GameStop Corp (NYSE: GME) Q4 2019 Earnings Conference Call Transcript

GameStop Corp New  (NYSE: GME) Q4 2019 Earnings Conference Call
Mar. 26, 2020

Corporate Participants:

Eric Cerny — Investor Relations

George Sherman — Chief Executive Officer

Jim Bell — Executive Vice President and Chief Financial Officer

Analysts:

Stephanie Wissink — Jefferies — Analyst

Raymond Stochel — Consumer Edge Research — Analyst

Curtis Nagle — Bank of America — Analyst

Joseph Feldman — Telsey Advisory Group — Analyst

Lavesh Hemnani — Credit Suisse — Analyst

Anthony Chukumba — Loop Capital Markets — Analyst

Presentation:

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 — Investor Relations

Thank you. 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 statements 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 the call can be found in the earnings release issued earlier today as well as the investor 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 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 — Chief Executive Officer

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 are aware, the situation remains fluid with each day bringing new information. Our highest priority is on 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 pickup 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 the new 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 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 a 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 are in the late stages of the current console cycle as well as working against a 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 built a new web platform, introduced new omnichannel capabilities including buy online pickup in stores with encouraging results. However, we are 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 remain 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 a 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 and 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 with 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 our 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 continued to improve the product offering and combine the product and merchandising discipline around inventory and improved markdown strategies, we are 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 flow 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 [Phonetic] 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 are 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 in 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 ahead of 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 re-launched website in 2019 continues to drive increased conversion rates and average revenue per user along with longer browsing time from customers using the site. Importantly, it has also driven increased buy online pickup 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, omnichannel 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 this strategic tenet, we began 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 are 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 — Executive Vice President and Chief Financial Officer

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 are 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 change was primarily driven by two things. First, we have re-organized the business and specifically our merchandising organization to better align related to category management, including the end-to-end lifecycle of products from new to pre-owned sales and secondly, we feel this is 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 accessories 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 accessories 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 included in 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 $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 a 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 have previously discussed, the Nintendo Switch platform continued 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 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 $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, a $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 ’18. 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 de-densify 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 our 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 [Phonetic] 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 $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 disparate share price during the fourth quarter and returned approximately $20.1 million to shareholders through share repurchases equating to 3.5 million shares and 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 are 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 [Phonetic] 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 ’20 until the launch of Gen 9 consoles from Sony and Microsoft. As we all clearly understand, the 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 the notable exception of Australia and New Zealand. Where we continue to operate in the U.S., our stores are closed to customer traffic, but 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 month-to-date period through Saturday. Every day brings a new challenge and new information as we navigate this very dynamic environment brought on by COVID-19. As such and consistent with most retailers, we are suspending any specific sales and earnings guidance for 2020 until we have further clarity. Notwithstanding this, we are intensely focused on continuing the work to deliver progress on our transformation goals. In 2020, we will continue our work to de-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 de-densification 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 are 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 experience expected robust sales increases in late 2020 led by the generation 9 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.

Questions and Answers:

Operator

Thank you [Operator Instructions] Our first question comes from Steph Wissink with Jefferies. Please state your question.

Stephanie Wissink — Jefferies — Analyst

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 — Executive Vice President and Chief Financial Officer

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

Stephanie Wissink — Jefferies — Analyst

And that’s a global measure as well?

Jim Bell — Executive Vice President and Chief Financial Officer

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

Stephanie Wissink — Jefferies — Analyst

Okay and then just second question is on the de-densification 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. And I think, 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 de-densify, can talk a little bit about what you’re seeing in the data?

George Sherman — Chief Executive Officer

Yes, Steph, I think when you talk about de-densification, we actually view this somewhat as some uncaptured synergies from the past, where there have been acquisitions and there is stores in very close proximity. So this is a proactive process on our part. It’s where we see the probability for heavy sales transference from one store to another. We drop occupancy, we operate with one staff, we operate a far more efficient, 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 — Executive Vice President and Chief Financial Officer

Yeah, the — Steph, this is Jim, we haven’t really quantified publicly the effects, but suffice it to say the percentage of transfer needed to breakeven 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 — Jefferies — Analyst

Okay, that’s great. And last one for us is just on the working capital improvement you 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 the generation 9 hardware, but just thinking about the business today, how much further do you think you can reduce that inventory level from here?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah, 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 I think 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 in 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 4 times globally. So you can see that that on a long-term basis our goal is to one [Phonetic] more full turn out of the inventory.

Stephanie Wissink — Jefferies — Analyst

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

George Sherman — Chief Executive Officer

Yeah, I mean we’re not really to 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 side and those cycles are — we’re in normal cycles with those discussions.

Stephanie Wissink — Jefferies — Analyst

Okay, great, thanks a lot.

George Sherman — Chief Executive Officer

Yeah, you bet.

Operator

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

Raymond Stochel — Consumer Edge Research — Analyst

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 — Chief Executive Officer

Yeah, 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, transforming the vendor relationships for the future of gaming is one of the key ones. I think we’ve said from the start, it will take — it will have the — it will 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 yet as we’re just getting started.

Raymond Stochel — Consumer Edge Research — Analyst

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 re-modeled stores in the area or any just general color on Tulsa and what you’re doing with your re-models.

George Sherman — Chief Executive Officer

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 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 — Consumer Edge Research — Analyst

Great, thanks again.

George Sherman — Chief Executive Officer

Thanks, Ray.

Operator

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

Curtis Nagle — Bank of America — Analyst

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 at least we had expected. Could we just go through, I guess, what were some of the biggest incremental factors, how much did it have to do with 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 — Executive Vice President and Chief Financial Officer

Yeah, we — everything that we’ve been talking about with respect to our first strategic tenet, optimizing the business and our focus on our $200 million profit improvement goal as we said, about half of that is around the expense structure. So what you’re seeing, Curt, is the evolution of all of those changes. They do take time — there is — 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 and 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’ve mentioned, we’ve really only been at this as a leadership team since the middle part of last year. So you’re seeing — there is more opportunity as those cost reductions start to annualize themselves throughout 2020. That really gives us, suffice it to say, I think we are on target with where our run rate is — or run rate to meet our target for that 2020 annualized figure that we’ve put out in the market.

Curtis Nagle — Bank of America — Analyst

Got it, okay. And then maybe just going back to some of the commentary you made about traffic through or I guess comps through March. Can you talk about a little. I guess a little bit more about the cadence. Was there kind of the initial build up, what’s going on now that we have stay at home orders in place. Was there maybe an initial buildup and now it’s fallen off. Any detail in kind of how to think about that would be helpful?

George Sherman — Chief Executive Officer

Yeah, 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 change the way that we operate. So certainly in a digital environment, we shortened operating hours. We’re seeing a different level of 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 our digital tenet that we want to drive that part of the business. We’ve been happy with omnichannel ever since we launched a new platform in August of last year and the progress that has been making. We are most certainly seeing a more definitive move toward digital right now including e-commerce pure play.

Curtis Nagle — Bank of America — Analyst

Okay, thanks very much.

George Sherman — Chief Executive Officer

Thanks, Curt.

Operator

Thank you. Our next question comes from Joe Feldman with Telsey Advisory Group. Please state your question.

Joseph Feldman — Telsey Advisory Group — Analyst

Yeah, 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. ‘m just trying to understand that.

George Sherman — Chief Executive Officer

Yeah, 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 they in stores, distribution centers or re-furb centers are operating in 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 walk-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 a manner that in most cases, one person can handle that and then certainly where we have breaks and wage hour elements for the states, we obviously are writing schedules to support all of those as we always do.

Joseph Feldman — Telsey Advisory Group — Analyst

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?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah, we haven’t been active in buying back stock in the period since the end of the year. 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. We are entering this time with a strong balance sheet. So we’re pretty confident we can navigate.

Joseph Feldman — Telsey Advisory Group — Analyst

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

George Sherman — Chief Executive Officer

Thank you.

Jim Bell — Executive Vice President and Chief Financial Officer

Thanks, Joe.

Operator

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

Lavesh Hemnani — Credit Suisse — Analyst

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 — Chief Executive Officer

Yeah, 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 another variable set of work in the SG&A that is out of our DCs in our refurbishment center. So those obviously flex with the volumes as well.

Lavesh Hemnani — Credit Suisse — Analyst

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 — Chief Executive Officer

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 due to good work by our merchandising team.

Lavesh Hemnani — Credit Suisse — Analyst

Got it. 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 — Chief Executive Officer

Yeah, as we’ve talked, I think if we take ourselves out of the current situation and just zoom out for a minute, we have — there is a pretty consistent underlying trend of the business that we’ve been talking about which is we are in the generation 8 to generation 9 console transition and 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 and these consoles come to market and we’re a very big part of bringing those products to the marketplace.

Lavesh Hemnani — Credit Suisse — Analyst

Got it. Sir, any other financial parameters you could share about just like the quarter-to-date perspective.

George Sherman — Chief Executive Officer

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 — Credit Suisse — Analyst

Got it. Thank you so much.

George Sherman — Chief Executive Officer

Thank you.

Operator

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

Anthony Chukumba — Loop Capital Markets — Analyst

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 but I was — I guess I was just wondering if there’s any more color that you can give because your store traffic has been been declining for a while now with the end of the console cycle but you managed to sort of buck that trend in collectibles and post sales increases. I guess I’m just trying to figure out what was different this quarter?

George Sherman — Chief Executive Officer

Yeah, Anthony, really this was driven by 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 drive some impulse sales and collectibles.

Anthony Chukumba — Loop Capital Markets — Analyst

Got it. That’s helpful. Thank you.

George Sherman — Chief Executive Officer

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 — Chief Executive Officer

Thank you very much. I want to thank everyone for joining the call today. Thank everyone for tracking the stock. Wish you all 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 fulfill the model and thanking them for what they do every day to provide great service. Thank you all.

Operator

[Operator Closing Remarks]