GameStop Earnings Up but Misses

GameStop Corporation (GME), the video game and entertainment software retailer, recently posted second-quarter 2010 results. The quarterly earnings of 26 cents a share missed the Zacks Consensus Estimate by a penny but rose 13% from 23 cents earned in the prior-year quarter.

The bottom-line growth was primarily driven by higher top-line and a decline in interest expenses (down 11%).

Quarterly Discussion

The Grapevine, Texas based company, GameStop, posted total revenues of $1,799.1 million that fell short of the Zacks Consensus Estimate of $1,816 million but climbed 3.5% from the year-ago quarter. The retailer hinted that comparable-store sales advanced marginally by 0.9%.

By sales mix, new video game hardware sales rose 4.3% to $314.3 million, whereas sales of new video game software climbed 5.3% to $663.2 million. However, sales of used video games remained soft, registering a growth of 0.8% to $565.5 million.

Management intimated that the robust market share gained from releases, such as Red Dead Redemption, Super Mario Galaxy 2, UFC Undisputed 2010, StarCraft II: Wings of Liberty and NCAA Football 11.

Despite a 3.2% increase in cost of sales GameStop’s gross profit for the quarter jumped 4.3% to $516.8 million, whereas gross margin expanded 20 basis points to 28.7% aided by top-line growth.

However, operating income dropped 1.9% to $69.6 million due to a rise in selling, general and administrative expenses (up 5.2%) and depreciation and amortization (up 6.4%). Operating margin also contracted 20 basis points.

Other Details

GameStop ended the quarter with cash and cash equivalents of $289.3 million compared to $197.9 million in the year-ago quarter. During the quarter, the company bought back 2,520,400 shares at $20.93 each, aggregating $52.8 million, thereby exhausting the $300 million share repurchase program.

The company also notified that, year-to-date, it has opened 99 net new stores.

Guidance & Zacks Consensus

Moving forward, GameStop continues to expect earnings of $2.58 to $2.68 per share for fiscal 2010, assuming flat-to-2% growth in comparable-store sales. The guidance also dovetails with the current Zacks Consensus Estimate of $2.64.

For the third quarter, the company anticipates earnings of 35 cents to 38 cents a share, assuming a comparable-store sales growth of 3% to 6%. The current Zacks Consensus Estimate for third quarter is 39 cents.

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