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Strong digital sales facilitated GameStop Corporation (GME - Analyst Report), the video game and entertainment software retailer, to post quarterly earnings of $1.73 a share, up 10% from $1.57 earned in the prior-year quarter. Moreover, earnings were a penny ahead of the Zacks Consensus Estimate.

Including one time items, earnings dropped 18.6% to $1.27 compared with $1.56 in the prior year period.

Revenue and Margins

Slump in the video gaming industry continues as the recent data of The NPD Group, a market research firm, states that US sales for February 2012 was down 20.0% from the comparable previous year to $1.06 billion.

The Grapevine, Texas-based GameStop posted total revenue of $3,578.6 million, down 3% from $3,692.8 million in the year-ago quarter. Moreover, total revenue came below the Zacks Consensus Revenue Estimate of $3,709 million. The retailer stated that comparable-store sales decreased 3.6% during the quarter, reflecting dismal sales across game consoles and hardware.  

By sales mix, new video game hardware sales decreased 19.9% to $626 million, whereas sales of new video game software increased 3.8% to $1,654.6 million. Moreover, sales of used video games registered a growth of 1.5% to $817.6 million.

Robust digital sales aided GameStop’s gross profit to increase 4.4% to $943.2 million.  Gross margin expanded 190 basis points to 26.4% reflecting a 190 basis points decrease in cost of sales as a percentage of total revenue. However, operating income decreased 19.5% to $302.5 million, whereas operating margin contracted 170 basis points to 8.5%.

Other Details

GameStop ended the quarter with cash and cash equivalents of $655 million and net receivables of $64.4 million. During the quarter, the company bought back 2 million shares at $22.38 each, aggregating to $45.3 million.  Moreover, the company also redeemed $125 million of its Senior Notes during the quarter under review.

In fiscal 2012, GameStop repurchased 3.3 million shares at $22.97 per share, totaling to $76.3 million till date.

Further, to boost shareholders value, GameStop announced a new $500 million share repurchase program. This newly announced authorization overrides the existing program which has $253 million left under the authorization.  

Guidance

Moving forward, for the first quarter of 2012, GameStop anticipates total sales to decline in the range of 9.5% to 7.5%, while comparable-store sales to be in the range of -9.5% to -7.5%.

Operating margin is expected to increase in the range of 5.4% to 5.7%. GameStop expects earnings in the range of 52 cents to 55 cents per share.

For fiscal year 2012, the company expects operating margin to increase in the range of 7% to 7.3%. Earnings are anticipated to be in the range of $3.10 to $3.30 per share, reflecting an increase of 8% to 15% over the last fiscal.

GameStop expects comparable-store sales in the range of -1.5% to 2%, reflecting a revenue growth of 1% to 5% for fiscal 2012. Capital expenditures are expected to decline by 15% in fiscal 2012.

Stores Update

In 2012, the company expects to open 100 new stores and close 150 stores in U.S., while, the company will keep looking for healthy opportunities internationally.  

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 #2 Rank, which translates into a short-term Buy recommendation.

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