Greetings, and welcome to the GameStop's Third Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Eric Cerny, Investor Relations. Thank you, Mr. Cerny, you may begin.

Thank you, and welcome to GameStop's Third 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 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 into our business and strategic framework for the future. Jim will then provide more detail on our financial results and expectations for fiscal 2020. 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.

Thank you, Eric. Good afternoon, everyone, and thank you for joining us today on our third quarter earnings call. I hope you're all safe and well. The third fiscal quarter represents a key pivot point in our trajectory to stabilize, optimize and transform GameStop. We have made significant strides in stabilizing and optimizing our core operations and are excited about the transformational plan we are executing that will enable us to create long-term value as our industry continues its rapid growth. Our third quarter results were largely as we had anticipated, marking the end of a challenging sales performance period as the industry transitions from generation 8 to generation 9 console video gaming products. The transition, coupled with the impact of a global pandemic on consumer retail mobility and also to some extent, supply chain disruptions is now segueing into what we see as a period of sustained growth, the beginnings of which I'll highlight in a moment. First, to summarize the third quarter. As we had anticipated, sales and profitability were down with comparable store sales declining 24.6% and an adjusted loss of $0.53 per share. But that notwithstanding, we saw 257% growth in our e-commerce sales versus the prior year, reflecting investments during the year that enhanced our omnichannel capabilities. We continued to reduce expenses, delivering over $315 million in SG&A expenses -- expense reductions so far this year, and we are pleased to end the quarter with almost $300 million more in cash and restricted cash compared to the end of the prior year third quarter. As I mentioned, we made significant strides in stabilizing and optimizing our core operations over the last 15 months, and we're excited about the plan we are executing for the rapid evolution of GameStop. Despite the unprecedented environment during the global…

Thank you, George. Good afternoon, everyone. I'd like to take this time to walk you through our third quarter fiscal 2020 results, and then I'll share some insight into the success of the new video console launch and how we're approaching the fourth quarter. As George discussed, we advanced our strategy in the third quarter, making significant on our near-term goals of optimizing our core business by reducing expenses, improving our inventory management and strengthening our balance sheet and capital structure. And we did so while continuing to focus on transforming GameStop for the future to deliver profitable long-term growth. With the third quarter behind us, we are intently focused on maximizing all that the new console cycle has to offer, expanding our foundational work on our elevated omnichannel platform and more efficient operating model, and quickly but methodically evolving the business to expand our addressable market and support our long-term growth and profit objectives. As the gaming consumer and industry evolve, we see an opportunity to expand our addressable market beyond our historical predominant focus on the console video game market with a comprehensive suite of product offerings and new services across all categories for games and entertainment. And simply put, we're making it easier for consumers to find what they need at GameStop, in an intuitive, relevant and frictionless shopping experience, all while taking a leadership role across the game and entertainment categories. Economically, this means adding incremental purchase occasions with higher-margin lines of business and therefore, capturing greater share of wallet. Let me turn to a review of the third fiscal quarter. As George mentioned, our third quarter sales performance was as expected as we transitioned through the final quarter of the generation 8 console video game cycle, which included the shift of many software titles into…

[Operator Instructions] Our first question comes from Stephanie Wissink with Jefferies.

This is Ashley Helgans on for Steph Wissink. On the SG&A reduction, you've been running about $100 million a quarter. What should we expect for pacing by quarter going forward? And what are the remaining cost buckets to address? And then how -- just on your performance in the quarter, how did it benchmark to industry figures of third-party data sources like NPD?

Yes. Ashley, thanks for the questions. With respect to SG&A, I mean, look, again, we're -- we continue to address, as you know, for several quarters now addressing SG&A in virtually every facet of the business. So it's not going to -- it won't be that different from the contribution of expenses for any quarter as we've seen historically because we're really removing cost out of the entirety of the system. A lot of it is stores coming off-line. A lot of it is productivity in our labor forces, both in the stores and the DCs, all aspects of our corporate G&A. So it really is everywhere. So I don't know that, that's going to change very much at all based on the history. And I'm sorry, second part of the question was?

Yes. That was helpful. But the second part of the question was just on the performance in the quarter, how did you benchmark to industry figures like NPD?

Yes. I don't -- I'm not exactly sure how to comment the benchmark point. But I mean, look, I think -- again, I think the quarter was in line with our expectations. And if you go back -- just go back a year. I mean when we first got here last summer and we set out on this journey, we said, look, these next 4 quarters will be representative of exactly what we just saw. And they met our expectations. And then more importantly, what happens at the end of the cycle as we then transition to the next one is we're not competing on price at the end of the cycle. So again, it's a balance. But importantly, I think we -- the third quarter is behind us now. And I think the most important point here is, is that we are indexing very well as we launched into the November time frame and the launch of these consoles. I think that's the critical message today is that we made that transition, and we're laser-focused on moving forward.

Yes. I think that's right. I mean I think all I'd add is that we knew that we were at the end of the -- we're going to experience some voidance in hardware as we got to the end of the cycle without the prior generations in place in any kind of quantity. We had some software titles moved from Q3 to Q4, and we've affected during this pandemic. So I mean, very clearly, as waves break out across the country, we feel the impact of that as shoppers become less and less comfortable, particularly going to a specialty store for a specialty purchase.

Okay. Great. And if I could just squeeze in 1 more. E-com representing 18% of the mix in the quarter. How much of the online business is now fulfilled from stores?

Yes. It's -- that's not a stat that we've actually supplied, but suffice it to say, it actually fluctuates, and this is important because it's based on what the consumer is demanding. And so if it's a ship from store or buy online pick up in-store or a direct-to-consumer element, or an absolute footfall into the box itself from a pure POS traffic standpoint, again, I think it's fluctuating. That's important. That's exactly what we mean by a frictionless digitally led omnichannel retailer is letting the consumer pick when they want the product, and we deliver to it.

Our next question comes from Colin Sebastian with Robert W. Baird.

I mean clearly, a lot of progress being made with e-commerce and with expense controls. So as it pertains to the transformation plan, I wonder if you could provide some context on how this differs from what was outlined in the letter to the Board? Because the face value, it seems like there's a fair bit of overlap in terms of the shift to digital-first and shrinking the store base. That's my first question.

Yes. Look, I'll only comment on our progress as we see it, Reboot to date and where we are today. We look at the business, and we feel quite good about the financial stability measures that have taken place. Over the period of Reboot, we've reduced long-term debt by well over $500 million. We've returned $200 million to the shareholders through buybacks, which represent about 37% of the company. We ended the quarter with a $300 million more cash than same quarter last year, and that's been a trend. I mean that's something that's been pretty continuous throughout the Reboot process. Just prior question, your SG&A run rate of reduction seems to be $100 million a quarter? Yes, it does. I mean, that's very much an important part of getting where we needed to be. And then the progress that we've made on working capital has been tremendous. And fortunately, that began at the very beginning of Reboot 15 months ago, and what that's done to allow us to navigate through this pandemic is I cannot overstate. So on the economic stability or financial stability front, good. We've made nice progress on digital, for sure, from an e-commerce standpoint. We were behind. I mean we were clearly behind in terms of digital penetration of sales. We are behind in terms of technology. We still are very candid about having work to do, but we've come a long, long way very, very quickly. So it'll be up 257% for Q3 to have penetration at that level and really spiking considerably higher than that during peak periods to have made investments in our e-commerce capability, both in terms of the platforms and human capital that's driving it. The capability expansion that we made, lease-to-own options, flexible payment terms, proprietary credit cards, all better alternatives for the customer on how to shop. And then just kind of looking ahead, while this generation of console launches is very, very important to us, and it is, and the demand is unprecedented, and it clearly is, we're working to be defined not purely as a console gaming retailer, but as serving the entire gaming community on all the various verticals. So we're glad to see sales up 16.5% despite being closed on Thanksgiving day and being very comfortable in that decision to close on Thanksgiving day. We have a lot of category expansion that both Jim and I mentioned during the course of our comments that are progressing well, and then really good progress on the digital-first omnichannel store fleet optimization work. So we look back, we feel pretty good about where we are and are poised for the next phase of work.

Yes. I mean just to put a fine point on it. Again, the second pillar that we launched in Reboot last year in the August, September time frame was to build a frictionless digital ecosystem. That's exactly what we've done, that is leading with technology, leading with a digital footprint, that optimizes our e-commerce evolution through the investments in advancement in technology as well as how it balances with the right footprint of stores. We launched that when we got here and launched our Reboot program. So I think that's the point George made. We did it, and we've been making some real strides against it.

That's helpful. In the release, there's some commentary around providing growth in reference to 2021. So I just wanted to clarify if that's specific referencing sales volumes next year or something else?

It's absolutely referencing sales volumes next year. And I'd say 2-part response to that. First of all, we have growth initiatives in place. Second of all, the console launch is not a Q4 phenomenon, as you all know. I mean I think there'll be great carryforward demand into the entirety of next year and beyond.

Okay. And then lastly, do you have a target for the cash balance expected at the end of the fiscal year?

Yes. We haven't put it out there, but I would just say consistent with the trajectory that we've been on.

Our next question comes from William Reuter with Bank of America.

I just had 2 quick ones. The first is -- and I don't think the question was asked this way. In terms of the November performance, was it in line with your expectations?

Yes. It certainly was in line with expectations. Again, we knowingly took a chunk out of that by closing on Thanksgiving. I think it's fair to say that in this environment, the sales compression that you might sometimes see is not prevalent. So we knew that, that was going to be an investment in our people and into safety. And we don't second-guess that for a moment. So yes, if you make that change, it is in line with our expectations.

Okay. And then in terms of the new shelf, I saw that you mentioned general corporate purposes. Would you consider issuing stock to repay debt under that program?

No, that's absolutely not the intent. The intent here is to simply optimize flexibility and optionality. There is a lot of unknowns going on in the marketplace with respect to this pandemic, ongoing flex of cases across the world, the impacts on our own businesses, and we're not immune to that, right? And in that regard, look, our -- we're going to continue to execute our strategies that have bolstered and strengthened our balance sheet. And you see all the work that we've done, including if we go back to even the long-term debt levels in early 2019 until today, as of this coming Friday, we'll have reduced our long-term debt over $530 million. By March of '21, they'll be over $600 million. In that same time frame, that same roughly 24-month time frame, plus or minus, we also returned over $200 million to shareholders. So I think, look, the goal is to continue to focus on running the business and optimizing the way we run the business, but also be very pragmatic and make sure that we have capital flexibility with no intention to do anything other than maintain our flexibility. Hopefully, that helps you.

And so far the debt is concerned, we don't need it.

Yes, absolutely.

We don't need it, bottom line.

And as I mentioned, well, Friday is the first voluntary redemption of $125 million of the remaining March '21 notes.

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

With regard to the consoles, how did your allocation compare to prior cycles? I mean presumably, you sold every single unit that you got. Is there still -- I assume there's still a very heavy backlog. And what are your thoughts on allocation through the rest of the period? We know Sony has come out and said that they plan to produce more. So can you share any thoughts on that?

Yes. I think the demand has been unbelievable, Joe, as you mentioned, and we don't see any end of that insight. So certainly, these are fabulous pieces of technology, the demand is terrific for it. Any allocation that we get, and I think I've mentioned this on past calls, the answer is we always want more. I will say the competitive set has changed between console launches really with the evolution of direct-to-consumer from the OEMs themselves. So that tells you a bit about what the allocations look like versus last time around. But we're playing meaningfully, which was our objective, and we're winning well. So I think one area and a point of differentiation for us, and it's been part of our premise all along is we attach differently. So when you look at accessories, first-party software, we attach differently, and that's been recognized, and we have seen some level of reward for that, and we expect it to be a differentiating point for us going forward in terms of allocation.

That's helpful. And then just another question. With regard to the cash balance, I mean, I know that some of it's restricted, but you have $603 million, presumably, you generate even more in the fourth quarter. Let's say, we're getting through this cycle with the pandemic. I understand the next couple of months are going to be rough. But I guess, how are you thinking about cash allocation or cash usage at this point? I know we've talked to people that are hoping you were going to buy back more stock in the coming years, so -- or return to that. So I guess I'm curious how we should think about that going forward.

Yes. Thanks, Joe. The short answer is, again, nothing is off the table. I mean our job is to find the optimum balance of capital allocation, which starts with, ultimately, the investment in the transformation of the business for future growth and profitability. That's the first point. And we'll continue to do that. And if it means accelerating those investments, to bring that return in, in a more rapid fashion, we'll do that. It also is the fine balance of the capitalization of the business. And ultimately, what is the right level of debt, we think we're approaching that after we get done paying down the rest of these March '21s. And then outside of that, certainly always the consideration to return capital to shareholders as well as we've proven, like I said, last year, in 2019, returned over $200 million to shareholders. So I think every one of those is on the table, we are always looking to find the optimum balance of capital allocation.

And just to kind of add the obvious, the underlying environment matters, certainly, we don't know what a few more months means right now. We're obviously encouraged by a vaccine just like all of you are. But we see more impact ahead, and we don't know the exact time lines or protocols for that nor does anybody at this point. So we look at something that we have to be guarded about into the future is. There's no particular end date in sight yet. This is something we're going to be dealing with for the indefinite future.

Our next question comes from Seth Sigman with Crédit Suisse.

I wanted to follow-up on the Q4 commentary, and I just want to confirm the language here. So in the release, you talk about positive year-over-year sales growth. I just want to confirm, are you guiding to year-over-year profitability growth as well?

Yes. We're not guiding to anything. The comment was specific to growth and profitability in the fourth quarter. And just to be clear, again, we're not guiding to anything. Again, it's -- I think we've been pretty straightforward on that.

What would you call sales year-over-year as then? I mean you're saying sales year-over-year will grow and there's a comment about profitability. I'm just trying to confirm, are you saying year-over-year profit growth in addition to year-over-year sales growth?

Yes. It was just a notation for the fourth quarter.

Yes. For the fourth quarter, I'm asking.

Yes. That's correct.

Okay. So year-over-year profit growth. So then the related question is, given the unfavorable mix of hardware, would you expect gross profit to be up as well? Obviously, you're going to have some mix impact here. Comps are going to be up, but you do have the negative mix. So gross profit up? Or is it really coming from the cost savings?

A little bit of both. Gross profit dollars because, look, we're talking about volume rate. So you get a little bit of -- from the overall top line as a flow through, but then you also take advantage of the flow through to the bottom line as a result of your expense structure. That's a lot more optimized than it was last year.

Okay. Interesting. Okay. And then just a follow-up question on the market share question earlier. Your growth rates did seem to trail the industry per MPD. I'm just curious what would be causing that? Do you feel like e-commerce, even though it's clearly progressing, do you feel like that's been one of the reasons for lagging or anything else that you would highlight? And then, of course, with all the initiatives, I'm curious, what do you think is going to be most incremental to regain share as you sort of look out over the next 12 months or so?

Yes. Look, I think there are periods during the course of Q3, certainly periods during the pandemic, where we certainly are aware of the fact that we lost some share. We've had closed stores. We've had a competitive situation where some of our competitors were open for business, we weren't. And you've got a very guarded shopping environment, obviously, as it applies to the brick-and-mortar aspect of our business, where there's a reluctance, there's a significant decrease in footfalls across retail in general, and we're not immune to that in any way, shape or manner. So I think you've got a prescribed shopping trip to GameStop to get gaming, and you've got a general trip elsewhere for multiple purposes. I think that probably is factored in. On the flip side, when there's -- again, when there's newness in the marketplace, we excel. We tend to lead in market share for those software releases, those new game releases. So that is our strength. We actually believe that we're going to be in a position to begin to claw back market share going forward. As we cycle some of those closure periods, as we're able to get customers back in stores and leverage the full omnichannel suite that we offer now. We've gained certainly through our increases on e-commerce, but there still is significant impact on the brick-and-mortar aspect of the business right now, and it will be for a while longer.

Yes. I'd just add 1 comment on the market share piece. I mean if you just look at the cyclicality, back in the 2013, 2014 gen 7, gen 8 transition period, you saw that at the end of the cycle, we tend to lose a little bit -- a couple of points of market share, and at the beginning of the cycle, we gain those points of market share. And a huge reason for that, and that is our expectation as we head forward, but a big reason for that is, again, the technical consultation of our expert gaming associates that are in the stores. And that's important with the advancements of the technology.

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

I just wanted to continue digging on the comment about the 16.5% comp in November, and just how to think about how the rest of the quarter plays out. November was obviously the quarter when consoles launched. I think at least it's going to be the only quarter where the industry will see a material sell-through due to the shortages. And November likely brought a lot of traffic into stores and the website. So thinking about December and January where you and your peers aren't likely going to have a ton of supply, at least, I think, do you think you see a reversal of traffic? How do we think about comps and positive? What's the setup for those 2 months, where, again, you just don't have the traffic driver in any materiality?

Yes. I think, Curt, first of all, let's take any potential effects of unknown components of the pandemic off the table because, look, we've seen it time and time again that it affects retail mobility. So let's just assume no one knows the impact of that, take it off the table. And the very simple fact outside of that is that, again, we're continuing to execute here in the fourth quarter. This is not a couple weeks in the month of November. So to be clear, that's not what this is. And it's certainly not the fourth quarter either. As George said earlier, this is a multiyear evolution here, and this is just the beginning.

Yes. Look, there's going to be an impact on December, as you know. I mean you've likely heard about global supply chain issues on every call that you've been on, and it certainly is a fact, and it is a mitigating factor. But we have newness in December. We have a release coming up in 2 days, called Cyberpunk 2077, which is a big driver for us, and we certainly believe that there are other events that will drive traffic in the month of December. That will continue this.

The other thing is, again, I don't want to miss not playing to the fact that we have added so much customer flexibility both in delivery options and payment options. These are all resonating incredibly well with our consumers and giving us an advantage. So again, this is how the -- you take advantage of a full omnichannel execution. So those are continuing to be part of our business as we move in through December and beyond as well.

Okay. And then just as a quick follow-up. Any commentary on the news business? How did that trend go into 3Q? And I guess, how is the hardware portion of that segment doing maybe seeing a little bit of boost near term, just given supply constraints across both our next and current gen consoles? And how the software performing as well?

Yes. On the hardware side, for the third quarter as it should be expected. I mean again, you've got lower supply elements. As we go forward, and what I mean by is our ability to intake. When our stores are closed, we're not in-taking preowned hardware, right? I mean that's just a natural equation. However, as we're navigating through this launch, a big part of that is our engagement with our customers with preowned product. And so we're positioning quite well. And I think what's different, though, as we go forward, this time around is that the OEMs are not making the prior gen product anymore. And that's critical because if you want a prior gen product, a lot of people do, there's demand in that marketplace. We are really your shop to go get that.

Yes. I'd emphasize that last point. We're bullish on preowned hardware for just that reason. And just, again, go back in time a little bit. The intake issue is pretty self-explanatory. We have presales, and then we have launch events for new next-generation consoles. You're not going to get my old console until I get my new console. So there's an inherent delay in that happening, and then it does. And that's where we are right now is kind of in the fulfillment and high demand phase, working through those preorders, but really in a very constricted environment going forward. But we actually think that this can be a bit of a renaissance for preowned gaming with the absence of the older generation consoles out there, and we have them and we can remanufacture them.

There are no further questions at this time. I'd like to turn the floor back over to George Sherman for any closing remarks.

Let me have Jim make 1 quick comment, and then we'll close off the call.

Yes. I just wanted to call your attention this quarter, we added -- as we're making this transformation, we added some slides to the IR website. So I'll call your attention to those that continues to iterate and lay out for all of you this -- our journey. So please take a reference to those. George?

Yes. Thanks to everyone, wishing you a safe and happy holiday. It's obviously been a quite unusual year. I hope you have a great end to it. I want to kind of lay out our communications cadence going forward. We will provide you with holiday sales results in early January, and then more details regarding our strategy and outlook at the ICR conference happening virtually in January and again, following our fourth quarter and year-end results. Thank you all very much.

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.