Greetings. Welcome to the GameStop First Quarter 2020 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Eric Cerny, Investor Relations. You may begin.

Thank you and welcome to GameStop's First Quarter Fiscal 2020 Earnings Conference Call. This 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 statements should be considered in conjunction with the cautionary statements in 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 insights in our first 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 fiscal 2020. Then we will open the call to take your questions. Now I would like to turn the call over to the company's Chief Executive Officer, George Sherman.

Thank you, Eric. Good afternoon, everyone, and thank you for joining us today on our first quarter earnings call. So much has changed since we last spoke to you in March, and I truly hope that you are all safe and healthy. Our thoughts are with the people who have been affected by the COVID-19 pandemic as well as the first responders, health care workers and medical providers, who are on the front lines. We want to extend our appreciation for all of their efforts. Our priority has been and continues to be the well-being of our employees, customers and business partners during this unprecedented time. More recently, we have endured a period of social unrest, as following acts of cruelty have underscored the racial injustice that endures in this country. At GameStop, we stand against this injustice, and as an act of solidarity, closed our stores in each of Minneapolis, Fayetteville and Houston markets during each of the respective memorial services in those markets. For our time today, I'd like to start for providing an overview of the company's response to the COVID-19 outbreak, a few comments regarding the company's first quarter performance and then briefly discuss the strategic initiatives we are executing to optimize, stabilize and transform our business. Then Jim will review our first quarter financial results and provide a framework for how we are approaching 2020. As we approach the fiscal year, we articulated that we expected sales in the first half of the year to be challenging as we are entering the final phase of a 7-year console cycle. The COVID-19 pandemic has presented us with new challenges, and we're facing them head on. We are capitalizing on our global leadership position in gaming to support the surge in demand stemming from the change in…

Thank you, George. Good afternoon, everyone. I'd like to take this time to walk you through our first quarter fiscal 2020 results. I'll then share some insight into how we're approaching the remainder of the year. As George just discussed, our #1 priority is the health and safety of our associates, customers and communities during the COVID-19 pandemic. And as such, in March, we temporarily closed approximately 76% of the company's 1,802 international stores. On March 22, we temporarily closed all of our 3,526 U.S. locations, 2/3 of which were closed to any direct customer access, but did conduct a limited curbside pickup offering, leveraging our omnichannel buy online, pick up in-store and ship-from-store capabilities. During the remainder of the first quarter, approximately 10% of the global fleet, which was primarily our Australian business unit, remained fully open and accessible to customers. Despite the impact of store closures around the world, our business in Q1 reflected 3 primary elements: first, a surge in gaming and work from home products; secondly, the power of GameStop's deep omnichannel engagement with its loyal customer base; and finally, the ability of our teams around the world to quickly adapt to meet increased product demand despite the limited ability to meet face to face with our customers. In that light, for the first fiscal quarter, we delivered a global comp store sales decline of 17%. Consistent with other retailers, these results exclude the stores that were closed for longer than 2 contiguous weeks during the quarter. Importantly, despite these closures and limited operations during the peak pandemic weeks, our global sales comp for fiscal March was a decline of 0.7% and April was a decline of 14.4%. In the fiscal month of May, we realized comp sales decline of approximately 4%. As you can see,…

[Operator Instructions] And our first question is from Steph Wissink from Jefferies.

I have 2 quick housekeeping questions in for you. And then, George, a bigger picture question, if I could. The first is just can you remind us what percentage of your leases are up for renewal over the next 12 months? And then you mentioned transfer rates in the script. I'm wondering if you could just give us a quick statistic update on what you are seeing in store closures and the transfer value.

Yes, Steph. The average lease-up primarily here in the U.S. remains around 2 years. So that would obviously, say, that in a 12-month period, then we're going to turn over about half the fleet from a lease perspective. And in general, that's kind of how it tracks. On the second one, the transfer rate is -- it's actually not something that we've published publicly. But suffice it to say that we're actually seeing a little bit even stronger rates than we had, I think, really pragmatically planned early on. And so that's why we've accelerated some of the closures numbers by about 100 in terms of our expectations. So we're seeing a little bit better than that -- than what our original expectations were.

Okay. That's helpful. My question, George, for you is you said something in the script that really struck me, which is the idea of kind of this renewed interest in gaming that was maybe inspired by the pandemic or a result of the pandemic. I'm curious if you can talk a little bit about what you're seeing in your customer database. Were these customers that were once gamers and have returned to become gamers? Are you finding that this is a new population of gamers? And how does that play into the negotiations you are having right now with the OEMs regarding your revenue sharing partnerships?

Yes, Steph. Thanks for the question. I mean we saw this early on when the store closures began. So really, the last couple of weeks of March, kind of going into April, and it really showed up in the form of hardware sales predominantly. I think we mentioned that any game that was launched in this time frame really did better than expected. And that's on a large scale basis like Animal Crossing, and then certainly smaller games perform much better as well. So we saw a lot of new interest, and we saw, obviously, a lot of hardware purchasing late in the console cycle. And we know that our core customer has long since bought second devices and is looking ahead toward the next-generation consoles in November. So we're certain that we saw new gamers come in. We don't have any reason to believe that it is a return to gaming. We think that it's net new gaming predominantly. And that shows up for us in terms of loyalty as net new e-mail addresses and net interest. So it's certainly beneficial to us. I mean any time that the overall pie gets bigger, we benefit from that given our market share. So yes, by all means, it's something that we can parlay into conversations with our partners as we look down the road. And certainly, our hope would be that we can maintain close contact, build that social interaction with these new customers, get them deeper and deeper in the gaming and have them start looking forward to new consoles as well. So yes, no doubt. I mean hardware was a pretty scarce commodity and very, very end of cycle. And then, of course, the Switch, which is still very, very viable, did amazingly well. And as we said, we think we're the largest sellers in the world of that device. And we get them in, we sell them out in 24 hours. So still big demand, which we think is largely attributable to new gamers.

And our next question is from Ray Stochel from Consumer Edge Research.

On e-commerce, the growth that you have seen, I'm sure a lot of that is due to just your store closures and all the success that you've had with omnichannel. But can you give us an update as far as are you going to be able to hit that $1 billion target much earlier than expected as a result? And then what changes you're making to your e-commerce platform itself to drive results or fulfill demands that you're seeing incremental to your expectations?

Yes. I mean, first of all, Ray, thanks. It obviously is going to help us is a step in the right direction. It's pretty rapid for our growth that we experienced. So again, those peak periods up over 1,500% and over 500% for the quarter. By all means, we've made some process improvements. I think it all begins with the hiring of a Chief Digital Officer. So we put a stake in the ground on this. It's obviously 1 of our 4 growth pillars is frictionless digital ecosystem. We've been going after this one pretty hard. We've been improving the fulfillment process. It's changed a number of things. I mean from the amount of freight that flows through to stores versus how much is held back into distribution centers. It's had a ripple effect on our supply chain strategy. We are a 7-day a week operation now in our DCs as it applies to e-commerce. So it's been great growth. Of course, you're right. I mean a lot of that really began with the closure of stores, but there's no question that it has been an unnatural, and to a certain degree, I mean, unfortunate inflection point. But it sure drove our business in the right direction in a hurry.

I'd add a color point to that because it's important. It's not just a function of how the e-commerce channel operates by itself relative to the brick-and-mortar locations. But more importantly, how the omnichannel, the entirety of the omnichannel business works collectively. And importantly, what we saw is with the growth in e-commerce, a lot of that was driven by buy online pickup in-store and ship from store, but the vast majority of those orders are picked up in the same day or the next day. And that's important because that gives us the true omnichannel efficiency. And so we'll continue to balance both of those. But as we continue to open stores, we see some continued health in e-commerce driven ordering.

Yes. And I'll build off of what Jim said, we couldn't have done it without this e-commerce capability. I mean our ability to do -- to have contactless curbside delivery was built directly off of our "buy online pickup in-store" capability. As I mentioned, we generally would flow through more of our freight to the stores and hold it there. So early on, ship from store was a big fulfillment channel for us in terms of driving omnichannel. So it really was the fungibility of all these assets leveraging off of one another.

Got it. And then a follow-up on pre-owned inventory. So you guys have inventory down substantially year-over-year, and you've seen strong demand for some of the hardware preowned that you talked about. Is there any way to think about where your sort of total customer rewards points are trending? So are you seeing a situation where rewards points are falling as people keep buying new things with those rewards points? And then so you're sort of going to be heading into holiday with a lack of sort of money in the system to buy other products? Or is that the wrong way to think about it? You are doing well as far as a trade-in perspective as well as demand perspective?

Yes. This is Jim. First of all, from an inventory perspective, I think I'll comment more globally about our pre-owned inventory. This has been an area that Chris Homeister, our Chief Merchant, and myself have been working out with our teams extensively, not just on new inventory management, but the pre-owned as well, and creating efficiencies in how we manage that in terms of overall turn and cash conversion cycle. So that's one. Two, certainly, with respect to the way that you discussed the points with loyalty -- in the loyalty program and the engagement with our products, that isn't the right way to think about it. In fact, what we -- in particular, George mentioned the new entrants. What we saw in this last several couple of months here with the surge is really these are tend to be new entrants into the, at least from what we can see in terms of the file. So we think that's important. And again, the preowned product in the buy-sell-trade capability gave us the opportunity that we think not a lot of people have, which is be able to supplement when the new -- when there was a scarcity for new hardware, we were actually able to lean in on our pre-owned product that we have in the system.

Our next question is from Curtis Nagle from Bank of America.

First one, just a clarification on the May down 4% comp. Is that an adjusted number excluding closures? And if that's the case, what's the all-in number? And could you comment on any category performance within that comp?

Yes. No, we're not providing any more information on May. We just wanted to provide some direction on how May was performing relative to the months that we also disclosed, which is how do we make -- we wanted to make sure that we were giving some information and some insight into how the business was trending pre, during and as we're continuing to make the evolution out of the peak of the pandemic. I mean obviously we're still in the middle of this process, we're opening stores. So we wanted to just give some indication of that. Is that when you say it's adjusted, yes, we do not include stores that are closed for longer than 2 weeks on contiguous basis. So that's it.

Got it. Understood. And then as a follow-up, I just wanted to dig a little bit more into the comment about hitting positive EBITDA for the year. I know you guys are obviously very positive in terms of the coming cycle. But I don't know, just kind of looking back at the history, typically, at least from what I can see in quarters where you have constant launches, those aren't great in terms of EBITDA, just given the sales mix into hardware and maybe less sales for some of the higher-margin products. So are you expecting an increase in EBITDA in 4Q? And how should we think about -- are you expecting positive free cash flow for the year given that comment?

Yes. I think I'll comment specifically, and George, you might have some color here as well. But the way to think about it is we have been working in the year that this management team has been together here. The core of our activities, especially around optimizing the core of the business, have been focused on really re-architecting the financial architecture of this business. And so that we're actually in a much better place to take advantage of a console launch. So if you're looking at history, I don't think you should look at that flow through because the ability to have lower expenses, ability to have a much tighter inventory management, cash conversion cycle, all of those thing yield better results all the way through in terms of the flow-through of the sales growth. And we think that, that's actually incredibly important difference of where GameStop sits today versus in prior long cycles. George?

Yes. Look, Curtis, I'd add, I think when you're a specialty retailer, you feel the full impact of the downside of the cycle as we felt over the last year or so. You also get the benefit of the upside. It is not our intent to sell gaming consoles by themselves. That's where we're different. That's where we're -- we play a very important role to the vendor community. We attach you at a different level. So we certainly would expect it to attach games, we certainly would expect to attach accessories and we certainly would expect to attach collectibles at a higher-margin rate as part of this. So it's going to be a traffic event for both online and for our stores, no question about it. We will parlay out the traffic.

And our next question is from Seth Sigman from Crédit Suisse.

I did want to follow-up on that May trend. So the down 4% comps, that compares to down 14.4% in April, I think I heard. But presumably very different store numbers included in each of those periods, just given the store closing dynamics. So can you just help us a little bit here? What percent of your store base is captured in that comp base for May versus April?

Yes. I mean here's the way to think about it. Again, very, very dynamic week to week. So in the U.S. market, as an example, we really started to -- stores started to open up for some form of limited access. When we say limited access, what we mean is, is safe and secure or safe and sanitary access for a limited amount of customers to maintain proper social distancing. And so it really is a dynamic number. I can't give you any one binary point because it's -- and it's continuing to evolve today. And we still have roughly a little over 500 stores that are opening as we speak. So it's really difficult for me to answer that question of binary form.

Yes. It really is 3 dimensional. You have open versus closed, you have delivery at door versus limited access and you have open for 1 week versus open for 4 weeks, all rolling across the country and across the world. So as mentioned in the script, 90% open across the world right now, that includes virtually the entirety of Europe. So for all practical purposes, save 5 stores, I think it is in France around the large malls in the Paris suburbs, a few in Italy in the Milan area. Europe is open. Australia/New Zealand is 100% open. And that leaves the majority in the U.S. and Canada that we're working towards. But it's happening very, very quickly. But as Jim said, it's just too rolling in nature to really answer that 1 directly.

Yes. Okay. Okay. And this is just a clarification, then I have a real follow-up. But just to help us modeling here, since the negative 4 doesn't really flow through the model, I know it's really illustrative, right? But it's revenue that flows through the model. So can you sort of give us a sense of what the revenue growth in the May time period will look like quarter-to-date so that we can use that in the model?

You know what, I don't have it in front of me. So I don't think we're prepared to talk about that today.

Okay. Okay. So my real follow-up was around the comments around positive EBITDA for the year. Can you just help us with that a little bit more? I want to confirm, is that all expected to come in the fourth quarter? And if so, it does imply a pretty significant year-over-year increase. It doesn't seem like hardware alone gets you there. So can you kind of give us a sense of some of the other assumptions embedded there? And what gives you confidence?

Yes. Again, we're not giving any breakout of a quarterly contribution of that. So that's just meant to give some indication as to how we view the entirety of the year working together. A couple of key things I'd share on this is, in the third quarter, there are a number of key software titles, many of which were postponed from last year into this year, and some of those were originally slated for earlier in the year that were then postponed again due to the pandemic from the beginning of the year to the back half. And so there's a whole series of moving parts here that around new software launches, and then certainly, the expected console launches, which we expect to see hit the marketplace in the fourth quarter. But now remember, as George indicated in some of the earlier comments, that also entails a significant degree of attachment to those consoles, whether that's warranty levels, whether it's controllers, whether it's collectibles, whatever it might be. I mean there's a whole series of things that come along with. What is now 7 years of technological development by the OEMS, and that brings further technology and the accessories as well.

Our next question is from Carla Casella from JPMorgan.

My question is if you could talk to us about the borrowing base and the seasonality of how you expect it to trend through the year. And I'm not sure if you gave the liquidity number as of the quarter, how much was available under the revolver?

So I don't remember saying that actually specifically. But the way the borrowing base works, Carla, is that it's obviously supported by the inventory. It's an asset-backed lending revolver. The primary security factors, the inventory and the AR. And so as a function of that, it follows the high seasonality of our fourth quarter. And so the peak availability in that revolver is $430 million. But that really only is available during a couple of months, really November, December time frame, if you think about it that way, generally speaking. And so in essence, anywhere between $150 million and $250 million of availability for the rest of the year, again, depending on the inventory levels.

And so, did you give what that availability was as of 1Q? And I was just -- I understand the seasonality, but I was wondering if this year with the COVID disruption you expect any of that to be different. You've reduced your inventory pretty considerably.

Yes. And again, I just don't have that number off the top of my head, but it's in the Q. And certainly, available there in. So sorry about that, Carla, but I just don't have it off the top of my head. But suffice it to say, yes, we've reduced our inventory levels, but we do have availability. And as we mentioned, for example, we paid down about -- actually down to about $100 million. We originally borrowed about $150 million on the revolver, and we've paid down $50 million of that. So we were holding about $100 million as of about a week or 2 ago.

Okay. That's great. And then I had one question on your -- the business trends and if it will trend any different this year because of the launches. So if we look at margins on preowned versus software versus hardware, we've seen them historically, it's been a long time since there has been a new hardware launch. How do you expect margins to trend your gross margins on those categories as we're going into the launch?

Yes. So again, I think you have to think about -- so as we saw, for example, in the last couple of months, you saw a hardware shift and a lot of that was new hardware. And so that was the primary driver between, for example, the 270 basis points of year-over-year change in the margin was really due to the mix shift into the hardware. And if you're looking about it, for example, those are new entrants, it's important because then there are second, third, fourth order transactions that come from those new entrants that we enjoy here with respect to -- especially customers that come into our loyalty program. And so you'll see a change in the margin rate of that market basket at later transactions. But suffice it to say, if you think about some of the key titles, major titles that I talked about a minute ago, we'll have some velocity in the third quarter, at least expected launches. That will tend to P mix into, or product mix into software, new software. And those rates are obviously going to be better than hardware. Hardware, new products are going to be, from a rate perspective, lower than our preowned hardware and software. And pre-owned continues to be an important part of the business. Importantly, as I mentioned in my comments, pre-owned software and collectible are 2 categories that are higher-margin categories. And it's important because when the stores are closed and customers don't come and they generally have their attachments into a market basket. And so the associates in the stores are building that market basket with customers as they're coming in, and then also new software that's in the catalog. And so when we don't have customers able to walk in the stores, that does change the margin profile of the transaction. But when they come back into the stores, then we also see it shift back the other way.

Yes. I think Jim mentioned it in his script, I mean, part of the area that we do not see sales in during COVID, especially when we're in a delivery at door mode, is catalog sales. So most of the sales tend to be dominated, in this particular case, by hardware and new release software. As stores open up, customers that have access to the store, we would expect to see a different depth of shopping experience getting back into catalog software sales. Of course, there was no access to collectibles other than via the web. So unless something was a new release, a Funko Pop! or something like that is not going to have much visibility. And we would expect the reemergence of our pre-owned business going into the fall season as well. We've been closed. It's just not been, from a hygiene standpoint, something that we wanted to do, exchanging games and exchanging software via curbside. Now that stores are open and now that we have a UV cleaning process, we're putting all of our hardware through as we return it to our refurb operations center, we do expect to see trade-in as a down payment toward new gaming consoles and new games.

And our next question is from William Reuter from Bank of America.

In terms of the timing of when payables are due, I would expect that given that you have a handful of software launches, which are expected to probably do fairly well, and then you've got the console, which I imagine you sell-out of those extremely quickly, will the terms be such that the working capital build for inventory should be less than we've seen maybe in historical periods around the holidays?

Look, the right way to think about it, yes. The right way to think about it is a perspective that when you're turning -- given our payment terms, which I'm not going to comment on here in terms of what our agreements are with our vendors. But suffice it to say that, yes, if you're thinking about selling the product inside of once or twice inside of those payment terms, yes, that's the right way to think about it.

Okay. And then I'm not sure if you could provide in aggregate what the shift in terms of the new software releases, which were shifted from 1Q into 2Q would be. Is there any guidance you can help us with there?

No, we're really not providing any further guidance. Again, importantly, there's just -- there's 2 -- there still remains too much uncertainty in the marketplace right now.

And our final question is from Bryan Hunt from Wells Fargo.

My first question is I was wondering if you could touch on when the plane, your corporate jet was sold, what were the proceeds? And then shifting gears, looking at the asset base, what other asset may be for sale? And what type of proceeds are you expecting to yield from asset sales during the year?

Yes. This is Jim, Bryan. On the jet we just sold last week, we were holding it for sale on -- as an asset held for sale. And so that was roughly around just short of $9 million in terms of the asset. And then we have some real estate assets that are -- that we've had out in the marketplace here over the last several weeks. And I'll just break it down for you, 1 in Canada, 1 in Australia and 3 buildings here in the U.S.

And are those all of your distribution centers?

They're distribution centers and offices as well in all 3 locations in Canada, Australia and the U.S., we co-locate offices with the distribution centers.

Okay. Are those assets you plan on continuing to use? Like are you looking to do sale leasebacks or completely exit the facility?

No, we fully expect to utilize those assets. Just we own them. They're sitting on the balance sheet as assets and we feel that as a retailer and certainly one that's making this transition that we are for some of the important growth vehicles we have on the plate that we don't need to be in the business of owning real estate, but we can deploy that capital in a much more efficient way.

Very good. So you don't have those listed as assets for sale on the 10-Q. Currently, that is...

No, because -- Yes, because the intention is to do a sale leaseback. And so therefore, the requirement doesn't provide for that.

Thank you. We have reached the end of the question-and-answer session. And I will now turn the conference over to George for any closing remarks.

Yes. Look, in closing, I'd like to thank our entire team across the company. I'm very proud of the resilience of our store team, distribution team and refurbishment teams that they've shown during this unprecedented time, and honored to have a group of store associates and total team that are so passionate about gaming and serving our customers. This will serve us well in the rapidly changing environment. Thank you. Thanks to all of you for your interest in the stock.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.