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GameStop Corporation (GME - Analyst Report), the video game and entertainment software retailer, recently posted better-than-expected second-quarter fiscal 2013 results on the back of digital and mobile businesses, effective cost management, gross margin improvement and gain in market share.

The quarterly earnings of 9 cents a share not only surpassed the Zacks Consensus Estimate of 4 cents but also came ahead of its previously provided guidance range of 1 cent to 7 cents a share.

But what paint the picture dull was year-over-year drop of 43.8% in earnings from 16 cents earned in the year-ago quarter.

Let’s Unveil the Picture

The Grapevine, Texas-based GameStop’s total net sales of $1,383.7 million dipped 10.7% from the year-ago quarter, and also fell short of the Zacks Consensus Estimate of $1,393 million. Comparable-store sales dropped 10.7% during the quarter.

The fall in sales was due to the lack of significant game title launches. Customers are postponing their purchasing activities due to the launch of console in the later part of the year.

By sales mix, new video game hardware sales slid 19.4% to $147.8 million, whereas new video game software sales dropped 9.3% to $429.8 million. Moreover, pre-owned video game products sales declined 6% to $528.7 million. Sales in other category plunged 16.1% to $277.4 million.

The fall in new video game software sales for the company is narrower than the industry’s decline, and gained a market share of 290 basis points.

Within its other category, digital receipts increased 17.9% year over year to $158 million, whereas Mobile sales came in at $55.1 million, surging 121.4%.

GameStop continued to branch out and transformed as a mixed retailer of physical and digital gaming and electronics products. The company’s venture in digital, iDevice and gaming tablet businesses would be accretive to its results.

During the quarter, gross profit tumbled 7.3% to $481.4 million due to fall in the top-line, however, gross margin expanded 130 basis points to 34.8%, reflecting a contraction in cost of sales as a percentage of total net sales. Operating income declined 45.5% to $18.8 million, while operating margin shriveled 90 basis points to 1.4%.

Other Financial Aspects

GameStop, which competes with Amazon.com Inc. (AMZN - Analyst Report), ended the quarter with cash and cash equivalents of $199.5 million, net receivables of $55.7 million and shareholders’ equity of $2,156.7 million.

During the quarter, GameStop has bought back 2.39 million shares at a price of $37.21 per share, totaling $88.9 million. The company still has $311 million remaining at its disposal under its existing share repurchase program.

GameStop declared a quarterly dividend 27.5 cents to be paid on Sep 19, 2013, to stockholders of record as of Sep 3, 2013.

Strolling Through Guidance

Management now forecasts third-quarter fiscal 2013 comparable-store sales to increase between 11% and 15%. Earnings are predicted to be in the range of 50 cents to 55 cents a share.

For fiscal 2013, GameStop now expects comparable-stores sales to be in the range of -3.5% to +1.5%. Buoyed by stronger-than-anticipated second-quarter results, favorable trends seen in new console pre-orders and better-than-expected launch quantity allocation, management now envisions earnings between $3.00 and $3.20 per share.

Earlier, management had anticipated earnings in the band of $2.90 to $3.15 per share.

The current Zacks Consensus Estimate for the third quarter and fiscal 2013 stands at 35 cents and $3.14 per share, respectively.

Currently, GameStop carries a Zacks Rank #2 (Buy). Other stocks worth considering in the retail sector, include Fortune Brands Home & Security, Inc. (FBHS - Snapshot Report) and Lumber Liquidators Holdings, Inc. (LL - Snapshot Report), all sporting a Zacks Rank #1 (Strong Buy).

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