Take-Two's Steamy Scenes: a Wash?

Take-Two predicted that earnings would come in 30 cents to 40 cents lower than expected because of the moves it will make, because of retailers' expected response.

That response came quickly on Wednesday and Thursday. Citing company policies that prohibit the sale of "adult only" rated titles, major video-game retailers including Wal-Mart (WMT Quote), GameStop (GME Quote), Best Buy (BBY Quote) and Circuit City (CC Quote) all said they would pull San Andreas from their store shelves.

"If the major channels of distribution are blocking you, that's a problem," says Steve Monticelli, president of Mosaic Investments, who has no position in Take-Two.

The market seemed to agree, as Take-Two shares plummeted immediately following Take-Two's announcement after the bell Wednesday. But the stock recovered much of the lost ground in the regular session on Thursday, ending the day off less than 5% from Wednesday's close -- or up more than 6% from its nadir in the after-hours session.

However, a bigger problem is that retailers may be unwilling to give the company the benefit of the doubt next time around, Monticelli says. Even if they do, parents who might otherwise have bought the game for their kids may be wary of doing so.

"If parents are aware of it -- and I think they will be -- they'll say 'no.' That's the damage," Monticelli says. "I would guess this is going to hurt them beyond the current quarter."

A key indicator of the long-term fallout could be sales of Grand Theft Auto: Liberty City Stories, a special version of the game designed for the PlayStation Portable that is due out later this year. The game has been expected to be a big part of Take-Two's revenue and earnings this year.

"Parents before might have said, 'I'll buy it for you.' Now they might not," says Joe Spiegel, a portfolio manager at Dalek Capital, who has no position in Take-Two. "That's the risk."

But other developments signaled that the sales fallout may not be as bad as Monticelli and other observers might think.