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Strong digital sales helped GameStop Corporation (GME - Analyst Report), the video game and entertainment software retailer, to post quarterly earnings of 39 cents per share, up 2.6% from 38 cents in the prior-year quarter.  

The earnings came in line with the Zacks Consensus Estimate.

According to the recent data of market research firm The NPD Group, U.S. video game retail sales showed signs of revival in October 2011 as retail sales inched up 1% to $1.08 billion (including games released for personal computers).  

Revenue and Margins

The Grapevine, Texas based company posted total revenue of $1,946.8 million, up 2.5% from $1,899.2 in the year-ago quarter. However, total revenue was below the Zacks Consensus Revenue Estimate of $1,963 million. The retailer stated that comparable-store sales inched lower 0.6% during the quarter, reflecting sluggish sales of new software.

By sales mix, new video game hardware sales showed a marginal increase of 0.6% to $277.6 million, whereas sales of new video game software increased 4.8% to $879.1 million. Moreover, sales of used video games registered growth of 3.1% to $544.5 million.

Robust digital sales, aided GameStop’s gross profit, increased 4.9% to $572.9 million. Gross margin expanded 60 basis points to 29.4%, reflecting a 60 basis points decrease in cost of sales as a percentage of total revenue. However, operating income decreased 11% to $82.6 million, whereas operating margin contracted 70 basis points to 4.2%.

Other Details

GameStop ended the quarter with cash and cash equivalents of $442.6 million and net receivables of $58.1 million. During the quarter, the company bought back 1.92 million shares at $22.09 each.  Moreover, the company also redeemed $125 million of its Senior Notes during the quarter under review.

To boost shareholder value, GameStop announced a new $500 million share and debt repurchase program. This newly announced authorization overrides the existing program, which has $180 million left under its authorization.

Guidance Update

For the fourth quarter of 2011, GameStop anticipates comparable-store sales in the range of flat to 2%. GameStop expects earnings in the range of $1.66 to $1.76 per share.

For fiscal year 2011, the company stood by its earlier guidance and anticipates earnings in the range of $2.82 to $2.92 per share, reflecting an increase of 6.4% to 10.2% over the last fiscal year.

GameStop expects comparable-store sales in the range of -1% to flat, reflecting revenue growth of 2% to 3% for fiscal 2011.

Currently, we have a long-term ‘Neutral’ rating on GameStop. Moreover, GameStop, which faces stiff competition from Amazon.com Inc. (AMZN - Analyst Report), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.

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