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GameStop boosts profit forecast, but shares fall 10 percent

GameStop shares dropped 10 percent Thursday after the company indicated its sales growth may slow the rest of the year, compared to the first quarter.

The Grapevine video game retailer reported a $62.1 million first-quarter profit, compared to a $24.7 million profit for the same period last year. Sales in comparable stores – those open at least a year, an industry benchmark – increased 27.1 percent for the quarter.

But GameStop, in a release, reiterated its earlier forecast that comparable-store sales will grow 10-12 percent for the full fiscal year.

That “implies that the last two quarters are single digits,” Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles, told Bloomberg News. “The market doesn’t like that.”

GameStop shares were down $4.50 to $46.34 at 11 a.m. Central and had dropped as low as $44.11 on the New York Stock Exchange.

The company’s first-quarter profit amounted to 37 cents per share of common stock, the company said, noting that beat the “high end” of GameStop’s guidance to Wall Street by five cents per share. The per-share profit included debt retirement costs of 1 cent.

The company said sales of new video game software grew “an amazing 72 percent” in the fiscal first quarter, which ended May 3.

The top five selling games during the quarter were Take Two Interactive’s Grand Theft Auto IV, with “only five days of sales at the end of the quarter;” Super Smash Bros. Brawl and Mario Kart Wii from Nintendo; Rainbow Six: Vegas 2 from Ubisoft; and Electronic Arts’ Army of Two, GameStop said.

“We are very bullish on the future,” Richard Fontaine, GameStop’s chief executive, said in a release.

Three major factors are “transforming the business and accelerating the potential for GameStop growth,” including growth in sales of video game consoles; significant expansion of video gamers’ demographics, particularly growth among women; and an “outstanding lineup of new games coming during the rest of the year.”

Those include: Nintendo’s WII Fit, Konami’s Metal Gear Solid 4, Microsoft’s Gears of War 2, and Activision’s Guitar Hero 4.

During a conference call with Wall Street analysts and reporters, GameStop executives said most hardware shortages “have abated,” with the Nintendo Wii continuing to be the primary hardware shortage the company has.

Fontaine said the company doesn’t know whether federal tax rebates are driving the company’s sales.

“The truth of the matter is I can’t point to a specific impact,” he said during the conference call. “I don’t have any metrics that indicate that is the reason for the purchases. I would assume that as more of these rebates come into the markets that a certain percentage of them will be spent on entertainment and we will get more than our fair share.”

For the fiscal second quarter, GameStop forecast comparable store sales to range between 12 and 14 percent.Earnings per share are expected to range between 26 and 28 cents per share.

The company, based on its “stronger than expected results” in the first quarter, also increased its earnings guidance for the full fiscal year to a range of $2.30 to $2.39 per share. That would represent a 28-33 percent increase over last year.

Total sales grew to $1.8 billion in the first quarter, from $1.27 billion in the same period the prior year.

GameStop has more than 5,400 stores. The company opened 210 – a record for GameStop – in the first quarter. “We are well underway to achieving our goal of opening between 550 and 600 new stores in 2008,” GameStop said.

“With half of the new stores opening outside of the U.S., our international store base will grow by 25 percent and our overall global market share will continue to increase,” the company said.

Fontaine said the company continues to be interested in overseas markets, such as the European Union.

“We’re not resting on our laurels,” he said. “We look to improve. We think the opportunities we have are not only worldwide, but within all our divisions.”

Scott Nishimura, (817) 390-7808