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GME Gamestop

Participants
Eric Cerny IR
George Sherman CEO
Jim Bell EVP & CFO
Colin Sebastian Robert W. Baird
Steph Wissink Jefferies
Curtis Nagle Bank of America Merrill Lynch
Seth Sigman Credit Suisse
Joe Feldman Telsey Advisory Group
William Reuter Bank of America Merrill Lynch
Bryan Hunt Wells Fargo
Call transcript
Operator

Greetings, and welcome to the GameStop Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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.

Eric Cerny

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 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 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. 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.

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 through our strategic priorities, as evidenced by our robust digital growth, meaningful expense reduction and strong free cash flow generation. These results service 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 seven year long hardware cycle. We began the quarter with a modest sales decline in May as we responded to continue to shelter in place mandates, by expanding our ability to deliver exceptional service and product to 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 age cycle created a significant limitation on new hardware and accessories availability from suppliers. Despite these emerging supply headwinds, our sales decline was a bit better than we expected as our investment in omnichannel capabilities and our ability to connect with our strong loyalty member base, particularly for new software launches kept us engaged with our customers and allowed us to meet their needs wherever, however, and whenever they chose to shop with us.

We continue to make progress on our real estate and market de-densification strategy, with a corresponding 10% decline in our worldwide store base year-over-year, which includes the completion of the wind down underperforming Nordics region.

Importantly, in the United States, where market de-densification represents the greatest opportunity, we've seen sales transfer of just under 40% of closed store sales volume to neighboring locations and online, well in excess of profit breakeven levels.

Our high sales transfer rate and expanded omnichannel capabilities will continue allow us to accretively optimize market and trade area profitability.

Our e-commerce growth has been a major development for GameStop, accelerating our strategic objective to create a frictionless digital ecosystem by several years.

As the pandemic shutdowns began, we quickly recognized that we are seeing a dramatic shift towards e-commerce and that this represented an historic opportunity.

As a result, we diverted additional resources and focus towards our strategic imperative to build a frictionless digital ecosystem, in an effort to leverage the moment and build momentum. Global e-commerce sales rose 800% for the quarter, and our e-commerce sales penetration grew from a low-single digits to over 20%. We believe the shift is long-term and highly advantageous for our business. I mentioned in a prior call that I thought e-commerce should be at least the $1 billion business and I'm happy to report we're on a trajectory to cross that milestone in 2020, well ahead of schedule and will only build upon that in 2021 and beyond, as we see this critical to our future. The quarter saw us deliver enhanced service capabilities and fulfillment options for our customers, such as curbside delivery, or delivery at doors as we call it, buy online pick in store and enhanced ship from store and web in-store capabilities.

In addition to advancing our omnichannel capabilities, these capabilities also enable us to quickly adapt to changes in the shopping environment, and service customers through any one of these fulfillment options. In the quarter, while the 90% of all buy online pick up in-store orders were fulfilled within 24 hours, including almost 70% on the same day. To that end, we'll still be announcing two key advanced capabilities, including same day delivery, and a significant expansion of our consumer payment options, including expanded focus on our private label credit card, several buy now pay later options, and also leasing options for high value items providing our customers with a wide array of payment flexibility. We believe enhanced service and expanded payment options will improve GameStop's customer experience, and expand affordable options to acquire the next generation of consoles. One final note on our strategic initiative to build a frictionless digital ecosystem. Later this month, we are set to launch our newly redesigned mobile app, designed to create engagement and excitement for the gaming enthusiast. We'll be able to evolve the app experience to offer personalized and localized experiences, digital wallet capabilities and a gaming news hub. We believe that the mobile app is going to play a key role in enriching our customers' experience inside and outside of our store shopping experience for all things gaming.

We also saw strong progress in other areas of our strategy, most notably our efforts to increase our efficiency and optimize our core operations. Jim will go into further detail on many of these endeavors, but I'm very pleased that our ongoing expense reduction initiatives have yield a significant results as we leveraged our reported SG&A rate by 40 basis points in the second quarter, no small task in this environment and are part of the team's work here. These results were achieved despite the sales decline, and were driven by $134 million reduction in overall reported SG&A expense for the quarter, and $201 million decline in the first six months of fiscal 2020.

On the merchandising side of the business, we are pleased with our initial launch of an expanded assortment and PC accessories. It will be extending that assortment chain wide later in the third quarter.

While this is early, we absolutely believe GameStop can participate meaningfully in the PC accessory market with high quality products that deliver strong margins. Likewise, we are pleased with our assortment of private label merchandise and our high sell through rates for lower cost and higher margin structure.

We continue to realize meaningful improvements in working capital efficiency led by a 50% reduction in inventory, and a 30% decline in accounts payable.

Our continued efforts led to material strength, and period end liquidity reflected in our $735 million cash balance, even as we further reduced borrowings on our credit facility by $100 million within the quarter. These combined efforts fuel free cash flow of approximately $182 million, even with negative adjusted EBITDA for the period, and navigating COVID-19, including store closures for most of May and early June. Overall, I'm pleased with the operational progress we've made in the second quarter amid a challenging operating environment.

As we begin the second half of the year, we are appropriately cautious, yet excited about our opportunity to capitalize on the next generation of consoles that are expected to launch ahead of the holiday. In the second quarter, customers showed tremendous response to newness, and when there was newness available, customers chose GameStop.

Specifically, we continue to realize market share leading results with Nintendo Switch hardware and key new physical software titles that launched in the recent few months, such as Animal Crossing for the Last of Us II.

Additionally, we have seen strong customer response to the latest technology and headsets and controllers, when supply is available.

Our customers show us, GameStop remains a preferred destination. The success with newness in the second quarter gives us confidence that GameStop will benefit from the acceleration in demand, as new hardware and software is launched later in the year and well into 2021. And while there has been growth in digitally downloaded games, we believe there are several other areas in our favor that bode well for GameStop in the near and medium-term.

First, new consoles have a disk drive.

So for the next seven years, the consoles will play both the physical and digital software that we sell.

Importantly, across most regions of the U.S. and the world, there remains an increased taxation on broadband. With significant increases in work from home and learn from home activities, many are forced to make tradeoffs on broadband usage, a natural advantage for physical gaming.

We are not debating the growth of digital gaming however, we are simply saying that the life of physical gaming is here to stay for the foreseeable future. Likewise, we have and we’ll continue to redouble our efforts on digital game sales, including subscription offers, which already represent a meaningful portion of our sales and will expand through recent digital revenue sharing agreements we have with select partners.

Second, we have a strong loyalty base of customers who look to us to educate them on a wide array of new products, a huge asset we intend to leverage, particularly with a new console providing significant technological upgrades that provide even more immersive gaming experiences.

Third, consumers like the physical aspects of games, they collect them and they value as a trading.

So as software continues to evolve with dramatically better graphics, it does not take up valuable storage space and disk were available to those without broadband internet. With our current capabilities and added same day delivery, we believe most consumers can get a physical game copy faster than it takes to download. Almost 70% of our buy online pickup in store orders over the last four months have been fulfilled on the same day, many within an hour or two. In summary, we know the environment remains uncertain, even as the excitement on the console cycle builds. To be clear, we believe this upcoming console cycle represents the most immediate short-term opportunity to win back sales volume.

We will participate in the console cycle in a very significant way, however, we will also continue to plan conservatively by tightly managing expenses and inventory, while leveraging our unique strengths, including our leadership position in gaming and our strong loyalty base. This, combined with our focus on advancing our four strategic initiatives, positions us to attain long-term profitable growth and drive value for our stakeholders.

Now, let me turn the call over to Jim to discuss our financials in more detail.

Jim Bell

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, now 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 seven 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 declined 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 certain geographies or exit unprofitable businesses.

As part of those ongoing efforts, we continue to realize strong sales transfer, which is accretive to profitability, averaging almost 40% of sales recaptured through the transfer to neighboring locations, or our online business. Relatedly, we're pleased to report that we completed the Nordics region wind down as of the end of July.

In terms of category performance, while hardware and accessories declined 20% for the second quarter reflecting the end of the generation console cycle, we did see better than expected sales in these categories, with the recent surge in video game product demand during the COVID-19 pandemic era.

As George mentioned, some of the sales declines later in the quarter are largely reflected of a lack of console hardware supply in the marketplace, given we're operating at the end of the console cycle along with some COVID-19-related effects within the supply chain.

However, importantly, the Nintendo Switch continues to perform very well, and we leveraged our market share leading position around the world on this product line.

Additionally, we have and continued to leverage our pre-owned inventory, particularly in hardware and accessories to supplement lower new hardware availability and drive sales. Overall, software was down 31% for the quarter, despite the strong performance of key titles, such as Animal Crossing and the Last of Us II.

As George mentioned, when there is newness in video games, whether titles or consoles, we perform very well.

However, our performance was somewhat negatively impacted, as numerous title launches were pushed from the first-half of the year into the latter part of the year.

As an example, last year second quarter benefited from the launch of Madden NFL 20, a title that launched in the third quarter this year. Collectibles were down 34% for the quarter as the opportunity for in-store basket additions tend to benefit from higher store traffic, and newness continues to push out the various franchise delays. From a product margin standpoint, gross margins declined due to product mix shifting heavily into hardware. Hardware sales represented about 47% of sales as compared to 43% last year.

As a result, our overall global gross margins were 26.8%, down 420 basis points from the more software led 31% in the fiscal second quarter last year.

Now turning to our expenses and expense management objectives, after adjusting for roughly $11.3 million in divestiture and severance expenses, and costs related to the exchange of our March 2021 notes, our SG&A expenses were $336.9 million, reflecting a decline of approximately $108 million or 24%, compared to adjusted SG&A in the second quarter last year. These results do not adjust for the approximately $2.7 million investment in additional protective and sanitary-related products and equipment in the quarter to ensure the safety of our associates and customers.

Importantly, the pandemic has shown the resiliency of our associates and also continued opportunities to be more effective as an omnichannel retailers. In that light, while some of the lower SG&A will come back with sales volume increases in future quarters, we will maintain a large degree of operating efficiency throughout our stores and distribution centers.

Importantly, a meaningful portion of the expense reductions are permanent, and are directly related to our ongoing efforts to aggressively rationalize the overall cost structure of our business. We realized an operating loss of $85.6 million compared to an operating loss of $446.7 million in the prior year second quarter. Adjusted operating loss excluding transformation, severance and other charges was $84.7 million compared to an operating loss of $45.8 million in the prior year second quarter, reflecting the seasonally slower second quarter period.

Our effective tax rate as reported for the second quarter was a negative 19.2%, and was impacted by certain discrete tax items, primarily related to the sale leaseback transactions and the mix of earnings across the jurisdictions in which we operate.

Excluding those onetime items, our adjusted effective tax rate for the quarter was 1.2%. On a reported basis, our net loss was $111.3 million or a loss of $1.71 per diluted share, compared to a net loss of $415.3 million or loss per diluted share of $4.15 in the prior year second quarter. Adjusted net loss from continuing operations, excluding transformation, severance and other charges was $91.2 million or a loss of $1.40 per diluted share, compared to an adjusted net loss of $32 million or $0.32 per diluted share.

During the second quarter, we continue to focus on optimizing our global store fleet and strategically de-densifying certain markets.

For the quarter, we closed a worldwide net total of 206 stores, bringing our total worldwide to 388 year-to-date, including our Nordics wind down. At the end of the quarter, we operated 5,122 stores worldwide, which is 602 fewer stores compared to last year.

Given the strong sales and profit transfer rates we continue to experience we're on track to close a total of approximately 400 to 450 stores worldwide this fiscal year. These closures along with the growth in our online business and expanded omnichannel capabilities will allow us to more efficiently and profitably service our customers.

Now turning to the balance sheet, which continues to be an area of focus for the team, and a highlight for the second quarter. At the end of the fiscal second quarter, we had total cash of $735 million, well ahead of our expectations of between $575 million and $625million, importantly, as we ended the period with zero net debt. We ended the second quarter with total inventory of $474.6 million compared to $948.9 million in the prior year period, a reduction of 50%.

As we said previously, effective and efficient inventory management, including improved inventory turns, and the resultant cash conversion cycle gains continues to be a significant area of focus for us, and is a key driver of the further improvement in the working capital efficacy.

Our accounts payable at the quarter end were $256.4 million, down from $368.3 million or 30.4% at the end of the second quarter of fiscal 2019, which is directly related to our ability to leverage a flexible supply chain and reduce purchase orders around the world at the very onset of the pandemic. And that create a liability drag on the business or on cash flows.

As a result of these many continued improvements, we realized positive free cash flow of approximately $182 million in the quarter.

In addition to the free cash flow gains during the quarter, we completed the sale of our corporate jet and completed a sale leaseback transaction for three of the five own buildings being offered, adding a total of $51.8 million in liquidity, of which $43.2 million was related to the sale leaseback. Subsequent to the close of the second quarter, we executed sale leaseback transactions for the remaining two buildings being offered, adding an additional approximately $43.7 million in liquidity not visible in the Q2 balance sheet.

Given the relatively stronger performance in the business, and the proceeds from monetizing our real estate assets, we also paid down $100 million of the revolver borrowings and had only $35 million outstanding as of August 1.

As previously announced on July 2, 2020, we completed an exchange offering consent solicitation for the remaining unsecured notes due to mature in March of 2021. We exchanged roughly 52% of the notes that were set to mature in March of '21, well within our range of expectations, given the high retail ownership and the participation by the majority of qualified bondholders. The newly issued notes of approximately $216 million provide additional financial flexibility by replacing and extending the maturity to 2023, as we continue to focus on advancing our long-term strategy and objectives. With regards to roughly $198 million remaining of the 2021 notes, we anticipate redeeming those bonds over the course of the coming months between now and the maturity date. In the second quarter, we had $10.9 million of capital expenditures bringing the year-to-date spend to $17.5 million.

We continue to focus on only mandatory maintenance or near-term high value strategic projects, and anticipate that we will invest between $55 million and $60 million in CapEx for the year before vendor allowances, a significant reduction from the roughly $80 million spent in 2019. I will note this is approximately $15 million more than our previous estimate, but reflects a holiday store merchandising refresh project, for which we will receive a full reimbursement from vendors. Due to the uncertainty regarding the ongoing impact of COVID-19 on the business, we have suspended formal guidance.

However, we do want to provide you with some of the puts and takes that will likely impact the remainder of the year. From a topline perspective, the third quarter will see several key software titles move into Q4. And while the August sales trends are consistent with Q2, those shifts will create somewhat of a headwind for us in September and October.

With the new product launches that generally drive our business as a specialty video game retailer shifting later in the year, such as Call of Duty and Cyberpunk shifting into Q4 and in the case of Microsoft's Halo Infinite launch shifting into 2021, we expect our sales results could be choppy for the remainder of the third quarter. Compounding the sales impact on the software title launches will be the limited availability of current generation new console and accessories supply, as the availability of product for manufacturers remains tight.

We have the ability to lean in on our pre own inventory and we are very well positioned on that side of the business. But as we have anticipated for some time, new hardware sales will likely be pressured as we approach the launch of the new technology. The strength of the balance sheet, in particular, the positive free cash flow trend positions us well from a cash and liquidity standpoint to maximize the upcoming key hardware and software releases in the fourth quarter, and further drive the strategic evolution of our business in 2021 and beyond.

As it relates to our reboot objectives, we continue to be pleased with our progress and are seeing firsthand how these efforts are enabling us to navigate this challenging time. We remain intensely focused on continuing to execute actions to further strengthen our overall financial architecture, including all key profit and expense levers. This is important as a result an organization is a GameStop that is meaningfully more efficient, streamlined and poised to capitalize on a significant profit flow through improvement, as we experience expected robust sales growth in late 2020, led by both the expected new software title slate and the Generation 9 console launch. I will now turn the call over to the operator, and we'll take any questions that you may have.

Operator

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

Colin Sebastian

Great. Thank you. 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. Thank you.

Jim Bell

Yes. Hi, 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. Any e-commerce business is 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.

Colin Sebastian

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 other ways that you can participate in digital software as subscriptions for those or other platforms? Thank you.

George Sherman

Yes. Hey Colin, it’s George. We intent to sell the both platforms for both vendors 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.

Colin Sebastian

Okay, thank you very much.

Operator

Our next question comes from line of Steph Wissink with Jefferies. Please proceed with your question.

Steph Wissink

Thank you. Good afternoon, everyone.

We also have two questions.

The first one George, probably for you is just to help us think about the volumes 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? Any sense 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? Thank you.

George Sherman

Yes. Steph, let me start off with the allocations 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 learned 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 accessory 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 to how it's going to be allocated out. But I'd say as of this point in time, we would consider it to be in line with what we expected.

Jim Bell

And then Steph, this is Jim.

On the cost profile, I think the best way to think about that is, over two thirds of the SG&A changes quarter-over-quarter and then for the full year or 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.

Steph Wissink

Thanks, guys. If I could toss one more in just on the app.

We haven't talked about that much in the past. Could you talk a little bit more about what the app features may 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 you've been tracking for many years?

Jim Bell

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 development 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 M&A from a mobile device, not from a desktop or laptop any longer.

So it was necessary work for us. It'll 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 power up 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 so excited about being able to be at a point where it's almost ready to go.

Steph Wissink

Thank you.

Operator

Our next question comes in line of Curtis Nagle with Bank of America. Please proceed with your question.

Curtis Nagle

Good morning, sorry, good afternoon, guys.

Just a very quick one on the gross margins for the quarter.

So I know you guys have shifted up in how you report it. We don't have preowned numbers anymore. There's 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 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 down shift in use, something on margin there, markdowns and collectibles? Anymore detail you could give would be a huge help.

Jim Bell

Hey 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 47% of sales versus 43% last year. That's the mixed 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 margin.

Curtis Nagle

Okay, thanks very much.

Jim Bell

Yes, you bet.

Operator

Our next question comes from line of Seth Sigman with Credit Suisse. Please proceed with your question.

Seth Sigman

Hey, guys, thanks for taking the question. 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. Thanks.

Jim Bell

Yes, sure. 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 pre-owned, again, I think it's also a function of when the stores are not open and the traffic is not in the stores our pre-owned software tends to be an attached to the market basket. And still 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.

Seth Sigman

Got it.

So pre-owned was down more than the negative 31 for the software category overall.

Jim Bell

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

Seth Sigman

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 and 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 it in the Q.

You'll also have fewer stores going into this.

Now, 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?

George Sherman

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 payments 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 pre-owned hardware cycle as part of this as well, that there certainly is a trade in alternative that gives you a down payment toward a new gaming console that we expect will be utilized.

So I think just to comment a little bit more on the pre-owned business and Jim gave you the heavy weighting that contributed to the margin shift. But as he said, we were closed for part of this time period.

So to go back to May and parts of June, there's just no ingress, there's no product coming in. And even when reopened, we had concerns around the sanitary nature of dealing with trade and 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 pre-owned activity begin to flex up a bit as we have ways of putting consoles through UB treatment and putting games through either UB or some kind of a 99.99% type effective sanitation treatment. We see those volumes come back online. But it's also worth noting that pre-owned also gets a push from an 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 option alternatives, leasing alternatives and a trading alternative, and then obviously, we'll certainly promote that we'll have bundles we'll have our fair share of inventory.

Seth Sigman

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 struggled for some time. And then what are you seeing there and what is your view of that side of the business?

George Sherman

Do you want to clarify a little bit? I can interpret to secondary market in a couple of ways.

One of which is selling along sideways.

Seth Sigman

The resale market, right? So people are trading on games 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 it's not just because of trade, but also demand.

So what is happening on the demand side for used games?

George Sherman

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 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 pre-owned 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.

Seth Sigman

Thanks, George. Good luck.

George Sherman

Thank you.

Operator

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

Joe Feldman

Hi guys, thanks for taking my questions. I 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 pre-owned, 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?

George Sherman

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 meet our traffic into the stores, even to the degree of having appointments potentially. And certainly our pre-sell 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 and just large influx of the population into the store.

So we're ready for it.

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 buy online pick up 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 would 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 and there is supply, clearly, and that will kind of go on its own course in its own timeline. 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 unlevel 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 the Last of Us II, 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.

Joe Feldman

Got it, thank you. And then just a follow-up on the real estate side. Can you just remind us where we are? I know where 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 rightsize and de-densify? Or what's that? Or is it two year process, three year process? Like, can you just refresh our memory on that?

Jim Bell

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's 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 favorable position with our leases into 2021.

Joe Feldman

That's great. Thanks, guys. Good luck with the quarter.

Jim Bell

Thanks, Joe.

George Sherman

Thank you.

Operator

Our next question comes from a line of William Reuter with Bank of America. Please proceed with your question.

William Reuter

Hello. 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 buying back in the open market. I guess, is that your plan? And what do you expect your trough liquidity to be I guess through the holiday period?

Jim Bell

Yes, Will. Yes, that is correct. That will -- our intention is to 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, and let me just reiterate, 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 working capital and inventory turns and all those 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 certainly positions us incredibly well from the overall liquidity standpoint.

William Reuter

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?

Jim Bell

We'll start to annualize some of the costs out so we took out in the back-half of 2019.

So you won't see the same type of run rate, but we're still continuing to work on elements of cost efficiencies.

So 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, where a lot of the way there as you said. I mean, a lot of that $200 million as I mentioned, more than two-thirds of it is permanent.

William Reuter

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 payment plans? And I guess how much of the cash drain, do you think those will be on the business? That's it for me. Thanks.

George Sherman

Yes. They won't be at all. I mean, these will be at POS third-party options that they can take.

So we're not bringing on any liability.

So there is no working capital impact whatsoever.

Jim Bell

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

William Reuter

Okay. Thank you.

Jim Bell

You bet.

Operator

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

Bryan Hunt

Just 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, 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 in the fewer amount of stores that you all have today versus, again, the last five years in terms of a potential inventory increase?

Jim Bell

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 in the cash conversion cycle, which really equates to inventory turn. This business would go back a couple of years and the years you're talking about was turning globally less than four times. We're now approaching almost five times on a trailing 12 basis.

And so our goal is to see those terms above five times. 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 in 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 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.

Bryan Hunt

That is. Thank you, Jim. And then my second question, and I don't know if there's any way to frame it up. I've got a teenager was looking for new controller, one to three year stores couldn't find anything.

So, we in the Hunt family lived 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-- and not only in fiscal Q2, but maybe in Q3.

Jim Bell

Yes, I don't know.

In terms of quantification, I think the thing was Bryan is that there was there was flow of new products 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 control 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 that 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 did into launching the Generation 9 product.

Bryan Hunt

Alright. And then my last question, kind of theoretical and scenario. Can you talk about the potential opportunity that in 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 life advantages and/or opportunities for you all?

George Sherman

Yes. I mean, I won't say much other than 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.

Bryan Hunt

Very good. I appreciate your time and best of luck.

George Sherman

Thanks, Bryan.

Operator

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.

George Sherman

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, refurbishment operation center, all those working on the frontlines. And then really a call out for omnichannel folks for effecting such quick change and such dramatic change so well. And thanks to all of you as always for your interest in GameStop. I appreciate it.

Operator

This concludes today's teleconference.

You may now disconnect your lines at this time. Thank you for your participation. And have a wonderful day.