Shares of GameStop Corporation ( GME - Analyst Report ) dipped 6.3% to close at $23.19 on Tuesday, following the video game retailer’s dismal holiday sales performance on account of weak store traffic count. This offset solid digital growth and muted the launch of Nintendo's Wii U, compelling the Grapevine, Texas based company to trim its forecasts and thus, hinting at troubled waters for the video game business.

GameStop’s holiday sales for the nine-week period ended December 29, 2012 dropped 4.6% to $2.88 billion. Comparable-store sales fell 4.4%, reflecting a decline of 3.5% and 6.4% at its U.S. and international comps, respectively.

By sales mix, new video game hardware sales edged down 2.7%, despite having sold 320,000 Nintendo Wii U units globally, whereas new video game software sales dropped 5.1%. The pre-owned category sales plunged 15.6% due to lower number of new titles released in 2012 and less promotional strategies undertaken.

The disappointing holiday sales results persuaded management to become more cautious on their outlook, which now envisions comparable-store sales to decrease between 4% and 7% during the fourth quarter and in the range of 7.5% to 9% in fiscal 2012. Earlier, GameStop had projected comparable-store sales in the range of 1% up to 7% down for the fourth quarter, and to decline between 6% and 9% in the fiscal year.

GameStop also restricts its fourth-quarter fiscal 2012 earnings outlook at the lower-end of the previously provided guidance range of $2.07 to $2.27 per share. The current Zacks Consensus Estimate for the quarter is $2.16. Consequently, we could witness a correction in the Zacks Consensus Estimates in the coming days as well in the rank of the stock, which currently stands at Zacks Rank #2 (Buy).

On the brighter side, Digital receipts surged over 40% year over year, whereas Mobile sales, consisting of tablet and pre-owned iDevice products, came in at $76.5 million during the holiday season. GameStop, at its last earnings call had guided mobile sales in the range of $150 to $200 million for fiscal 2012, and has so far achieved more than $160 million. The company also informed that worldwide e-Commerce sales soared 20.5% during the holiday season versus the prior-year period.

GameStop, which competes with Amazon.com Inc. ( AMZN - Analyst Report ) , also continued with its shareholder friendly moves during the holiday period, and bought back 458,000 shares at a price of $25.51 per share, aggregating $11.7 million. The company still has about $488.3 million at its disposal under its share buyback program.

Let’s Conclude

The slump in the video gaming industry persists due to increased online gaming activities, and shifting preferences toward tablets and mobile phones from traditional game consoles. Consumers increasing accessibility to video games and PC entertainment software over the Internet could hit the sales of packaged goods and used games, and impede future growth. Consequently, GameStop continues to branch out and has reinvented itself 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.

Currently, we have a long-term Neutral recommendation on the stock.