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GME Gamestop

Participants
Eric Cerny Investor Relations
George Sherman Chief Executive Officer
Jim Bell Executive Vice President and Chief Financial Officer
Stephanie Wissink Jefferies
Raymond Stochel Consumer Edge Research, LLC
Curtis Nagle Bank of America Merrill Lynch
Joseph Feldman Telsey Advisory Group LLC
Lavesh Hemnani Credit Suisse
Anthony Chukumba Loop Capital Markets
Call transcript
Operator

Welcome to GameStop’s Fourth Quarter 2019 Earnings Call. This call is being recorded and will be made available.

I would now like to turn the call over to Eric Cerny, Investor Relations.

Eric Cerny

Thank you, and welcome to GameStop’s fourth quarter and fiscal 2019 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 statement and 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 insight into our fourth quarter and fiscal 2019 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’ll open the call up to your questions.

Now, I would like to turn the call over to the company’s Chief Executive Officer, George Sherman.

George Sherman

Thanks, Eric. Good afternoon, everyone, and thank you for joining us today on our fourth quarter and full-year earnings call.

Before I begin a review of our 2019 financial results, I’d like to update you on how we are navigating our business during the COVID-19 pandemic.

As you’re aware, the situation remains fluid with each day bringing new information.

Our highest priority is ensuring the health and safety of our associates and customers around the world.

We have been steadfast in our adherence to CDC-guided safety and local government orders for retailers in each of our communities.

We have countrywide closures in Europe, primarily in Italy and France. And where we have stores that are open, we have temporarily closed our storefronts moving to curbside pickup at stores to facilitate buy online and pick up in store orders and e-commerce deliveries only.

As millions of consumers adapt to remote work, play and learning, we’re pleased to be able to serve their needs.

In fact, we’ve seen an increase in store and online traffic over the past few weeks. We remain committed to continuing to meet those needs in a safe environment.

As for the impact on any supply chain and manufacturing for the new consoles, we will continue to work with the console makers as the launch approaches. But as of now, we have no indication of any impact on the product launch or delivery date, which is expected in time for holiday 2020.

In the near-term, we continue to monitor inventory levels for specific categories that might be impacted by shipping or delivery delays. But as of now, any impact has been minimal.

As Jim will highlight during his remarks, we will pay all U.S. employees, whose hours have been eliminated, an additional two weeks at the regular pay rate, based on the average hours worked over the last 10 weeks.

In addition, the company will reimburse all benefits – all benefit eligible U.S. employees, one month of the employee portion of the benefit expenses.

Now turning to a review of fiscal 2019, beginning with our fourth quarter. The fourth quarter concluded the year in which we achieved significant progress against our key priorities, focused on optimizing our business model, strengthening our balance sheet and improving our cash flow in a period that was expected to see significant declines in sales.

Our overarching goal is to capitalize on GameStop’s leading global market position and strong loyalty base to stabilize sales trends and ultimately position the company for sustained long-term profitable growth.

Overall, our fiscal year top line results were in line with our January update.

Our bottom line results were better-than-expected, demonstrating strong progress toward our key priorities of fueling gross margin expansion, a reduction in SG&A expenses and a strengthened balance sheet.

As expected, sales were down double digits, driven by the industry-wide headwinds we’ve discussed before, as we’re in the late stages of the current console cycle, as well as working against the strong fiscal 2018 fourth quarter, which saw a strong accessories business related to Fortnite market penetration.

We are steadfast in our mission to accelerate the changes needed to our operating model, to position the company to capitalize on the way consumers are shopping and gaming today.

We’re accelerating our digital capabilities and testing new experiential elements in their stores.

In 2019, we have built a new web platform, introduced new omni-channel capabilities, including buy online pick up in stores with encouraging results.

However, we’re still early in that activity.

In terms of the fourth quarter results, overall, consolidated global sales were $2.2 billion, reflecting a comparable sales decline of 26%, and we delivered adjusted operating income of $109 million and adjusted earnings per share of $1.27.

For the fiscal year, consolidated global revenue declined 22%, reflecting a comparable store sales decline of 19.4%. Adjusted operating income was $62 million and adjusted EPS was $0.22.

We remained intensely focused on inventory reduction and working capital improvements in fiscal 2019. And these efforts drove a 31% reduction in inventory and a 64% reduction in accounts payable, putting us in position to enter fiscal year 2020 with a significantly stronger balance sheet fundamental.

2019 was a challenging year as we entered the low point in demand for the current console cycle.

However, there were some bright spots and we made significant progress against our key initiatives.

As a reminder, our strategic plan is anchored on four key tenets: first, optimizing the core by improving efficiency and effectiveness in everything we do; second, creating the social and cultural hub of gaming within each GameStop store and online; third, building a frictionless digital ecosystem to reach our customers wherever they want to do business with access to the best digital content in products; and fourth, transforming our vendor and partner relationships for the future of gaming.

Starting with optimizing the core by improving efficiency and effectiveness in everything we do.

As we discussed earlier in 2019, this pillar was expected to deliver the earliest results and, in fact, this is where we have made the most progress, and the primary driver so far against our 2021 run rate improvement goal.

As a reminder, of the $200 million profit improvement goal, we know that roughly half of that will be delivered in the form of expense reductions, while the other half coming from product margin enhancements and implementation of additional revenue streams.

In fiscal 2019, we achieved an expense reduction of $130 million on an adjusted basis, with about half directly attributable to cost optimization activities. We still have work to do here and we’ll continue to focus on this objective in 2020, as we remain on track to deliver on our fiscal 2021 goal.

From an inventory management perspective, I already mentioned a 31% year-over-year reduction, representing a significantly improved position, both in terms of quality of inventory and overall stock levels.

We will continue to focus our efforts on optimizing our inventory position to protect our strong cash flows in fiscal 2020.

We made good progress in fiscal 2019, continuing to expand into higher-margin categories, such as PC gaming accessories, private label and collectibles, as reflected in the gross margin expansion across categories. In 2019, we expanded our PC gaming business in the stores and we’ll continue to expand our offering in 2020 and beyond, as we cater to all the needs of our gaming customers.

On the collectibles front, we continue to improve the product offering and combined the product with merchandising discipline around inventory and improved markdown strategies, we’re driving margin expansion.

Going forward, we have opportunity to better leverage our scale, as we source product and act more strategically in our initial buys and in terms of how we pull inventory into certain categories, further enhancing our ability to expand margins in the category.

In 2019, as part of our decisive actions to address underperforming areas of the business, we began to wind down our business in the Nordic countries of Denmark, Finland, Norway and Sweden.

Through an accelerated effort, we now expect to fully exit these markets by late July of 2020.

We continue to anticipate the run rate impact once the exit is complete to be a positive full-year annualized EBITDA contribution of just over $50 million.

Our next strategic priority is creating a social and cultural hub of gaming within each GameStop store and online. An important element of this evolution is rapid customer-centric experimentation.

As you’re aware, we’re piloting 12 test stores within our Tulsa, Oklahoma market and are pleased with some of the initial discoveries.

We also enhanced our PowerUp loyalty program with new features that have been driving increased paid enrollment and attach rates with transactions.

Our PowerUp loyalty program continues to be well received by our customers. And we are pleased with the November launch of the enhanced suite of benefits for the pro tier customer, such as reward certificates and member access to exclusive opportunities and events.

This loyalty program allows us to engage with our customers to keep them up-to-date on the new technology, which is especially important to enter the fourth quarter console launch. In 2020, we expect to continue to leverage the program, grow the base and drive customer activation through the program.

Third, building a frictionless digital ecosystem to reach our customers wherever they want to do business with access to the best digital content and products.

Our relaunched website in 2019 continues to drive increased conversion rates and average revenue per user, along the longer browsing time from customers, using the site.

Importantly, it has also driven increased buy online pick up in store sales, which is key to drive customers to the store.

We are very pleased with this performance so far and we’ll continue to leverage this asset as we expand our capabilities in fiscal 2020.

And finally, transforming our vendor and partner relationships for the future of gaming. In 2019, we began to have very constructive discussions with our partners, and they’ve recognized the value, omni-channel reach and expert consumer selling engagement that we provide.

While still early, we began testing the concept of digital revenue sharing with select key partners. Also, under the strategic tenet, we begin to optimize our supply chain and global purchasing power to leverage our scale, as well as develop new category offerings, such as gaming PCs.

So in summary, while fiscal 2019 reflects the prevailing industry trends, we are pleased with the operational progress we made against our strategic initiatives. Many of these initiatives will take time before they are reflected in our results. But we feel confident that they will drive improved results and long-term sustainable growth.

As it relates to our outlook, we view 2020 as a transitional year.

As you’re aware, the industry is anticipating new gaming consoles from both Microsoft and Sony to launch at some point in the late fall. Notwithstanding the improved trend we’ve experienced over the past few weeks, as we’ve mentioned several times, over the first three fiscal quarters, we expect a continued challenging sales environment, followed by a material sequential improvement of the console launch.

Before turning the call over to Jim, I want to take a minute to publicly welcome our new Board members that we announced earlier this month, as part of the Board refresh and other corporate governance enhancements.

We’re able to attract a very talented slate of directors that bring unique skill sets to the table and will be great assets for the company as we start 2020 and continue to execute our transformation.

I also want to reiterate that our thoughts are with all of those who’ve been personally impacted by COVID-19.

In addition, I’d like to thank and recognize all of our dedicated associates who are providing excellent customer service in an unprecedented environment. Thank you for all that you’re doing to navigate this challenging time.

And with that, I’ll turn the call over to Jim for more detail on our fourth quarter and full-year results in addition to our 2020 outlook.

Jim Bell

Thank you, George. Good afternoon, everyone. I’d like to take this time to walk you through our fourth quarter and full-year 2019 results in more detail. And then I’ll share some insight into how we’re approaching fiscal 2020.

As George shared with you, fiscal 2019 saw strong progress toward our transformation plan, as we advanced our goals, focused on strengthening the underlying business and capitalizing on the advantageous position we have in the gaming industry.

One of these primary objectives in 2019 was optimizing our balance sheet and specifically reducing liabilities, including payables and long-term debt, increasing cash flow, primarily through significant inventory management initiatives and deploying capital to return value to our shareholders.

Additionally, our intense focus on inventory management is also contributing to improved gross margins. The result, we successfully ended the year with a strengthened balance sheet and the financial flexibility to navigate the near-term challenges posed by the end of the console cycle.

Turning to our performance. We delivered both fourth quarter and fiscal 2019 top line results, in line with our January update and profitability ahead of our updated expectations on an adjusted basis.

Looking at our fourth quarter results, total company sales decreased 28.4% to $2.2 billion from $3.0 billion in the prior year period. The overall sales decline was primarily attributed to a comp store sales decline of 26.1%, with the remaining 230 basis points attributed to closed stores and foreign exchange headwinds.

Our comp store sales results were primarily driven by the fact that we’re in the late stages of the console cycle, which is putting pressure on traffic to the stores. We saw declines across all three categories: hardware and accessories, software and collectibles.

As you likely noted from our press release, we have adjusted the way we are reporting our category detail. This chain was – change was primarily driven by two things.

First, we have reorganized the business and specifically, our merchandising organization to better align related category management, including the end-to-end lifecycle of products from new through pre-owned sales.

And secondly, we feel this is more – a more appropriate view of the console product vertical and will better align with our expansion of products and business across other video gaming verticals.

Finally, we feel this structure provides us with a more accurate reflection of how gamers are consuming video games today, primarily as they consume both digital and physical software in a very integrated manner.

For the fourth quarter, we anticipated sales would be tough, given the dynamics in the industry. But as we mentioned earlier this year, the accelerated decline in hardware and software after the Black Friday period was more than we had originally anticipated.

However, at the time of our holiday sales update in early January, we anticipated full-year comp sales to be in the range of down 19% to 21%, and we finished the year towards the high-end of that range, down 19.4%.

Hardware and accessory sales decreased 32.5%, reflecting anticipated next-generation console launches in 2020, as well as being up against significant accessory sales related to Fortnite in the fourth quarter of 2018.

As a percentage of total sales, hardware and accessory sales were 44%. Of note, we continue to see the Nintendo Switch platform resonate with customers, and this was a key positive, both within the merchandising presentation in our stores and as an offset to lower console sales.

Software sales decreased 27.8%, and as a percent of total sales were 44.8%.

Given the early announcement of new console launches, the number of title launches for this final holiday period on the current console was much weaker than the prior years, with more than nine major titles moving out of 2019 and into later fiscal 2020. Two bright spots in the quarter, however, were Call of Duty: Modern Warfare and Nintendo Switch titles.

Collectible sales decreased 9% to $245 million, driven by traffic declines in domestic stores.

As a percent of total sales, collectibles were 11.2%. Consolidated gross margins increased 280 basis points to 27.2% in the quarter. This increase was driven by a mix shift to higher-margin categories, as well as improved merchandising tactics related to inventory management, which led to greater efficacy in both pricing and promotions.

Now turning to our expenses and expense management objectives. After adjusting for roughly $23.6 million in one-time transformation, severance and other charges associated with our Reboot profit improvement initiative, our adjusted SG&A expenses were $488.1 million, reflecting a decline of $58 million, or roughly 11% versus the fourth quarter last year. This reduction is directly related to our ongoing efforts to rationalize the overall cost structure of our business.

We delivered operating income of $75.2 million in the fourth quarter, compared to an operating loss of $232.1 million in the prior year fourth quarter. Adjusted operating income, excluding transformation, severance and other charges was $109.2 million, compared to adjusted operating income of $202.5 million in the prior year.

Our effective tax rate as reported for the fourth quarter was 63.7% and impacted by certain discrete tax items, including the quarter, primarily related to $31.7 million valuation allowance on our deferred tax assets and the mix of earnings across the jurisdictions in which we operate. The impact of non-cash tax adjustments in the quarter was approximately $29 million.

Excluding one-time items, our adjusted effective tax rate for the quarter was 18.4%.

On a reported basis, our net income was $21 million, or $0.32 per diluted share, compared to a net loss of $187.7 million, or a loss of $1.84 per share in the prior year fourth quarter. Adjusted net income, excluding goodwill impairment, one-time transformation, severance and other charges associated with our Reboot profit improvement initiative, was $83.8 million, or $1.27 per diluted share, compared to adjusted net income of $148.5 million, or $1.45 per share.

Now turning to our full-year results. Total consolidated company sales decreased 22% in 2019. The sales decline was primarily attributed to comp store sales decline of 19.4% with the remainder attributed to closed stores and foreign exchange headwinds.

In terms of category performance for the year, we saw 27% decline in hardware and accessories, a 22% decline in software sales, and a 4% increase in our collectibles business.

Despite the continued decline in hardware and software categories, there are some highlights within each.

As we previously discussed, the Nintendo Switch platform continue to perform well throughout the back-half of the year and we saw full-year growth in pre-owned hardware and software and in the new software for the Switch.

Gross margins increased 160 basis points to 29.5% in fiscal 2019. This increase was primarily driven by the mix shift to higher-margin categories, such as collectibles and accessories, but also to merchandising initiatives I spoke to earlier, which were implemented primarily in the back-half of the year.

After adjusting for roughly $76 million in one-time, transformation, severance and other charges, our adjusted SG&A expenses were $1.846 billion, reflecting a decline of $130 million, or roughly 6% versus 2018. This reduction largely – is largely related to our ongoing efforts to rationalize the overall cost structure of our business.

On an as reported basis, we delivered an operating loss of $399.6 million, compared to an operating loss of $702 million in the prior year. Adjusted operating income, excluding transformation, severance and other charges was $62.3 million, compared to an operating income of $331.3 million in the prior year.

Our effective tax rate as reported for the year was a negative 8.8%. The impact of the tax rate was due to lower projected earnings and certain discrete tax items throughout the year, including a goodwill impairment, $52.5 million valuation allowance on our deferred tax assets and the mix of earnings across the jurisdictions in which we operate. The impact of the non-cash adjustments in the year was approximately $35 million.

Excluding one-time items, our adjusted effective tax rate for the year was 45.5%.

As a reminder, as a result of our taxable income being relatively low, our reported U.S. GAAP tax expense and resulting rate can be volatile. This impact was unique to the quarterly results in 2019, and the effective tax rate and overall expense normalized when looking at the full-year results.

On a reported basis, net loss was $470.9 million, or $5.38 per share, compared to a net loss of $673 million, or $6.59 per share in the prior year. Adjusted net income, including goodwill impairment, one-time transformation, severance and other charges was $19.1 million, or $0.22 per diluted share, compared to an adjusted net income of $218.4 million, or $2.14 per diluted share in fiscal 2018.

We continue to focus on optimizing our global store fleet in fiscal 2019 and closed a net total of 321 stores, inclusive of 333 closings and 12 openings. In fiscal 2020, we will continue in our efforts to dedensify our store base, focused on maximizing product – productivity of the entire fleet.

Now turning to the balance sheet. At the end of the fiscal fourth quarter, we had total cash and liquidity of $770 million, including $499.4 million in cash and $270.3 million in net availability under a revolving line of credit.

Our accounts payable at the end of the quarter were down 64% to $381 million, down from $1 billion at the end of fiscal 2018. We ended the quarter with total debt of $419 million, a decline of $401 million, or 49% versus the $820 million balance at the end of the fourth quarter of 2018.

We ended the fourth quarter with total inventory of $859.7 million, compared to $1.25 billion in the prior year, a reduction of 31.3%.

As we have said, improvement in inventory efficiency is a significant area of focus for us and it doesn’t mean simply reducing inventory levels. But more importantly, is focused on increasing our inventory turns and improving our working capital to materially improve on the strong cash flow generation of the business model.

In terms of capital allocation, given the strength of our balance sheet and the ability of our business model to continue to generate cash flows, even in a tough sales environment, we took advantage of our depressed share price during the fourth quarter and returned approximately $20.1 million to shareholders through share repurchases, equating to 3.5 million shares at a weighted average price of $5.74 per share.

For this year, in total, we repurchased 38.1 million shares, or approximately 37% of the outstanding shares coming into the year. In total, for fiscal year 2019 via share repurchases and the first fiscal quarter dividend, we returned nearly $240 million to shareholders. This is a clear reflection of our commitment to prudently return capital to our shareholders and our conviction in the strategic initiatives we’re pursuing and their ability to enhance our profitability.

As of the end of the fourth quarter, we had approximately $101 million remaining under our current repurchase authorization. In the fourth quarter, we had $17 million of capital expenditures, bringing the fiscal total to just under $80 million at the low-end of our full-year capital expenditure outlook, which was between $80 million and $85 million.

Going forward, we will continue to evaluate optimal capital allocations that include a prudent management of our debt levels, a return to capital to shareholders and investments in the business that collectively optimize returns for all stakeholders, all while balancing the importance of maintaining a strong balance sheet.

I’ll now shift to some commentary on the outlook for our base business in fiscal 2020.

As George already mentioned, we anticipate the cyclicality of the console business to continue to impact sales through the first three quarters of fiscal 2020, until the launch of gen 9 consoles from Sony and Microsoft.

As we all clearly understand, COVID-19 pandemic has added significant complexity to the business. In that light, we are not only adhering to the guidelines of the Centers for Disease Control for safety of our customers and guests, but also several state and local orders, which mandate the temporary closure of stores.

As of this week, we have closed the majority of our global locations with a notable exception of Australia and New Zealand, where we continue to operate in the U.S. our stores are closed to customer traffic. It’s still fulfilling increased demand for our products through our contactless curbside delivery process, we call delivery at the door.

Despite having most of our European stores closed for the last few weeks, the increased demand for our products across the world has led to a positive 2% comparable sales results for the March monthly period through Saturday. Everyday brings a new challenge and new information as we navigate this very dynamic environment brought on by COVID-19.

As such the consistent – and consistent with most retailers, we’re suspending any specific sales and earnings guidance for 2020 until we have further clarity. Notwithstanding this, we are entirely focused on continuing to work to deliver progress on our transformation goals. In 2020, we will continue our work to densify our global store fleet and anticipate store closures to be equal to or more than 320 net closures we saw in fiscal 2019 on a global basis.

Importantly, we want to emphasize that these store closures are a very specific and proactive part of our dedensification plan and they are not related to recent business trends.

Following several years of both organic and inorganic growth, this process is yielding profit synergies not heretofore realized. And in that light, we expect these closures to positively impact both sales and for our EBITDA growth as we transfer sales to nearby stores.

As we continue to evaluate some underperforming aspects of our business, we’ll continue to wind down Denmark, Finland, Norway and Sweden operations and expect to exit these markets in late July earlier than we had originally expected.

We expect the run rate impact once the exit is complete to be a positive full-year annualized EBITDA contribution of just over $15 million.

We’re intensely focused on continuing to make the necessary changes to further strengthen our overall financial architecture, including all key profit and expense levers that will result in an organization that is efficient, streamlined, and poised to capitalize on a significant profit flow-through improvement, as we experienced expected robust sales increases in late 2020, led by the generation nine hardware and software slate.

Equally important is that our balance sheet is strong, as total cash and liquidity at the end of our fiscal February 2020 was in excess of $680 million, ahead of our expectations and will be further supported by recent positive trend in the March business.

I will now turn the call over to the operator and we’ll take any questions that you may have.

Operator

Thank you. Ladies and gentlemen, at this time, we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Steph Wissink with Jefferies. Please state your question.

Stephanie Wissink

Hi. Good afternoon, everyone. I have a few questions. Hopefully, these will go pretty quickly. But Jim, I just wanted to make sure I heard you correctly that the statistic you gave on 2% comp is month-to-date from March, not quarter-to-date through March last Saturday?

Jim Bell

Hi, Steph, yes, that’s correct. It’s month-to-date through March through last Saturday, correct.

Stephanie Wissink

And that’s a global measure as well?

Jim Bell

That is on a global basis, that’s correct.

Stephanie Wissink

Okay. And then the second question is on the dedensification of the stores.

I think, you mentioned 320 at or above that level, which would imply 600 stores plus for the last couple of years. Can you just give us a snapshot of what the transfer rate has looked like? Anything George, you mentioned in your comments as well, this idea of creating kind of network profitability, so looking at adjacent stores and trade regions and looking at the profitability as you dedensify? Can you talk a little bit about what you’re seeing in the data?

George Sherman

Yes. Steph, I think, when you talk about dedensification, we actually view this somewhat as some uncaptured synergy from the past, where there’ve been acquisitions and there’s closed stores in very close proximity.

So this is a proactive process on our part is where we see the probability for heavy sales transference from one store to another. We drop occupancy, we operate one staff, we operate a far more efficient in far more profitable store.

So we’re kind of working our way around the world as we look at that to see where there’s opportunity, but we certainly see plenty of it.

Jim Bell

Yes. The – Steph, this is Jim. The – we haven’t really quantified publicly the effects. But suffice it to say, the percentage of transfer needed to break-even is fairly low. And while that’s the case, we’re significantly exceeding that in those stores that we’ve closed and what we’ve seen in terms of our transferability.

So more to come on that as it unfolds. But at this point, we’re not – we haven’t quantified that in any particular way.

Stephanie Wissink

Okay, that’s great. And last one for us is just on the working capital improvement you’ve seen. And the inventory, in particular, has been quite astonishing. Do you think about the business from a volume per store target level setting aside to generate the nine hardware, but thinking about the business today? How much further do you think you can reduce that inventory level from here?

George Sherman

Yes. It’s – suffice it to say, I think, this is the right way to think about it. This is about cash conversion and optimizing cash conversion across the entire chain. And way – the one measure that we really focus on is the inventory turn. To be clear, this is not about just taking the inventories down, it’s about really creating that turn and cash conversion cycle or optimizing the cash conversion cycle.

So from a total inventory turn, our targets are about five times.

And so we’re exiting the year at about – just about four times globally.

So you can see that on a long-term basis, our goal is one more full turn on the inventory.

Stephanie Wissink

Okay, that’s great. And then I have to ask, when do you expect to start buying inventory in the the gen 9 hardware? When do you expect to be placing those orders?

George Sherman

Yes. I mean, that we’re not going to really talk about the timing of that. But the general point is that, we’re already working and have been working with all the vendors, both on the hardware and the software sides and those cycles are – we’re in normal cycles with those discussions.

Stephanie Wissink

Okay, great. Thanks a lot.

George Sherman

Yes.

You bet.

Jim Bell

Thank you.

Operator

Thank you.

Our next question comes from Ray Stochel with Consumer Edge Research. Please state your question.

Raymond Stochel

Great. Thanks for taking my question. Can you talk about what the economics of digital revenue sharing look like? And how that might be different from how you previously participated in the digital games market?

George Sherman

Yes. Ray, it’s George.

We’re not going to go into much detail on that.

I think, if you look at our four growth pillars, certainly, we think the last one vendor – transforming the vendor relationships for the future of gaming is one of the key ones.

I think, we’ve said from the start, it’ll take – it’ll have the – take the longest to develop.

We’re pleased to say that we’re making some traction on that.

We’re excited about what that looks like, but we’re not really going to give any level of detail on that way yet as we’re just getting started.

Raymond Stochel

Got it. Thanks. And are there any details that you can give us in terms of market-level economics or comps for Tulsa, given your remodeled stores in the area, or any just general color on Tulsa and what you’re doing with your remodels?

George Sherman

Yes, I wouldn’t Ray – and the reason that I wouldn’t given all this is that, Tulsa is to a greater extent than most other stores closed, because we put communal arena in gaming into these stores. We closed that portion early on.

So when we had the potential for large congregation in our stores, we made a proactive move early in the Tulsa market to move away from that.

So Tulsa is in a bit of a state of limbo right now, operating at that same level as other stores at delivery at door and not really a true representation of how the store is intended to work.

Raymond Stochel

Great. Thanks, again.

George Sherman

Thanks, Ray.

Operator

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

Curtis Nagle

Good afternoon. Thanks very much for taking my questions. Maybe just starting with the SG&A in 4Q, it came in a good bit lower than we had expected. Could we just go through, I guess, what were some of the biggest incremental factors? How much do you have to do things like perhaps incentive compensation? How sustainable are these types of declines? And at least at a high-level, how to think about 2020?

Jim Bell

Yes. We – everything that we’ve been talking about with respect to our first strategic tenant, optimizing the business and are focused on our $200 million profit improvement goal.

As we’ve said, about half of that is around the expense structure.

So what you’re seeing, Curt, is the evolution of all those changes. They do take time.

There’s – we’ve – every single aspect of the business from the organizational changes we made in the late summer and early fall last year to every single contract how we operate the business in every facet has been scrutinized and is continuing to be scrutinized.

You’re starting to see the evolution and the building and the annualization of those effects. That’s what you saw in the fourth quarter SG&A.

As I mentioned, we’ve been – we’ve really only been at this as a leadership team since the middle part of last year.

So you’re seeing there’s more opportunities. Those cost reductions start to annualize themselves throughout 2020. That really gives us – suffice it to say, I think, we’re on target with where our run rate is or the run rate of – to meet our target for that 2020 annualized figure that we’ve put out in the market.

Curtis Nagle

Got it.

Okay. And then maybe just going back to some of the commentary you made about traffic through – I guess, comps through March. Can you talk about a little, I guess, a little bit more about the cadence? Was there kind of initial buildup? What’s going on now that we have stay at home orders in place? Was there maybe initial buildup and now that’s falling off? But any detail on kind of how to think about that would be helpful?

George Sherman

Yes. I’m not sure we can say that the buildup has changed. There certainly was one.

I think, when this all began, there was a pretty good level of demand that we saw while our stores were fully opened. And that is the sales period that Jim talks about when you talk about through Saturday of last week. There have been a number of state, county, municipal regulations since then that have caused us to obviously change the way that we operate.

So certainly, in a digital environment with shortened operating hours, we’re seeing a different level of demand in our stores.

We’re thrilled with what’s happened in terms of digital. And we stated early on that as part of digital – our digital tenant, that we want to drive that part of the business.

We’ve been happy with omni-channel ever since we launched our new platform in August of last year and the progress that it’s been making.

We are most certainly seeing a more definitive move toward digital right now, including e-commerce pure play.

Curtis Nagle

Okay. Thanks very much.

George Sherman

Thanks, Curt.

Operator

Thank you.

Our next question comes from Joel Feldman with Telsey Advisory Group. Please state your questions.

Joseph Feldman

Yes, hi. Good afternoon, guys. Wanted to better understand that – with the current situation with stores and doing curbside, how do you guys staff the store? Like is there one employee per store? I guess, is that allowed in most locations? And then also, do you need or have you found that you need to compensate the employees more to be working during this time period when there are orders to stay at home? I’m just trying to understand…

George Sherman

Yes.

Let me start – yes.

Let me start at the top and just kind of make the point that we’re working with a volunteer team right now.

So all of our team members be the in-stores, distribution centers or refurb centers are operating on a voluntary basis.

So it begins with a team member that wants to be there. It generally is single staffing, in most cases.

We are talking about certainly less volume that is traditional and no lock in traffic and no entry into the store.

So that certainly changes the program quite a bit.

So this is a fulfillment process effectively in the store, where it is in a very natural kind of way, metered in, in a manner that in most cases, one person can handle that workload. And then certainly, where we have breaks and wage hour elements that are for the states, we obviously are writing schedules to support all those as we always do.

Joseph Feldman

Understood. Thanks for clarifying that. And then another question, just given the environment, we’re hearing a lot of your peers out there is talking about really consolidating the cash, and you guys are obviously in very good shape. But one of the things that’s been talked about has been reducing or stopping buybacks altogether in the near-term. I mean, do you guys have any thoughts on that?

George Sherman

Yes.

We haven’t been active in buying back stock in the period since the end of the year. We – as we entered 2020, from a capital allocation standpoint, we really, as we’ve talked about previously, really started to pivot and focus on our 2021 maturity of our 6.75 bonds, that hasn’t changed. But as you might expect, everything is about how do we continue to be very prudent and manage through a very – a set of very unforeseen circumstances with COVID-19 and the impacts.

So we’re very pragmatic and very focused on how do we continue to manage through really what is an unknown over the course of the weeks and months to come. But again, I think you said it well, Joe, I appreciate that, that we are entering this time with a strong balance sheet.

So we’re pretty confident we can navigate.

Joseph Feldman

Got it. Thank you, and good luck with this tough time, guys. Thank you.

George Sherman

Thank you.

Jim Bell

Thank you, Joe.

Operator

Our next question comes from Seth Sigman with Credit Suisse. Please state your question.

Lavesh Hemnani

Hi, this is Lavesh Hemnani on for Seth Sigman. Thanks for taking our questions.

So firstly, just to follow-up on the SG&A reduction in the quarter. I mean, it sounds like you guys are halfway through the plan, which should continue into 2020. But how do we think about like the financial impact from the stores that are not being run in the U.S.? I mean, just for curbside pickup right now?

George Sherman

Yes. I mean, as you might expect, I mean, those stores that are running in the U.S., again, are running on a very limited staff.

So you have some variable impact that is – that scales with those operations. Further to that point, we do have another variable set of work in the SG&A that is out of our DCs and our refurbishment center.

So those obviously flex with the volumes as well.

Lavesh Hemnani

Understood. And just sticking to the profit improvement plan, I mean, when do we expect the second leg to come in, in terms of the product side, on the margin side? Are you already starting to see some of it?

George Sherman

Well, we saw it in this quarter that we’re reporting right now.

I think, you see a pretty healthy basis point expansion in gross margin rate. Part of that admittedly due to mix, the other do through good work by our merchandising team.

Lavesh Hemnani

Got it. And just a quick follow-up on just the quarter-to-date trends. I mean, you guys discussed the consumer demand for the products and March had a positive 2% comp. Can you talk about some of the trends exiting Q4 into February? And I mean, what sort of products are you seeing?

George Sherman

Yes.

As we’ve talked, I think if we take ourselves out of the current situation, we – and just zoom out for a minute, we have – there’s a pretty consistent underlying trend of the business that we’ve been talking about, which is, we are in a generation eight to generation nine console transition, and that we don’t expect that to change. We know it. We know where we go from here through the third quarter. And we know what to expect when the fourth quarter comes in these consoles come to market and we’re a very big part of bringing those products to the marketplace.

Lavesh Hemnani

Got it.

So any other financial parameters you could share about just like the quarter-to-date perspective?

George Sherman

No, not at this point.

As you might expect, I mean, again, we’re not providing any further guidance. It’s just too much – there’s too many unknowns.

Lavesh Hemnani

Got it. Thank you so much.

George Sherman

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from Anthony Chukumba with Loop Capital Markets. Please state your question.

Anthony Chukumba

Good afternoon, and thanks for taking my questions.

So I had a question on collectibles.

So you mentioned that the decline there was mainly driven by lower store traffic. And that’s – because I was just wondering if there’s any more color that you can give, because your store traffic has been declining for a while now with the – with this – at the end of the console cycle, but you managed to sort of buck that trend and collectibles and post sales increases.

So I guess, I’m just trying to figure out what was different this quarter?

George Sherman

Yes. Anthony, really, this was driven by a fourth quarter volume. And I think we’ve talked about it a few times, where, number one, we had a lower watermark fourth quarter, given the anticipation around the console cycle. It also went up against a very healthy fourth quarter last year, driven by some really good releases, as well as a lot of activity around Fortnite.

So I think if you look at the year-over-year aspect of it, that’s part of it. But, again, our collectibles were positive year-to-date is the fourth quarter that they were down stronger on a relative basis, but certainly impacted by the traffic in the stores, which drives them impulse sales in collectibles.

Anthony Chukumba

Got it. That’s helpful. Thank you.

George Sherman

Thank you.

Operator

And there are no further questions. I would now like to turn the call back over to George Sherman for closing remarks.

George Sherman

Thank you very much. I want to thank, everyone, for joining the call today. I thank, everyone, for tracking the stock. I wish you all a safety and health out there as we navigate through a unprecedented experience in our lifetimes right now. And again, use this opportunity to thank our teams who are out there doing their best, either in a indirect capacity or in-stores working to fulfill the model and thanking them for what they do every day to provide great service. Thank you, all.

Operator

Thank you. This concludes today’s conference. All parties may disconnect. Have a great evening.