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GameStop sales, profits up - but investors wonder what's next

GameStop sales, profits up - but investors wonder what's next

November 21, 2013 | By Kris Graft

As the next generation of consoles gets underway, retailer GameStop reported a boost in sales and profits for the quarter ended November 2.

Sales for the third fiscal quarter were $2.11 billion, up 19 percent compared to the same quarter a year ago. Profits were $69 million, up 45 percent.

The big challenge for GameStop moving forward will be to weather the industry's transition from physical retail to digital. The new consoles that GameStop is counting on to drive sales are, at the same time, providing customers with a way to circumvent physical retail, via digital storefronts.

GameStop CEO Paul Raines still sees opportunities for the masses of people who prefer the in-store experience.

"Our strong third quarter sales results give us great momentum as we enter the new console cycle," he said in a statement. "Consumer appetite for the new consoles is very strong judging by last week’s successful PS4 launch and the excitement for tonight’s Xbox One launch event. Globally, we are executing our unique playbook to maximize our position of strength."

The immediate focus might be the new consoles, but GameStop is placing increasing emphasis on its mobile and digital businesses as it repositions itself for the future. In its earnings call with investors this morning, the company said that its sell-through rate on PlayStation 4 hardware and software was already up to 80 percent of all PS3 sell-through in the previous year. Mobile sales during the quarter grew 14 percent year-on-year to $49.9 million; digital rose 9 percent to $138 million.

Sales of pre-owned hardware and software – GameStop's bread and butter – dropped to $487 million for the quarter, or 23 percent of total sales during the period. For the same quarter a year ago, pre-owned sales were $496 million, or 28 percent of total sales.

Gross profit margins for pre-owned also dropped year-on-year to 45 percent, down from 48 percent, marking the second-lowest margins for the category in eight years.

The company expects comparable store sales (sales of stores that have been open for at least a year) to rise between 1.5 and 4.5 percent for the full fiscal year, and bumped earnings per share estimates from the $3.00 to $3.20 range up to the $3.08 to $3.25 range.

The raised full-year guidance wasn't enough to please investors -- a weak outlook for the company's holiday quarter caused shares to drop 10 percent this morning.

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