GameStop Corp. (GME) Q4 2017 Earnings Conference Call Transcript

GameStop Corp. (GME -3.94%)
Q4 2017 Earnings Conference Call
March 28, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Please stand by. We're about to begin. Thank you and welcome to GameStop's Fourth Quarter 2017 Earnings Conference Call. This conference call will include forward-looking statements which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Any such statements should be considered in conjunction with cautionary statements 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 company's earnings release issued earlier today, as well as in the investor's section of the company's website.

Now I'd like to turn the call over to the company's CEO, Mike Mauler. Please go ahead, sir.

Mike K. Mauler -- Chief Executive Officer

Good afternoon and welcome to GameStop's Fourth Quarter 2017 Earnings Call. With me today is Rob Lloyd, our CFO; Dan Kaufman, our EVP and Chief Legal and Administrative Officer; Troy Crawford, our SCP and Chief Accounting Officer; and Jason Ellis, our President of Technology Brands.

It's great to be with you today and we appreciate you taking the time to join us as we discuss our fourth quarter and full-year results and objectives for 2018. This is my first time to address you on an earnings call as GameStop's CEO and I am honored by the support and confidence the board of directors and their associates have placed in me and look forward to leading GameStop into the future.

This company has a tremendous legacy of continually evolving to meet the needs of our global customer base and changing industry dynamics and I expect to build on that by leveraging the innovative thinking and resourcefulness of our culture that I've experienced firsthand during my 16 years with the company.

Before we discuss our results, I would like to start by addressing the passing of our good friend, Paul Raines. As you know, Paul stepped away from the business in November of 2017 to focus on his family and health. We had hoped that Paul would be able to rejoin the GameStop family but, unfortunately, his battle proved to be too much. He was an integral part of our company and a truly inspirational and compassionate leader. I know those of you on the call today are some of the many people that Paul touched during his life's journey and are saddened by his loss and are mourning with us.

Now I would like to transition to our results for 2017 and our outlook for 2018. Our fourth quarter revenues increased 15% driven by strong sales of new hardware, new software, and collectibles. Our store team's ability to drive sales and provide exceptional customer service over the important holiday period drove a 12% increase in same-store sales.

Looking at hardware sales, we're driven by innovative new consoles like Nintendo Switch, the PS4 Pro, and the Xbox 1X. Software also increased as we have proved to be the destination of choice for customers to purchase video game software for the holidays as well as strong title launches like Call of Duty: World War II and new software for the Nintendo Switch.

Our collectibles business increased over 20% through the quarter, reaping the benefits of recent investments in the category. This includes the square footage expansion in our video game stores to provide unique and compelling products across a wide variety of categories.

With that said, not all of our businesses performed to our expectations but we have opportunities for improvement such as in technology brands and pre-owned. These areas are being addressed, as well as continuing to improve our video game and collectibles categories. In 2017, our pre-owned business was down nearly 5% to the prior year. This is a business where GameStop has a built-in advantage. Leveraging our loyalty program, trade credit benefits, and the expertise of our sales associates, we can engage our core customer and provide value unlike any other retailer.

Given the strong performance in new hardware and software sales, particularly around the Nintendo Switch console, we believe the pre-owned categories experienced some natural softness and expect the Nintendo Switch components and games will work their way into our pre-owned ecosystem in the near future. However, we can also improve on execution. The key driver of pre-owned sales are healthy trade-ins on the right products so, in the near-term, we are executing the following.

We must increase trade awareness with both our loyalty customers as well as non-loyalty customers. Only 30% of our customers trade in games, so this presents a big opportunity. This will be done through increased marketing spend to communicate through social media, CRM, and other marketing channels. We also need to increase both trades and reservations, which we will do through more compelling trade-in promotions around new releases. Finally, we need to make trades top-of-mind with our associates and we are doing that through more objective training and increased focus on KPIs.

As we turn to technology brands performance, the business has not yielded all of the returns we expected, which we have communicated on previous calls. Due to the changes in the compensation structure made by AT&T, the delayed and staggered launch of the iPhone 8 and iPhone X and operational execution challenges, we fell short of the sales and profitability goals we had outlined at the beginning of the year. Rob will go into further detail surrounding the impairment charge that the division incurred, but I want to share with you some of my initial thoughts.

We believe that AT&T is a good partner and we are in discussions with them to improve the compensation plans. Both partners want the other to succeed and I believe we will find improvements that will a win-win for both companies. In the interim, we have taken several steps to improve the profitability of this division, including the sale of our Cricket Wireless stores, the closing of underperforming AT&T locations, and the reorganization of our operating structure.

The extremely fast store count growth through close to 40 acquisitions did pressure internal systems, business processes, and the organization's capabilities. All of these steps will allow the team to focus on operational improvements in the retail portfolio that has potential for long-term growth. While the first half will be the most difficult to overlap due to the AT&T compensation change, we do expect an improvement in operating income through this division in 2018.

Before I turn the call over to Rob, I want to share with you my thoughts in near-term areas of strategic and tactical focus for 2018. We have five key strategic imperatives. First, we will be taking a pause on investing in new businesses and acquisitions and focus on the fundamentals of fixing the businesses that we already have. We have three core profitable businesses -- video games, collectibles, and technology brands -- and once these businesses are operating at the level that I know that they can achieve, we can then explore other opportunities to drive shareholder growth. Second, we need to improve our value proposition with hardcore gamers to solidify this key demographic. We also need to expand our customer base to include more moms, and families, and casual consumers. I believe this is a tremendous opportunity for us in the future. Fourth, we need to improve the average transaction value of every customer, both in-store and online, by attaching other relative products and services. And, finally, fifth, we need to reduce operating expenses in areas that do not drive revenue or operating profit. We will be frugal but not cheap, spending our money wisely to achieve the greatest returns for our shareholders.

These imperatives will be central to our success but, without a tactical plan for execution, they are just wishes. The major tactics to drive success in these areas are as follows. One, improve the shopability of our stores through the expansion of hybrids and remodels to improve the store experience. Two, expand our range of cool and relevant products such as collectible, high-end e-sports accessories, and other licensed merchandise. Three, continue to enhance the benefits of our loyalty program to appeal to our expanded customer demographics. Four, continue to invest in an enhanced omni-channel experience. And, five, drive operational excellence to improve GameStop's circle of life performance, driving increases in new release reservations, trade-ins, pre-owned sales, warranties, and accessories with priorities going forward.

Our overarching goal is to improve the performance of our business, drive growth, and improve profitability to generate strong cash flows and solid returns for our shareholders. In terms of capital expenditures, the focus will be on systems and remodels and maintenance, not new store growth. There will continue to be some store rationalization to the extent we can improve profitability at neighboring stores. We remain committed to returning excess cash to our shareholders. Rob will cover this in more details.

In closing, over the next several quarters, you can expect the GameStop management team to focus on operational excellence to drive revenue and operating profits. We will be revisiting all of our assumptions across all parts of the business and, together, we will test fresh thinking on every aspect on how we execute, from our partnerships in merchandise to the way we attract and retain customers. And, in the coming quarters, we will share our learnings and how we may revise our approach.

Meanwhile, as I've discussed, we have some clear areas of near-term focus that will lay a strong foundation for the years ahead. Now I would like to turn the call over to Rob for more color on our financials and 2018 outlook.

Rob Lloyd -- Chief Financial Officer

Thank you, Mike. Good afternoon. I'll start today by taking you through a review of our fourth quarter and full-year 2017 results and then share with you our outlook for 2018. Looking back on the year, total sales exceeded the guidance we issued coming into the year and we delivered adjusted earnings per diluted share near the high-end of the annual guidance range we provided at the start of the year and maintained throughout the year. From a topline perspective through the quarter, total sales increased 15% and we delivered a 12% increase in comp sales. In the U.S., comps increased 14% and international comps increased 8%. For Fiscal 2017, total sales increased 7% and we delivered a nearly 6% increase in comps. In the U.S., comps increased 4%, while international comps increased 9%.

Fiscal 2017 contained a 53rd week, which accounted for approximately $143 million in sales. Our video game business was strong in the fourth quarter and throughout the year, largely driven by the success of the Nintendo Switch. This innovative console was the largest contributor to our comp sales growth and drove a 45% increase in hardware sales for the quarter and a 28% increase for the year. Software sales increased 12% in the quarter and nearly 4% for the year. Call of Duty, with an increase of more than 36% over 2016, was the best-selling title for both quarter and the year. Star Wars: Battlefront 2 was the second best-seller for the quarter, while Nintendo Switch titles were also strong and contributed to the growth throughout the year.

Our pre-owned business performed in-line with our expectations, declining nearly 3% in the quarter and 5% for the full-year. Given the relative newness of the Nintendo Switch, it's important to point out that it is not yet contributing to our pre-owned business in a meaningful way. In addition, we've seen a shift in the pre-owned business from software into hardware, as we see fewer physical games published and sold each year and consumers playing games long to take advantage of added digital content and in-game transactions.

Moving to tech brands, revenues were down 14% due to a weaker-than-expected iPhone launch. For the year, tech brand revenues declined 1% to $804 million as the compensation change, the slowdown in the upgrade cycle, and the weaker iPhone launch impacted results.

For collectibles, the category increased 23% for the quarter and 29% for the year. Despite the strong sales increase, we fell just short of the $650 million to $700 million target for the year and we delivered sales of $630 million.

Going forward, we've made some improvements in our procurement and distribution strategy and are working with vendors to gain more exclusives and to be first to market whenever possible on non-exclusive launches. We believe these enhancements can help improve this already healthy and growing business.

Shifting gears to gross margins, our gross margins declined 380 basis points for the quarter to 29.3% and 200 basis points for the year, resulting in a 33% margin rate. The decline war primarily due to the extraordinary strength of hardware sales in the quarter and the year. The decline in pre-owned business and the mix shift away from tech brands also put pressure on our gross margin rate. Gross profit for the year increased $31 million to $3 billion and the 53rd week in Fiscal 2017 contributed roughly $43 million in gross profit dollars. Our hardware and software margins declined for the quarter and the year due to the mix of vendors and cooperative marketing funding as well as our promotional activity.

Pre-owned margins were 45% for the quarter, a decline of 190 basis points. For the year, pre-owned margins were 45.5%, a decline of 80 basis points. We executed more promotional activity in international markets, which grew pre-owned sales but at a lower margin rate. In the U.S., pre-owned sales declined but had delivered a higher margin rate in our international markets.

Going forward, we see opportunities to drive sales similar to what we experienced in Europe this past year, where increased promotional activity drove an increase in pre-owned hardware and software sales. We're working hard to expand our trade awareness and customer base among moms and families and these types of activities can help us do that. Expect to see us advertise more and be more promotional on both hardware and software as we find the right balance between sales and margins and come to better understand this evolving business.

Therefore, we expect our pre-owned margin to range from the low-40s to mid-40s going forward. For collectibles, gross margin was 29.6% for the quarter and 32.7% for the full-year. We executed strategically targeted promotions in the holiday season in an effort to drive sales and clear excess inventory. We continue to learn more about collectibles and, by leveraging the expertise of our new leadership team for this business, we look to improve our product lifecycle management and optimize our markdown cadence.

By refining these activities across various product types and intellectual property going forward, we believe we can prevent the buildup of slow-moving inventory. These learnings should allow us to introduce exciting and compelling assortments on a more timely and frequent basis, providing the customer with a better experience. However, as we continue to learn, we expect the margins in this category to range from low-30s to high-30s from quarter to quarter as we may take advantage of peak store traffic to execute sale and clearance events.

Now, moving to SG&A excluding charges, SG&A increased $54 million, or nearly 9% for the fourth quarter and $130 million or 6% for the full year. The 53rd week of operations in Fiscal 2017 accounted for roughly $29 million of the increase while foreign currency accounted for $15 million of the increase for the quarter and $20 million for the year. The remaining $10 million increase for the quarter was driven by the 15% increase in sales. SG&A excluding charges as a percentage of sales was 19.4% for the quarter, compared to 20.4% in Q4 of last year. For the full-year, $51 million of the SG&A increase was attributable to the increase in the store count for tech brands. The remaining $30 million increase was driven by the increase in total sales, including strong growth in our collectibles business. SG&A excluding charges as a percentage of sales was 25.6% for the full-year, compared to 25.9% last year.

During the fourth quarter, we incurred the following charges: $339.8 million in intangible assets and $32.8 million in goodwill due to the performance of the tech brands division. $23.3 million on a pre-tax basis and $17.0 million after tax for asset impairments, store-closure related costs in the tech brands division as we closed 75 stores in the fourth quarter. We impaired $2.7 million in store assets in the video game store base and incurred an additional $7.9 million in business divestiture and other charges. The tax effect of the total $406.5 million in charges was $95.6 million.

With regards to the technology brand store footprint, rationalization will continue to be a normal activity as we focus on a portfolio of stores most capable of driving profitability. We will see some costs related to additional store closures as some of the underperforming stores will close in the first quarter of 2018.

On an adjusted basis, total company operating earnings declined $33 million for the quarter and $83 million for the year. The two biggest contributors to the overall decline were a decrease in pre-owned gross profit of $21 million in the quarter and $67 million for the year and a decline in tech brands operating earnings of $3 million for the quarter and $15 million for the year.

Our effective tax rate on adjusted pre-tax earnings was 3.9% for the quarter and 29.5% for the year due to our tax planning efforts in certain of our foreign operations and the one-month impact of the new U.S. tax reform act. Full-year adjusted earnings per share were $3.34.

We made the following changes to our store portfolio in 2017, all of which were in-line with previously disclosed expectations. We closed a net of 131 video game stores around the world, ending the year with 3,827 video game stores in the U.S. and 1,969 internationally. During the year, we closed a net of 80 technology brand stores and, in January of 2018, sold our 65 Cricket stores, ending the year with 1,329 AT&T stores and 48 Simply Mac stores. We opened a net of 17 collectible stores during the full-year and now have 103.

In 2017, we returned $155 million to shareholders in dividends and generated free cash flow of $325 million with significant focus on year-end working capital management. The impact of the 53rd week was less than we expected given the timing of payments and actual clearing of outstanding checks. Our year-end cash balance was $864 million.

Shifting to our outlook for 2018, given our recent management changes, including Mike's appointment as CEO and his desire to assess all of our businesses and focus on the fundamentals of retail operations, we are keeping our guidance at a very high level this year and continuing to guide toward annual performance. For Fiscal 2018, full-year revenues are forecasted to range between down 6% and down 2% with same-store sales ranging from down 5% to flat. We expect growth in the collectibles business, while the video game business is expected to decline mid-single digits due to the overlap of the huge success of the switch. As a reminder, the first quarter will be a tough comparison for tech brands until the we anniversary the compensation change with AT&T. For the year, we expect tech brands operating earnings to improve.

We're forecasting a tax rate of approximately 26% to 27% in 2018, compared to an adjusted effective rate of 29.5% in 2017. The lower tax rate is due to tax reform enacted in the U.S. However, our overall rate is higher than the new U.S. federal due to the mix of our earnings and the jurisdictions in which we operate and the impact of state taxes. We're guiding the full-year earnings of $3.00 to $3.35 per diluted share for 2018, assuming average shares outstanding of $101.5 million. The 53rd week in 2017 accounted for approximately $0.11 per share, higher than we expected due to sales performance and the new tax rate.

Absent the impact of the 53rd week in Fiscal 2017, our EPS guidance for Fiscal '18 is very comparable to the guidance for '17. We anticipate the first half of the year will play out vastly different than last year due to the huge success of the Switch launch and the strength of titles in the first quarter of 2017. The back half of 2018 has a stronger title slate with Call of Duty Black Ops 4 and Red Dead Redemption 2. Given the timing of these events, we anticipate that between 10% and 15% of our annual earnings will come in the first half, compared to 23% for Fiscal '17 and 25% in each of the two years prior to that.

Our first quarter results will include charges associated with the recent changes in our executive team, some of which are tied to the terms of employment agreements. We anticipate free cash flow for Fiscal 2018 to be approximately $300 million given the projected decline in earnings. We expect capital expenditures to be between $110 million and $120 million in 2018, similar to 2017. From a store portfolio perspective, we will continue to rationalize the video game store's footprint as we assess individual store profitability and, when the opportunity to transfer sales makes sense.

Looking in capital allocations, our board recently approved the quarterly dividend at $0.38 per share, consistent with our quarterly dividend rate paid in 2017. Given our commitment to maintaining a robust and flexible balance sheet, we will continue to prioritize shareholder returns and our decision-making around both capital structure and capital allocation. We also anticipate that, as part of our 2018 capital allocation strategy and balance sheet management, we will refinance our 350 million senior notes maturing in 2019 through proceeds of longer-term financing and approximately $75 million of our cash balances.

In closing, we were pleased with our topline results in 2017 and are looking forward to the opportunity that 2018 provides. We continue to be optimistic that, as we focus on operational excellence in the coming months, we can enhance our business and improve operating profits.

I'll now turn it over to the moderator for questions.

Questions and Answers:

Operator

Ladies and gentlemen, if you'd like to ask a question at this time, please press *1 on your telephone keypad. If you are on a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, to ask a question today, please press *1.

Our first question will come from Colin Sebastian with Robert W. Baird.

Colin Sebastian -- Robert W. Baird -- Managing Director, Senior Research Analyst

Thanks for taking my questions and, Mike, glad to have you. So, I guess first off, in your commentary on focus and operational excellence, I wonder if you could identify or go into more detail, I guess, into some of the specific areas of opportunity that you see for the company to show improvement over the year? And then, secondly -- and maybe this is Rob -- on the gross margins for pre-owned, you talked about greater or more focus on advertising there. I assume promotion is also embedded in that relative to the decline in gross margin? And I have one to follow-up. Thanks.

Mike K. Mauler -- Chief Executive Officer

Okay. Yeah, in terms of focusing on the fundamentals, we talked about what drove last year's results and some of the opportunities that we have within all three of our businesses. We need to expand our customer demographics and, when we develop that strategy, we need to change the shopability of our stores to be a better value proposition to moms and families, for example. We need to expand our range of cool and relevant products and the type of merchandise we sell so, when we bring in these new customers, that once we get them into the GameStop ecosystem, that we can market other products to them. And, tie it along with that, we need to do a better job at the value proposition from our loyalty program. Right now, it's very focused on video games and there's an opportunity for us to have that more focused on collectibles and these new customer demographics.

On the pre-owned side, I mentioned a number of things that we're focused on in terms of increasing trade penetration. It's amazing that only 30% of our customers actually trade in games and so we've got to market to those customers that aren't trading in games and we've got to improve making it top-of-mind in the stores with our sales associates which has to do with training them better on pre-owned sales and trades and also making sure we have the right KPIs to make that happen.

We've got to make more investments in our omni-channel experience so that we can drive more sales online as well as different channels like order online, pickup in-store or order in-store and have it sent to your house. And, finally, it's really around the circle-of-life performance. I think there's a number of things we can do to drive increases in new release reservations and have that tied to trade-in promotions to drive pre-owned sales, making that more visible in our marketing. And, finally, a better attach rate -- once we get these new customers into our stores and expand that demographic, making sure that we're increasing the average transaction value through warranties and accessories. So, those are just some examples of the areas that we would want to focus on.

Rob Lloyd -- Chief Financial Officer

Colin, in terms of the gross margin on pre-owned, I think part of what you will see is that we'll have more promotional activity designed to incent not only the existing power of customers that we have traditionally reached through our marketing efforts -- to bring their trades in and buy pre-owned -- but that expanded customer based that Mike just talked about. The moms and the families, how do we get them, one, aware of the fact that we take trades and then, two, how do we get them participating in the process? So, we do expect to be more promotional as well.

Colin Sebastian -- Robert W. Baird -- Managing Director, Senior Research Analyst

Thank you. And my follow-up, I guess, is since you're not planning to accelerate the pace of the store rationalization, I wonder if you foresee a change in the format within the stores? For example, in Europe, having half of the store proportionate to collectibles and the other remainder to the games? Since there's some vision you have in terms of the stores looking like that, any details would be appreciated. Thanks.

Mike K. Mauler -- Chief Executive Officer

Sure. Converting our stores, where appropriate, to hybrids and the new model, we've gotten a lot of feedback outside of the core gamers that our stores can be a little disorganized or confusing for somebody that really doesn't normally purchase video games or collectibles. And so, what we've done in Europe, we've talked about in the past, and in Australia is convert a lot of these stores to be more open, organized, more friendly to that demographic and so we are looking at doing the same thing in the U.S.

Now, there's a key difference in the execution of that between the different markets. Outside of the U.S., about 90% of our stores are mall-based and malls are healthy outside of the U.S. and only about 10% of our stores, our street stores, are strip stores. In the U.S., it's reversed so about 90% of our stores are actually strip malls. And so, the difference, then, the strategy's the same and what we're trying to do with that customer bases is the same, but the execution of it has be to be different. Just to give you an example, if I go into a mall store and change the window and the signage and put collectibles in the front, I have an immediate impact on the traffic in that mall that's walking by that store. In a strip mall, it's more of a destination store, so we've got to figure out a better way to communicate to these customers that we have a new value proposition -- we have new products, it's relevant, it's cool -- and get them into our ecosystem.

And so, there's a number of different tests that will be under way this spring to look at different ways of doing that, both in terms of store design and the marketing. And then, based on that, we'll invest in expanding those -- the concept that works.

Rob Lloyd -- Chief Financial Officer

Colin, let me just address the pace of closures in the stores. What we've found is, as we've moved through about six years of actively working to close stores using the power of program transfer sales to other nearby stores, is that we were operating about a max level of store profitability of, call it, $50,000.00 to be a candidate for closure. So, anything below $50,000, we would look hard at closing the stores.

And, as we moved through the years and actually maintained profitability in that store base and remarkably well, we're finding that to close the same rough number of stores or percentage of stores, we'd have to drift that store profitability up to $75,000.00 and it's just not as compelling on the economics to do that. So, where the opportunities exist to close those marginally profitable stores, we will continue to do so. We just don't see that that is at as great of a level on annual basis as we've seen in the past.

Colin Sebastian -- Robert W. Baird -- Managing Director, Senior Research Analyst

Great. Thanks, guys.

Operator

Our next question will come from Brian Nagel with Oppenheimer.

Brian Nagel -- Oppenheimer & Co -- Managing Director

Hi, good afternoon. Congratulations on your new role, Mike. So, I've got a couple questions. First off, with regard to tech brands and the change you've made here -- you mentioned the change in compensation structure -- can you just go into a little more detail as to what that actually means in both the near and the longer-term implications for that business given this change from AT&T? Thanks.

Mike K. Mauler -- Chief Executive Officer

Sure. I just want to start off with... just say it again that AT&T is a really good partner for us. We have a great relationship and we are working closely with them to change the compensation plan so that it's a win-win. They would like us to expand, we would like to, obviously, have a profitable business, so I think we both have goals that tie together and I'm confident we're going to be able to make some improvements in that area. And, maybe, Jason, you can take it from there?

Jason Ellis -- President of Technology Brands

So, Brain, last year AT&T made some changes to the compensation -- how they reward us for activating customers in our retail stores -- and I think well-intended to move more of that compensation toward the entertainment category, which is obviously where they've made some large investments. And, quite honestly, whether it was through sales execution or the macro category, we didn't get the traction in entertainment sales like we would have hoped so we're back at the table with AT&T. As Mike has indicated, they want us to be a healthy distribution partner. Obviously, this business has the potential to really provide great returns -- it has, historically, with the exception of last year -- so we're optimistic that we're at the table with them and we're going to get something that will produce longer-term results.

Brian Nagel -- Oppenheimer & Co -- Managing Director

So, Jason, is there any idea or can you say anything with regard to timing of these negotiations?

Jason Ellis -- President of Technology Brands

Yeah, I would say, Brian, they're active and expect that something will happen in 2018 and we're hopeful that they'll happen sooner than later. As Rob mentioned, I think the first quarter will be the toughest for us to comp but then, when we get to the back side of that, if we can reach some reasonable terms with AT&T, then I think the second half will look really good for us.

Brian Nagel -- Oppenheimer & Co -- Managing Director

Got it. Thank you. And then my second question, Rob, you had mentioned in your prepared comments, when you talk about the pre-owned business that, I guess, some efforts you've put forth in Europe and success there, so wondering if you can elaborate a little bit more on that and how that may translate to what you could do in the United States and also timing around any of those initiatives?

Rob Lloyd -- Chief Financial Officer

So, what we saw in Europe, I'd say that the largest thing that we did is we ran some very targeted PS4 promotions around trading in an old PS4 to get the PS4 Pro. Those were funded in part by Sony to help protect our margins and they were highly, highly successful. We ran them in the spring and they were much more successful than either party anticipated. It helped drive our market share and it kept us pretty well-stocked on PS4 inventory on the pre-owned side on hardware for quite a while. We ran that kind of promo again in the holiday season. I think both Sony and GameStop were a little more focused on where we were going to put the outer limits of the test. Again, we were pleased with that.

So, as we look back on the results across the year for Europe, what we're seeing is that the hardware pace was different than it was in the U.S. That, in turn, translated to the software pace as well. There was an investment made in the margin in order to drive that promotion, but it changed the dynamics of that business a bit for us. And so, we're going to look at how we can employ that in other markets as well, just recognizing that running the same old playbook that we've been doing inside the U.S. hasn't been working for us as we've seen declines in pre-owned, overall, so that's really what we're talking about.

Brian Nagel -- Oppenheimer & Co -- Managing Director

Got it. Thank you. And then, one more if I could just slip it in, with regard to the Switch, clearly, itself was a big sales driver to you in 2017. As we look out and see, basically, how, I guess, the Switch phenomena continues to evolve, will it be similar to other platforms where, over time, you get a better and better attachment rate just because you have this installed base of hardware?

Mike K. Mauler -- Chief Executive Officer

Yeah, I think that's a fair question with Nintendo. We know what happened with the Wii U. I'd say this is definitely a whole different platform that we saw in the past. We have visibility to the software... So, last year was a tremendous year for their software as well as hardware, between Zelda and Mario Odyssey and all the games that they had, it really drove a lot of hardware sales as well as software. I think, this year, when we look at the slate of titles -- many of which haven't been announced yet -- this year looks also very, very strong. So, I think, at least for 2018, we'll continue to see the strong software slate drive additional install based on the hardware and increase attach rate. We don't have, really, visibility for '19 yet, but for '18, it should play out that way.

Brian Nagel -- Oppenheimer & Co -- Managing Director

Thank you.

Operator

And, once again, ladies and gentlemen, if you'd like to ask a question at this time, please press *1. Our next question will come from Curtis Nagle with Bank of America-Merrill Lynch.

Curtis Nagle -- Bank of America-Merrill Lynch -- Vice President, Equity Analyst

Great. Thanks very much for taking the question. So, I guess, the first one, could you guys, if possible, talk a little bit about the balance sheet and gross margin SG&A this year? I was looking at recent trends and some of your comments on what you think the segments are going to do this year -- I think implies that SG&A dollar growth would be fairly minimal. Is that the right way to think about it?

Mike K. Mauler -- Chief Executive Officer

Well, I'd start with, certainly, SG&A reduction is part of our strategy and that was one of the drivers in some of the restructuring we've done already this year. And I think we'll see additional focus... We talked about focusing on the fundamentals and the basics. One of the fundamentals is to make sure that you're controlling and reducing costs and so that'll be an important part of our strategy. I think, maybe, Rob, you could probably talk to that in a little more detail?

Rob Lloyd -- Chief Financial Officer

Yeah. So, if you look at just the raw dollars year-over-year, we talked about the forecasted decline in revenues and comps. Obviously, that would contribute to a lower gross profit level, but that 53rd week is a component there -- the amount I stated in my script was $43 million of margin from that 53rd week -- so we do expect to see that we would have a related decline in gross margin but we would also see, through SG&A focus and that 53rd week, we would expect to see some decline in SG&A as well.

Brian Nagel -- Oppenheimer & Co -- Managing Director

Got it. And then, just as a follow-up, ex the extra week, where did U segment sales trend for 4Q?

Rob Lloyd -- Chief Financial Officer

We're going to have to get back to you on that. I don't have that number in front of me.

Brian Nagel -- Oppenheimer & Co -- Managing Director

Okay. And I'll just pop, maybe, one more. Just it looks like both inventory and payables were up pretty significantly, more or less in balance -- just curious what was going on there?

Rob Lloyd -- Chief Financial Officer

Well, to a large degree, what you saw on the inventory side of the equation was that we had sizable increase in our collectible sales for the year so there was an increase in the collectibles inventory to support that sales growth. We also had an increase in the inventory to support hardware and software sales as well.

In terms of the accounts payable, that was up, basically, in greater proportion, I believe, than the inventory was. Some of the timing, with respect to the accounts payable, had to do with purchases of hardware. We generally get shorter payment terms on hardware and we were pretty well in-stock on a couple of the consoles at the end of the year.

Brian Nagel -- Oppenheimer & Co -- Managing Director

Okay. Thanks very much.

Operator

Our next question comes from Joe Feldman with Telsey Advisory Group.

Joseph Feldman -- Telsey Advisory Group -- Senior Managing Director

Hi, good afternoon, guys. Thanks for taking my question. I wanted to ask, on the collectibles business, I know you guys mentioned and have been expanding space within the store -- do you have a sense of how much that expanded space was up year-over-year, I guess, if you think about the stores in aggregate?

Mike K. Mauler -- Chief Executive Officer

Yeah, I don't... That's something we'll have to get back to you on, I would think, in terms of the exact amount of space increase. I know, in Europe, we took quite a few of our stores -- maybe more than 50% -- to a 50/50 model. I think, in the U.S., we're really just starting out with that and so, while we did do some expansion, it wasn't as aggressive and that's something we're still continuing to look at for this year.

Rob Lloyd -- Chief Financial Officer

I believe the overall came in at about an increase from about 8 linear feet at the end of 16 to about 15 on average across the portfolio.

Joseph Feldman -- Telsey Advisory Group -- Senior Managing Director

Got it. Okay. Thank you. And then, another question, to stay on the collectibles theme for a minute, can you share any, maybe, the upcoming licenses in 2018 that gives you some confidence in driving the business there? And, also, wanted to understand if there's any type of products -- I know, within collectibles, there's a lot of different categories that you guys sell and that people seek out -- but is there any trend around a certain category or two and then, also, the licenses like I said? Thanks.

Mike K. Mauler -- Chief Executive Officer

Sure. I think we're seeing very strong growth with some of the video game licenses. Overwatch is a really good example of that. We're seeing strong growth with Fortnite. I think Black Panther did well for us globally -- the movie was a blockbuster and the licensed merchandise did really, really well. In terms of the categories, Funko Pop Vinyls are our most popular category and we've been working very hard with Funko to get good exclusives that other retails don't carry and we're able to pre-sell those and they drive a lot of traffic when they launch -- it's almost like a new release.

I'd say the other area of focus, from a category perspective, is apparel. We're really just scratching the surface on what we've done in the past with apparel. We now have someone dedicated to that. And, along with our strategy to focus on moms and families beside just the hardcore, we've opened a couple stores now that focus on female and kid sizes and they have done very, very well for us. So, I would say those would be the two categories right now that are doing the best.

Joseph Feldman -- Telsey Advisory Group -- Senior Managing Director

Thank you.

Rob Lloyd -- Chief Financial Officer

This is Rob. In response to that question Curtis asked, I didn't have the data in front of me. It's now been placed in front of me. Ex the 53rd week, pre-owned would have been down 8% in the fourth quarter, 6% for the year, which is in-line with the mid-single-digit guidance we gave at the beginning of the year.

Operator

And, once again, ladies and gentlemen, if you'd like to ask a question at this time, please press *1 now.

Mike K. Mauler -- Chief Executive Officer

Okay. Well, thank you, everybody, for joining us this afternoon on our call. We look forward to speaking with you on our Q1 Earnings Call in May and providing you with more details on our strategy.

Operator

That does conclude our conference for today. Thank you for your participation.

Duration: 46 minutes

Call participants:

Mike K. Mauler -- Chief Executive Officer

Rob Lloyd -- Chief Financial Officer

Dan Kaufman -- EVP and Chief Legal and Administrative Officer

Troy Crawford -- SCP and Chief Accounting Officer

Colin Sebastian -- Robert W. Baird -- Managing Director, Senior Research Analyst

Brian Nagel -- Oppenheimer & Co -- Managing Director

Jason Ellis -- President of Technology Brands

Curtis Nagle -- Bank of America-Merrill Lynch -- Vice President, Equity Analyst

Joseph Feldman -- Telsey Advisory Group -- Senior Managing Director

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