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

Thank you. Good afternoon and welcome to the GameStop earnings call. I want to thank all our global associates for your outstanding service to our customers in 2016 navigating transformation takes a full team effort and I'm extremely proud of how our organization has built an even strong culture through out the year. Speaking on the call today will be Rob Lloyd and Tony Bartel; also in the room are Mike Hogan, Mike Buskey, Mike Mauler, Jason Ellis and Matt Hodges. 2016 proves to be a more difficult year than we originally forecast, while our strategic transformation drove record gross margins of 35% and earnings came in within our revised guidance of 377, we encountered stiff headwinds as we completed the third year of the console cycle. As a result, the physical games category declined 15% and our GameStop brand lost a small amount of market share during the holiday period due to deep discounting. Our internal model, which aggregates PwC, DSC and IDG, forecast only a 5% decline even as latest September, experts were still expecting a 5% decline for the year. However, according to NPD, excluding Pokemon, the top eight physical software titles actually declined over 40% from October to December compared to the top eight release in the same timeframe in 2015. As a result, most publishers began discounting titles much earlier than previous years leading to a steep decline in retail pricing. The 2016 holiday was also more promotional than prior ones with average hardware prices down 15% versus prior years. That decline reflected the impact of all the below cost discounts and complimentary gift cards that we saw from Black Friday that ultimately carried through the holiday season. This console upgrades were also not as meaningful as we had hoped. Some have argued that this…

Thanks Paul. Good afternoon everyone. Today, I would like to take you through review of our Q4 and full year 2016 results our and 2017 guidance. Overall, as Paul said, our financial results met our most recent guidance. Sales decreased 13.6% in Q4 and 8.1% for the full year. Comparable store sales decreased 16.3% for the quarter and 11.0% for the year. U.S. comps were down 20.8% for Q4 and 13.5% for the year. While the gaming business had its challenges, our non-gaming business continued to grow and provide a more validation for our business transformation. Tech Brands revenues grew 43.9% in Q4 and 52.4% to $842 million for the year. We also hit the high-end of our collectibles target of $450 million to $500 million with $494 million in sales. Gross margins came 350 basis points for the fourth quarter 33.1% and 380 basis points for the year resulting in third a 5.0% margin rate, which is a record annual gross margin rate for GME. Gross profit for the year grew 3.1% to a record $3.0 billion. During the fourth quarter, we took charges totaling $56.5 million on a pre-tax basis and $35.1 million after-tax, for asset impairments and store closing related costs. More specifically, we impaired $10.5 million in intangible and store assets in the video game store base, $46 million of the charges were in the technology brands division. After four years of rapid expansion, we took some aggressive moves related to the consolidation of the store portfolio. Charges related to AT&T stores totaled $27.5 million, more primarily associated with stores acquired in last year's large dealer acquisitions or former RadioShack locations. The remaining $18.5 million of the charges were related to simply max stores which were not profitable doing large measure to a lack of product…

Thanks, Rob. Good afternoon. I'd like to spend my time walking through results and expectations around our four strategic pillars. Let's start with the physical games segment. During the fourth quarter in an environment of heavy discount in particularly around the holidays we choose not to sell hardware below costs, while we did give up some share in hardware, we actually increased our attach ratio of profitable new and pre-owned software. We ended the quarter with a software attach ratio that was doubled the rest of the industry. We were able to accomplish this by leveraging our PowerUp Rewards program and specifically focusing on our PowerUp Rewards pro-customers. For the year, we grew our PowerUp Rewards pro customer base, thanks to a strong focus in our stores in the back half of the year. As a remainder, these PowerUp Rewards pro-customer has been 6x the amount of a non-member and PowerUp Rewards members accounted for 71% of our GameStop branded store sales in the fourth quarter. Our pre-owned business continues to outpace new software declines as Q4 was 12.6 points better and the full year was 9.1 points higher. We also believe we're seeing a resurgence in pre-owned technology as strong customers on the next program and other similar programs now owned their phones and are bringing them back into our GameStop branded stores to use its currency. We are rolling out new technology to streamline this trade and experience in our stores. Moving to 2017, we are cautiously optimistic about innovation in the category. We recently returned from so many destination Playstation where we reviewed all major games and development and we are impressed with the quality of the games that we saw. As Paul said we are also pleased with the recent Switch launch where we saw through…

Thanks, Tony and Rob. With that operator, we'll open it up for questions and answers.

[Operator Instructions] And we'll take our first question from San Phan with Mizuho.

Hi, thanks for taking the question. [indiscernible] on getting nine physical gaming representing more than 50% of operating margins for this year, does that drive with your numbers?

The comment that I made in my prepared remarks, this is Rob by the way was north of 40%.

Okay. And then, can you just maybe clarify what's embedded in your top-line guidance with Nintendo Switch units?

There is lot of excitement about the Switch, San, but there is also a lot of caution. Nintendo hasn't spoken a lot it on publicly, we saw the Wall Street Journal article, we are very cautious simply because of allocation, but do you want to comment anything on this guys.

I will say that I will refer back to my remarks that based on the high attach rates that we have in the quick sell through that we do anticipate having the highest market share, but that's pretty well, we can say this.

And I mean the way we see it San is that we really don't have an aggressive forecast built-in here and we've learned with Nintendo through the years not to do that. But, there is models out there that you could look at that will give you a better idea of what could happen here.

Okay, great. And then, just final question on -- but the difference between the same-store sales during this year in abroad, was that mainly just a heavy discounting that you saw from your competitors in the U.S. so was there something else that alone could explain the difference between the domestic and international markets.

The way we see it San is, we're trying to drive best practices around the world. But clearly, the international markets had a better year or less decline in growth. Mike Mauler is here, you want to talk about what you guys have done to drive best practices.

Sure. I think first every market is different and there are some group based on difference between the markets, PlayStation for example, I mean Europe has 70% market shares, it's much more even here. And so when you came to PlayStation we are launching -- launch of PlayStation Pro and some of the really good titles they had that moved the needle a lot more internationally than the U.S. I think one of the other things is internationally we're about 90% mall-based and so there is a lot more casual consumers in the malls and our customers in the stores. And so when you have some new leases as Paul mentioned like eight new releases in the fall that significantly missed our expectations, those would effect sort of where your mass market consumers are just a lot greater percentage. And so I think when you put those things together there will always be variability between the markets, but those are some of the big reasons.

And the other thing I would add San is, it's clear us watch that the international markets maybe or less further along with the console cycle, they are also less digital.

Thank you.

Thank you, San.

Our next question comes from Seth Sigman with Credit Suisse.

Thanks a lot. Good afternoon guys.

Hi.

I have a couple of questions on Tech Brands to start, the gross profit comp improvement that you're guiding to for this year flat up to -- sounds like it's going to be more backend weighted which makes sense, but are you guys assuming an improvement, is there an assumption here for certain new products that haven't been announced yet, any more color on what would be driving that improvement? And then, the second piece of that is in terms of the operating margin improvement that's embedded here looks like a 100 to 200 basis points for Tech Brands in 2017 anymore color on that would be helpful also. Thank you.

Yes. Jason Ellis is here, Jason, why don't you to take the first part and then Rob can follow-up.

Hi, Seth. Thanks for the question and I'll lead up with the margin comps. We anticipate that we're going to do a lot of -- we haven't had a lot of growth in our TV business this year, DIRECTV is a new product that we only sold in the stores for a little over a year now and we're anticipating we're going to be able to double that business. We also have some programs in place that we're getting the outside of the four walls. We think small to medium size businesses or segments that are under-penetrated today. And we have a unique position with the scale we've created with 1,500 stores to be able to get out and attack those small to medium size businesses. So we have some unconventional ideas I'd say and how we're going to drive more profit into those retail stores and we're excited about those. In terms of the margins, we also have a great opportunity for us to bring some additional accessory products and services and move up stream into the retail stores and I would say specifically things that are in the connected home category that might connect to Apples home technology on the smartphones that we're selling or Samsung SmartThings, those are both really good opportunities that we haven't brought into the stores yet today.

In terms of the operating margin, Seth, with the growth in store count that we had last year through the acquisitions we have the opportunity to really leverage the infrastructure that's in place around the business and that will help as well.

Rob, are there any parameters you can give us around the scalability of the model in terms of the type of comps you need now that you do have that infrastructure in place, anyway to think about that?

I think we have to get back to you on that one. I don't really have that information off the top of my head.

Okay, great. Thanks very much.

Thank you, Seth.

Our next question comes from Colin Sebastian with Robert Baird.

Great, thanks guys. I have a couple of questions. First off, apply for Rob, just a clarification on the EPS guidance with the midpoint roughly $0.50 below that you reported for 2016, you mentioned $0.25 from the tax rate. Can you breakout the other $0.25 or so is that – is that related to below the line items or you are something else in there?

Approximately 3% that would be related to the interest expense that I talked about being $5 million higher year-to-year, the remainder would come from the operating earnings which I mentioned we expect the decline between 3% and 10%.

Okay. So there was no restructuring or store closing costs that are somehow embedded in that number?

No.

Okay. Secondly, in terms of capital allocation and the free cash flow guidance versus 2016, how should we expect that to impact dividend payments and share repurchases if at all?

Well, we've talked about the dividend payments and we raised the dividend 2.7% is now a $1.52 and we would expect that would have about $155 million payout given the share count in terms of further use of free cash flow, we talked about the ROEs begin to drive growth initially and then to the extent available buyback.

Let me provide some color on that Colin. You know it's no secret that we've been a strong buyer of our stock. We bought over $2 billion. And I think we've done the right thing on that and we've demonstrated a willingness to return cash to shareholders. Our dividends speaks for itself. It's a very healthy dividend. It's a very good holding. As we face into the future, there is a lot of uncertainty that you just saw in holiday for us. The physical gaming category is in a -- what we think is a cyclical decline before a new set of technologies. We need to see Switch. We need to see PlayStation VR and we need to see E3 before I think we can make any guidance or forecast. It is logical to assume we would return all cash flow over and above investments but we're not ready to make those statements until we see what has been an uncertain category play out.

All right. And then, maybe Paul, and I know it, lastly on Switch, what in particular signals to you guys that this has we like potential I mean in terms of broadening the market beyond the traditional Nintendo fans? Thank you.

I'll let Tony answer that question, but just one comment for all of you guys, I hope you played it, if you played it that's the best way to know that it has tremendous broadening potential, Tony walk through the sales.

I'd say two things, first just the demand is incredibly strong for this column, and then, as soon as we get into our stores, it's out within hours. And so we're going to be -- we anticipate that we're going to be chasing supply this entire year. The other thing is that every game that's out there is to add over 5.5 attach rate to this, signifies there is a lot of people are finding this a great platform and they're picking up anything they can and we have almost one to one attach result, which is a great game. But there is tremendous demand for this and we just don't know how high it is because every time we get it out in our stores it's literally gone.

Yes. I would also add that Nintendo has got several more great games they are launching this year for the console which we didn't see with Vu. [indiscernible] in April and there is couple of more, I think that hasn't been announced yet as well as there is some good third-party publishing support on the Switch, which we really hadn't seen with Vu either and that will drive demand.

So the way we see it is, all the data says it's selling there is tremendous demand everything we do it seems sells out quickly. But, if you play the device, it's far more focused on motion and on the controllers than it is that we use very focused on the tablet a lot of the gameplay revolved around touching the tablet and all now that sort of thing. This one feels a lot more broad and a lot more movement associated and we think that's going to be a broader feel. We'll see what they announced on numbers.

Thank you.

Thanks Colin.

Our next question comes from Brian Nagel with Oppenheimer.

Hi, good afternoon.

Hi, Brian.

Thanks for taking my questions. The first question I had was, with respect to the fourth quarter charges to close in the Tech Brands division. As you look at the 18 -- I guess the 18 of these stores you are closing. Was that something that was anticipated as you made these big acquisitions and you're going to review this portfolios that was a decision that came later after you looked closer to performance of these units.

In terms of the stores that came with the acquisitions, we acquired larger businesses last year and had a portfolio of stores, some of which were performing extremely well and some of which were not performing. And unfortunately we couldn't share pick what we bought. We knew that we would have to deal with some number of these stores and so you see part of that -- you see that in part of these numbers. In terms of the RadioShack locations, we took a pretty aggressive approach working with AT&T to find locations to help them try to replace the traffic that they were getting out of the RadioShack store base overall. We took about 120 locations, some of which were in markets where AT&T didn't have strong shares as Tony talked about and unfortunately there was a number of these stores we just couldn't make work.

Those are the both, yes, I mean, I think Tony, you may want to share this. If you go back in history, right, the way we see it is AT&T, our partner needed to recover loss sales at RadioShack.

So we've worked very closely with them as we looked at the RadioShack stores and we knew we're taking some rest but we got some great real-estate, the whole portfolio has worked out well, but there were some stores that we knew that will have market share, but we as good partners do we worked together with them to try and retain as much of the traffic that they were losing in from the RadioShack stores.

And we've achieved our 20% IRR hurdle, so we feel like it was good calling of what we had. Now there is another side of this which is of course simply max side. I don't know if you want to talk about that or not, Colin, that's a very different animal.

Yes. That was nice. It's closer than that division reflects some type of strategy change for circle math?

Yes, it's a good question and I'm going to let Jason, maybe take that but just remember we have a billion dollar relationship with Apple, so Simply Mac doesn't define our Apple relationship, we're heavily into the Apple business, but Jason do you want to talk about Simply Mac?

Yes, I do and I guess when we talk about Simply Mac, I will reiterate what Paul said. We have a multifaceted relationship with Apple. So in our retail business, on our mobility business, we sell over a million iPhones for them, we sell lot of product and so we're a great channel partner for them. On the Simply Mac side, that channel distribution strategy has been a little more difficult largely due to product allocation. I think Apple would admit that when we got into the second half of last year a lot of the product they've launched were heavier allocated than they've seen in years prior. But we saw that the stores that we've had for a long-time that have an embedded base still performed very well. Our service business continues to grow so it's really again a culling of some of the real-estate that we just didn't think at long-term potential.

And so Brian we feel pretty good about the technology brand strategy. I don't think there was a strategy shift. We did think we would grow Simply Mac faster and Spring Mobile slower that was the original thinking. I think today we would say we're growing Spring much faster and so we don't mind reducing size of our Simply Mac. But, Simply Mac is a good business that goes forward. We just had a great meeting with Apple yesterday by the way so we got positive exciting things we're planning on doing with them.

Great, thanks. So just follow-up to that on Paul, on the AT&T business, big acquisitions last year, how should we think about the unit growth in that division into 2017 and going forward?

I would say maybe I'll let Rob or Jason to talk about the unit growth, but we're very strong with AT&T in lots of different ways. We were at the Pebble Beach sales meeting they had on -- I'm calling it the sales meeting, because I don't want to call it a Golf extravaganza. But we're very tight at the hip with them. They have a lot of things going on. And so we think there is an opportunity to grow stores, but also other forms of revenue driving, do you want to talk about the unit growth guidance, Rob or…?

Yes, we've talked about 65 what we call white space stores on the technology brand side and so you can frame it that way. We'll continue to look forward to revitalize position opportunities. We have been very successful with that. We don't expect anything of the size that we did last year obviously there aren't that many dealers of that size available, but we do think there are still a large number of opportunities to consolidate smaller resellers.

Thank you.

Thank you, Brian.

And we have time for one final question which we will take from Curtis Nagle with Bank of America Merrill Lynch.

Thanks very much. So just a quick one on the Scorpio, so I'm just kind of curious why you guys or what gives us optimism on a launch just given how the pro for the PS4 has performed, how great is that theoretically all the difference and what does it look like particularly strong fleet of exclusive titles for the Xbox system over the next year or so.

Yes. Thank you for that Curtis. Let me start it off and I will let Tony to follow-up. I mean the way we see this is -- we see Switch is being very strong, that indicates there is a demand out there for gaming. We were just at a studio this week a group of us and we've heard a lot of excitement about Sony VR and so you can't discount VR from this discussion because what's Sony VR will do is they will put pressure on Microsoft. So we have a pretty interesting expectation now about Sony VR that maybe we didn't have. When you talk to studios that helps you get a little more insight into what's going on. But Tony, do you want to talk about what we know about Scorpio and what we can talk about.

Unfortunately we can't talk about a lot other than what's known what is in public is -- they are a very powerful system that's really made for 4K and we see it has a very gaming centric, very, very powerful unit and so we do believe that there will be a significant some great games that are made for this and we do believe that game stuff is poised significantly over shared in this launch when it happens.

Okay. And then -- sorry, go ahead Paul, my apologies.

I know it's quite right, Curtis. I was just going to say that we have to believe that if VR becomes the meaningful part of this business which we don't know if it will, but the likelihood is and the indications are that everything we get at Sony VR sells out, you have to believe that others who want to get in that game so that's one of the reasons we both are success.

Got it. And then, just a quick follow-up on free cash flow guidance for this year looks like I think about 300 so step-down is about $100 million despite lower CapEx just curious what's -- what was driving that?

Well, as I mentioned in my remarks the timing of the year end this year January 28, next year February 3rd, I think it is, it means that any of those bills that were due February 1, which whether it's a rent, international payroll, certain vendor obligations would fall into the fiscal 2017 timing and they didn't fall into the fiscal 2016 timing, so we got a benefit in 2016 that puts around on as a bit in 2017. Obviously, as we approach the end of the year as we look our way through the year, we're going to manage our payables and our inventory levels and working capital in a most efficient manner possible, but they were just below -- overall.

Okay. Thank you very much.

Thank you, Curtis.

Okay. With that I guess we will wrap-up the call. Thank you very much for your support. Please stay tuned, we've got a lot of exciting things going on at GameStop and look forward to speaking with you in the next quarter.

Once again, that does conclude today's call. We appreciate your participation.