Going Easy on GameStop

Shares rise 6% despite some bottom-line woes.
Author:
Publish date:

Shares of

GameStop

(GME) - Get Report

jumped more than 6% Thursday afterthe company reported that revenue surged in its second quarter.

Investors bid up the stock even though the video-gameretailer missed the Street's earnings estimates by a penny a share andoffered a disappointing outlook for its third quarter.

But company officials may have addressed some investor concerns bypredicting strong sales of game hardware in coming quarters andexpanding gross margins.

"We expect consumer demand to continue to be strong, and webelieve supplies will match demand," said Dan DeMatteo, the company'schief operating officer, on a conference call.

In the quarter ended July 30, GameStop earned $7.9 million, or 14cents a share. That was up marginally from the $7.7 million, or 13cents a share, the company earned in the year-prior quarter.

Weighing on the company's bottom line in the just-completed periodwas a $1.1 million write-off of its inventory of used copies of

GrandTheft Auto: San Andreas

. GameStop decided to pull the title fromits shelves after publisher

Take-Two Interactive

(TTWO) - Get Report

re-rated the game as an adult-only title.

The company's posted sales of $415.9 million in the secondquarter, up from $345.6 million a year earlier.

Analysts surveyed by Thomson First Call were expecting the companyto earn 15 cents a share.

Looking forward, GameStop forecast earnings of 18 cents to 20cents a share. The company predicted that same-store sales, whichcompare results at outlets open for more than a year, would fall 8% to10% in the quarter. For the full year, the company predicted earningsranging from $1.30 to $1.40 a share, excluding any benefitfrom its planned merger with

Electronics Boutique

(ELBO)

.

Analysts were predicting that the company would earn 21 cents ashare in the current period and $1.42 for the full year.

The expected decline in same-store sales in the current quarter isthe result of tough comparisons with the year-earlier period, companyexecutives explained on the call, noting that GameStop had a 12%comparable store sales gain a year ago, a record high for the company.

Despite the declining same-store sales, GameStop expects its grossmargins to jump in the current quarter. In the third quarter lastyear, the company saw strong sales of new software with the release ofTake Two's

San Andreas

. In comparison, this year the companyexpects a larger contribution from sales of its higher-margin usedtitles.

The company also expects to see a boost from hardware sales thisyear. During the holiday season last year, major retailers were unableto meet demand for consoles as both

Microsoft's

(MSFT) - Get Report

Xbox and

Sony's

(SNE) - Get Report

PlayStation 2 were in short supply.

But this year, GameStop expects to have sufficient supply to meetdemand for both consoles. Additionally, the company expects to see awindfall from surging sales of Sony's PlayStation Portable handheldsystem and Microsoft's new Xbox 360 console. A recent price cut byNintendo on its DS handheld should also help sales of that device,company officials said.

In recent trading, shares of GameStop were up $1.85, or 6.3%, to $31.30.