We still view this business as a rapid growth business, and we look at the model that we have created here and, as I said, beginning to work it better and better. Being in a very strong cash position is going to give us more options in the future. So we will, as David indicated, certainly get to the end of the year and have a good discussion about that with the board. But we intend to be very flexible in terms of which way we can move, and we think that there are many more opportunities out there for GameStop, and we intend to be in a position to pursue any and all of them that make sense.

On the Wii, obviously the demand is outstripping supply, we have heard that since its release. How is the supply flowing into the stores and how is it ramping and how do you expect it to ramp into the holiday period?

I don't have the schedule directly in front of me, but the supply has ramped on a weekly basis week over week throughout the second quarter, mostly ever increasing. In addition, we have been getting a shipment every week, and every week we get the shipment and we ship the products to the stores. I expect it to slow down, and it never does. So I just don't know where the demand is. There is a schedule that we have in front of us, I think it is a tentative one that was given to us, and we are working through that right now. So I think if you ask me, the Wii is going to be in short supply throughout the year.

Your next question comes from David Magee - SunTrust Robinson Humphrey.

A two-part question if you will. One is, given the success that Wii and I guess the PS3 performing better of late, what is your latest thinking regarding the overall installed base growing this year? Do you have any preliminary thoughts as far as next year at this point?

Our installed base numbers at the beginning of the year, I don't think we have changed our thought process on most of the platforms. The Wii number we had given out, I believe we had said 3 million to 3.5 million, obviously is probably low. We said that at the beginning of the call that our Wii and DS numbers that we projected are a little bit under what we are experiencing. But I believe our PS2, PS3 and Xbox projections are pretty much in line where we think they are going to end up. So we are pretty happy with those at this point.

Secondly, I know you have been trying to have more sophisticated marketing in place this year and elevate the brand name and line awareness. What of your various efforts are you most pleased with regard to marketing, and how do you gauge the success of that?

Well, the first thing I would say, David, is as you know and we've mentioned this for a period of time, being out there with multiple brands as we were coming out of the EB merger pretty much precluded us from doing any national single brand advertising. We have gotten to the point now that with the Madden release, we were able to for the first time do national brand advertising. So for me, that is a very seminal point where for the first time ever, we can begin to talk in a national media forum of GameStop. Our feedback indicates that those ad campaigns have been extremely successful, which will lead us into being able to think much more globally in terms of our brand building. So if you were asking for a single point, it would certainly be the launch of the national Madden campaign. We did extremely well with the titles in all platforms, and we have to give some real credit to that national campaign.

Your next question comes from Edward Williams - BMO Capital Markets.

Just a couple of questions on the international market. Can you just give us some color as to how significant Europe was specifically in the quarter, what your comps were like there and what you expect out of the European market as far as the year is concerned? Also, what profitability you are seeing in Europe relative to the company average? Then if you can give us a little bit more color about the used opportunity outside of the US market and kind of rank Canada, Australia, and Europe in terms of expansion opportunity and how they compare to the US market.

Well that's a lot of data points wrapped up in a single question, but I think fair questions at that. First of all, I would repeat that it was an extremely strong quarter for all of our business segments. Specifically dealing with Europe, and I don't have that immediately in front of us, I believe the comp we experienced in Europe was much higher than the overall comp. It's a more immature market. It grew faster. We were extremely satisfied with the results. We are in a position where what we are seeing there is continued growth literally in every country that we do business. Our used business, which was another part of your question, actually coming again from a lower base, grew faster than our US used business which we would have expected. The model is again more immature there, which gives us much more growth and upside opportunity, and indeed we are experiencing that. So as that continues to grow and we think will follow the course as we were building the business in the US, we would anticipate the strengthening of the model and, therefore, the strengthening of the margin relative to the mix in the European countries. Net-net, we are extremely satisfied with Europe and indeed with the entire international operations for the quarter.

Ed, when the 10-Q comes out, you'll be able to see profitability by segment. So we are just not quite ready to talk about that.

Your next question comes from Tony Wible -Citi.

I was hoping we could stay on the international side, and is there any opportunity to gain market share in the UK in light of the issues I guess Game Group is having with the Game Station merger?

All I would say is that relative to somewhat our use of cash is that we want to stay flexible if any opportunities come up for us to make any sizable move in any of the markets that we have looked at. You are referring to the fact that the Game acquisition of Game Station has been referred to the competition committee from the OFT. We really don't know where that is going to go. As we understand, that will take a number of months to play out. We would certainly state that if an opportunity arose, we would definitely have an interest, but it will be up to the regulatory authorities in the United Kingdom to determine if we, or anybody else, has an option to pick up that should it be a forced dissolution of the merger. We have offices in the United Kingdom and as I said, we believe that the model that we have applies in every country and we think we will be better at applying it. As Dan indicated, with the next generation of systems that have just launched in Europe, we believe from a systems standpoint we are much, much more ready to enter any new country that we do business. Should an opportunity arise there, we would be interested. Thank you for joining us for the conference call. Obviously an outstanding quarter. Believe it or not, we are heading into what will probably be an even more exciting third quarter and what should be an absolute record second half for the video game industry and for GameStop. Thanks for joining us today. It’s up 345%: