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(GME) - Get GameStop Corp. Class A Report

second-quarter results disappointed Wall Street. But the video game retailer has several tricks up its sleeve that are expected to be catalysts for the stock.

On the surface, second-quarter results were worrisome, with profit tumbling 23%, same-store sales falling 9% and revenue missing analysts' estimates.

GameStop CEO, Paul Raines

Still, there's several reasons to be optimistic, including GameStop's secret weapon, its PowerUp rewards program, which is changing the way the company does business.

GameStop's CEO Paul Raines reveals how the company plans to beat out the competition and make a killing this holiday season.

Raines on pre-sales:

Software sales dropped 10% during the quarter, as GameStop saw a 30% reduction in new titles being offered.

"New software is largely driven by title count," Raines said. "We have seen this happen for many years. If you have a lot of great titles and strong names you see a tremendous growth in software. We have five or six very large titles coming in the fall, so you will see stronger software. Software sales were lighter in the second quarter because you didn't see the title count that we had last year."

Already, GameStop has more than a million reservations for some of these titles and Raines expects to have a "massive" holiday. The company is forecasting flat software growth for the industry but positive for GameStop.

Raines on hardware price cuts:

Hardware sales also tumbled 12%, but Raines does expect levels to normalize in the second-half of the year.

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"On the hardware front, that is a big-ticket business and that is where you see the how the consumer feels about the economy. We also had some allocation issues. Sony has this tragic earthquake and tsunami situation, which caused some allocation problems and out of stock."

"We think that the recent price cuts will drive hardware units. The 3DS had a price cut a week and a half ago and this week we had a price cut of $50 on the PS3. Those two facts will drive hardware growth we think in the back-half."

Raines on used games business:

Used gaming grew 12% during the quarter and Raines said it was GameStop's strongest growth in used video game sales in several year.

"We announced in January we are repositioning our used business. We have added a tremendous amount of resources and connected it very closely to our PowerUp Rewards Program, which is a customer engagement program we have that now has over 12.5 million members in less than a year. We are doing a lot of stealth marketing to our PowerUp users and that is driving a lot of growth."

"The used business is a great value business. It's an opening price point business. It doesn't compete with new software. Our average used title is $18. Customers use the used business to bring back games and help pay for new titles. Right now the consumer is under some pressure and the trade in business is a great high value, low cost entertainment option."

Raines on GameStop's digital strategy:

Digital grew 69% during the second-quarter and GameStop is forecasting the segment will rake in close to $500 million in revenue this year. GameStop also saw its gross margins grow 250 basis points for the three-month period, with digital making up 50 basis points of that increase.

"So what you are seeing is that in the aggregate the digital business is a rich margin business growing very rapidly. The strategy of our digital businesses is to sell content in stores. You will hear us talk about DLC

downloadable content. DLC is content that we can promote in store and sell in store that the customer can download through online platforms. That's going extremely well and we are gaining share and will be the market share leader in DLC content sold at retail. In addition to that, we made three key acquisitions:, a casual gaming site that sells ad-based and currency based games; Impulse, our PC download business; and Spawn Labs, streaming technology that isn't in the marketplace yet. The model there is to stream games to consumers with varying price points."

"We have seen some very interesting behaviors. We just did a survey and some consumer work of all the people that have bought digital content at GameStop. A couple of interesting things: 50% of the consumers never bought DLC before. It is clear we are introducing DLC to mom and dad. We are bringing digital content to people who have never seen it before. If you go online to buy digital content it is far more complex than the app store because games are bigger files. We are bringing a lot of people into DLC that were never there before."

Raines on the future of brick-and-mortar:

"Our stores have already begun to transition. There's a lot more discovery and less inventory in stores. If you go to our stores most of them will have a digital kiosks, you will see us promoting digital content through TVs and so forth. The store becomes a discovery and entertainment center as much as it is a physical inventory location. We know there is going to be demand for physical games for a pretty long time. There's an over 100 million installed base of consoles out there, there will be a used business that will go on. In terms of our stores, we said this year there will be a net zero square footage growth in the US. We think that's a good target for next year as well. If there is less demand for stores we have a model that allows us to close stores and allow us to relocate them, etc. The store becomes an entertainment center. It becomes a hybrid store."

Raines on social and mobile gaming:

"It's clear that Facebook games, specifically Zynga, have expanded the audience for gaming. They have brought in people that weren't there before. A lot of people play Farmville and Mafia Wars and Cityville that have perhaps never played a video game before. They have also taken share of time. We see that people spend a lot of time on this. At the same time, we also know that many of them have not had high rates of sale. Angry Birds has been a success, Farmville has been a success. Because we are in that space through our Jolt acquisition, we know there isn't a ton of revenue running around in those businesses aside from the one or two marquee games. Having said all of that, we think it is an exciting category. You will see us be here at holiday with extensive promotions promoting casual games in our stores for people to play on their phone and online. You may even see us bundle some casual games with some console games and holiday products. We participate in Farmville and the other social games through

game card sales in our stores. We sell digital currency to allow you to play those games on social platforms."

"We have had some very interesting conversations and visits with Zynga to see how we can grow more and even use GameStop and Power Up rewards to launch more games on tablets and online. We are very actively engaged in that with all the major players. One of the challenges the social games folks have is how do they get their price points up. How do they get beyond the 99 cents and $4.99, and one of the things we do really well is the selling process for $59 games. We have a really unique marketing tool with PowerUp rewards, we do fulfillment online and that is really attractive to the social game developers. Holiday will have a lot of tablet activity so you will see us be active in that space."


Reported by Jeanine Poggi in New York.

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