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March 14, 2005
Electronics Boutique Announces Fiscal 2005 Fourth Quarter and Full Year Results
Full Year Sales Increase 25% to $1,984 Million Full Year Pro Forma Net Income Increases 37%
by HNN Staff
West Chester, Pa. (HNN) – Electronics Boutique Holdings Corp. (Nasdaq: ELBO), the leading global specialty retailer of video games and related products, today announced financial results for the fourth quarter and full year ended January 29, 2005.
Fourth Quarter Results
For the fourth quarter of fiscal 2005, total revenue increased 20.5% to
$809.0 million from $671.5 million in the same period last year. Comparable
store sales increased 3.0%, versus an increase of 2.0% last year. Sales were
led by a 22% increase in software as well as the launch of the Nintendo DS and
were strong across all geographic regions. During the quarter, the Company
opened 108 net new stores.
Fourth quarter net income was $38.1 million, or $1.53 per diluted share,
which includes a one-time, cumulative, non-cash charge of $2.7 million
after-tax, or $0.11 per diluted share, related to the Company's lease
accounting (as discussed in detail below). Excluding this one-time charge,
net income was $40.8 million, or $1.64 per diluted share. Net income for the
fourth quarter of last year was $39.4 million, or $1.57 per diluted share,
which includes $2.9 million after-tax, or $0.12 per diluted share, of
management fee income recorded in connection with last year's termination of
the Company's services agreement with Game Group Plc.
Full Year Results
For the full year, total revenue increased 24.2% to $1,989.4 million from
$1,601.8 million in fiscal 2004. During the year, the Company opened 449 net
new stores, increasing the total store count to 1,977 as of January 29, 2005
versus 1,528 stores at the end of fiscal 2004.
Full year net income was $52.3 million, or $2.13 per diluted share, which
includes a one-time, cumulative, non-cash charge of $2.7 million after-tax, or
$0.11 per diluted share, related to the Company's lease accounting (as
discussed in detail below). Excluding this one-time charge, net income was
$55.0 million, or $2.24 per diluted share. Last year's net income was $45.7
million, or $1.80 per diluted share, which includes $2.9 million after-tax, or
$0.12 per diluted share, of management fee income recorded in connection with
last year's termination of the Company's services agreement with Game Group
Plc.
Commenting on the results, Jeffrey Griffiths, President and Chief
Executive Officer, stated, "Fiscal 2005 marked a very successful year for our
Company, and this is reflected in our performance across all areas of our
business. With respect to our financial performance, robust top line
expansion was supported by solid software sales, led by the success of
Microsoft's 'Halo 2' and Take Two's 'Grand Theft Auto: San Andreas,' and
slightly offset by the industry-wide hardware shortages in the fourth quarter.
In addition to driving sales, we made a number of operational improvements to
enhance our efficiency and improve margins which contributed to our strong
bottom line result.
"We also continued to implement a variety of strategic initiatives to
ensure the long term growth and profitability of our business. We ended
fiscal 2005 with 55% of our U.S. stores located in strip center locations
which, in conjunction with our pre-played offering, puts us in a strong
position to serve our value-driven consumers and compete with the mass market
merchants. Our international operations, a key point of differentiation for
our business, had a great year, and we have extended our global presence so
that our non-domestic stores now represent approximately 26% of our total
outlets. These measures, together with our ability to leverage our leading
market position and retail expertise, helped us gain further market share and
outperform the industry as a whole," said Mr. Griffiths.
Pro Forma Results
As a complement to the results provided in accordance with generally
accepted accounting principles ("GAAP"), the Company is providing non-GAAP
(pro forma) net income and earnings per share results. GAAP results include
items unrelated to the Company's ongoing operations as well as a one-time,
non-cash charge. Pro forma results are among the indicators management uses as
a basis for evaluating financial performance as well as for forecasting future
periods. For these reasons, the Company believes these non-GAAP measures
provide investors and financial analysts with a better understanding of the
Company's core operating results. The presentation of this additional
information is not meant to be considered in isolation or as a substitute for
net income or earnings per share calculated in accordance with GAAP.
Pro forma net income for fiscal 2005 increased 37.3% to $51.2 million, or
$2.09 per diluted share, from $37.3 million, or $1.47 per diluted share, last
year. Pro forma net income excludes the Company's lease accounting charge,
discussed below, and all management fee income. Management fee income for
fiscal 2005 of $3.7 million after-tax, or $0.15 per diluted share, was related
to the termination of the Company's services agreement with Game Group Plc.
Management fee income for fiscal 2004, including the aforementioned $2.9
million related to the termination of the services agreement, was $8.4 million
after-tax, or $0.33 per diluted share. (Please see the table in this release
for the full reconciliation of GAAP to pro forma results)
Company Outlook
Based on current visibility, the Company expects first quarter total
revenue to increase between 30% and 34%, driven by a comparable store sales
increase of 9% to 13%, and diluted earnings per share to be in the range of
$0.12 to $0.14. For the full year, the Company currently anticipates a total
revenue increase in the range of 15% to 20% with comparable store sales of
flat to 3%. This translates into annual earnings of $2.34 to $2.44 per
diluted share.
Mr. Griffiths added, "We believe fiscal 2006 will be a year marked by many
exciting developments in the gaming industry. However, it is also likely to
be a year of transition as we prepare for the launch of the next generation of
consoles. That said, we believe we are well positioned to capitalize on
changing industry trends and perform well regardless of where we are in the
cycle. Specifically, the current phase in the cycle typically appeals to
value conscious consumers given the combination of affordable hardware and a
strong pre-played pipeline. We believe our ever-growing strip store presence
and leadership in the pre-played business will allow us to capitalize on this
trend. Additionally, we believe the new portables, particularly the Sony PSP,
will serve to generate excitement and help smooth the transition to the new
generation of consoles.
"The first half release schedule is strong relative to last year.
However, we will face tougher comparisons in the third and fourth quarters
given the exceptionally strong holiday line-up in 2004. We face some
uncertainty surrounding the timing of the new Xbox2 launch, which could cause
our earnings estimates to shift between quarters or even years. That said, we
are excited about the long term prospects for our industry and our solid
positioning that will enable us to take advantage of its growth," concluded
Mr. Griffiths.
Lease Accounting Practices
On February 7, 2005, the Office of the Chief Accountant of the Securities
and Exchange Commission issued a letter to the American Institute of Certified
Public Accountants expressing its views regarding certain operating lease
accounting issues and their application under GAAP. In light of this letter,
the Company initiated a review of its lease-related accounting methods for
rent holidays (the period prior to the store opening when the Company pays
reduced or no rent) and for tenant improvement allowances. Based on this
review, the Company recorded a one-time, cumulative, non-cash charge to rent
expense of $2.7 million after-tax, or $0.11 per diluted share, in the fourth
quarter of fiscal 2005. Of the $2.7 million after-tax expense, $0.4 million,
or $0.02 per diluted share, is attributable to the current year and the
balance is related to prior periods. Financial results for prior periods will
not be restated due to the immateriality of these amounts to the income
statement and balance sheet for fiscal 2005 and for each prior year. This
charge will not affect historical or future cash flows or the timing or
amounts of payments under related leases, as this relates solely to the
accounting treatment. Furthermore, this change is not expected to have any
material impact on future earnings. The Company has discussed the adjustment
to its lease accounting practices with its independent auditors and Audit
Committee.
Previously, the Company followed a practice prevalent across the retailing
industry in which it began recording rent expense at the time a store opened.
The Company will now begin recording rent expense when it takes possession of
a store, which occurs up to two months prior to the opening of the store.
This will result in rent expense being recorded at an earlier date for each
lease and will reduce future monthly rent expense, as the total rent due under
the lease is recognized over a greater number of months.
Additionally, the Company's financial statements have historically
reflected tenant improvement allowances as a reduction of the related
leasehold improvements and were amortized over the shorter of the useful life
of those assets or the initial lease term. The Company will now recognize
tenant improvement allowances as deferred rent which will be amortized as a
reduction in rent expense over the life of the related leases. The financial
statements for prior years have been adjusted to reflect a reclassification of
the tenant improvement allowances and accumulated amortization to deferred
rent on the balance sheet and the reclassification of the associated
amortization credit to selling, general and administrative expenses on the
income statements.
Conference Call Information
The Company will host an investor conference call today at 10 a.m. Eastern
to review its financial results. The call will be open to all interested
investors through a simultaneous Internet broadcast at
http://www.ebholdings.com, and it will be archived for two weeks on the
website. A recording of the call will also be available at 1 p.m. Eastern on
March 14, 2005 through 1 p.m. on March 21, 2005. Listeners should call
(800) 642-1687 (domestic) or (706) 645-9291 (international), and use access
code 4381481.
About Electronics Boutique Holdings Corp.
Electronics Boutique, a Fortune 1000 company, is the leading global
specialty retailer dedicated exclusively to video game hardware and software,
PC entertainment software, accessories and related products. As of February
21, 2005, the company operated 2,000 stores in the United States, Australia,
Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico and
Sweden -- primarily under the names EB Games and Electronics Boutique. The
company operates an e-commerce website at http://www.ebgames.com. Additional
company information is available at http://www.ebholdings.com.
This release contains forward-looking statements, including statements by
Jeffrey Griffiths and those related to the financial performance of
Electronics Boutique for the first quarter and full fiscal year ending January
31, 2006, to video game industry events and trends and the impact of those
events and trends on Electronics Boutique, and to growth prospects for
Electronics Boutique. Forward-looking statements refer to expectations,
projections and other characterizations of future events or circumstances and
are often identified by the use of words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimated," "continue" or
comparable terminology. In addition to factors specified in Electronics
Boutique's recent filings with the Securities and Exchange Commission, there
are other factors that could cause actual results to materially differ from
those expressed or implied in these forward-looking statements, such as the
schedule and sell-through for new hardware and software releases, consumer
demand for video game hardware and software, the timing of the introduction of
new generation hardware systems, pricing changes by key vendors for hardware
and software and the timing of any such changes, the adequacy of supplies of
new and pre-played product, currency fluctuations, increased competition and
promotional activity from other retailers, and the availability of locations
for, and timing of the opening of, new domestic and international stores. In
light of the risks and uncertainties inherent in the forward-looking
statements, these statements should not be regarded as a representation by
Electronics Boutique or any other person that the projected results,
objectives or plans will be achieved. Electronics Boutique undertakes no
obligation to revise or update the forward-looking statements to reflect
events or circumstances after the date hereof.
Electronics Boutique Holdings Corp.
Consolidated Statements of Income
(Amounts in thousands, except per-share amounts)
13 Weeks Ended 52 Weeks Ended
Jan. 29, Jan. 31, Jan. 29, Jan. 31,
2005 2004 2005 2004
Net sales $807,504 $662,865 $1,983,537 $1,588,406
Management fees 1,461 8,653 5,845 13,375
Total revenues 808,965 671,518 1,989,382 1,601,781
Cost of goods sold 601,961 496,009 1,450,205 1,174,429
Gross profit 207,004 175,509 539,177 427,352
Costs and expenses:
Selling, general and
administrative expense 138,454 105,298 422,374 327,260
Depreciation and amortization 10,485 8,323 37,473 29,211
Operating income 58,065 61,888 79,330 70,881
Interest income, net 1,031 636 2,350 1,751
Income before income tax
expense 59,096 62,524 81,680 72,632
Income tax expense 21,028 23,120 29,393 26,903
Net income $38,068 $39,404 $52,287 $45,729
Net income per share:
Basic $1.56 $1.59 $2.16 $1.82
Diluted $1.53 $1.57 $2.13 $1.80
Weighted average shares
outstanding:
Basic 24,378 24,849 24,159 25,114
Diluted 24,803 25,155 24,547 25,415
Electronics Boutique Holdings Corp.
Supplemental Information - Pro Forma Net Income and EPS
(Amounts in thousands, except per-share amounts)
13 Weeks Ended 52 Weeks Ended
Jan. 29, Jan. 31, Jan. 29, Jan. 31,
2005 2004 2005 2004
Net income as reported $38,068 $39,404 $52,287 $45,729
Add back: Non-cash cumulative charge
relating to lease accounting 2,680 2,680
Pro forma net income excluding lease
accounting charge (1) 40,748 $39,404 54,967 $45,729
Less: Management fee income (941) (5,453) (3,741) (8,421)
Pro forma net income $39,807 $33,951 $51,226 $37,308
Pro forma diluted EPS (1) $1.60 $1.35 $2.09 $1.47
(1) Pro forma diluted earnings per share excluding lease accounting
charge for the 13 weeks ended January 29, 2005 was $1.64 per share
and for the 52 weeks ended January 29, 2005 was $2.24 per share.
Electronics Boutique Holdings Corp.
Selected Consolidated Balance Sheet Data
(Amounts in thousands)
January 29, January 31,
2005 2004
Cash and cash equivalents $175,295 $157,968
Merchandise inventories 291,678 253,577
Total current assets 515,636 477,687
Total assets 724,200 643,932
Accounts payable 228,825 220,481
Total current liabilities 340,214 311,680
Total liabilities 372,732 339,952
Total stockholders' equity 351,468 303,980
Schedule 1
Electronics Boutique Holdings Corp.
Domestic Retail Sales Mix
13 Weeks Ended 13 Weeks Ended
January 29, January 31,
2005 2004
Video Game Software 60% 61%
Video Game Hardware 18% 19%
PC Software 7% 7%
Accessories 11% 11%
Other 4% 2%
SOURCE Electronics Boutique Holdings Corp.
