Greetings, and welcome to GameStop's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Eric Cerny, Investor Relations. Thank you. You may begin.

Thank you, and welcome to GameStop's Second 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 statement 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 this 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 into our second 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. And then we'll 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.

Thanks, Eric. Good afternoon, everyone, and thank you for joining us today on our second quarter earnings call. I hope each of you are safe and well. Our second quarter results show significant progress toward our strategic priorities as evidenced by our robust digital growth, meaningful expense reduction and strong free cash flow generation. These results serve as testament to GameStop's ability to navigate COVID-19 and bridge the period until the introduction of new consoles. I continue to be proud of our team and their dedication to our mission, our strategy and importantly, safely serving our customers whenever and however they wish to shop during this unprecedented time. Turning to some highlights for the second quarter. Our comparable store sales declined 12.7%, which was ahead of our expectations and driven by continued consumer demand for gaming and the success of our e-commerce channel. While total sales declined 26.7%, they were also ahead of our initial expectations at the start of the year. Results exceeded our own expectations even as temporary store closures related to COVID-19 resulted in 13% fewer store operating days in the quarter versus second quarter last year, and year-over-year, we have 10% fewer stores worldwide. Our quarterly sales results were negatively impacted by both the global pandemic and as we've discussed before, the last few months of a 7 year-long hardware cycle. We began the quarter with a modest sales decline in May as we responded to continued shelter-in-place mandates by expanding our ability to deliver exceptional service and product through the omnichannel digital capabilities we developed over the last year. In June and July, limited new hardware availability constrained sales as the early surge in demand, coupled with both the pandemic impacts on the supply chain and the end of the Generation 8 cycle created a…

Thank you, George. Good afternoon, everyone. I'd like to take this time to walk you through our second quarter fiscal 2020 results, and then I will share some insight how we're approaching the remainder of the year. As George just discussed, we're very pleased with our team's ability to adapt to the challenging operating environment during the second quarter. Our ability to swiftly pivot to leverage our investment in creating a frictionless omnichannel digital ecosystem, drive efficiencies across the business and continue to optimize our core operations, enabled us to generate significant positive free cash flow and exit the quarter with a materially stronger balance sheet, improved liquidity and an overall healthier business model as we approach the console launches later this year. Turning to a review of the second fiscal quarter. Total consolidated global sales declined 26.7% to $942 million from $1.29 billion in the prior year period. The sales decline, which was slightly better than our internal expectations set at the beginning of the year, reflects the impact of, one, the last few months of the 7-year gaming console cycle; two, a 13% reduction in operating days due to the temporary store closures driven by the global COVID-19 pandemic; three, 10% fewer stores versus the end of the second quarter last year as part of our de-densification strategy; and finally, delays in new software titles in response to the global COVID-19 pandemic with several titles continuing to shift to later this year. Despite these headwinds, we reported a comparable store sales decline of 12.7% after adjusting for approximately 8 percentage points from the impact of reduced operating days due to COVID-19. As a reminder, our permanent store closures representing approximately 6 percentage points of our overall sales decline are a result of our ongoing efforts to either de-densify…

[Operator Instructions] Our first question comes from the line of Colin Sebastian with Robert W. Baird.

A couple of questions. First off, I'm curious with the e-commerce and the digital volumes in markets or states where you have had primarily reopenings. Do you retain those e-commerce volumes? Or do they shift back to stores? I guess I'm trying to understand if some of that digital volume is incremental ultimately. And then secondly, just any commentary on EBITDA for the fiscal year. I think that was removed from the press release versus the last quarter. If you can just clarify that.

Yes. Colin, it's Jim. Yes, importantly, as we brought our stores back online, we've seen the contribution of e-commerce sales to the total, maintain at levels that are north of 20%. Historically, that's been in the single-digit range, mid-single-digit range. So that's important because it's sustainable in e-commerce business, it's not just a simple channel shift. And then secondly, again, we're not providing any guidance and/or not reiterating any guidance. I mean, a couple of months more into the pandemic, and there's just still too many unknowns. So we're not reiterating any further guidance for the rest of the year.

Okay. And then one quick follow-up. On the digital-only hardware platforms, what is your view? Or what's the plan for sales of those platforms? And are there other ways that you can participate in digital software or subscriptions for those or other platforms?

Colin, it's George. We intend to sell the both platforms for both vendors. So and adjust those units and we certainly anticipate participating in those programs. And we certainly see the opportunity to capitalize beyond just the initial gross margin on the console itself, and that means participating in digital sales and in subscription programs.

Our next question comes from the line of Steph Wissink with Jefferies.

We also have 2 questions. The first one, George, probably for you, is just help us think about the volumes of available units that you anticipate come fourth quarter at the hardware launch? Any sense of how we should benchmark to prior next-gen cycle launches? And then, Jim, one for you. As we think about the overall cost profile and the overall plans for store closures, are you thinking about SG&A per store as a measure? And also if you can give us around kind of the future state of the cost model relative to the store base and how you're thinking about overall cost productivity?

Yes. Steph, let me start off with the allocation for the new consoles, and I would just say that they're in line with expectations and probably with prior releases as well. There are elements of this that we don't know. Like you, we learn the price point of the Microsoft units today at the same time that you did. So we now know that we don't know what the breakout looks like specifically of the consoles themselves or the accessories as they go along with them. So just very much in that stage right now of the production data getting to our partners, and they're making the decisions as how it's going to be allocated out. But I'd say, as of this point in time, we would consider to be in line with what we expected.

And then, Steph, this is Jim. On the cost profile, I think the best way to think about that is over 2/3 of the SG&A changes quarter-over-quarter and then for the full year, year-to-date, are permanent. And some of that is related to the store closures, which you aptly pointed out, but a lot of that is related to the cost-out initiatives that we've been undertaking for quite some time. We talked about at the end of last year. We're starting -- we're seeing some of that anniversary upcoming in the third quarter, but really started to get momentum out in the fourth quarter last year. So we'll still have more to go on that here for the rest of the year.

If I could toss one more in, just on the app. We haven't talked about that much in the past. But could you talk a little bit more about what the app features might be, how you expect to roll that out, the content side and then how you're expecting to leverage your fairly robust CRM and customer data that you've been tracking for many years?

Yes. You're right, Steph. We haven't said a lot about it. We have a new Chief Digital Officer. We're very pleased with the developments that he's made on that front. And we've been in need of a new app. And I think, as you know, if you look at e-commerce, a large percentage emanates from a mobile device, not from a desktop or laptop any longer. So it was necessary work for us. It will be a far more intuitive app than what we've had prior. There is a game news section where you can catch up on the latest and greatest in gaming. We actually view that as kind of an extension of the social hub of gaming as well. You'll be able to keep track of things like your PowerUp Rewards. So there's a connection to that piece of it too. And it will launch in late September. So I think it's just something that we'll have more information on, certainly on the next call when it's in place and when it's active, but we're certainly bullish about what it can do, and we're something excited about being able to be at a point where it's almost ready to go.

Our next question comes from the line of Curtis Nagle with Bank of America.

Just a very quick one on the gross margins for the quarter. So I know you guys have kind of shifted up in how you report it. We don't have preowned numbers anymore. It is a little bit difficult to compare things. But just looking at some of the explanations you guys gave for what drove down the gross margins, predominantly mix in hardware, I think. I just can't really get to kind of square the numbers. I mean, is there something else going on here in terms of a big downshift in use, something going on with the margins there, markdowns on collectibles. Any more detail you could give would be a huge help.

Yes. Curt, it's Jim. No, there really isn't. And it's really all about hardware mix. And as the hardware mix and the volume of hardware is significantly higher, over 47% of sales versus 43% last year. That's the mix effect that we had -- that we see on the margin rate. The collectibles business was a little bit more promotional, but not really extensively across the world in all of our various regions. But again, solely around the hardware mix and then certainly, what that means in terms of volume impact on overall margins.

Our next question comes from the line of Seth Sigman with Credit Suisse.

I did want to follow-up on that last point because I guess we're struggling with that math a little bit as well. So we get the hardware mix. However, I think the mix shift was more severe last quarter to hardware. So can you just give us a sense of what else is going on within categories? And maybe more specifically speak to margin rates by category, I think that would be helpful year-over-year. And then the second point is, if you could comment specifically on the performance of preowned relative to the software bucket overall, that would be helpful.

Yes. Sure. I mean, again, there's not a whole lot more to talk about with respect to the impact of hardware mix on the margins. That's just the math. And ultimately, that's what drove the vast majority of the margin differential. And then you talked about preowned. Again, I think it's also a function of when the stores are not open and the traffic is not in the stores, our preowned software is -- tends to be an attach to the market basket. And without stores open and without traffic entering our stores for all of May and the first part of June around the world, that business obviously is going to do lower volume.

Got it. So preowned was down more than the negative 31% for the software category overall?

No, I didn't say that. But we -- as you know, we're not -- we don't disclose the differential between preowned and new software.

Got it. All right. Yes. That's fine. So my follow-up question is around some of the levers that GameStop has used in the past to capture share in a very fair share during past console launches. I'm just curious, what are you guys doing differently this time around? For example, I think some of the tools like currency, your unredeemed currency is just a lot lower right now than it's been in the past. You disclosed that in the Q. You'll also have fewer stores going into this. You also do have some digital assets. So I'm just curious, what's the plan? How are you guys thinking about managing that and making sure that you capture your fair share?

Yes. Look, I think there are a number of things we're planning on for this launch. I think as we mentioned in the earnings script itself, we are going to be launching some new payment options. So some delayed or fractional payment options that you can just buy and for payment steps along the way. We will be doing leasing alternatives. One of those will be Microsoft All Access for their particular platform. The other will be a product that we have on our own. And then we continue to believe that the preowned hardware cycle as part of this as well, that there certainly is a trade and alternative that gives you a down payment toward new gaming console that we expect will be utilized. So I think just to comment a little bit more on the preowned business, and Jim gave you the heavy weighting that contributed to the margin shift. But as he said, we were closed for part of the year -- part of this time period. So if you go back to May and parts of June, there's just no ingress, there's no product coming in. And even when we reopened, we had concerns around the sanitary nature of dealing with trade in product. We've now gotten there to a point that we have a comfort level with that, and we see the customer getting to a higher comfort level with that as well. So we're seeing our preowned activity begin to flex up a bit as we have ways of putting consoles through UV treatment and putting games through either UV or some kind of a 99.99% type effect of sanitation treatment. We see those volumes come back online. But it's also worth noting that preowned also gets a push from activity. It's an activity based function as well. And the gaming console cycle is certainly a big activity that's going to drive some interest in that. So payment alternatives, leasing alternatives and a trade and alternative. And then obviously, we'll certainly promote that. We'll have bundles. We'll have our fair share of inventory.

George, that's really helpful. Just if I could follow-up on that used point. So it sounds like the trade in activity may be picking up. However, how are you thinking about the other side of that, the secondary market? I mean, obviously, that's struggled for some time. I mean what are you seeing there? And what is your view of that side of the business?

Do you want to clarify a little bit? I can interpret secondary market in a couple of ways, which is selling sideways.

The resale market, right? So people are trading on gains on the other side of that someone needs to buy that game on that side. What does that look like? Obviously, there are alternatives today. That business, your used business has been down, and that's not just because of trade, it's also demand. So what is happening on the demand side for used games?

Yes. Look, we think the demand will be there. We certainly see high demand right now for gaming consoles for the current generation, as I think Jim noted, and we both mentioned in our script, I mean, there was a period early on in the pandemic which for this quarter certainly crossed over into May, where there was high demand on any existing current generation gaming device. Clearly, we believe that others had an advantage in that space as they were open for business, and our stores were largely closed in that time frame. But certainly, we've seen sell-through across the board, and it is very constrained right now. We receive more than our fair share of Nintendo Switches, and we sell those very rapidly. But as for the current generation PlayStation and Xbox, it's awfully hard to find, and we're able to create a supply of preowned devices that certainly can fill the need. So I think once the flywheel is going again and we have that trading going on both sides, there's an opportunity there for us.

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

Wanted to ask about traffic. It seems like when you've opened stores, you got more people in, as you talked about, it helps drive preowned, it helps drive other parts of the business. How are you thinking about holiday with traffic this year, given that it's going to be so different and your stores aren't very large, so you may have to control the flow coming in and out. Can you just share more about the plan for the holiday period?

Yes, sure. It's a great question. I think, first of all, we're certainly encouraged by the increased penetration of e-commerce. So I think that makes it very straightforward. Certainly, capabilities like buy online pickup in-store allow us to meter traffic into the stores, even to the degree of having appointments potentially. And certainly, our presell process, where we have an advanced view of what's going to happen, helps us out as well and allows us to better plan out some of these iconic events in just large influxes of population into the store. So we're ready for. We have more channels to operate than ever before. We can offer customers a contactless transaction. We can offer customers an e-commerce pure-play transaction. We can offer a buy online pickup in-store transaction. We can ship from store. We can do it in many different ways that we think give us great flexibility for the holidays. But I think you're also going to see a more spread out holiday season as well. And I think all indications would point that there'd be a little less emphasis on the Black Fridays and a little bit more on a more elongated promotional period during the fourth quarter of the year. And then obviously, for us, with the console cycle launches, there'll be more demand than there is supply, clearly, and that will kind of go on its own course in its own time line. So we're -- and we feel great about it. I mean, I think we have no doubt that we lost some sales early on in existing console hardware due to a little bit of an unleveled playing field in terms of accessibility to our product. And that there probably was some catalog sales that went along with those purchases along the way. But when we see newness, whether that be Animal Crossing, whether that be the Switch, whether that be Last of Us 2, we lead in share, and we do well, and our customers find us, and we find them, and we expect that, that's going to happen with the console launch in a big way.

Got it. And then just a follow up. On the real estate side, can you just remind us where we are? I know we're -- the target for this year, the 400 to 450 stores. How should we think about the go-forward of this? Like is it going to be this continued low single-digit reduction in the base to kind of right size and de-densify? Or what's that or is it a 2-year process, 3-year process? Like can you just refresh our memory on that?

Yes, sure. I mean it's going to take a couple of years. And again, as we think about each region is a little bit different. It's -- your de-densification in Europe is going to look very different than it is in the U.S., et cetera. And so we're a large way through this process, but we're not there yet. Obviously, we gave the direction for the rest of the full fiscal year, around 400 to 450 stores. But there are more to do out in 2021 as well. And again, our emphasis here is our short lease liability lives give us a great deal of flexibility so that we're not buying out of leases and that we're able to make these choices without capital outlay. So we'll continue to take advantage of that and leverage that because that favorable position with our leases into 2021.

Our next question comes from the line of William Reuter from Bank of America.

My first question, your commentary around the 2021 maturities made it sound like you're not going to wait for the maturity date and you're going to go ahead and either tender for those or buy them back in the open market. I guess, is that your plan? And how you -- what do you expect your trough liquidity to be, I guess, through the holiday period?

Yes, Will, yes, that is correct, that we'll -- our intention is to at select points redeem between now and the end of -- well, I guess, it's March of '21, which is the maturity date. So that is certainly our intention. And again, we're not providing any further guidance on the rest of the year. So suffice it to say, we -- I mean, let me just reiterate. Our -- if we go back and we look at history, the amount of liquidity and overall cash and what we've been able to do here in a little over a year with this management team in place is to the tunes of hundreds of millions of dollars of improvements in the working capital and inventory turns and all the things that -- just to remind everybody, that we set out to do last year that we communicated we would do, and we've delivered on it in a big way despite the global pandemic. So that we are incredibly confident with the strength of our balance sheet and liquidity as we make our way through into this console launch, and we're certain -- certainly positions us incredibly well from an overall liquidity standpoint.

No, that's all come through, right. You're going to certainly generate more working capital than a lot expected. In terms of the cost savings, you had laid out a goal of $200 million this year. It looks like we've achieved that in the first half of the year. Are there still further cost savings that we're going to see in the back half of this year?

We'll start to annualize some of the costs out that we took out in the back half of 2019. So you won't see the same type of a run rate, but we're still continuing to work on elements of cost efficiencies. Some of that comes inside of the operations of our stores. Some of it comes in our overhead G&A. But we're still working on several elements. We're a lot of the way there. As you said, I mean, a lot of that $200 million, as I mentioned, more than 2/3 of it is permanent.

Okay. And then just lastly for me, implementing payment plans. Obviously, that can be a drag on working capital. I guess, what is the timing of when you're going to be implementing these plans? And I guess how much of the cash drain do you think those will be on the business? That's it for me.

Yes. They won't be at all. I mean, these will be POS third-party options that they can take. So we're not bringing on any liabilities. So there is no working capital impact whatsoever.

Yes, I'll just reiterate. None whatsoever. They're all the third parties.

Our final question comes from the line of Bryan Hunt with Wells Fargo.

Just a couple for me, George and Jim. Thanks for the time. If I look back the last handful of years in ground, we didn't have a cycle, a new hardware cycle, your inventory went up somewhere between on the low end $350 million, on the high end $750 million going into the holiday season. What should we anticipate, given your new inventory discipline and the fewer amount of stores that you all have today versus, again, the last 5 years in terms of a potential inventory increase?

Yes. I'd say, Bryan, it's a great question, and thanks for that. It's really all about -- it's centered on the efficiency and the cash conversion cycle, which really equates to inventory turn. This business if we go back a couple of years in the years you're talking about, was turning globally less than 4x. We're now approaching almost 5x on a trailing 12 basis. And so our goal is to see those turns above 5x. And that's our ultimate goal. We're well on our way to see that. So we have a little bit more work to do there. What does that mean? That means that the other aspect of even closing stores and the transference of sales to those stores is important because we're recapturing a lot of those sales. We're recapturing the cost of goods sold and that movement of inventory. And so thinking about it on a more average basis, the business was carrying well over $1 billion in inventory on an annualized average basis. And we won't see any -- we won't go anywhere near those numbers. Even as we spike as we get towards these -- towards the launch upcoming, especially because there's so much demand and the inventory turns so quickly when you see these launches occur. So hopefully, that's helpful.

That is. And then my second question, and I don't know if there's any way to frame it up. I've got a teenager who was looking for a new controller, 1 to 3 stores couldn't find anything. So we and the Hunt family live through your hardware shortages. I was wondering, is there any way you can quantify what the hardware shortages did to your sales and how they limited sales in the current period? And maybe in the current -- not only in fiscal Q2, but maybe in Q3.

Yes. I don't know in terms of quantification. I think the thing was, Bryan, is that there was a flow of new product, but it was just spotty. And I think that's the critical factor. When the newness was available and the switch is a great example, new controller is a great example. And then -- and even the sell-through that we talked about with our private label accessories was fantastic. The reception from customers is great. Again, I don't know if there's a way to really quantify that. But again, remember, part of this is a pull forward from the pandemic peak during the height of the stay-at-home orders. And then at the same time, the manufacturers have shifted from Gen 8 to Gen 9 in their manufacturing plant. So there's a little bit of a confluence, and we think it's a short-term lived confluence as we just get into launching the Generation 9 product.

All right. And then my last question is kind of theoretical and scenario. Can you talk about the potential opportunity that the conflict in between Epic and Apple may create for a third-party seller of hardware and software and how this conflict may bring to light advantages and/or opportunities for you all?

Yes. I won't say much other than that we're obviously very aware of the situation. We're following it very closely, and we're watching. And we always look for opportunity within the industry, and this is no exception. So we're watching from the sidelines at the moment, but watching closely.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to Mr. George Sherman for any closing remarks.

Thanks very much. Just want to quickly thank the team at GameStop for all that they've done during the course of the quarter, the entire team, particularly our store teams, our distribution center teams, the refurbishment operations center, all those working on the front lines. And then really a call out for our omnichannel folks for affecting such quick change in such dramatic change so well. And thanks to all of you, as always, for your interest in GameStop. Appreciate it.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.