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03/22/2012

GameStop quarterly profit falls on charges, but beats Wall Street estimates

GameStop’s profit fell in the fourth quarter as it took several one-time charges, but, excluding those items, earnings were in line with the company’s projections.

Net profit for the Grapevine-based video games retailer fell to $174.7 million compared to $237.8 million. Excluding the writedowns and restructuring charges, profit was $1.73 per share of common stock, 10 percent over a year earlier, GameStop said.

For the new fiscal year, which began Jan. 29, GameStop said its sales growth would be driven primarily by its digital business, used video games, and mobile initiatives. It said it expects 8-15 percent in earnings per share growth over 2011.

GameStop forecasted sales in comparable stores would fall off in the first quarter of the new year, but accelerate through the year. It said it expected first-quarter sales in comparable stores – those open at least a year, an industry benchmark - would fall 7.5-9 percent. For the year, it expects comparable store sales to be in the range between down 1.5 percent to up 2 percent.

GameStop said it expected to open 100 new stores and close 150, and it continues to focus on its digital business.

Rob Lloyd, GameStop’s chief financial officer, said in an interview that GameStop expects its fast-growing digital business to grow 50 percent above the 57 percent growth in 2011. Digital sales finished 2011 at $453 million, he said, compared to the total $9.5 billion in sales for the company.

Digital sales, which the company has said its future growth will come from, should grow into “the high $600 million range for 2012,” Lloyd said in the interview.

As for the expected tough first quarter in comparable store sales, Lloyd noted GameStop is up against a strong period from a year earlier, after Nintendo launched its 3DS game unit.

Through the remainder of the year for the stores, GameStop expects a boost from its software lineup and growing buy-sell-trade program for Apple “i” devices such as iPhones and iPads.

Nintendo is also preparing to launch its new Wii U device later in the year, and “that is always a (comparable store sales) driver, when we have a hardware launch,” Lloyd said.

GameStop expects its net retail square footage to be down 1 percent for the year, primarily driven by shrinkage in the U.S. store base.

Lloyd said GameStop is using its rapidly growing PowerUp Rewards affinity program to help it make decisions on opening and closing stores.

In the case of closing a store, he said the company can use the PowerUp Rewards system to redirect customers to the nearest store. Typically, the company can redirect 40 percent of a closing store’s customers to another nearby store, Lloyd said.

Including subtraction of costs, the combination of two stores can increase the profit of those combined operaitons by 20 percent, he said. PowerUp now has more than 17 million participants, up from 15.9 million at the end of the fiscal year, Lloyd said. The company went national with the program in 2010, and thhe company estimates 59 percent of its sales come from PowerUp customers.

The company wants to get that number up above 70 percent by the end of 2014, Lloyd said.

“That’s been a home run for us,” he said. “Knowing what customers are spending, what their frequency is, incenting them, it’s been a great tool for us.”

- Scott Nishimura

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