GameStop's profit beats Street, shares recover

NEW YORK Thu Aug 18, 2011 4:30pm EDT

A customer laughs with a clerk as he purchases a copy of the video game ''Grand Theft Auto IV'' at a GameStop store in New York April 29, 2008. REUTERS/Lucas Jackson

A customer laughs with a clerk as he purchases a copy of the video game ''Grand Theft Auto IV'' at a GameStop store in New York April 29, 2008.

Credit: Reuters/Lucas Jackson

NEW YORK (Reuters) - GameStop Corp (GME.N) said its growth this year will be driven by a strong holiday lineup and customers buying used games to save money, which sent its shares higher after an initial drop on Thursday.

The largest video game retailer said its second-quarter profit and revenue fell as sales of video game hardware and software unperformed. Its shares fell by as much as 10 percent before turning positive in the afternoon.

Sales of traditional video game products such as consoles have been struggling globally as gamers turn to lower-priced online games or play games on tablets and cellphones.

But GameStop expected a strong holiday season, as orders grow at a record pace for upcoming titles such as Activision Blizzard Inc's (ATVI.O) Call of Duty and Electronic Arts Inc's ERTS.O "Modern Warfare 3.

With markets down on Thursday, it took some time for investors to realize GameStop's potential this year.

"The optimism about the second half of the year is now beginning to make it onto the marketplace. That word is starting to get out and you're seeing a recovery taking place," said GameStop president Tony Bartel in an interview.

Manufacturers such as Sony Corp (6758.T) and Nintendo Co Ltd 7974.OS have been cutting prices, which will help GameStop in the lead-up to the holiday season. On Wednesday, Sony said it was cutting the price of the entry-level PlayStation 3 console by nearly a fifth in the United States.

Bartel said GameStop saw a bump in sales this week as soon as it started selling the cheaper PlayStation units.

For the second quarter ended July 30, the company said its net income fell to $30.6 million, or 22 cents per share, down from $39.8 million, or 26 cents per share a year earlier. Its earnings beat Wall Street by a penny.

"This is not as bad as people were fearing," said Sterne Agee analyst Arvind Bhatia, pointing to the company's 12 percent boost in used video game sales, which have higher margins than sales of new games.

The jump in the used game business is also attracting Wall Street's attention because it appeals to budget-minded consumers. Shoppers can trade in their used games in stores for new games at reduced prices. This draws in consumers with tighter budgets who cannot spend $60 on a game.

"Used games will become increasingly important in a challenging market. Budget gamers find more value in the product," said Janney Capital Markets analyst Tony Wible.

Sales fell 3 percent to $1.7 billion, which missed Wall Street expectations of $1.8 billion, according to Thomson Reuters I/B/E/S.

For the third quarter, the company said its comparable store sales should rise 2 percent to 4 percent. Its earnings per share should range from 38 cents per share to 41 cents per share, which is in line with Street estimates.

GameStop repeated its full year earnings forecast in the range of $2.82 to $2.92 per share.

Its shares rose 4.7 percent to close at $21.43 on the New York Stock Exchange.

(Reporting by Liana B. Baker; editing by Gerald E. McCormick and Andre Grenon)

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