GameStop Corp. (GME) Q3 2020 Earnings Call Transcript

GameStop Corp. (NYSE: GME) Q3 2020 earnings call dated Dec. 08, 2020

Corporate Participants:

Eric Cerny — Investor Relations

George Sherman — Chief Executive Officer and Director

Jim Bell — Executive Vice President and Chief Financial Officer

Analysts:

Ashley Helgans — Jefferies — Analyst

Colin Sebastian — Robert W. Baird & Company — Analyst

William Reuter — Bank of America — Analyst

Joseph Feldman — Telsey Advisory Group — Analyst

Seth Sigman — Credit Suisse — Analyst

Curtis Nagle — Bank of America – Merrill Lynch — Analyst

Presentation:

Operator

Greetings and welcome to GameStop’s Third Quarter 2020 Earnings Call. [Operator Instructions]

It is now my pleasure to introduce your host, Eric Cerny, Investor Relations. Thank you, Mr. Cerny. You may begin.

Eric Cerny — Investor Relations

Thank you and welcome to the GameStop’s third quarter fiscal 2020 earnings conference call. This call will include forward-looking statements which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Any such statement should be considered in conjunction with the cautionary statements in 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 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 business and strategic framework for the future. Jim will then provide more detail on our financial results and expectations for fiscal 2020. Then we’ll open the call to take your questions.

Now I would like to turn the call over to the Company’s Chief Executive Officer, George Sherman.

George Sherman — Chief Executive Officer and Director

Thank you, Eric. Good afternoon everyone and thank you for joining us today on our third quarter earnings call. I hope you’re all safe and well. The third fiscal quarter represents a key pivot point in our trajectory to stabilize, optimize and transform GameStop. We have made significant strides in stabilizing and optimizing our core operations and are excited about the transformational plan we are executing that will enable us to create long-term value as our industry continues its rapid growth.

Our third quarter results were largely as we had anticipated, marking the end of a challenging sales performance period as the industry transitioned from Generation 8 to Generation 9 console video gaming products. The transition, coupled with the impact of the global pandemic on consumer retail mobility and also to some extent supply chain disruptions is now segueing into what we see as a period of sustained growth the beginnings of which I’ll highlight in a moment.

First, to summarize the third quarter. As we had anticipated sales and profitability were down with comparable store sales declining 24.6% and an adjusted loss of $0.53 per share. But that notwithstanding we saw a 257% growth in our e-commerce sales versus the prior year, reflecting investments during the year that enhanced our omnichannel capabilities. We continued to reduce expenses delivering over $315 million in SG&A expenses — expense reductions so far this year and we are pleased to end the quarter with almost $300 million more in cash and restricted cash, compared to the end of the prior-year third quarter.

As I mentioned, we made significant strides in stabilizing and optimizing our core operations over the last 15 months and are excited about the plan we are executing for the rapid evolution of GameStop. Despite the unprecedented environment during the global pandemic, our strong performance in November shows not only where we are but the rapid pace of our transformation, beginning with the cost reductions and significantly improved balance sheet delivered by our ongoing work followed by the console launch in early November and now our focus on key transformational strategies that will power future growth.

Our goal is simple. We are positioning GameStop to be the leading global omnichannel retailer for all things gaming and entertainment. We are encouraged by our successful efforts in 2020 to begin category and product extensions that increased our addressable market as well as by our customers’ early response to an expanded products and services offering. At the forefront of this strategy is a digital-first approach focused on delivering a best-in-class e-commerce experience along with an optimized retail footprint. Together with enhanced fulfillment options, they provide our customers with the most comprehensive set of games and entertainment products and events wherever, however and whenever they want them.

The current console based video games product are an important element of our strategy over the next few years and we realized a very successful launch of the next-generation products in November, driving 16.5% growth in comparable store sales. This was the first positive comparable store sales month in nearly two years despite being closed on Thanksgiving Day in North America and the ongoing negative impact of COVID-19 which saw the closure of the vast majority of our European storefronts for the entire month.

In addition to the appeal of the next generation of consoles, these results also reflect the significant improvements we have already made to the performance of our omnichannel platform as global online sales in the month of November grew 352%. In line with these early results we expect to generate strong sales growth and profitability in the final quarter of the year.

Let me review some of the additional highlights for the third quarter. Jim will share some of the specific details of the quarter, but broadly speaking, our global store fleet saw on and off periods of store closure or restricted access to customers, particularly as COVID-19 cases accelerated around the world in October and then through November. We believe the pandemic and importantly the depression of retail consumer mobility lowered our comparable sales in the third quarter by 3 percentage points to 5 percentage points.

Pivoting to our strategic accomplishments in the quarter. We continue to optimize our core business by improving efficiency and effectiveness across the organization leading to a reduction in SG&A expenses of nearly $115 million for the quarter, bringing our total for the year to over $315 million versus 2019, roughly two-thirds of which we view as permanent. We continue to work quickly to optimize our omnichannel capabilities through the transformation of our physical store presence.

Through the third quarter, we have closed almost 800 stores worldwide since the beginning of 2019, representing both underperforming locations and de-densification in certain trade areas. We expect these closures to create a more profitable footprint. In the US, we continued to see strong sales and profit transfer to neighboring locations and e-commerce, an important point in supporting the continued optimization of our store fleet. Consumer affinity for our continually improving e-commerce experience and the ease of shopping and same-day delivery of our omnichannel fulfillment is increasing efficiency across our store footprint. By the end of the fiscal year, we will have closed over 1,000 stores since we began this optimization journey in the middle of 2019, all with little to no capital outlay.

Given the strength of our e-commerce sales and omnichannel capabilities, which I’ll comment on momentarily, we now see the opportunity to close additional stores going forward in 2021 and 2022 as we optimize the profitability of an omnichannel architecture. Overall, our goal is to serve our customers wherever, whenever and however they choose to shop.

We continue to improve our balance sheet. We again improved working capital management with a 33% reduction in inventory and a 38% decline in accounts payable ending the period with $603 million of cash and restricted cash, about $300 million more than the prior-year third quarter.

Finally, as a result of the continued strength of our balance sheet, we further enhanced our capital structure with the announcement of the voluntary early reduction — redemption of $125 million or approximately 63% of our outstanding notes due in 2021.

As you know, we remain very committed to our efforts to build a frictionless, digital-first omnichannel ecosystem and our customers are responding significantly changing the way they shop with us. Our focus on customer centricity and the best end-to-end customer experience has led to recent material gains in our e-commerce business and we expect to build on this success reinforcing the core focus of our go-forward strategy.

In the third quarter, we delivered a 257% increase in e-commerce sales versus the prior year, fueled by our elevated omnichannel capabilities. E-commerce penetration continues to grow and represents nearly 25% of total sales this year, up from a low single-digit percentage historically. We are also leveraging our expanded fulfillment capabilities such as curbside pickup, buy online, pickup in-store, ship in-store and in the third quarter, we rolled out same-day delivery for online transactions to 2,000 locations and now have that option available in all of our US stores.

Given our relatively high average transaction size, we can profitably partner with last mile delivery services to provide customers with same-day delivery.

Our new mobile app, which launched fully in October is much more engaging than the previous version and provides newly available functionality and a dramatically improved customer experience. The app is customizable, enables customers to personalize features, select same-day delivery options and browse a curated deal hub. With more people downloading and using the app on a weekly basis and engaging with it for longer periods of time, we’ve seen a significant increase in engagements within the transactions, a 30% increase in conversion.

With the increased usage, e-commerce sales originating from the app have now doubled. We are very pleased with the initial performance and look forward to rolling out additional features such as the gamer news feed and a comprehensive easy-use digital wallet in early 2021. Going forward, you will see us leverage our GameStop ecosystem of stores, e-commerce and our app to deliver an enhanced 360 degree experience for consumers with products and services that are more relevant to how they connect and play on devices today and in the future, all with the focus on driving customer lifetime value. These efforts have already resulted in and we believe will continue to lead to higher conversion, basket size, frequency of purchase as well as a new customer acquisition for our PowerUp royalty program. As you appreciate, these are very encouraging metrics.

The progress we made during the quarter on our strategic initiatives, despite the COVID-19 backdrop largely completes our optimization and stabilization phases of our strategy, which we’ve been working on for over the last 15 months and positions us for the next phase transformation. Before discussing our future plans and opportunities, I’d like to quickly review the material accomplishments that we set out to achieve with the launch of GameStop Reboot just 15 months ago. In that time, we optimized our physical store presence through the ongoing de-densification and we’ll have closed over 1,000 stores by the end of 2020. We exited unprofitable businesses in the four Nordic countries and divested of the Simply Mac business unit.

We continue to take cost out of the business, significantly reducing SG&A by $316 million year-to-date and over $440 million from our starting point in the middle of 2019. We increased productivity with an improved store labor strategy, invested in our e-commerce platform driving 433% growth in the channel to nearly 25% of sales year-to-date. We improved inventory management with faster turns delivering well over $300 million and working capital benefits, key to our ability to definitely navigate this pandemic.

We monetized several assets, including the sale leaseback transactions for five office buildings and the sale of our corporate jet adding over $95 million in liquidity. We enhanced our financial flexibility with the completion of an exchange offer and consent solicitation for $216.4 million of our unsecured notes, reducing the amount due to mature in March 2021 to approximately $198 million of which we have already announced the voluntary early redemption of $125 million. By March, we will have reduced the overall debt on our balance sheet by almost $600 million since early 2019.

We repurchased 38.1 million shares since the spring of 2019, approximately 37% of shares outstanding at the time at a weighted average price of $5.21. And we significantly expanded our customer payment options, including elevated focus on our private label credit card adding several new — several buy now, pay later options and launched rent to own options to complete the payments deck.

As we enter the fourth quarter we have several tailwinds that set us up to win during this holiday season, starting with the new console cycle and including our digital omnichannel acceleration. But to be clear, we are not just focused on the console video game market and we’re expanding the spectrum of products and services we sell to position GameStop to be a worldwide leader of games and entertainment for our customers. As many of you have seen, we have begun to expand our SKUs to include PC gaming, computers, monitors, game tables and gaming TVs to name only a few categories. Many of these SKUs will continue to be online exclusives. PC hardware and accessories represent a major market opportunity and industry research by NPD shows that the large majority of console gamers also play PC games.

Our overarching goal is to leverage the power and competitive advantages of our brand, significant loyalty base, dedicated and experienced sales associates and expansive omnichannel capabilities to drive lifetime value across all things games and entertainment. As customers evolve the way they play, we are evolving with them, expanding our addressable market as we expand our suite of products and services to meet their needs.

In closing, as we look back over the five quarters since launching GameStop Reboot, we are very proud of the tenacity of our teams to not only produce meaningful results during the stabilized and optimized stages of our plan, but to do so all while delivering our products and services to our customers and doing so in the middle of an unprecedented business disruption caused by the global pandemic. We have made advancements that have begun to return our business to sales growth and profitability while enabling us to undertake the significant transformational work we now have underway. As we look to next year and beyond, we are confident in our strategic plans and the transformation of improved results and long-term sustainable growth of GameStop.

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 third quarter fiscal 2020 results and then I’ll share some insight into the success of the new video console launch and how we’re approaching the fourth quarter.

As George discussed, we advanced our strategy in the third quarter, making significant progress on our near-term goals of optimizing our core business by reducing expenses, improving our inventory management and strengthening our balance sheet and capital structure. And we did so while continuing to focus on transforming GameStop for the future to deliver profitable long-term growth.

With the third quarter behind us, we are intently focused on maximizing all that the new console cycle has to offer, expanding our foundational work on our elevated omnichannel platform and more efficient operating model and quickly but methodically evolving the business to expand our addressable market and support our long-term growth and profit objectives. As the gaming consumer and industry evolve, we see an opportunity to expand our addressable market beyond our historical predominant focus on the console video game market with a comprehensive suite of product offerings and new services across all categories for games and entertainment and simply put, we’re making it easier for consumers to find what they need at GameStop in an intuitive, relevant and frictionless shopping experience, all while taking a leadership role across the game and entertainment categories. Economically, this means adding incremental purchase occasions with higher margin lines of business and therefore capturing greater share of wallet.

Let me turn to review of the third fiscal quarter. As George mentioned, our third quarter sales performance was as expected as we transition through the final quarter of the Generation 8 console video game cycle, which included the shift of many software titles into the fourth quarter of this year and even into 2021. Further, we realized some top line softness in October as COVID-19 case spikes drove retail consumer mobility down.

Our consolidated global sales for the third quarter was $1 billion or 30.2% below the third quarter of 2019. The decline was a combination of a negative 24.6% comparable store sales, the impact of both store closures and lower retail customer mobility through most of our operating countries and the impact of operating 607 fewer stores as part of our strategy to exit unprofitable businesses and optimize our store fleet through de-densification. We continue to see strong sales and profit transfer rates from that de-densification strategy.

Geographically, our Australia and New Zealand business unit continued to perform very well relative to other regions, delivering a slight increase in sales for the quarter. It is important to note the performance in this region is driven by very little reduction in store operating days as the COVID-related retail operating mandates have generally not required full foreclosure or limited access except for short periods of time.

In terms of category performance, hardware and accessories declined 24% for the quarter, an expected slight deceleration from the second quarter largely reflective of a lack of hardware product in the marketplace ahead of the launch of the new consoles, much of which was pulled forward into the second quarter. Despite this Nintendo Switch continued to perform extremely well, increasing significantly compared to last year. And we continue to leverage our preowned inventory to drive sales.

Software was down 39% for the quarter versus 2019, a deceleration from the second quarter and was driven by the lack of title launches, most of which shifted later into the fourth quarter and into 2021, notably Call of Duty launched in the third quarter of last year compared to the fourth quarter of this year.

Our collectibles business was down 9% for the quarter, which represents a significant improvement sequentially from the second-quarter performance as we realized the benefit of store traffic as stores began reopening during the quarter, after being closed during the second quarter.

From a product margin standpoint overall gross margins declined as the increase in the mix of higher margin collectibles sales was more than offset by the mix of lower margin hardware sales and an increase in industry-wide freight costs and credit card processing fees, driven by our higher penetration of e-commerce sales. Our overall global gross margins were 27.5%, down 320 basis points from our more software led 30.7% in the fiscal third quarter last year.

Now turning to our expenses and expense management objectives. Our reported SG&A expenses were $360 million, reflecting a decline of approximately $115 million or 24% versus the reported SG&A in the third quarter last year. The total year-to-date SG&A cost reductions reached over $315 million at the end of the third quarter, ahead of our expectations. Importantly, we continue to expect about two-thirds of these reductions to be permanent, reflecting our ongoing efforts to aggressively rationalize the overall cost structure of our business. While we expect some of these variable costs to come back in future quarters as we return to more normalized operations of our stores and distribution centers, we are also steadfastly focused on further operational efficiencies to create additional permanent expense reductions in the future. To this end, we have more than doubled the original annual cost reductions we expected as a result of these actions we took as part of the reboot initiative which began in 2019.

We reported an operating loss of $63 million compared to an operating loss of $45.6 million in the prior-year third quarter. Income tax in the third quarter was a benefit of $53.9 million, driven by a change in the tax status of certain foreign entities that we have elected and the impact of the CARES Act, which allowed for a five-year carryback period for certain current year tax losses. This tax benefit compares to an income tax expense of $31.6 million in the prior-year third quarter. Our effective tax rate for the quarter was 74.1%.

On a reported basis, our net loss was $18.8 million or a loss of $0.29 per diluted share compared to a net loss of $83.4 million or a loss per diluted share of $1.02 in the prior-year third quarter. Adjusted net loss, excluding the gain on sale of assets related to the sale leaseback transactions, was $34.4 million or a loss of $0.53 per diluted share compared to adjusted net loss of $40.2 million or $0.49 per diluted share in the fiscal 2019 third quarter.

During the third quarter we continued to focus on optimizing our global store fleet and strategically de-densifying certain markets. For the quarter, we closed a net total of 74 stores, bringing our total to 461 closures year-to-date. At the end of the quarter we operated with 5,048 stores or 607 fewer compared to the end of the third quarter last year. Given the strong sales and profit transfer rates we continue to experience, we are on track to close nearly 700 stores in total this fiscal year and over 1,000 stores worldwide since we began this part of our strategy in 2019. Importantly, we are completing these closures generally with little to no capital outlay to do so.

Now turning to our balance sheet, which continues to be an area of focus for the team. At the end of the fiscal third quarter, we had total cash and restricted cash of $602.6 million, almost $300 million higher than the end of the third quarter last year, reflecting our continued efforts to optimize working capital. Additionally, during the quarter we completed the sale leaseback transactions for the remaining two office buildings being offered, contributing $43.7 million toward total liquidity.

Accounts payable at the quarter-end were $440.2 million, down from $709.9 million at the end of the third quarter last year, reflecting a 38% reduction which is directly related to our ability to leverage a flexible supply chain and improve our inventory management. We ended the third quarter with total inventory of $861 million compared to $1,286.7 million in the prior-year period, a reduction of 33%. Inventory efficiency in the third quarter continued to improve as we realized a trailing 12-month inventory turn of 4.7 times from 4.1 times this time last year.

During the third quarter we reduced outstanding borrowings under the asset-based revolving credit facility by about $10 million, down to $25 million outstanding. At the end of the third quarter, we had $269.5 million of short-term debt and $216 million of long-term debt on the balance sheet. Subsequent to the quarter-end, we announced the voluntary early redemption of $125 million in principal amount of our 6.75% senior notes due 2021. The redemption will take place on December 11, 2020 and covers approximately 63% of the outstanding ’21 notes. The voluntary early redemption is consistent with our actions to strengthen and enhance our balance sheet, improve our debt profile and optimize our capital structure.

In the third quarter, we had $15.1 million of capital expenditures and we continue to focus our capital spending on near-term, high value strategic projects and mandatory maintenance and still anticipate that we’ll invest approximately $60 million to $65 million in capex for the year, some of which is offset by our various vendor support programs.

Separately, today we also filed a shelf registration statement and established a related optional at-the-market program to offer and sell up to $100 million of additional common stock. As I noted several times this year, we are extremely pleased with the results we have achieved to strengthen our balance sheet and advance our strategic objectives and believe we have more than sufficient liquidity and balance sheet strength to continue to execute on these endeavors, as well as navigate through any potential unknown or extended pandemic effects. As such, the timing and amount of sales of shares under the program, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares and other factors we may determine. However, as a pragmatic matter initiating this program provides us with the maximum flexibility and optionality to further bolster our balance sheet and liquidity position and increased flexibility gives us the ability to leverage opportunities to accelerate our transformational strategies such as increasing the speed at which we elevate and expand our omnichannel strategy, while further ensuring minimal disruption from any potential further pandemic impacts around the world.

Before moving to our fourth quarter outlook, I want to spend a few minutes highlighting the initial results of the console launches that occurred in November. By all accounts, these consoles are experiencing unprecedented demand and we continue to work with the suppliers to meet that demand. Importantly, we continue to be able to achieve attachment rates for first party and third party software and accessories that are in most cases more than two times that of any other competitor, which is leading to us having opportunities to get additional allocations for these high-demand consoles.

Given the strength of our performance so far with the console launch, we expect strong sales growth and profitability in the fourth quarter, something we have not seen in quite a few quarters. As George mentioned, November comparable store sales increased 16.5% despite the impact of store closures throughout most of Europe and part of Canada in November. In addition, our customers continued to respond favorably to our improved e-commerce experience, including our new app and flexibility of new fulfillment and payment options provided within our elevated omnichannel ecosystem. As a result, year-over-year e-commerce sales grew 352% in November versus the same month last year.

Despite the strong start to the fourth quarter given the uncertainty around the evolving impact of COVID-19, we are continuing to suspend guidance. As we mentioned, we have seen varying levels of closures across our international operations, particularly in Europe and as things remain very fluid in the US temporary store closures due to COVID-19 could be likely heading into the rest of December and January. Keep in mind that the comparable store sales exclude the impact of permanent store closures in locations that were [Phonetic] closed 14 contiguous days or more due to the pandemic.

Before I conclude, I wanted to elaborate a little further on our real estate strategy and efforts to optimize our fleet, especially de-densifying overstored markets and how we’re approaching further actions. Looking at 2019 and 2020 combined, we will have closed over 1,000 stores over that time frame with over 300 in 2019 and nearly 700 in 2020 and importantly have spent little to no capital to do so.

With our investments improving our omnichannel capabilities, including hiring almost 30 professionals with extensive digital experience coupled with the impact that COVID-19 has had on our customers’ desire to experience GameStop across our digital platforms, we see an opportunity to further optimize the fleet in the coming year or two. These efforts come with EBITDA improvement and we have had a very flexible store base in terms of lease expirations. And that will enable us to close stores at very little cost to the business. We will update you further on these objectives during our fourth quarter and fiscal year-end earnings conference call.

In summary, we’re off to a great start for holiday and our associates are energized by the buzz and excitement generated by the console launches. We have long said that the newness in consoles and software drive our business and we see that playing out now. While we are now benefiting from a nice tailwind, we are equally focused on transforming our Company for the future and believe we have the right initiatives in place to achieve this goal, reshaping GameStop for effective market reach and offering a broader array of products and services in the games and entertainment space.

In the short term, we will remain intensely focused on continuing to improve our financial architecture. But today GameStop is a meaningfully more efficient streamlined organization than it was 15 months ago due to all the hard work that our teams have done as part of stabilization and optimization components of our strategy. As a result, we believe we are poised to capitalize on significant profit flow-through improvement as we experienced sales growth led by both the Generation 9 console launch and expected new software title slate as well as the expansion of the transformation phase of our strategy and many exciting category and product extensions and services we will bring into our ecosystem in 2021 and beyond.

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 Stephanie Wissink with Jefferies. Please proceed with your question.

Ashley Helgans — Jefferies — Analyst

Hi. This is Ashley Helgans on for Steph. Thanks for taking our questions. On the SG&A reduction, you’ve been running about $100 million a quarter. What should we expect for pacing by quarter going forward and what are the remaining cost buckets to address? And then how — just on your performance in the quarter, how did it benchmark to industry figures of third-party data sources like NPD? Thanks.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. Hi, Ashley. Thanks for the questions. With respect to SG&A, I mean look again we continue to address, as you know for several quarters now addressing SG&A in virtually every facet of the business. So it’s not going to — it won’t be that different from the contribution of expenses for any quarter as we’ve seen historically, because we’re really removing cost out of the entirety of the system. A lot of it is stores coming offline, a lot of it is productivity in our labor forces, both in the stores and the DCs, all aspects of our corporate G&A. So it really is everywhere. So I don’t know that that’s going to change very much at all based on the history.

And I’m sorry, the second part of the question was?

Ashley Helgans — Jefferies — Analyst

Yeah. Thank you. That was helpful. But the second part of the question was just on the performance in the quarter, how did you benchmark to industry figures like NPD?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah, I’m not exactly sure how to comment the benchmark point. But I mean, look, I think — again, I think the quarter was in line with our expectations. And if you go back — just go back a year, I mean when we first got here last summer and we set out on this journey, we said, look these next four quarters will be representative of exactly what we just saw and they met our expectations.

And then more importantly what happens at the end of a cycle as we then transition to the next one is we’re not competing on price at the end of a cycle. So, again, it’s a balance. But importantly, I think the third quarter is behind us now and I think the most important point here is is that we are indexing very well as we launched into the November time frame and — in the launch of these consoles. I think that’s the critical message today is that we made that transition and we’re laser focused on moving forward.

George Sherman — Chief Executive Officer and Director

Yeah, I think that’s — I mean, I think all I’d add is that we knew that we’re at the end of — we’re going to experience some voidance in hardware as we got to the end of the cycle without the prior generations in place in any kind of quantity. We had some software titles move from Q3 to Q4 and we are wave affected during this pandemic. So — I mean, very clearly as waves break out across the country we feel the impact of that as shoppers become less and less comfortable, particularly going to a specialty store for a specialty purchase.

Ashley Helgans — Jefferies — Analyst

Okay, great. Thank you. And if I could just squeeze in one more, e-comm representing 18% of the net in the quarter. How much of the online business is now fulfilled from stores?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. That’s not a stat that we’ve actually supplied but suffice it to say it actually fluctuates and this is important because it’s based on what the consumer is demanding. And so if it’s a ship from store or a buy online, pick up in store or a direct to consumer element or absolute footfall into the box itself from a pure POS traffic standpoint, again, I think it’s fluctuating, that’s important. That’s what exactly what we mean by a frictionless, digitally-led, omnichannel retailer is letting the consumer pick when they want to — when they want the product and we deliver to it.

Ashley Helgans — Jefferies — Analyst

Okay. Great. Thank you so much. I’ll pass it off to someone else.

Jim Bell — Executive Vice President and Chief Financial Officer

Thanks, Ashley.

Operator

Thank you. Our next question comes from Colin Sebastian with Robert W. Baird. Please proceed with your question.

Colin Sebastian — Robert W. Baird & Company — Analyst

Hi. Good afternoon. Thanks, guys. I mean, clearly a lot of progress being made with e-commerce and with expense controls. So as it pertains to the transformation plan, I wonder if you could provide some context on how this differs from what was outlined in the letter to the Board because at face value it seems like there is a fair bit of overlap in terms of the shift to digital-first and shrinking the store base. That’s my first question.

George Sherman — Chief Executive Officer and Director

Yeah. Look, I’ll only comment on our progress as we see it reboot to date and where we are today. We look at the business and we feel quite good about the financial stability measures that have taken place. Over the period of reboot, we’ve reduced long-term debt by well over $500 million, we’ve returned $200 million to the shareholders through buybacks which represent about 37% of the Company. We ended the quarter with $300 million more cash than same quarter last year and that’s been a trend. I mean, that’s something that’s been pretty continuous throughout the reboot process.

Just prior question, your SG&A run rate of reduction seems to be $100 million a quarter. Yes, it does. I mean that’s very much an important part of getting where we needed to be. And then the progress that we’ve made on working capital has been tremendous. And fortunately that began at the very beginning of reboot 15 months ago and what that’s done to allow us to navigate through this pandemic is I cannot overstate.

So on the economic stability, our financial stability front, good. We’ve made nice progress on digital for sure from an e-commerce standpoint. We were behind. I mean, we were clearly behind in terms of digital penetration of sales, we were behind in terms of technology. We still are very candid about having work to do, but we’ve come a long, long way very, very quickly.

So to be up 257% for Q3, to have penetration at that level and really spiking considerably higher than that during peak periods, to have made investments in our e-commerce capability both in terms of the platforms and human capital that’s driving it, the capability expansion that we made, lease to own options, flexible payment terms, proprietary credit cards, all better alternatives for the customer on how to shop. And then just kind of looking ahead, while this generation of console launches is very, very important to us and it is and the demand is unprecedented and it clearly is, we’re working to be defined not purely as a console gaming retailer, but as serving the entire gaming community on all the various verticals.

So we’re glad to see sales up 16.5% despite being closed on Thanksgiving Day and being very comfortable in that decision to close on Thanksgiving Day. We have a light category expansion that both Jim and I mentioned during the course of our comments that are progressing well and then really good progress on the digital first omnichannel store fleet optimization work. So we look back, we feel pretty good about where we are and are poised for the next phase of work.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. I mean just to put a fine point on it. Again the second pillar that we launched in reboot last year in the August, September time frame was to build a frictionless digital ecosystem. That’s exactly what we’ve done. That is leading with technology, leading with a digital footprint that optimizes our e-commerce evolution through the investments in advancing the technology as well as how it balances with the right footprint of stores. We launched that when we got here and launched our reboot program. So I think that’s the point George made. We did and we’ve been making some real strides against it.

Colin Sebastian — Robert W. Baird & Company — Analyst

Thanks. That’s helpful. In the release there is some commentary around providing gross in reference to 2021. So I just wanted to clarify if that specifically referencing sales volumes next year or something else.

George Sherman — Chief Executive Officer and Director

It’s absolutely referencing sales volumes next year.

Colin Sebastian — Robert W. Baird & Company — Analyst

Okay.

George Sherman — Chief Executive Officer and Director

And I’d say two-part response to that. First of all, we have growth initiatives in place. Second of all, the console launch is not a Q4 phenomenon as you all know. I mean I think there’ll be great carry-forward demand into the entirety of next year and beyond.

Colin Sebastian — Robert W. Baird & Company — Analyst

Okay. And then lastly, do you have a target for the cash balance expected at the end of the fiscal year?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. We haven’t put it out there, but I would just say consistent with the trajectory that we’ve been on.

Colin Sebastian — Robert W. Baird & Company — Analyst

Okay. All right. Thanks, guys.

George Sherman — Chief Executive Officer and Director

Yeah. You bet.

Operator

Thank you. Our next question comes from William Reuter with Bank of America. Please proceed with your question.

William Reuter — Bank of America — Analyst

Hi. I just had two quick ones. The first is, and I don’t think the question was asked this way, in terms of the November performance was it in line with your expectations?

George Sherman — Chief Executive Officer and Director

Yeah, it certainly was in line with expectations. Again we knowingly took a chunk out of that by closing on Thanksgiving. I think it’s fair to say that in this environment these sales compression that you might sometime see is not prevalent. So we knew that that was going to be an investment in our people and into safety and we don’t second-guess that for a moment. So, yes, if you make that change, it is in line with our expectations.

William Reuter — Bank of America — Analyst

Okay. And then in terms of the new shell, I saw that you mentioned general corporate purposes, would you consider issuing stock to repay debt under that program?

Jim Bell — Executive Vice President and Chief Financial Officer

No, that’s absolute not the intent. The intent here is to simply optimize flexibility in optionality period. There is a lot of unknowns going on in the marketplace with respect to this pandemic, ongoing flex of cases across the world, the impacts on our own businesses and we’re not immune to that, right.

In this — in that regard, look we’re going to continue to execute our strategies that have bolstered and strengthened our balance sheet and you see all the work that we’ve done, including if we go back to even the long-term debt levels in early 2019 till today as of this coming Friday we will have reduced our long-term by over $530 million, by March of ’21 that’ll be over $600 million. In that same time frame, that roughly 24-month time frame plus or minus, we also returned over $200 million to shareholders.

So I think, look, the goal is to continue to focus on running the business and optimizing the way we run the business, but also be very pragmatic and make sure that we have capital flexibility with no intention to do anything other than maintain our flexibility. Hopefully that helps you.

George Sherman — Chief Executive Officer and Director

And insofar the debt is concerned we don’t need it.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah, absolutely.

George Sherman — Chief Executive Officer and Director

We don’t need it. [Indecipherable]

Jim Bell — Executive Vice President and Chief Financial Officer

And as I mentioned, we will have Friday is the first voluntary redemption of $125 million of the remaining March ’21 notes.

William Reuter — Bank of America — Analyst

Great. I’ll pass to others. Thanks so much.

Jim Bell — Executive Vice President and Chief Financial Officer

You bet. Thank you.

George Sherman — Chief Executive Officer and Director

Thank you.

Operator

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

Joseph Feldman — Telsey Advisory Group — Analyst

Yeah, thanks. Hi, guys. With regard to the consoles, how did your allocation compared to prior cycles? I mean presumably you sold every single unit that you got. Is there still — I assume there is still a very heavy backlog. And what are your thoughts on allocation through the rest of the period? We know Sony has come out and said that they plan to produce more. So can you share any thoughts on that?

George Sherman — Chief Executive Officer and Director

Yeah. I think the demand has been unbelievable, Joe, as you mentioned and we don’t see any end of that in sight. So certainly these are fabulous pieces of technology, the demand is terrific for it. Any allocation that we get, and I think I’ve mentioned this on past calls, the answer is we always want more.

I will say the competitive set has changed between console launches really with the evolution of direct to consumer from the OEMs themselves. So that tells you a bit about what the allocations look like versus last time around. But we’re playing meaningfully which was our objective and we’re winning well.

So I think one area and a point of differentiation for us and it’s been part of our premise all along is we attach differently. So when you look at accessories first-party software we attach differently and that’s been recognized. And we have seen some level of reward for that and we expect it to be a differentiating point for us going forward in terms of allocation.

Joseph Feldman — Telsey Advisory Group — Analyst

Thanks. That’s helpful. And then just another question. With regard to the cash balance, I mean I know that some of it’s restricted, but you have $603 million, presumably you generated more in the fourth quarter. Let’s say we’re getting through this cycle with the pandemic. I understand the next couple of months are going to be rough, but I guess how are you thinking about cash allocation or cash usage at this point? I know we’ve talked to people that are hoping you are going to buy back more stock in the coming year so — or return to that. So I guess I’m curious how we should think about that going forward.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. Thanks, Joe. The short answer is, again, nothing is off the table. I mean, our job is to find the optimum balance of capital allocation, which starts with ultimately the investment in the transformation of the business for future growth and profitability. That’s the first point and we’ll continue to do that. And if it means accelerating those investments to bring that return in in a more rapid fashion, we’ll do that. It also is the fine balance of the capitalization of the business and ultimately what is the right level of debt we think we’re approaching that after we get done paying down the rest of these March ’21s.

And then outside of that, certainly always the consideration to return capital to shareholders as well as we’ve proven, like I said, last year in 2019 returned over $200 million to shareholders. So I think every one of those is on the table. We are always looking to find the optimum balance of capital allocation.

George Sherman — Chief Executive Officer and Director

And just to kind of add the obvious. The underlying environment matters certainly. We don’t know what a few more months means right now. We’re obviously encouraged by a vaccine just like all of you are. But we see more impact ahead and we don’t know the exact timelines or protocols for that nor does anybody at this point. So we look at something that we have to be guarded about into the future is there is no particular end date in sight yet. This is something we’re going to be dealing with for the indefinite future.

Joseph Feldman — Telsey Advisory Group — Analyst

Understood. Thanks and good luck with this holiday season, guys.

George Sherman — Chief Executive Officer and Director

Okay.

Jim Bell — Executive Vice President and Chief Financial Officer

Thanks, Joe.

Operator

Thank you. Our next question comes from Seth Sigman with Credit Suisse. Please proceed with your question.

Seth Sigman — Credit Suisse — Analyst

Hey, guys. Thanks for taking the question. I wanted to follow up on the Q4 commentary and I just want to confirm the language here. So in the release you talk about positive year-over-year sales growth. I just want to confirm, are you guiding to year-over-year profitability growth as well?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. We’re not guiding to anything. The comment was specific to growth and profitability in the fourth quarter. And just to be clear again, we’re not guiding to anything. Again, it’s — I think we’ve been pretty straightforward on that.

George Sherman — Chief Executive Officer and Director

[Speech Overlap]

Seth Sigman — Credit Suisse — Analyst

What would you call same sales year-over-year is then? I mean you’re saying sales year-over-year will grow and there is a comment about profitability. I’m just trying to confirm, are you saying year-over-year profit growth in addition to year-over-year sales growth?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. Just notation was for the fourth quarter.

Seth Sigman — Credit Suisse — Analyst

Yes. For the fourth quarter, I’m asking.

Jim Bell — Executive Vice President and Chief Financial Officer

Yes, that’s correct.

Seth Sigman — Credit Suisse — Analyst

Okay. So, year-over-year profit growth. So then the related question is given the unfavorable mix of hardware, would you expect gross profit to be up as well? Obviously, you’re going to have some mix impact here. Comps are going to be up, but you do have the negative mix, so gross profit up or is it really coming from the cost savings?

Jim Bell — Executive Vice President and Chief Financial Officer

A little bit of both, gross dollar — gross profit dollars, because look we’re talking about volume rate. So you get a little bit from the overall top line as a flow-through but then you also take advantage of the flow-through to the bottom line as a result of your expense structure that’s a lot more optimized than it was last year.

Seth Sigman — Credit Suisse — Analyst

Okay. Interesting. Okay. And then just a follow-up question on the market share question earlier. Your growth rates did seem to trail the industry per MPD. I’m just curious what would be causing that. Do you feel like e-commerce, even though it’s clearly progressing, you feel like that’s been one of the reasons for lagging or anything else that you would highlight? And then, of course, with all the initiatives I’m curious what do you think is going to be most incremental to regain share as you sort of look out over the next 12 months or so?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah, look, I think there are periods during the course of Q3, certainly periods during the pandemic where we certainly are aware of the fact that we lost some share. We’ve had closed stores. We’ve had a competitive situation where some of our competitors were open for business. We weren’t — and you’ve got a very guarded shopping environment obviously as it applies to the brick and mortar aspect of our business where there is a reluctance, there is a significant decrease in footfalls across retail in general and we’re not immune to that in any way, shape or manner.

So I think you’ve got a prescribed shopping trip to GameStop to get gaming and you’ve got a general trip elsewhere for multiple purposes. I think that probably is factored in. On the flip side, when there is — again when there is newness in the marketplace, we excel. We tend to lead in market share for those software releases, those new game releases. So that is our strength.

We actually believe that we’re going to be in a position to begin to claw back market share going forward, as we cycle some of those closure periods, as we’re able to get customers back in stores and leverage the full omnichannel suite that we offer now. We’ve gained certainly through our increases on e-commerce, but there is still a significant impact on the brick and mortar aspect of the business right now and there will be for a lot longer.

George Sherman — Chief Executive Officer and Director

Yeah, I just add one comment on the mortgage share piece. I mean, if you just look at the cyclicality back in the 2013, 2014 Gen 7, Gen 8 transition period you saw that at the end of the cycle, we tend to lose a little bit — a couple of points of market share and at the beginning of the cycle, we gain those points of market share and the reason — a huge reason for that — and that is our expectations we had forward. But a big reason for that is again the technical consultation of our expert gaming associates that are in the stores. And that’s important with the advancements of the technology.

Seth Sigman — Credit Suisse — Analyst

Okay. Thanks. Thanks and good luck.

George Sherman — Chief Executive Officer and Director

Yeah, you bet. Thank you.

Jim Bell — Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Curtis Nagle with Bank of America. Please proceed with your question.

Curtis Nagle — Bank of America – Merrill Lynch — Analyst

Good evening. Thanks very much. Yes, I just wanted to continue to gain on the comment about the 16.5% comp in November and just how to think about how the rest of the quarter plays out. November was obviously the quarter when consoles launched. I think at least it’s going to be the only quarter where the industry will see a material sell-through due to the shortages and November likely brought a lot of traffic into stores and the website.

So thinking about December and January where you and your peers are likely going to have a ton of supply, at least I think, do you think you see a reversal of traffic? How do we think about comps staying positive? What’s the setup for those two months where, again, you just don’t have the traffic driver in any materiality?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. I think, Curt, first of all let’s take any potential effects, the unknown components of the pandemic off the table because, look, we’ve seen time and time again that it affects retail mobility. So let’s just assume no one knows the impact of that, take it off the table.

And the very simple fact outside of that is — is that again we’re continuing to execute here in the fourth quarter. This is not a couple of weeks in the month of November. So to be clear, that’s not what this is and it’s certainly not the fourth quarter either. As George said earlier, this is a multi-year evolution here and this is just the beginning.

George Sherman — Chief Executive Officer and Director

Yeah. Look there’s going to be impact on December as you know. I mean, you’ve likely heard about global supply chain issues on every call that you’ve been on and it certainly is a fact and it is a mitigating factor. But we have newness in December.

We have a release coming up in two days called Cyberpunk 2077 which is a big driver for us and we certainly believe that there are other events that will drive traffic in the month of December that will continue this.

Jim Bell — Executive Vice President and Chief Financial Officer

The other thing is again I don’t want to miss not playing to the fact that we have added so much customer flexibility both in delivery options and payment options. These are all resonating incredibly well with our consumers and giving us an advantage. So again this is how you take advantage of a full omnichannel execution. So those are continuing to be part of our business as we move through December and beyond as well.

Curtis Nagle — Bank of America – Merrill Lynch — Analyst

Okay. And then just as a quick follow-up. Any commentary on the used business, how do the trend go in 3Q? And I guess how is the hardware portion of that segment doing, maybe seeing a little bit of boost near term, just given supply constraints across both next gen and current gen consoles and how is software performing as well?

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. On the hardware side for the third quarter as it should be expected, I mean again, you’ve got — you’ve got lower supply elements. As we go forward and what I mean by it is our ability to intake. When our stores are closed, we’re not intaking preowned hardware, right. I mean that’s just the natural equation. However, as we’re navigating through this launch, a big part of that is our engagement with our customers with preowned product and so we’re positioning quite well.

And I think what’s different though as we go forward this time around is that the OEMs are not making the prior-gen product anymore and that’s critical, because if you want a prior-gen product, a lot of people do, there’s demand in that marketplace, we are really your shop to go get that.

George Sherman — Chief Executive Officer and Director

Yeah. I’d emphasize that last point. We’re bullish on preowned hardware for just that reason. And just again go back in time a little bit. The intake issue is pretty self explanatory. We have pre-sales and then we have launch events for new next-generation consoles. You’re not going to get my old console until I get my new console. So there is an inherent delay in that happening and then it does and that’s where we are right now is kind of in the fulfillment in high demand phase working through those pre-orders, but really in a very constructed environment going forward. But we actually think that this can be a bit of a renaissance for preowned gaming with the absence of the older generation consoles out there and we have them and we can re-manufacture them.

Curtis Nagle — Bank of America – Merrill Lynch — Analyst

Okay. Thank you.

Jim Bell — Executive Vice President and Chief Financial Officer

You bet.

Operator

Thank you. There are no further questions at this time. I’d like to turn the floor back over to George Sherman for any closing remarks.

George Sherman — Chief Executive Officer and Director

Yeah. Let me have Jim make one quick comment and then we’ll close out the call.

Jim Bell — Executive Vice President and Chief Financial Officer

Yeah. I just wanted to call your attention. This quarter we added — as we’re making this transformation, we added some slides to the IR website. So I’ll call your attention to those that continues to iterate and lay out for all of you this — our journey. So please take a reference to those. George?

George Sherman — Chief Executive Officer and Director

Yeah. Thanks to everyone. Wishing you a safe and happy holiday. It’s obviously been a quite unusual year. Hope you have a great end to it. I want to kind of lay out our communications cadence going forward. We will provide you with holiday sales results in early January and then more details regarding our strategy and outlook at the ICR Conference happening virtually in January and again following our fourth quarter and year-end results. Thank you all very much.

Operator

[Operator Closing Remarks]