Thank you. Good afternoon, everyone, and thank you for joining us today on our second quarter earnings call.
As I mentioned in our last call, I along with my new management team, have been moving quickly to assess the business and develop our strategy to reposition the organization for the future.
Following numerous meetings with stakeholders, from across every aspect of our business, we have acquired valuable feedback and data to further reform our direction and, believe, we are formulating the strategic framework and specific initiatives to achieve our long-term growth and profit objectives.
We are committed to taking quick and deliberate actions to improve the performance of the company and set on the correct strategic path, fully leveraging our unique position and brand in the video game industry. I believe that during the call today, you will hear that we are fully committed to that mission and are acting with a sense of urgency to address the areas of the business that are critical to achieving long-term success and value creation.
We recognize that there was a need to rebuild credibility with the investment community and some of our stakeholders. We plan to accomplish this by quickly establishing a track record of delivering on our promises and executing plans for the business that will support improved financial performance and fuel future growth over the long-term.
You're going to hear a similar message from Jim Bell regarding clarity of financial metrics and appropriate level of transparency for how we hold ourselves accountable in meeting our objectives.
To that end, today we will outline a strategy that includes both near-term and long-term measurable objectives, which we plan to track our progress against each quarter.
Let's get into the details of that plan.
Our strategic plan is anchored on four key tenets: One, optimizing core business by improving efficiency and effectiveness in everything we do. Two, create a social and cultural hub of gaming within each GameStop store and online. Three, build compelling digital capabilities to reach our customers where ever they want to do business and give them the full spectrum of content and access to the products they are looking for and, four, transform our vendor and partner relationships, unlocking additional high-margin revenue streams and optimizing the lifetime value of every customer.
Let's take each of these one by one.
First, we’ll optimize the core business by driving efficiency and effectiveness across everything we do. There are several initiatives within this pillar, but broadly speaking, they include overhead cost restructuring, inventory management optimization, including streamlining SKU accounts and pricing and promotion optimization and a full review of rationalization of the store footprint across the globe.
As I mentioned, we are moving with a sense of urgency and have already demonstrated our commitment to doing so with our recent efforts to right-size the organization across our corporate infrastructure and our U.S. store leadership organization.
Over the last couple of months, we implemented changes that require us to make tough, but necessary decisions for the benefit of our organization moving forward. These changes will drive efficiencies and serve as a catalyst to rightsizing our cost structure.
That work is continuing and we are further executing other ways to optimize operational cost, including restructuring or exiting unprofitable businesses or markets, and each and every aspect of our indirect procurement activities.
As we told you in June, we are exiting the Simply Mac business and continue to work towards that divestiture in the near term.
We also embedded ThinkGeek.com into the GameStop.com environment to leverage that existing platform, further streamlining the organization.
As you may know, in June we hired Chris Homeister as our Chief Merchandising Officer. Chris has an extensive hardlines and specifically consumable electronics retail background and has already developed and implemented several initiatives to improve the overall productivity of our stores and products.
First, we are employing more effective merchandising practices, including among other things, few rationalization, which will declutter our stores and provide a better experience to our customers.
The first store set with this evolving strategy begins next week.
Second, we believe that through a more comprehensive pricing architecture and end-to-end product and pricing life cycle management, we can drive higher overall product margins. And third, we are committed to adding and growing high-margin product categories, which not only work to offset market-driven declines and pre-owned software sales, but also add to our credibility with customers as the only retail outlet for the aggregation of all things video gaming and pop culture.
For example, we see further opportunity in expanding our double-digit growth collectibles category, creating more exclusive packages with our vendors, expanding our PC gaming offerings, and evolving our private label business by leveraging our significant scale and retail expertise. Optimizing our store base for an increasingly digital world is essential for the future and increasing profit productivity.
We have an expansive and profitable store base with 95% of our stores posting overall EBITDA positive results.
However, we know we have the opportunity to do even better and expand profitability by de-densifying our store footprint in some markets.
We are committed to both closing loss-making locations as well as maximizing profit productivity from capturing sales and profit transfer in stores with overlapping trade areas. We believe that store de-densification will be materially accretive to the overall business model, and remembering that our average lease life is only two years, we can approach these strategic decisions with limited, if any, cost implications.
In total, we believe these operating profit improvement initiatives will substantially exceed the previous management team's initial $100 million target that was communicated earlier in the year. We believe the total annualized run rate of our profit improvement initiatives will be in excess of $200 million for 2020 and beyond.
Moving to the second pillar of our strategy, we are committed to creating a social and cultural hub of gaming within each GameStop store, online and within the digital environment. This is especially important as the video game industry experiences a significant change, from the evolving methods in which customers are consuming video games to the more near-term disruption from the current console cycle coming to an end.
We are and have been the leading expert in the industry for decades and have the ability to leverage that position to create an experience that ignites passion before, during and after each transaction. Not only are we the largest videos sales generator for our hardware and software partners, we are also the video game authority in countless neighborhoods around the globe. This is what makes GameStop unique. There is no other brand better position to be the aggregator of video game products and content including eSports and Digital Media, with the deep expertise of our associates to gamers of all demographics worldwide.
As part of this strategy, we have begun testing a series of experiential offerings within the Tulsa, Oklahoma market. Think of this approach as a live laboratory, which will help us define and execute the optimum mix of high margin immersive experiential gaming content with our existing array of the video games and collectibles products.
For example, we are trying – try before you buy experience was up to 12 gaming days, eSports focused comparative gaming content delivery.
Our Collectibles focus is experience, all supporting physical and digital video gaming accessories transactions. Of note, this is a very controlled and disciplined test that fits well with our capital expense budget for fiscal 2019, and any rollout from this test will not be implemented in every store in the chain. It's still early, and we will share some of these findings with you as we progress in the coming quarters.
While we believe these tests along with our other initiatives are necessary to define and add new high-growth and high-margin revenue streams for our business. We remain committed to two things. One, we are the leading omni-channel video game retailer and will continue to be. And two, we do not intend to completely remodel our chain of stores, but rather we expect the results of these tests will yield a highly profitable store model that will complement various key markets, further enhancing our already strong customer engagement as well as evolving our product offering and position within the gaming industry.
Finally, an integral part of being the social and cultural hub of gaming is our customer engagement within our loyalty program.
We are exploring ways to expand the PowerUp Rewards program by enhancing the program's value to our most active shoppers, while simultaneously driving profitability.
Most importantly, we are redesigning our PowerUp Rewards program where among other things we are testing various recurring revenues subscription opportunities.
Secondly, we are in the final stages of rolling out a new and improved value proposition for the paid PowerUp Pro tier which in early test is yielding favorable results in enrollment and customer frequency.
Finally, we've upgraded our customer database management toolset based on the Salesforce marketing cloud platform. This integration along with some new agency partnerships will enable a more sophisticated propensity-driven marketing model at the one-to-one level thereby focused on growing customer lifetime value and ROI.
Our third strategic pillar is building a complete and compelling set of digital capabilities. Digital is not only a growing aspect of our industry it's also a large part of who we are. Today, we attach significantly more digital content in-store and online purchases than any other retailer and we're focused on evolving further as we build-out best-in-class omni-channel capabilities. Simply, we have to adapt to meet our customers where ever they want to do business. We must and will be channel agnostic.
The first component of delivering a best-in-class omni-channel experience is the new GameStop.com platform that launched in August. This new online experience delivers highly engaged and fast online merchandising, new buy or hold and pick up in store functionality and rich community content. With enhanced functionality like Apple Pay and integrated PowerUp Rewards enrollments and improved shopability, this re-launch marks an important step towards our long-term goal of creating $1 billion e-commerce business. It also provides our customers with the omni-channel capabilities that they've come to expect.
Our efforts won't end here. Instead, we are currently working on various capabilities that we believe will add significant value for customers. Simply by leveraging existing assets, we have the opportunity to enrich and monetize data available to us and create digital exclusives. We recognize and embracing digital as an opportunity for GameStop and we are committed to supporting our vendor initiatives, both digitally and physically, including initiatives such as developing capabilities that allow for or enable, a more streamlined embedded digital purchase process.
Finally, the fourth pillar in our strategy. We're in the early stages of transforming our vendor and partner relationships to better position us for the future of video gaming. When I first spoke to you in June, I told you that, I believe it was important for GameStop to transform and evolve to remain a viable player in our industry, which is undergoing meaningful technological change.
We are committed to doing that, but recognize that this part of the strategy will take longer to develop. The good news is twofold.
First, we are advancing very constructive discussions with our partners and they have recognized the value that we bring to them. And second, both Microsoft and Sony recognize the market and technology advancement will still require physical disks in the next gaming console cycle.
Our 50,000-plus knowledgeable associates worldwide remain the only full-time dedicated sales force in the video game industry. And the results they drive are meaningful. We attach significantly more games, content, digital media and related pop-culture content than any retail outlet for both our hardware and software partners and in most cases are their number one volume sales outlets.
Our associates bring an enormous amount of value to console makers, given they are integral part of our customer acquisition model.
Our partners are actively engaging with us to evolve the model from a historical transactional model to one that rewards us across the customer acquisition and lifetime value spectrum, not simply transactions.
As an organization, we are intensely focused on advancing each of our four strategic tenets and we will continue to update you on our progress against our goals in the months ahead.
Some of these opportunities will serve to benefit us sooner, rather than later and some of these initiatives will take time to nurture and cultivate over the long term.
We will be disciplined with our approach to innovation by focusing on initiatives that will benefit the core video game business and leverage our current portfolio of assets, but not require significantly more capital growth.
In fact, we intend to maintain our historical annual capital expenditure levels and redirect some of those funds toward these initiatives.
We are out of the diversification business.
We will test and learn before we deploy and our decision-making will be driven by a disciplined approach to capital allocation.
We will not under any circumstances debt to farm.
As you can tell from my comments, I'm excited about the opportunity in front of us. It's a tremendous challenge and will require significant effort on our part, but we are well on our way. Make no mistake, this transition will take time and our sales expectations over the next several quarters will reflect the end of console cycle and the next generation of console launches by both Sony and Microsoft later for 2020.
However, as you can see, our strategic framework is focused not only on sales, but expanding our gross margin, reducing costs and optimizing inventory management, all of which will lead to continued growth of free cash flow of the business, both in the near term and over the long term.
Before I turn the call over to Jim for our financial review of the quarter and outlook for the remainder of the year, I want to take a minute to address some of the misconceptions that I've heard over my first few months. It's clear to me that market sentiment regarding our core business is not fully reflective of our intrinsic value. There are likely several things driving that many of which we are currently addressing.
But what I do know is that, we have tremendous assets that have driven and can continue to drive meaningful shareholder value and cash return. We believe those assets are being discounted by a market that is focused solely on a short-term view and mistake supplier management such as sale diversification investment decisions.
In our view, our current sales performance reflects the natural end of console cycle that will rebound with console launches later in 2020.
However, while we believe strongly in the value creation opportunity of our initiatives, this management team is committed to being a goods stored as capital and being disciplined and highly strategic in terms of any potential investments, as well as returning excess capital to shareholders.
We have a strong and improving balance sheet and cash flows, a highly profitable store base, a very resilient brand that operates resilient strength in the industry.
In closing, we have a tremendous chance to shape the future of GameStop in this evolving and dynamic industry as the leading provider of rich video gaming products, content and expertise across all purchasing channels.
Our team is committed to tackling the challenges in front of us and we are confident that we are positioning the business to deliver strong results, particularly with the next console cycle on the horizon.
As we evolve our business model over that same timeframe, we'll be better equipped to drive increased profitability when the industry cycle turns and consoles launch in 2020. I'd now like to turn the call over to Jim for a recap of the quarter and our outlook on key business metrics. Thank you.