March 26, 2009 / 9:44 PM / 11 years ago

UPDATE 3-GameStop profit rises on strong game demand

* Q4 EPS $1.34, meeting analyst views

* Sees Q1 EPS 40-42 cts, compared with 39 cts estimate

* Reiterates forecast of 2009 sales growth of 10-12 pct

* Reiterates forecast of 2009 EPS growth 18-22 pct (Adds analyst comment, CEO comment, stock activity, byline)

By Franklin Paul

NEW YORK, March 26 (Reuters) - GameStop Corp’s (GME.N) fourth-quarter profit rose 22 percent and it issued a first-quarter forecast that beat analyst estimates, helped by growth in new video consoles and hit games such as Microsoft’s “Halo Wars.”

GameStop, the largest U.S. video game retailer said on Thursday its net earnings were $232.3 million, or $1.39 a share, up from $189.8 million, or $1.14 a share, in the year-ago period.

Revenue rose 21.9 percent to $3.49 billion, driven by sales of games such as Activision Blizzard Inc’s (ATVI.O) “Call of Duty: World at War.” The profit and revenue were generally in line with analysts’ forecasts.

The retailer remains optimistic about the video game industry, which has defied the economic downturn on robust sales of video game consoles by Nintendo 7974.OS, Sony Corp (6758.T) and Microsoft Corp (MSFT.O). That in turn drives consumers into GameStop stores to buy software.

Still, analysts said the company may in time face increased competition as rival retailers take a stab at the trade-in business which boosts GameStop’s profit margins. In addition, the online systems that allow users to download games, while still far from fruition, is seen as a threat.

“We continue to view the story as a balance between near-term fundamentals which are holding up well, but a cloudy long-term picture threatened by new competitors in the used game space and an accelerating move toward digital distribution,” said Signal Hill analyst Todd Greenwald.

COMPETITION FOR USED GAMES

GameStop’s margins benefit from its trade-in system which lets shoppers return used games for a fraction of the purchase price in cash or credit toward future sales. Returned games sell at a higher profit margin — around 50 percent — than new games.

Greenwald noted that gross margins on used games were unusually low in the fourth quarter, at 46.4 percent, down from 48.2 percent in the third quarter and 48 percent a year ago, as a result of holiday discounting and promotions.

GameStop brushed off the threat to its used game sales, including a renewed effort by Best Buy. What is more, Chief Executive Dan DeMatteo told Reuters that Amazon.com’s (AMZN.O) online video game exchange plan is unlikely to succeed.

“Many people have tried this and ... they have failed because they don’t have the sales support ..., the pricing knowledge (and) the inventory management systems to make it succeed,” he said. “We have not seen any impact on our trades (from) the recent initiatives at all.”

GameStop said its optimism is fueled by steady growth in the installed base of game consoles, new games titles, and “consumer enthusiasm” for its trade-in model, which helps makes buying new games more affordable for cash-strapped shoppers.

It expects first-quarter earnings per share of 40 cents to 42 cents, compared with analysts’ average forecast of 39 cents.

The company repeated its 2009 forecast for sales growth of 10 percent to 12 percent, and an increase in earnings per share of 18 percent to 22 percent.

GameStop shares rose as much as 7.2 percent, before closing down 2.35 percent at $26.21 on the New York Stock Exchange. The stock has risen about 24 percent so far this year. (Reporting by Franklin Paul; Editing by Derek Caney, Richard Chang)

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