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GameStop Corp. (GME)

F1Q07 Earnings Call

May 23, 2007 11:00 am ET

Executives

R. Richard Fontaine - Chairman of the Board, Chief Executive Officer

Daniel A. DeMatteo - Vice Chairman of the Board, Chief Operating Officer

David W. Carlson - Chief Financial Officer, Executive Vice President

Analysts

Tony Gikas - Piper Jaffray

Ben Schachter - UBS Securities

Colin Sebastian - Lazard Capital Markets

Bill Armstrong - C.L. King & Associates

Mike Hickey - Janco Partners

Presentation

Operator

Good morning. Welcome to GameStop Corporation’s first quarter results conference call. (Operator Instructions) I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop’s public documents and is the property of GameStop. It is not for rebroadcast or use by any other party without the prior written consent of GameStop.

At this time, I would like to turn the call over to Dick Fontaine, Chairman and Chief Executive Officer of GameStop Corporation. Please go ahead, sir.

R. Richard Fontaine

Thank you. Good morning and welcome to GameStop's 2007 first quarter earnings call. I’m Dick Fontaine, GameStop's Chairman and CEO. With me as usual this morning are Dan DeMatteo, our Vice Chairman and Chief Operating Officer and David Carlson, our Executive Vice President and Chief Financial Officer. This morning as you know we released our results for the first quarter which were very strong. I want to take an opportunity to repeat the headlines and then in a minute, David will follow up with more details.

GameStop had the best first quarter ever. Our earnings per share exceeded the high-end of our guidance and in fact, our net earnings increased by 111%. As a result of that, we have also increased our 2007 EPS guidance. I think you would all agree that it was an outstanding set of headlines but the columns that underline that are equally positive and highlight why GameStop is well-positioned to continue to thrive. I just want to touch on a few of those this morning.

First of all, the title lineup forecast for the remainder of the year continues to firm up and will make 2007 the year with really something for everyone and the most platform diverse year ever. As a matter of fact, last week, of our top 25 best-sellers in software, they were represented by six different platforms.

The hardware side of the business, last week we had six different platforms that sold over $1 million in sales and it would have been seven had not for a brief shortage of the PlayStation 2 titles.

In our year-end call, I stated that this cycle was deeper, wider and longer than at any time before it. To that prediction I want to add more price dynamic than ever before. So far this quarter, we’ve had a price drop of $30 on the PSP and have had the introduction of the 360 Elite with a $479 dollar price point, and there will almost certainly over the cycle be many more price breaks to come, all of which have historically driven an increased installed base of gamers.

With more platforms, more titles, more accessories and more purchasing decisions to make, our gamer associates deliver real value-added information and service. The specialist in a very differentiated business, which is what the videogame business has become, is going to be more important than ever.

During the quarter, we averaged over 95% positive response to a customer survey question, would you recommend GameStop to your friends? I’m happy to say that our field team wants to improve on that rate.

I want to assure everybody that while we’ve had a long string of success, we’re not going to rest on that success or take anything for granted. We are going to continue to invest in the infrastructure of the company to make us both more efficient and more responsive to marketing conditions. Dan a little bit later on will touch on some specifics in this area.

We continue to strengthen the balance sheet and put GameStop into a position of being able to pursue any and all profitable growth opportunities. During the quarter, we opened 86 new stores while closing 48. Twenty-nine of these were in Spain, which brings close to a conclusion our winnowing of the Spanish acquisition EB made just prior to our closing on the merger. The others were by and large overlap stores which we had fully anticipated and expected.

We continue to be on schedule to open between 500 and 550 stores nationwide with roughly about 325 of those coming in the U.S. and approximately 200 internationally. As a matter of fact, we will open new stores in every country where we operate.

In fact, during the quarter we opened stores in Portugal, making it the 16th country where GameStop now does business.

Our management team continues to do a great job in controlling the business. Over the past 18 months, we have doubled the size of our company from a very large base of 2,026 stores to at the end of this quarter 4,816 stores. Keeping our business under control has always been a mandatory condition of growth and a goal that we’ve worked hard to achieve. In fact, nothing speaks to this better than the synergies that we’ve achieved from the EB Games merger, synergies that continue to benefit the combined operation.

Finally, before I turn the call over to David, I want to mention two very gratifying public milestones that occurred during the quarter. GameStop was officially listed as a Fortune 500 company and we are particularly pleased to be recognized as the 18th best company on that list when measuring past years’ total return to investors, where GameStop came in at 73.2%.

In Barron’s Best Companies for 2006, GameStop was listed as number 16 when measured on the 52-week total return versus the Standard & Poor’s 500, the three-year cash flow return on investment and total sales growth. No question we’ve come a long ways in just five years as a public company and in many ways we’re just beginning to capitalize on the worldwide opportunities of this business and the growing potential of our model as we do more and more to establish our brand around the world.

Now I will turn it over to David for additional details.

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David W. Carlson

Thanks and good morning. Before the market opened today, we released our sales and earnings results for the first quarter of fiscal 2007. GameStop sales for the first quarter increased 23% to $1.28 billion as compared to $1.04 billion in the prior year quarter. Comparable store sales for the first quarter increased 15.3%, driven by the demand for next generation hardware and the continued popularity of the PS2 console and its related new and used games.

Videogame hardware grew 75% during the quarter and videogame software grew 13%, with titles such as Pokemon Diamond and Pearl for the Nintendo DS, and God of War II for the PS2 topping the best-seller list.

Net earnings for the quarter grew 111% to $24.7 million, including debt retirement costs of $4.2 million, more than doubling last year’s first quarter net income of $11.7 million. Diluted earnings per share for the quarter were $0.15, including $0.03 per share for debt retirement costs. These results were $0.02 per share higher than the high-end of our guidance issued in mid-March.

Gross margins declined year over year in the quarter due primarily to a higher mix of low margin hardware related to the strong sell-through of Sony PS3 and Nintendo Wii, which were not available in the prior year quarter, and to a lesser degree to a planned increase in the amount of co-op income that was spent on brand advertising, consistent with converting our stores to a single GameStop brand.

SG&A leverage improved from the prior year quarter by 260 basis points. This leverage came primarily from the strong sales comps, continued efficiencies from refining our business model, and the closing of the EB Games Pennsylvania general office and distribution center in May of last year. As such, we were able to grow operating margins by 100 basis points during the quarter.

We also issued updated guidance for both the second quarter of fiscal 2007 and the full year. Second quarter comparable store sales are expected to increase between 16% and 18%, driven by continued strength in next generation hardware and strong summer sell-through of used games.

Diluted earnings per share for the second quarter are expected to range from 7% to 8% as compared to -- excuse me, are expected to range from $0.07 to $0.08 as compared to $0.02 per share in the prior year quarter. Based on the strong results experienced in the first quarter, we are raising our full year 2007 EPS guidance to range from $1.39 to $1.42 per diluted share, with sales and comp expectations remaining at 19% to 21% and 14% to 16% respectively.

Our balance sheet remains very strong with over $300 million in cash at the end of the quarter. Inventories grew 25% from the prior year, in line with the sales growth experienced during the quarter and partially due to increased hardware shipments near the end of April.

Within the last few weeks, both Moody’s and Standard & Poor’s upgraded our corporate debt ratings based upon strong cash flows and continued debt reductions. So far in fiscal 2007, we have repurchased $150 million of notes, completing the authorization the Board approved in February, 2007. We continue to believe we will repurchase or call at least $250 million of notes in the aggregate during fiscal 2007.

With that, I will turn it over to Dan.

Daniel A. DeMatteo

Thanks, Dave and good morning. The first quarter shaped up pretty much as we thought it would -- a wide breadth of products selling to an ever-widening group of game players. These players not only comprise the avid gamers that have been our core customer but casual gamers who tend to be both younger and older than the hard core and budget-oriented consumers that are buying last cycle games and systems. With seven active systems, including the original X-Box, which is the most active of our trailing platforms, this is an outstanding time for both new and used product.

Nintendo continues to have a very hot product lineup and I don’t think that the pent-up demand for the Wii has yet been satisfied as we continue to sell all that we get. The supplies of the DS Lite system are better than the Wii but still we have shortages of certain colors as sales are very strong. Two of the best-selling titles for the quarter were DS games, Pokemon Diamond and Pearl.

Sales were also driven by continued phenomenal demand for the six-year old PS2 system. Nationwide, almost the same number of these units sold this Q1 compared to last year and the number one title for the quarter across all platforms was Gods of War II for the PS2 at $49.99.

The Microsoft X-Box 360 system sold well and the new X-Box 360 Elite has been a sellout. The best-selling 360 title for the quarter was Crackdown and last week’s announcement that Halo 3 is scheduled for release on September 25th has 360 gamers running to our stores to reserve their copy of this gotta-have game. As a matter of fact, we would expect that our reservations on this title will reach an all-time high.

And the PSP price reduction in March helped fuel sales of Sony’s handheld system during the quarter, as we saw more than a two times sustainable sales lift after the change.

Lastly, first quarter sales were driven by our used business, which grew 18% in the quarter due to increased trades that resulted in increased sales.

Now, on to what we see as sales drivers in Q2. First, we expect to see continued strength in sales of next generation systems and we’ll probably still have shortages of some, like the Nintendo Wii and the X-Box 360 Elite. This year’s title lineup looks very good for a summer quarter, with titles releasing across all platforms led by: NCAA, all systems; Mario Party 8 for the Wii; Forza Motor Sports for the X-Box 360; and for the PS3, Ninja Gaiden and Lair should help drive system sales. We expect our used business to excel as these new titles will drive trades which will drive sales.

We also have been busy improving our operations and maximizing our rebranding efforts. To date, we have rebranded 500 stores from EB to GameStop in the U.S. and we expect to complete this rebranding by the end of Q3. As Dave mentioned, we are spending more on developing the GameStop brand now that we have economies of scale in most markets.

In the U.S. systems area, we will be installing a new warehouse management system in our refurbishment facility this summer that will aid our work-in-process operations and we are continuing our implementation of DSL in all possible stores to improve our speed at the cash wrap. But as you know, we are now an international company with many growth opportunities outside the U.S.

Therefore, this quarter we will be implementing a new ERP system in Germany that will be the basis for our international operations. This system will run all facets of the operations from merchandising, warehousing to finance. It will give us the capabilities to seamlessly move into any country as it can adapt to any language, currency, local laws and regulations.

So as you can see, we are continuing to invest in the future so that we maintain our dominant position as the world’s leading specialty retailer of video games.

Now I would like to turn it over to the moderator for the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Tony Gikas, Piper Jaffray. Please go ahead.

Tony Gikas - Piper Jaffray

Good morning, guys. Congratulations on a good quarter. A couple of questions; your sell-through on the Wii is certainly predicated on your allocation. Do you have a view on the product schedules from Nintendo and what your allocations look like for the U.S. and Europe markets for the near term? Also, how long do you think that PlayStation 3 hardware sales will be sustainable at this price point? Do you anticipate sometime in the next few months of starting to get back to Sony with the fact that you are reducing or not taking more hardware?

Daniel A. DeMatteo

I’ll take those questions. On the Wii, I don’t have any visibility in the Wii as supply for Europe. I do in the United States and we do know what our allocations will be through June, and they clearly have improved. Whether that means that supply will catch up with demand, I can’t tell you because I’m not sure what the pent-up demand is but it has improved and we know our numbers through June.

On the PS3 price point, I don’t know. We have a couple of new titles coming this summer, Lair, Ninja Gaiden and there’s another that slips from my mind that we are expecting to help drive hardware sales. I think that’s probably a better question answered by Sony whether or not what their plans are.

R. Richard Fontaine

I think I would pick that up in Europe, that roughly -- excuse me, seems to mirror the future in at least Italy, Germany and Spain. It seems like we may be a little bit more in the dark in terms of the Wii distribution in our Nordic countries but in our major areas in Europe, it pretty much seems like it’s shadowy to some degree the allocations in the U.S.

Tony Gikas - Piper Jaffray

Are PS3 sales trends in Europe better than they are in the U.S.?

R. Richard Fontaine

Again, I think our measuring it -- we stated when it first released that our general consensus is that the release was good, not great. The follow-up sales have moderated to some degree. The price point impact in many of the European countries even makes the perception and the fact the reality of this price point much higher with the VAT expenses being added on, so it’s fairly slow. By no means a disaster but the price point, particularly post Christmas, is being felt.

Tony Gikas - Piper Jaffray

Last hardware question here -- are there too many hardware systems out there right now at different price points with price drops on some handhelds? Are your consumers confused at all by this, particularly with the X-Box 360 Elite coming out -- is it getting too confusing? Are there too many systems out there at different price points?

R. Richard Fontaine

That’s a great question and it really points up one of the tremendous strengths we have. First and foremost, no, there are not too many systems out there in that every system delivers real value and every system delivers great technology, depending on what you want.

I’d absolutely agree if I thought there were some pretenders in the market, some poor systems, some systems that are trying to latch on to the tremendous trends in the business but that’s not the case. As I mentioned, we have six and in some cases seven systems that last week sold over a million. The systems themselves in different ways serving different audiences at different price points are very, very good.

Is the business becoming more complex because there are more options? Yes, I think that is absolutely the case but more options, given that all options are delivering great value, really plays into the hands of the specialist. So there is no question in my mind that coming into a GameStop store where it is our only business and our managers and our associates who are avid gamers are clearly delivering added value by walking our customers through their buying decisions, answering their questions.

As a matter of fact, I think the more differentiated marketplace in videogames is playing right into the hands of the specialist. As a matter of fact, I think it’s one of the strongest trends we could possibly hope for.

Operator

We’ll take our next question from Ben Schachter, UBS Securities. Please go ahead.

Ben Schachter - UBS Securities

Congratulations on a fantastic quarter. When we look ahead out to international growth throughout this year and next, what are some of the key milestones or just key metrics that you’re going to be tracking to determine your own success and how can the investment community follow that?

And then separately on PS3, beyond the few titles you mentioned in the near term, what do you expect to be the key drive titles for the year for PS3? Thanks.

Daniel A. DeMatteo

I’ll take the first one. The key drive titles, I think Madden could be one. From what I understand, the graphics are just phenomenal on the PS3 with Madden, so I think that could be. I think Grand Theft Auto, even though it’s coming out on both the 360 and the PS3, if the graphics are as such, could be one. So I would have to put those two as probably the two biggest drive titles for the year.

Ben Schachter - UBS Securities

Are there any exclusives that you think are key drive titles?

David J. Moore

Well, Lair is an exclusive, Ninja Gaiden is an exclusive, this version of it, rather. So those two are exclusive coming out this summer, so it will be interesting to see, as I mentioned, what they will do to drive hardware sales because they are exclusive on the PS3.

R. Richard Fontaine

In response to what are the elements of international expansion that we can look forward to, as most of you know at least on the GameStop side, we’ve been in this international business now for about 18 months and we’ve put a lot of focus and a lot of attention, as we always have, on the domestic side on strengthening our approach to real estate.

What we are doing now and what we can look forward to are a number of things. Number one, doing a much better job of promoting the brand and telling the story to all of the mall developers throughout all of the countries that we operate in. The European countries particularly, Australia, are very mall-oriented and outside of Australia, there was a certain amount of ambivalence about exactly who EB Games were in some of these malls. We have made huge advances forward and have shown them that we are very aggressive and are now getting involved in virtually every new project across Europe.

Secondly, developing our broker network to not only deal with the malls where they are comfortable but to particularly look at potentials in the hypermarkets. These are usually smaller sites that are dominated by one major food and general retailer, like a Carrefour, an [Ochon] and the like. They generally serve more specialized market areas. We think there’s potential in there but it usually is very delicate real estate because of the size. We’re doing a better job in identifying what works and what doesn’t work for us.

And then the third and final thing is to really refining how well we can serve either central business district and/or neighborhood markets. As you know, the neighborhood concept that we inherited in Spain proved to be a bit brittle and we’ve shed a number of the underperforming stores. But we still believe that there is significant expansion opportunity in that but we have to tighten up our criteria and that’s underway.

Having said all of that, and as I mentioned in my comments, we believe there’s expansion opportunities in every one of the 16 countries that we are doing business and we will move forward very significantly this year in having the EB GameStop brand recognized by all of the developers.

Operator

We’ll take our next question from Colin Sebastian with Lazard Capital Markets. Please go ahead.

Colin Sebastian - Lazard Capital Markets

Good morning and I’ll add my congratulations to the quarter. A couple of questions; you mentioned the increase in the inventory at the end of April. I was curious if that was from the Nintendo platforms.

And then, also in terms of inventory, can you talk about the situation of used products ahead of the summer?

Daniel A. DeMatteo

Yes, it was shipments from Nintendo and if you look at our leveraging this year over last year, you can see in the numbers that we have inventory turning faster, so yes. On the used inventory, I think -- what was your question? Will we have sufficient supplies?

Colin Sebastian - Lazard Capital Markets

Your comfort level of the inventory position now in front of the summer period.

Daniel A. DeMatteo

Yes, it’s good. Our inventory position is good. We’re always chasing used inventory. We never say we have enough but our refurb function is working at top speed in fixing systems and games that we have here, so that we can assure a good supply of games to our stores this summer.

Colin Sebastian - Lazard Capital Markets

Okay, and I apologize if you mentioned this, but on the last call you mentioned 15% to 17% in software growth for the industry in 2007. Just curious if you are still comfortable with that range. Thank you.

R. Richard Fontaine

We’re still looking at that same range. Things really haven’t changed. Halo is coming out a little bit earlier than we originally expected but I don’t think that will necessarily cause it to sell through more, so we are pretty much comfortable with that 15% to 17% industry range that we talked about.

Operator

We’ll take our next question from Bill Armstrong, CL King and Associates. Please go ahead.

Bill Armstrong - C.L. King & Associates

Good morning. I noticed that within the hardware and software used categories, your gross margins were down a little bit year over year. I was wondering if you could talk about that a little bit.

Daniel A. DeMatteo

I’ll talk about the used and then Dave, you can talk about the new, but yes in the used, it was down year over year but as we’ve always said, we expect our used margins to range between 49% and 51%, depending on the sales mix within the used and promotional activity. So we were very pleased with our used rate for the quarter and it is right in line where we wanted it.

David W. Carlson

Right and both our new hardware and new software margins were down slightly from the prior year and as I said in my comments, it really had to do mostly with the amount of brand advertising that we are spending our co-op income on. We are spending a little bit more than we have in the prior years and we probably will continue to increase our brand advertising as we go forward. So that was the main reason for the slight decrease in margins on those two categories.

Bill Armstrong - C.L. King & Associates

Okay. With more hardware systems than ever before being viable sellers, does that place any physical strain on your stores? Your stores are pretty small. Just storing them and holding them, has that presented any problems for you?

R. Richard Fontaine

It certainly represents a challenge for us and I think I even mentioned on the year-end call that the relays of our stores and how we apportion the space that we have has become more important than ever before. The spring relay, which I would say was done more professionally with more detail than any I’ve ever seen, was a great first step in addressing some of that issue, an embarrassment of riches, if you will. And the fourth quarter relay going into the holiday season will obviously be even more important.

We are looking at this at a level of detail that frankly we’ve never looked at it before. It’s almost adopting the grocery store model of productivity per linear shelf square foot merchandise mix that is being analyzed by our field force.

Your point is right. It’s a challenge but it’s a great challenge to have so much great product in stores that are really going to be stressed to do a great job of merchandising everything we have. But I think we are going to be better than we have ever been in the past. I wouldn’t lie to you that it certainly is a cycle that we are passing through. It would be great to have stores that were somewhat larger but the good news is that these smaller stores become phenomenally productive in cycles like this.

Daniel A. DeMatteo

I also might just add to what Dick said is you may remember, we kept the Louisville facility that Electronic Boutique had opened several years ago, and we also have the facility here in Dallas. But in the Louisville facility, we keep our hotter selling games and systems because we are about two to three day ground from just about anywhere in the country, so we do a lot of just-in-time delivery, which means the stores do not have to have lot of product in the back rooms because they are getting shipped continuously -- every day if they need it.

Bill Armstrong - C.L. King & Associates

Okay, and then finally on our second quarter guidance, I was wondering if you could maybe drill down a little bit on some of the assumptions regarding gross margins, interest expense and average shares outstanding for the quarter.

David W. Carlson

I can give you a little color on that. Our gross margins will decline again in the second quarter because of the hardware mix that we are expecting, so you should expect a similar decline in the second quarter. It could be even a little bit more than in the first quarter. Interest expense should be very similar to the first quarter. As we’ve said earlier, we’ve retired about $150 million of notes so far this year, so we are looking at a similar number there. And the shares outstanding, you’ll see a slight increase. The share price that has increased over the last three months has caused our diluted share number to go up a bit, so probably about a 2 million share increase in the average shares for the second quarter in comparison to the first quarter.

Bill Armstrong - C.L. King & Associates

Okay, and just a point of clarification; the debt extinguishment cost, those are non-cash expenses, right?

David W. Carlson

Some of them are and some of them aren’t. A lot of it has to do with the write-off of the deferred fees, so those are non-cash but there are the actually costs of buying back the debt, and some of that is cash. It is probably about 50% cash, 50% non-cash.

Bill Armstrong - C.L. King & Associates

50-50, okay. Thanks very much.

Operator

We have time for one final question and we’ll take that question from Mike Hickey, Janco Partners. Please go ahead.

Mike Hickey - Janco Partners

Great quarter, thanks for taking my question. Thinking about the Wii and demographic expansion, do you guys have any sense at this point the percentage of Wii buyers that are new gamers or maybe first-time console buyers? And then I have a follow-up.

Daniel A. DeMatteo

Mike, I don’t have any data. I only anecdotally and I can tell you that I’ve gotten personally more telephone calls from people that I would have never have thought were play a game. I’ll give you an example; a neighbor of mine who is 60-some years old asked me to get him a Wii and some of the related product, and I did. I had it in a box and the box was all taped shut, and I told him I kept it taped because I assumed you want to ship it somewhere. And he said “no, it’s for me”.

I would have to think that at this point, maybe not at the get-go when it first came out, they were probably being scooped up by the hardcore gamers and the normal gamers, but boy I have to tell you at this point I think that more of these things are going to non-traditional gamers than to gamers right now.

R. Richard Fontaine

And I would say it certainly is our instinct but it really goes beyond that as well. We are backing up our strong feeling that this is a major change in the business and what we are doing in certain areas of the business, as a case in point, with more new customers coming into our store, we are finding it is imperative that we introduce them to the new and used business model. We have numerous marketing initiatives underway and some of the branding that we alluded to that is really pinpointed and targeted at that new gamer, who may never have come in touch with a business that takes back used products and lowers their cost of goods.

So there’s no doubt that it exists. Your question probably points us to the fact we probably should do some internal customer surveys to get a general handle on that. I suspect what it will do is it will even move us more rapidly down in doing a better job of introducing our model to the customers.

Mike Hickey - Janco Partners

Great, thanks. That’s actually a great segue too -- I was curious, at this point do you have any sense of, looking at the three next-gen consoles, the PS3, the 360, and the Wii, which installed base is more inclined to purchase used product? And then, looking at your total used sales for the quarter, maybe trailing six months, can you give us any idea of what percentage of that is representative of next-gen gamers?

Daniel A. DeMatteo

I can tell you that right now, the X-Box 360, we now have a supply of X-Box 360 used games and it takes a while to build a supply once a platform comes out but it’s been out for over a year-and-a-half, so now the X-Box 360 used games are in supply. We don’t have many PS3 and we don’t have many Wii games right now because they are fairly new platforms.

I would expect that platforms will trade fairly equally. I don’t know that we’ll see a lot of differentiation between the tendency of customers to trade one platform over another. I don’t believe we’ve seen that in the past, so I don’t think we’ll see that in the future.

R. Richard Fontaine

And as I said, I think relative to your question, I think we would agree that the X-Box 360 to some degree, the PS3, the more avid gamers buying those units are more knowledgeable about our trade model and our job is to introduce the new consumers to our trade model. So to that degree, we probably have a little bit more of an early challenge in front of us.

Mike Hickey - Janco Partners

Great, and the last question on your product mix for the quarter, was that generally in line with what you guys are expecting? I know that you updated us just a second ago on Q2, but can you give us any sense on how that is trending for your fiscal ’07 and if that’s changed? Kind of the same question for your SG&A as well.

David W. Carlson

Okay, that’s a lot of questions, but that being said, I think the mix for the first quarter was pretty much where we expected it. I think hardware maybe was a little bit higher than originally expected but other than that, I think the other categories were pretty much on plan but hardware was higher.

Second quarter, I think you are going to find that you will have again a very strong hardware mix versus the prior year. You’ll find that used and new will grow probably fairly similarly, new and used software will grow very similarly in the second quarter. I’m not sure I’m ready to predict the full year numbers for you at this point.

Mike Hickey - Janco Partners

Okay, and SG&A?

David W. Carlson

SG&A leverage in the second quarter, we will see leverage in the SG&A line probably not as dramatic as in the first quarter because in the first quarter, you had in the prior year you had the Electronics Boutique general office and distribution center open for the entire quarter, while it was only open for a portion of the quarter in the second quarter of last year. So the leverage -- we’ll still have good leverage. It will be very significant leverage but it won’t be quite as dramatic as it was in the first quarter.

Mike Hickey - Janco Partners

Great, thanks for your time, guys.

R. Richard Fontaine

Thank you for joining us today. I appreciate your support of GameStop. We are looking forward to a great second quarter and a very exciting year. Thanks again.

Operator

That does conclude today’s presentation. We thank you for your participation. You may now disconnect.

TRANSCRIPT SPONSOR

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Did the analysts get it right?

Wall Street hires some smart cookies. But it’s not always in their best interest to put the hard questions to management. Are YOU even their top priority?

Motley Fool co-founder David Gardner is still bullish on GameStop. It’s up 345% since he recommended it to his Motley Fool Stock Advisor subscribers back in October 2004. Now, discover the companies David and his brother Tom recommend in their free research report “The Motley Fool's 2 Top Picks - Plus Wall Street's Dirtiest Secret.”

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* Returns as of 6/12/2007

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Source: GameStop F1Q07 (Qtr End 5/5/07) Earnings Call Transcript
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