GameStop Corp (GME) Q2 2020 Earnings Call Transcript

GameStop Corp  (NYSE: GME) Q2 2020 earnings call dated Sep. 09, 2020

Corporate Participants:

Eric Cerny — Investor Relations

George E. Sherman — Chief Executive Officer

Jim Bell — Executive Vice President and Chief Financial Officer

Analysts:

Colin Sebastian — Robert W. Baird & Company — Analyst

Stephanie Wissink — Jefferies — Analyst

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Seth Sigman — Credit Suisse — Analyst

Joseph Feldman — Telsey Advisory Group — Analyst

William Reuter — Bank of America — Analyst

Bryan Hunt — Wells Fargo & Company — Analyst

Presentation:

Operator

Greetings, and welcome to GameStop’s Second Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Eric Cerny, Investor Relations. Thank you. You may begin.

Eric Cerny — Investor Relations

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 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 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 E. Sherman — Chief Executive Officer

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 showed significant progress toward our strategic priorities as evidenced by our robust digital growth, meaningful expense reduction and strong free cash flow generation. These results serve as testament to GameStop’s ability to navigate COVID-19 and bridge the period until the introduction of new consoles. I continue to be part 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 continued 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 8 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 choose to shop with us.

We continue to make progress on our real estate market de-densification strategy for the corresponding 10% decline in our worldwide store base year-over-year, which includes the completion of the wind down of 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 to 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 focused 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 low-single-digits to over 20%. We believe the shift is long term and highly advantageous for our business. I mentioned in our prior calls that I thought e-commerce should be at least a $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 we’ll only build upon that in 2021 and beyond as we see this critical to our future.

The quarter saw us deliver enhanced service capabilities in fulfillment options for our customers such as curbside delivery or delivery at door as we call it, buy online pickup 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, more than 90% of all buy online pickup in store orders were fulfilled within 24 hours, including almost 70% on the same day. To that end, we will soon 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 enthusiasts. We’ll be able to evolve the app experience to offer personalized and localized experiences, digital wallet capabilities and the 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 yielded 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 a $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 in PC accessories and will be extending that assortment chain-wide later in the third quarter. While it 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 their 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 in 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 made in the second quarter amid a challenging operating environment. As we begin the second half of the year, we are appropriately cautious, get 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, customer 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 and The Last of Us 2. Additionally, we have seen strong customer response to the latest technology in headsets and controllers when supplies available. Our customers show us GameStop remains our 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 US and the world, there remains an increased taxation on broadband. With significant increases in work-from-home activities, many are forced to make trade-offs 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 the new consoles providing significant technological upgrades that provide even more immersive gaming experiences.

Third, consumers like the physical aspects of games, they collect them and they add value as a trade-in. So as software continues to evolve with dramatically better graphics, it does not take up valuable storage space and disks are 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 strength, including our leadership position in gaming and a strong loyalty base. This, combined with our focus on advancing our four strategic initiatives, positions us to obtain 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 — 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 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 then, overall healthier business model as we approached 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 the later this year. Despite these headwinds, we reported a comparable store sales decline 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 8 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 reflective 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 continued to perform very well. And we leveraged our market share leading position around the world on this product line.

Additionally, we have and continue 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 2.

As George mentioned, when there is newness in video games, whether titles or consoles, we performed 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’s 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 retailer. 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 one-time 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 are 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 $625 million. Importantly, 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 resulting cash conversion cycle gains continues to be a significant area of focus for us and is a key driver of the further improvement in 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 reduced purchase orders around the world at the very onset of the pandemic and not [Phonetic] 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 offer and 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 top line 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 launching — launch shifting into 2021, we expect our sales results could be choppy for the remainder of the third quarter. Compounding the sales impact in 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-owned 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 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 in organization is the GameStop that is meaningfully more efficient, streamlined and poised to capitalize on a significant profit flow-through improvement as we experienced 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.

Questions and Answers:

 

Operator

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Colin Sebastian with Robert W. Baird. Please proceed with your question.

Colin Sebastian — Robert W. Baird & Company — Analyst

Great. Thank you. A 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 re-openings. 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, yes, that was removed from the press release versus the last quarter, if you can just clarify that. Thank you.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. Hi, Colin. It’s Jim. Yeah. 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 in e-commerce business. It’s 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 — Robert W. Baird & Company — Analyst

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

George E. Sherman — Chief Executive Officer

Hey, Colin. It’s George. We intend to sell the — both platforms for both vendors, so — and adjust those units and we certainly anticipate — participating those programs, and we certainly see the opportunity to capitalize beyond just the initial gross margin on the console itself and that means participating a digital sales and in subscription programs.

Colin Sebastian — Robert W. Baird & Company — Analyst

Okay. Thank you very much.

Operator

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

Stephanie Wissink — Jefferies — Analyst

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 NextGen 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 E. Sherman — Chief Executive Officer

Yeah, Steph, let me start off with the allocations for the new consoles and I would just say that they are in line with expectations and probably with prior releases as well. There are elements of this that we don’t know. Like you, we learn 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 accessories that 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 be allocated out, but I’d say as of this point in time, we would consider to be in line with what we expected.

Jim Bell — Executive Vice President and Chief Financial Officer

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, 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.

Stephanie Wissink — Jefferies — Analyst

Thanks, guys. If I could toss one more in, just on the app, we haven’t talked about that much in the past. So could you talk a little bit more about what the app features might 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 that you’ve been tracking for many years?

George E. Sherman — Chief Executive Officer

Yeah. You are right, Steph. We haven’t said a lot about it. We have a new Chief Digital Officer. We’re very pleased with the developments 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 emanates from a mobile device, not from a desktop or laptop any longer. So it was necessary work for us. It will 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 PowerUp Rewards. So there is 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 certainly excited about being able to be at a point where it’s almost ready to go.

Stephanie Wissink — Jefferies — Analyst

Thank you.

Operator

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

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Good morning, or sorry, good afternoon guys. Just a very quick one on the gross margins for the quarter. So I know you guys have kind of shifted up in how you reported. We don’t have pre-owned numbers anymore. It makes a little bit difficult to compare things, but I’m just looking at some of the explanations you guys gave for what drove down the gross margins, predominantly mix in 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 downshift in use, something going with the margins there, markdowns on collectibles? Any more detail you could give would be a huge help?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. Hey, Curtis. 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, over 47% of sales versus 43% last year. That’s the mix effect 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 margins.

Curtis Nagle — Bank of America Merrill Lynch — Analyst

Okay. Thanks very much.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. You bet.

Operator

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

Seth Sigman — Credit Suisse — Analyst

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 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 pre-owned relative to the software bucket overall, that would be helpful. Thanks.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. Sure. I mean, 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 into — in the stores, our pre-owned software is — tends to be an attach 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 — Credit Suisse — Analyst

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

Jim Bell — Executive Vice President and Chief Financial Officer

No. I didn’t say that. I believe — as you know, we’re not — we don’t disclose the differential between pre-owned and new software.

Seth Sigman — Credit Suisse — Analyst

Got it. All right. Yeah. That’s fine. So my follow-up question is around some of the levers that GameStop has used in the past to capture share in 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 that in the Q. You will also have fewer stores going into this. Now, you also do you 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 E. Sherman — Chief Executive Officer

Yeah, 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 payment 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 and alternative that gives you a down payment toward 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 you said, we were closed for part of their — part of this time period. So if you go back to May and parts of June, there’s just no ingress. There is no product coming in. And even when we reopened, we had concerns around the sanitary nature of dealing with trade-in 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 UV treatment and putting games through either UV 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 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 alternatives, leasing alternatives and a trade in alternative and then, obviously, we’ll certainly promote that. We will have bundles. We will have our fair share of inventory.

Seth Sigman — Credit Suisse — Analyst

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. I mean, what are you seeing there and what is your view of that side of the business?

George E. Sherman — Chief Executive Officer

Do you want to clarify a little bit? I can interpret secondary market in a couple of ways, one of which is selling everything sideways.

Seth Sigman — Credit Suisse — Analyst

The resale market, right? So people are trading on gains 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 that’s not just because of trade, it’s also demand. So what is happening on the demand side for used games?

George E. Sherman — Chief Executive Officer

Yeah, 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 when we both mentioned in our script, I mean there was a period early on in the pandemic, which for this quarter, certainly crossed over in the 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 received 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 needs. So I think once the flywheel is going again, and we have that trade-in going on both sides, there is an opportunity there for us.

Seth Sigman — Credit Suisse — Analyst

Thanks, George. Good luck.

George E. Sherman — Chief Executive Officer

Thank you.

Operator

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

Joseph Feldman — Telsey Advisory Group — Analyst

Hi guys. Thanks for taking my questions. Wanted to ask about traffic, it seems like when you’ve opened stores, you got more people and 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 E. Sherman — Chief Executive Officer

Yeah, sure. It’s a great question. I think first of all, we are 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 meter traffic into the stores even to the degree of having appointments potentially. And certainly, our pre-sale 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 in just large influxes of population into the store. So we are 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 a buy online pickup 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’ll 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 will be more demand than there is supply clearly and that will kind of go on its own course and its own timeline. So we are — 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 unleveled 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 Last of Us 2, we lead and 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.

Joseph Feldman — Telsey Advisory Group — Analyst

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 is 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 — Executive Vice President and Chief Financial Officer

Yeah. 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 is going to look very different than it is in the US, etc. And so, we are 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.

Joseph Feldman — Telsey Advisory Group — Analyst

That’s great. Thanks guys. Good luck with the quarter.

George E. Sherman — Chief Executive Officer

Thank you.

Jim Bell — Executive Vice President and Chief Financial Officer

Thanks, Joe.

Operator

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

William Reuter — Bank of America — Analyst

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 buy them back in the open market. I guess, is that your plan and how do you — what do you expect your trough liquidity to be, I guess, through the holiday period?

George E. Sherman — Chief Executive Officer

Yes. That is correct that we will — our intention is to at 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, we — I mean, let me just reiterate. Our — 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 the working capital and inventory turns, and all the 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 we’re certain — it certainly positions us incredibly well from an overall liquidity standpoint.

William Reuter — Bank of America — Analyst

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 — Executive Vice President and Chief Financial Officer

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 a run rate, but we are 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 are still working on several elements. We’re 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 — Bank of America — Analyst

Okay. And then, just lastly from 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 from me. Thanks.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. Actually…

George E. Sherman — Chief Executive Officer

They won’t be at all. I mean, these will be 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 — Executive Vice President and Chief Financial Officer

Yeah, I’ll just reiterate, none whatsoever. They’re all with third-parties.

William Reuter — Bank of America — Analyst

Okay. Thank you.

Jim Bell — Executive Vice President and Chief Financial Officer

You bet.

Operator

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

Bryan Hunt — Wells Fargo & Company — Analyst

Just a couple from 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, a 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 had today versus again in the last five years in terms of a potential inventory increase?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. I’d say — Bryan, it’s a great question and thanks for that. It’s really all about — it’s centered on the efficiency and the cash conversion cycle, which really equates to inventory turn. This business, if we 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 turns 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, 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 these — towards the launch upcoming, especially because there’s so much demand and the inventory turned so quickly when you see these launches occur. So hopefully, that’s helpful.

Bryan Hunt — Wells Fargo & Company — Analyst

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 who was looking for a new controller, one to three 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 — not only in fiscal Q2, but maybe in Q3.

George E. Sherman — Chief Executive Officer

Yeah. I don’t know. In terms of quantification, I think the thing was, Bryan, there was a 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, 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 if 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 get into launching the Generation 9 product.

Bryan Hunt — Wells Fargo & Company — Analyst

All right. And then my last question is kind of theoretical and scenario. Can you talk about the potential opportunity that 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 light advantages and/or opportunities for you all?

George E. Sherman — Chief Executive Officer

Yeah. I mean, I won’t say much other than that. 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 are watching from the sidelines at the moment, but watching closely.

Bryan Hunt — Wells Fargo & Company — Analyst

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

George E. Sherman — Chief Executive Officer

Thanks, Bryan.

Jim Bell — Executive Vice President and Chief Financial Officer

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 E. Sherman — Chief Executive Officer

Thanks very much. I 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 operations center, all those working on the front lines and then, really a call out for our omnichannel folks for affecting such quick change and such dramatic change so well. And thanks to all of you as always for your interest in GameStop. Appreciate it.

Operator

[Operator Closing Remarks]