Paul Raines - CEO Rob Lloyd - CFO Tony Bartel - COO Mike Mauler - EVP GameStop International Jason Ellis - SVP Technology Brands

San Phan - Mizuho Seth Sigman - Credit Suisse Colin Sebastian - Robert Baird Brian Nagel - Oppenheimer Curtis Nagle - Bank of America Merrill Lynch

Good day and welcome to GameStop Corporation's Fourth Quarter and Full Year 2016 Earnings Conference Call. A supplemental slide presentation is available at investor.gamestop.com. At the conclusion of the announcement a question-and-answer session will be conducted electronically. [Operator Instructions] I would like to remind you that this call is covered by the Safe Harbor disclosure contained in GameStop's public documents and is the property of GameStop. It is not for rebroadcast or used by any other party without the prior written consent of GameStop. At this time, I would like to turn the call over to Paul Raines, CEO. Please go ahead.

Thank you. Good afternoon and welcome to the GameStop earnings call. I want to thank all our global associates for your outstanding service to our customers in 2016 navigating transformation takes a full team effort and I'm extremely proud of how our organization has built an even strong culture through out the year. Speaking on the call today will be Rob Lloyd and Tony Bartel; also in the room are Mike Hogan, Mike Buskey, Mike Mauler, Jason Ellis and Matt Hodges. 2016 proves to be a more difficult year than we originally forecast, while our strategic transformation drove record gross margins of 35% and earnings came in within our revised guidance of 377, we encountered stiff headwinds as we completed the third year of the console cycle. As a result, the physical games category declined 15% and our GameStop brand lost a small amount of market share during the holiday period due to deep discounting. Our internal model, which aggregates PwC, DSC and IDG, forecast only a 5% decline even as latest September, experts were still expecting a 5% decline for the year. However, according to NPD, excluding Pokemon, the top eight physical software titles actually declined over 40% from October to December compared to the top eight release in the same timeframe in 2015. As a result, most publishers began discounting titles much earlier than previous years leading to a steep decline in retail pricing. The 2016 holiday was also more promotional than prior ones with average hardware prices down 15% versus prior years. That decline reflected the impact of all the below cost discounts and complimentary gift cards that we saw from Black Friday that ultimately carried through the holiday season. This console upgrades were also not as meaningful as we had hoped. Some have argued that this decline was caused by title fatigue, others have argued for a need for new consoles. And looking more broadly across the general retail spectrum it was obviously a transformational holiday season for a number of hard-line retailers. It is also encouraging though to see what was not a primary cause of physical declines. We know from various external sources that the penetration of full game downloads increased 2 to 8 points in 2016. Remember that we have mid-single digit share on full game digital downloads and an overall 18% share for console digital products including full game download, downloadable content, digital currency and PC. Our conclusions are that overall gaming declined slightly in 2016 as mobile growth slowed in console digital was flat. So, I think it's critical for our analysts and investors to understand that 2016's physical game decline were not caused solely by acceleration of full game downloads. Now, despite the physical decline based on our research within our gaming community, the majority of gamers purchase intent for new console this high was more than 50% of non-owners still planning to upgrade to a PS4 or Xbox One. Purchase intent for Switch and Scorpio's at PS4 levels are higher. Just a note on the Switch launch. We have had a very successful launch so far with high attach rates of software particularly Zelda and related add-ons. The Switch has provided a dramatic lift in traffic in-store and has real potential to be V-lite in its ability to expand the gaming category from core to broad audiences. In fact, the Wall Street journal reported late last week that Nintendo could potentially double their original output forecast over the next 12 months. As for now, we continue to receive more allocation, strengthening what we believe is already leading market share. We are also looking forward to the launch of the Switch title from GameTrust called Has-Been Heroes, which recently won an award at Paxi's as best handheld game. GameStop has an extensive loyalty CRM program known as PowerUp Reward. In 2016, our PowerUp members drove 71% of our sales volume in the United States, so they are very important to us. In addition, they spend roughly 6x that of a non-member, 3x that of a basic member. We have recently strengthened our PowerUp Pro program with ritual rewards and better focus in our [Technical Difficulty] and Web site. As a result, we grew our membership based in 2016 and they are rewarding us with greater frequency and larger average purchases. Historically growth in PowerUp Rewards brings us great benefits and if you are a PowerUp Pro member you know that the pro-gaming pass pro-days and exclusive offers are a fewer examples of new value for your membership. Shifting gears, let's talk about one of the great growth stories we had in 2016, our collectible business, which hit the high-end of our revenue guidance at $494 million. We are spending a lot of time on the collectibles business driving global best practices, buying synergies, developing standalone collectible stores and hybrids as well as integrating [indiscernible] into the enterprise. We are very focused on continuing to grow this year and the availability of licenses from IP holders and movie studios will continue to support that growth. In 2017, we expect to grow our collectibles business by 30% to 40%. Tech Brands was another great growth story in 2016, revenue grew 52% for the year to $814 million as we added a net 486 stores to become AT&T's largest deal. We continue to be closely aligned with AT&T and see their diversification as an asset to us as we continue to support their initiatives. Tony Bartel will provide color on our key activities for the Tech Brands business but it's safe to say that we look for more great things out of this business in 2017. So, despite the strength of our new businesses, some of you may still be asking is your strategy working? Our answer, it absolutely is. To help you see this more clearly, let's revisit the four pillars we presented to you at our spring 2016 Investor Day. In physical gaming there have been cyclical declines without question, but we have very strong cards to play in Nintendo Switch, Sony VR and Microsoft Scorpio. We have also demonstrated our ability to proactively and intelligently right-size our footprint and to reduce the in-store linear footage to give us more room for collectibles. This ability to flex in response to the marketplace is one our key assets as we continue to transform the business. Digital is another growth segment, with digital receipts growing 4% to $1.1 billion in 2016. Growth was driven by a 20% increase in DLC and congregate sales. We expect to continue to be a strong participant in this area and post steady games over the long-term. Collectibles is an absolute win and as great potential for future growth as we double our internal linear footage within GameStop branded stores. We expect to see continued growth along with ThinkGeek.com productivity in our Web sites and standalone stores, collectible is on-track to become a $1 billion business by the end of 2019. In technology brands, we continue to have high expectations as we cycle growth of our latest acquisitions and see new products from AT&T. Tech Brands is still on pace to generate $200 million of operating earnings in 2019. In terms of capital strength, we continue to generate significant cash flow and we are reducing capital expenditures to reflect a smaller business. This discipline has allowed us to not only to produce outstanding cash flow but also return that capital to shareholders generously and consistently. Therefore, we believe that our strategy is sound as we will continue to proactively navigate any and all consumer shifts on the physical gaming side of the business. And aggressively diversify through our strong non-gaming categories. In 2008, we were a 100% physical retailer. And last year we had 37% of earnings coming from non-physical businesses. Why do we think that is important, simply because that de-risks your investment in GME, while providing shareholders with the upside of the frequent cycles in gaming. As we grow our non-physical assets of digital collectibles and Tech Brands, we believe the value in our collective franchises will prove much higher than it is today. A further word on capital policy and I will ask Rob to derive more color when he walks through his prepared remarks. We have had a strong commitment to returning excess cash to investors in recent years reflected in our rich dividend and $2 billion of share buyback activity. This year, we have already increased the dividend on our shares and we will continue to evaluate the best capital allocation levers to pull to create value as we move forward balancing dividends against the maintenance of a strong balance sheet investing in our business in future share buybacks. On the growth front, we are aggressively redirecting capital investment to our growth including omini-channel, PowerUp Rewards, ThinkGeek.com integration and Indigames. Our Tech brands and collectibles will receive investments as well. We believe we are firmly grounded in doing the right thing for shareholders on all fronts. We have also changed our guidance policy moving to an annual guidance model. We will of course report quarterly earnings as we always have. So, we would like to set our sights more long-term we think it is a responsible approach to guidance. In closing, I have to share a comment I made on this earnings call a couple of years ago. "It is interesting when we first started talking about driving a high rate of internal change here at GameStop a few years ago. We had no idea, how rapidly our external space would change. The good news is that we have persevered and today find ourselves with an abundance of good business opportunities as we build a portfolio of specialty retail brand that make your favorite technologies affordable and simple." We continue to stay consistent with our strategy we covered with you in our analyst update from 2016. While our category continues to change, we think that GME has the correct strategy to diversify and weather cycle in the physical gaming category, while building on growth in digital, collectibles and technology brand. With that, I will turn the call over to Rob.

Thanks Paul. Good afternoon everyone. Today, I would like to take you through review of our Q4 and full year 2016 results our and 2017 guidance. Overall, as Paul said, our financial results met our most recent guidance. Sales decreased 13.6% in Q4 and 8.1% for the full year. Comparable store sales decreased 16.3% for the quarter and 11.0% for the year. U.S. comps were down 20.8% for Q4 and 13.5% for the year. While the gaming business had its challenges, our non-gaming business continued to grow and provide a more validation for our business transformation. Tech Brands revenues grew 43.9% in Q4 and 52.4% to $842 million for the year. We also hit the high-end of our collectibles target of $450 million to $500 million with $494 million in sales. Gross margins came 350 basis points for the fourth quarter 33.1% and 380 basis points for the year resulting in third a 5.0% margin rate, which is a record annual gross margin rate for GME. Gross profit for the year grew 3.1% to a record $3.0 billion. During the fourth quarter, we took charges totaling $56.5 million on a pre-tax basis and $35.1 million after-tax, for asset impairments and store closing related costs. More specifically, we impaired $10.5 million in intangible and store assets in the video game store base, $46 million of the charges were in the technology brands division. After four years of rapid expansion, we took some aggressive moves related to the consolidation of the store portfolio. Charges related to AT&T stores totaled $27.5 million, more primarily associated with stores acquired in last year's large dealer acquisitions or former RadioShack locations. The remaining $18.5 million of the charges were related to simply max stores which were not profitable doing large measure to a lack of product allocation and channel conflict. Many of these stores were closed in January or will be closed in 2017 as leases expire. Adjusted operating earnings fell $45.4 million or 11.7% for the quarter and $47.4 million or 7.1% for the year due to the decline in sales in resulting margin. While SG&A increased as we grew the Tech Brands store count. We did however report our third consecutive year of improved operating margin reaching 7.2%. In Q4, Tech Brands operating earnings excluding charges increased 89% from $18 million in Q4 last year to $34 million. We guided to $85 million to $100 million of operating profit in Tech Brands for 2016 and achieved $90.2 million excluding charges. As you have heard, our goal is to have 50% of our operating earnings come from sources other than physical gaming by the end of 2019. In 2016, we had 36.9% from sources like digital, collectibles and Tech Brands, so we remain on pace to achieve that goal. As we discussed in the holiday sales release, our tax rate was lower than normal for the quarter and the year due to our tax planning effort to [Technical Difficulty] of our foreign operations. Resulting tax benefit was $27.3 million in the fourth quarter. Adjusted net income for the year was down 6% to $391 million and full year adjusted earnings per share $3.77 down 3.3%. Now, I will dig in a bit deeper starting with the video game business. Hardware sales declined 29.1% in Q4 due to a 8% decline in unit sold and 25% decline in average selling price. For the full year, hardware sales declined 28.2% due to mid-teens percentage decline in both unit sold and average selling price. Software sales declined 19.3% in the quarter and 14.2% for the year. As we discussed in the holiday release, the key titles for the quarter did not perform well. Pre-owned revenue was down 6.7% in the quarter and 5.1% for the year. Pre-owned margin rates for the quarter and full year were 46.9% and 46.3% respectively. The Q4 margin rate was up slightly from last year's Q4. For the full year, the margin rate was down 60 basis points from the prior year. Accessories sales declined 17.4% during the fourth quarter following the trend of hardware. However, accessory sales outperformed the other game categories down 3.7% for the full year due to the impact of the [indiscernible]. Digital receipts declined 7% in the fourth quarter and GAAP digital revenues declining 5.8%. For the year, digital receipts grew 4% and GAAP digital revenues declined 3.9% primarily due to a shift in mix caused our launch of games on [Technical Difficulty]. Tech Brands revenues grew 43.9% in the quarter and 52.4% for the year due to store count growth. Tech Brands margins were 68.2% in the fourth quarter and 68.1% for the year up from 57.4% in 2015 as the AT&T business continues to grow within the Tech Brands mix. Collectibles hit $494 million in sales with 34.7% margin [Technical Difficulty]. As we have mentioned previously the margin rates was impacted by distribution [Technical Difficulty] of ThinkGeek.com. I'm pleased to report that we have eliminated the third-party logistics provider and are now poised for improved margins in 2017. SG&A as a percentage of sales increased from 17.4% in the prior year quarter to 21.2% for the quarter and from 22.6% in the prior year and 26.2% for 2016. The increases were due to the decline in sales overall with relative growth of Tech Brands which carries a higher SG&A rate. We were successful in cutting over $32 million in SG&A from our core business, seating our target for 2016 of $30 million. Cuts came in store expenses including payroll and an infrastructure and back office cost. We are on-track to remove $100 million SG&A cost by the end of 2019. In 2016, we closed a net of 119 video game stores around the world, ending the year with 3920 video game stores in the U.S. in 2007 internationally. We acquired 511 technology brand stores opened and opened another 72 and closed 97 for a net growth of 486 stores and the year ending store count of 1522. We opened a net 51 collectible stores during the full year and now have 86. In 2016, we paid out $155.5 million in dividends and repurchased $75.1 million in stock or 3.0 million shares in an average price of $24.94. We generated free cash flow of $400.3 million. Lastly, we completed several acquisitions for a total of $441 million adding 511 stores to our technology brands division. Now I'd like to talk about the shift in our guidance policy. As you know, we're on a multiyear journey to transform our business. In support of this, we've made the decision to stop providing quarterly guidance for earnings per share and same-store sales. This decision does not reflect a lack of visibility into the short-term environment, but rather our desire of both internally and externally to remain focused on longer term targets and performance. We also hope to reduce quarterly volatility that is driven by the seasonality and title driven nature of the videogame industry as well as the EPS volatility created by the significant reduction in our share count over the last few years. Given our transformation, the quarterly comparisons of title launches no longer reflect the long-term value drivers for our business especially as we expand our non-gaming store footprint and drive growth in higher margin categories. We will continue to offer some quarterly insights in context as appropriate, the content of which may vary from quarter-to-quarter depending upon what maybe relevant. We will provide annual guidance which I'll now cover. For fiscal 2017, full year revenue is our forecasted range between down 2% and up 2%. With same-store sales ranging from down 5% to flat. We're forecasting hardware sales to be roughly flat at sales from the Switch and Scorpio launches helped the category, but didn't know whether they were fully offset, we expected decline in hardware sales resulting from recent trend and a decline in average hardware price points. We estimate new software will decline mid-single digits based on our current visibility into the title lineup. We expect pre-owned to perform similar to new software. We forecasted collectibles revenues to increase 30% to 40% to approximately $650 million to $750 million next year as we continue to expand space in GameStop stores and as we open more collectible stores and grow our ThinkGeek.com business. The collectibles business should have about 10% operating margin for 2017. We also expect to drive gross margin higher by 50 to 75 basis points as we continue to grow Tech Brands and collectibles. SG&A will increase due to the growth in Tech Brands and the impact of the full year of the acquisitions completed in 2016. We expect Tech Brands sales to increase 10% to 16% while gross margins forecast to increase between 400 and 500 basis points and operating earnings are expected to grow over 30% to $120 million. We will continue our efforts towards our 2019 goal of reducing cost in our videogame stores by $100 million. However, positive impacts from Tech Brands, collectibles and cost savings are not expected to offset the projected declines in physical video games and as a result we expect operating earnings to decline between 3% and 10%. Overall, we expect more than 40% of our operating earnings will come from sources other than physical games and were on track to achieve our goal of 50% by the end of 2019. We're forecasting interest expense to be approximately $5 million more than in 2016 as we'll have the debt outstanding all year. We're forecasting a tax rate of approximately 35% in 2017 compared to an effective rate of 30% in 2016. As I mentioned earlier, we benefited from tax strategies implemented in 2016, some of which will help to reduce our rate in 2017 to approximately 35%, with much of the benefit hitting the first quarter. The increase in effective tax rate from 2016 to 2017 will have a negative impact of approximately $0.25 per share on 2017 EPS. As stated in our earnings release, we're guiding the full year EPS of $3.10 to $3.40 per share for 2017 or down between 9% and 18% on assumed average shares outstanding of $102.5 million. We project free cash flow for 2017 to be approximately $300 million with the largest variance from 2016 being the 53rd week and the timing of payments due February 1st 2018. We benefited in fiscal 2016 from our fiscal year ending on January 28. You can expect the next couple of quarters to play out differently than recent years and that there are fewer AAA title launches in the first half. There are also several meaningful technology and hardware releases in Q3 and Q4 including the next iPhone, which will likely drive increased spending in the second half. And we're assuming that some portion of consumers will adopt to wait for it approach and we've reflected that in our quarterly budget. You can expect approximately 20% of our annual earnings to come in the first half compared to 25% in each of the last two years. We expect to reduce capital expenditures of approximately 20% from $142.7 million in 2016 between $110 million and $120 million in 2017. We're planning to open approximately 35 new collectible stores globally and approximately 65 technology brand stores. As we've done in the past several years, we expect to close approximately 2% to 3% of our store footprint. Looking at capital allocation, our Board recently approved 2.7% increase in our dividend payout, which continues to show confidence in our business transformation and will result in returning approximately $155 million to shareholders in 2017. The remainder of our excess cash can be used for additional M&A most likely AT&T franchisees or for share repurchases. Priority will be given to the investment opportunities that we believe will drive growth. Last April at our Investor Day, we gave you a long-term roadmap for operating earnings growth. I'd like to update that roadmap. We forecast that we can achieve $700 million of 2019 potential operating earnings, however, we will now take contributions from the Switch and Scorpio launches for us to achieve that goal. We are still forecasting Tech Brands and collectibles to be the principle drivers of the growth in our profits in the next three years. I'll now turn it over to Tony for his comments.

Thanks, Rob. Good afternoon. I'd like to spend my time walking through results and expectations around our four strategic pillars. Let's start with the physical games segment. During the fourth quarter in an environment of heavy discount in particularly around the holidays we choose not to sell hardware below costs, while we did give up some share in hardware, we actually increased our attach ratio of profitable new and pre-owned software. We ended the quarter with a software attach ratio that was doubled the rest of the industry. We were able to accomplish this by leveraging our PowerUp Rewards program and specifically focusing on our PowerUp Rewards pro-customers. For the year, we grew our PowerUp Rewards pro customer base, thanks to a strong focus in our stores in the back half of the year. As a remainder, these PowerUp Rewards pro-customer has been 6x the amount of a non-member and PowerUp Rewards members accounted for 71% of our GameStop branded store sales in the fourth quarter. Our pre-owned business continues to outpace new software declines as Q4 was 12.6 points better and the full year was 9.1 points higher. We also believe we're seeing a resurgence in pre-owned technology as strong customers on the next program and other similar programs now owned their phones and are bringing them back into our GameStop branded stores to use its currency. We are rolling out new technology to streamline this trade and experience in our stores. Moving to 2017, we are cautiously optimistic about innovation in the category. We recently returned from so many destination Playstation where we reviewed all major games and development and we are impressed with the quality of the games that we saw. As Paul said we are also pleased with the recent Switch launch where we saw through our initial allocation in two days. We have had multiple replenishments since the launch, all of which have sold out in hours. In addition, we had passed over five and one half software and accessory items to each units sold. Based on our quick sell through and high attach rate, we expect to continue to receive an attractive share of this allocated product. VR also in strong demand. On average, we saw a limited allocation of product in less than a week. New titles like Resident Evil create spikes and demand and we do believe the demand will continue to outstrip supply this year. Finally, we impressed with Microsoft Scorpio product and feel that we were over index on this gamer friendly powerful console when it launches this holiday. So to summarize physical videogames, while we were disappointed in Q4, we as a company continue to execute with our opportunities to profitably enhance the business and offset the industry trend. Moving to our digital business, our digital receipts grew 4% to $1.1 billion during the year. We are currently scheduled to launch two more GameTrust Games, Has-Been Heroes and Deformers in the next two weeks. Has-Been Heroes are launching on all platforms including the Switch where it's rated as a top-five upcoming Switch game by Forbes Magazine. We are expanding our space for additional Indian PC games to increase share in these important categories. Also we are increasing our linear space for in-game content such as Madden Ultimate Team, FIFA Ultimate Team and Grand Theft Auto Shark Cash. We expect to grow our digital receipts in the mid-single digits in 2017. Our technology brands business had an impressive year finishing with over $90 million of adjusted operating profit growing 216%. Traffic comps were negative 0.9% for the fourth quarter and negative 1.3% for the year as you managed through inventory outages our certain mobile devices in the back half of the year. Comp gross profit was down 9% in the quarter and down 4.8% during the year as we're in the midst of pivoting this business to sell more DIRECTV and high-speed Internet. We are excited to be working with the partner like AT&T that has new and innovative products to sell and we're flexing our business to align with their new incentive structure. As we train our associates to take advantage of this transition, we expect gross margin comps to lack traffic counts by 5 to 10 points for the first two quarters. For full year 2017, we expect traffic and gross profit comps to both be positive. We've also added new B2B traffic driving initiatives both in our stores and outside of our Tech Brand stores to focus on our key small business accounts that drive new transactions. We continue to remain one of the most productive authorized retailers in the AT&T system. Like today, we remained acquisitions of $750 million in this business and have generated a return that exceeds our 20% IRR hurdle. Our 2017 plan of over $120 million of operating profit that Rob articulated continues as above hurdle performance. As Rob mentioned, we did trim our Tech Brands portfolio primarily due to unprofitable stores that we acquired in acquisitions, conversions of RadioShack stores in low AT&T market share markets and Simply Mac stores that were negatively impacted by low product allocations from Apple. Finally, collectibles had a strong year ending the year $500 million stretch goal. We've made strategic investments in this category over the last two years and those are beginning to payoff. In addition to consolidating our ThinkGeek.com logistics into our local warehouse and expanding our Dallas DC to accommodate additional collectibles product, we continue to increase the dedicated space in our stores. We've taken the following steps to grow this business in 2017. In U.S., we're doubling the amount of dedicated well space from 7.5% of linear fee to 15% of linear fee. We are converting 50 of our largest stores in the U.S. to hybrid stores where half of the store footprints are dedicated to collectibles. We are converting over 100 of our international stores to hybrid stores. We will add 20 dedicated ThinkGeek stores in the U.S. and 15 dedicated stores internationally. We are dedicating three and six-foot store within a stores sections within our U.S. GameStop branded stores to feature unique licensed product from relevant movie and TV properties. We are entering into licensing agreements with major IP holders to produce unique product to support our $650 million to $700 million sales plan. We are leveraging our loyalty programs in each country to drive relevant product around a robust launch schedule and we are leveraging best practices from around the world. To put this into perspective, if we grew the U.S. collectibles penetration to international levels, we would generate an additional $200 million of collectible sales annually. In summary, we continue to execute on our strategy of diversifying our business towards to our growth pillars while continuing to optimize our share in the cyclical gaming market. With that, I'll turn the call back over to Paul.

Thanks, Tony and Rob. With that operator, we'll open it up for questions and answers.

[Operator Instructions] And we'll take our first question from San Phan with Mizuho.

Hi, thanks for taking the question. [indiscernible] on getting nine physical gaming representing more than 50% of operating margins for this year, does that drive with your numbers?

The comment that I made in my prepared remarks, this is Rob by the way was north of 40%.

Okay. And then, can you just maybe clarify what's embedded in your top-line guidance with Nintendo Switch units?

There is lot of excitement about the Switch, San, but there is also a lot of caution. Nintendo hasn't spoken a lot it on publicly, we saw the Wall Street Journal article, we are very cautious simply because of allocation, but do you want to comment anything on this guys.

I will say that I will refer back to my remarks that based on the high attach rates that we have in the quick sell through that we do anticipate having the highest market share, but that's pretty well, we can say this.

And I mean the way we see it San is that we really don't have an aggressive forecast built-in here and we've learned with Nintendo through the years not to do that. But, there is models out there that you could look at that will give you a better idea of what could happen here.

Okay, great. And then, just final question on -- but the difference between the same-store sales during this year in abroad, was that mainly just a heavy discounting that you saw from your competitors in the U.S. so was there something else that alone could explain the difference between the domestic and international markets.

The way we see it San is, we're trying to drive best practices around the world. But clearly, the international markets had a better year or less decline in growth. Mike Mauler is here, you want to talk about what you guys have done to drive best practices.

Sure. I think first every market is different and there are some group based on difference between the markets, PlayStation for example, I mean Europe has 70% market shares, it's much more even here. And so when you came to PlayStation we are launching -- launch of PlayStation Pro and some of the really good titles they had that moved the needle a lot more internationally than the U.S. I think one of the other things is internationally we're about 90% mall-based and so there is a lot more casual consumers in the malls and our customers in the stores. And so when you have some new leases as Paul mentioned like eight new releases in the fall that significantly missed our expectations, those would effect sort of where your mass market consumers are just a lot greater percentage. And so I think when you put those things together there will always be variability between the markets, but those are some of the big reasons.

And the other thing I would add San is, it's clear us watch that the international markets maybe or less further along with the console cycle, they are also less digital.

Thank you.

Thank you, San.

Our next question comes from Seth Sigman with Credit Suisse.

Thanks a lot. Good afternoon guys.

Hi.

I have a couple of questions on Tech Brands to start, the gross profit comp improvement that you're guiding to for this year flat up to -- sounds like it's going to be more backend weighted which makes sense, but are you guys assuming an improvement, is there an assumption here for certain new products that haven't been announced yet, any more color on what would be driving that improvement? And then, the second piece of that is in terms of the operating margin improvement that's embedded here looks like a 100 to 200 basis points for Tech Brands in 2017 anymore color on that would be helpful also. Thank you.

Yes. Jason Ellis is here, Jason, why don't you to take the first part and then Rob can follow-up.

Hi, Seth. Thanks for the question and I'll lead up with the margin comps. We anticipate that we're going to do a lot of -- we haven't had a lot of growth in our TV business this year, DIRECTV is a new product that we only sold in the stores for a little over a year now and we're anticipating we're going to be able to double that business. We also have some programs in place that we're getting the outside of the four walls. We think small to medium size businesses or segments that are under-penetrated today. And we have a unique position with the scale we've created with 1,500 stores to be able to get out and attack those small to medium size businesses. So we have some unconventional ideas I'd say and how we're going to drive more profit into those retail stores and we're excited about those. In terms of the margins, we also have a great opportunity for us to bring some additional accessory products and services and move up stream into the retail stores and I would say specifically things that are in the connected home category that might connect to Apples home technology on the smartphones that we're selling or Samsung SmartThings, those are both really good opportunities that we haven't brought into the stores yet today.

In terms of the operating margin, Seth, with the growth in store count that we had last year through the acquisitions we have the opportunity to really leverage the infrastructure that's in place around the business and that will help as well.

Rob, are there any parameters you can give us around the scalability of the model in terms of the type of comps you need now that you do have that infrastructure in place, anyway to think about that?

I think we have to get back to you on that one. I don't really have that information off the top of my head.

Okay, great. Thanks very much.

Thank you, Seth.

Our next question comes from Colin Sebastian with Robert Baird.

Great, thanks guys. I have a couple of questions. First off, apply for Rob, just a clarification on the EPS guidance with the midpoint roughly $0.50 below that you reported for 2016, you mentioned $0.25 from the tax rate. Can you breakout the other $0.25 or so is that – is that related to below the line items or you are something else in there?

Approximately 3% that would be related to the interest expense that I talked about being $5 million higher year-to-year, the remainder would come from the operating earnings which I mentioned we expect the decline between 3% and 10%.

Okay. So there was no restructuring or store closing costs that are somehow embedded in that number?

No.

Okay. Secondly, in terms of capital allocation and the free cash flow guidance versus 2016, how should we expect that to impact dividend payments and share repurchases if at all?

Well, we've talked about the dividend payments and we raised the dividend 2.7% is now a $1.52 and we would expect that would have about $155 million payout given the share count in terms of further use of free cash flow, we talked about the ROEs begin to drive growth initially and then to the extent available buyback.

Let me provide some color on that Colin. You know it's no secret that we've been a strong buyer of our stock. We bought over $2 billion. And I think we've done the right thing on that and we've demonstrated a willingness to return cash to shareholders. Our dividends speaks for itself. It's a very healthy dividend. It's a very good holding. As we face into the future, there is a lot of uncertainty that you just saw in holiday for us. The physical gaming category is in a -- what we think is a cyclical decline before a new set of technologies. We need to see Switch. We need to see PlayStation VR and we need to see E3 before I think we can make any guidance or forecast. It is logical to assume we would return all cash flow over and above investments but we're not ready to make those statements until we see what has been an uncertain category play out.

All right. And then, maybe Paul, and I know it, lastly on Switch, what in particular signals to you guys that this has we like potential I mean in terms of broadening the market beyond the traditional Nintendo fans? Thank you.

I'll let Tony answer that question, but just one comment for all of you guys, I hope you played it, if you played it that's the best way to know that it has tremendous broadening potential, Tony walk through the sales.

I'd say two things, first just the demand is incredibly strong for this column, and then, as soon as we get into our stores, it's out within hours. And so we're going to be -- we anticipate that we're going to be chasing supply this entire year. The other thing is that every game that's out there is to add over 5.5 attach rate to this, signifies there is a lot of people are finding this a great platform and they're picking up anything they can and we have almost one to one attach result, which is a great game. But there is tremendous demand for this and we just don't know how high it is because every time we get it out in our stores it's literally gone.

Yes. I would also add that Nintendo has got several more great games they are launching this year for the console which we didn't see with Vu. [indiscernible] in April and there is couple of more, I think that hasn't been announced yet as well as there is some good third-party publishing support on the Switch, which we really hadn't seen with Vu either and that will drive demand.

So the way we see it is, all the data says it's selling there is tremendous demand everything we do it seems sells out quickly. But, if you play the device, it's far more focused on motion and on the controllers than it is that we use very focused on the tablet a lot of the gameplay revolved around touching the tablet and all now that sort of thing. This one feels a lot more broad and a lot more movement associated and we think that's going to be a broader feel. We'll see what they announced on numbers.

Thank you.

Thanks Colin.

Our next question comes from Brian Nagel with Oppenheimer.

Hi, good afternoon.

Hi, Brian.

Thanks for taking my questions. The first question I had was, with respect to the fourth quarter charges to close in the Tech Brands division. As you look at the 18 -- I guess the 18 of these stores you are closing. Was that something that was anticipated as you made these big acquisitions and you're going to review this portfolios that was a decision that came later after you looked closer to performance of these units.

In terms of the stores that came with the acquisitions, we acquired larger businesses last year and had a portfolio of stores, some of which were performing extremely well and some of which were not performing. And unfortunately we couldn't share pick what we bought. We knew that we would have to deal with some number of these stores and so you see part of that -- you see that in part of these numbers. In terms of the RadioShack locations, we took a pretty aggressive approach working with AT&T to find locations to help them try to replace the traffic that they were getting out of the RadioShack store base overall. We took about 120 locations, some of which were in markets where AT&T didn't have strong shares as Tony talked about and unfortunately there was a number of these stores we just couldn't make work.

Those are the both, yes, I mean, I think Tony, you may want to share this. If you go back in history, right, the way we see it is AT&T, our partner needed to recover loss sales at RadioShack.

So we've worked very closely with them as we looked at the RadioShack stores and we knew we're taking some rest but we got some great real-estate, the whole portfolio has worked out well, but there were some stores that we knew that will have market share, but we as good partners do we worked together with them to try and retain as much of the traffic that they were losing in from the RadioShack stores.

And we've achieved our 20% IRR hurdle, so we feel like it was good calling of what we had. Now there is another side of this which is of course simply max side. I don't know if you want to talk about that or not, Colin, that's a very different animal.

Yes. That was nice. It's closer than that division reflects some type of strategy change for circle math?

Yes, it's a good question and I'm going to let Jason, maybe take that but just remember we have a billion dollar relationship with Apple, so Simply Mac doesn't define our Apple relationship, we're heavily into the Apple business, but Jason do you want to talk about Simply Mac?

Yes, I do and I guess when we talk about Simply Mac, I will reiterate what Paul said. We have a multifaceted relationship with Apple. So in our retail business, on our mobility business, we sell over a million iPhones for them, we sell lot of product and so we're a great channel partner for them. On the Simply Mac side, that channel distribution strategy has been a little more difficult largely due to product allocation. I think Apple would admit that when we got into the second half of last year a lot of the product they've launched were heavier allocated than they've seen in years prior. But we saw that the stores that we've had for a long-time that have an embedded base still performed very well. Our service business continues to grow so it's really again a culling of some of the real-estate that we just didn't think at long-term potential.

And so Brian we feel pretty good about the technology brand strategy. I don't think there was a strategy shift. We did think we would grow Simply Mac faster and Spring Mobile slower that was the original thinking. I think today we would say we're growing Spring much faster and so we don't mind reducing size of our Simply Mac. But, Simply Mac is a good business that goes forward. We just had a great meeting with Apple yesterday by the way so we got positive exciting things we're planning on doing with them.

Great, thanks. So just follow-up to that on Paul, on the AT&T business, big acquisitions last year, how should we think about the unit growth in that division into 2017 and going forward?

I would say maybe I'll let Rob or Jason to talk about the unit growth, but we're very strong with AT&T in lots of different ways. We were at the Pebble Beach sales meeting they had on -- I'm calling it the sales meeting, because I don't want to call it a Golf extravaganza. But we're very tight at the hip with them. They have a lot of things going on. And so we think there is an opportunity to grow stores, but also other forms of revenue driving, do you want to talk about the unit growth guidance, Rob or…?

Yes, we've talked about 65 what we call white space stores on the technology brand side and so you can frame it that way. We'll continue to look forward to revitalize position opportunities. We have been very successful with that. We don't expect anything of the size that we did last year obviously there aren't that many dealers of that size available, but we do think there are still a large number of opportunities to consolidate smaller resellers.

Thank you.

Thank you, Brian.

And we have time for one final question which we will take from Curtis Nagle with Bank of America Merrill Lynch.

Thanks very much. So just a quick one on the Scorpio, so I'm just kind of curious why you guys or what gives us optimism on a launch just given how the pro for the PS4 has performed, how great is that theoretically all the difference and what does it look like particularly strong fleet of exclusive titles for the Xbox system over the next year or so.

Yes. Thank you for that Curtis. Let me start it off and I will let Tony to follow-up. I mean the way we see this is -- we see Switch is being very strong, that indicates there is a demand out there for gaming. We were just at a studio this week a group of us and we've heard a lot of excitement about Sony VR and so you can't discount VR from this discussion because what's Sony VR will do is they will put pressure on Microsoft. So we have a pretty interesting expectation now about Sony VR that maybe we didn't have. When you talk to studios that helps you get a little more insight into what's going on. But Tony, do you want to talk about what we know about Scorpio and what we can talk about.

Unfortunately we can't talk about a lot other than what's known what is in public is -- they are a very powerful system that's really made for 4K and we see it has a very gaming centric, very, very powerful unit and so we do believe that there will be a significant some great games that are made for this and we do believe that game stuff is poised significantly over shared in this launch when it happens.

Okay. And then -- sorry, go ahead Paul, my apologies.

I know it's quite right, Curtis. I was just going to say that we have to believe that if VR becomes the meaningful part of this business which we don't know if it will, but the likelihood is and the indications are that everything we get at Sony VR sells out, you have to believe that others who want to get in that game so that's one of the reasons we both are success.

Got it. And then, just a quick follow-up on free cash flow guidance for this year looks like I think about 300 so step-down is about $100 million despite lower CapEx just curious what's -- what was driving that?

Well, as I mentioned in my remarks the timing of the year end this year January 28, next year February 3rd, I think it is, it means that any of those bills that were due February 1, which whether it's a rent, international payroll, certain vendor obligations would fall into the fiscal 2017 timing and they didn't fall into the fiscal 2016 timing, so we got a benefit in 2016 that puts around on as a bit in 2017. Obviously, as we approach the end of the year as we look our way through the year, we're going to manage our payables and our inventory levels and working capital in a most efficient manner possible, but they were just below -- overall.

Okay. Thank you very much.

Thank you, Curtis.

Okay. With that I guess we will wrap-up the call. Thank you very much for your support. Please stay tuned, we've got a lot of exciting things going on at GameStop and look forward to speaking with you in the next quarter.

Once again, that does conclude today's call. We appreciate your participation.