GameStop profit plunges despite surging sales

Summer doldrums, EB Games merger cause retailer's Q2 earnings to fall 40 percent, even as sales spike 43 percent.

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Although GameStop's sales jumped an impressive 43 percent during the second quarter of its fiscal year, the game retailer posted a 40 percent drop in profit, a larger drop than expected. This morning, after GameStop reported earnings for its May-to-July quarter, its stock price fell almost $2, or about 4.15 percent, as of press time.

The retailer's sales rose to $963.3 million from $415.9 million, but the company's cost of sales more than doubled, to $664.1 million from $287.8 million. GameStop's profit fell 40 percent, to $3.18 million from $7.9 million, but the company saw a glimmer of good news as its used-games business grew 9 percent over the same quarter last year.

Of course, at the same time last year, GameStop--the largest video game retailer in the United States--was not carrying out a merger with former competitor Electronics Boutique. The separate GameStop and EB Games inventory systems were combined in March, and now the two brands' retail stores are connected to operate under "a single replenishment system," said president Steven Morgan.

"These completed tasks essentially end the integration of GameStop and EB Games," he said during a conference call with analysts this morning. "What now remains is the fine-tuning, enhancements, and the physical rebranding of our stores. But this organization is now officially on one system, one field organization, as one great company."

Citing strong sales of the Nintendo DS and the Xbox 360, GameStop said that Nintendo's New Super Mario Bros. and Electronic Arts' NCAA Football 07 were its two best-selling games during the quarter. The company expects next week's Madden 07 to set preorder and sales records for the store, as "tremendous, pent-up demand" for Xbox 360 games rises.

The release of the Nintendo Wii and Sony PlayStation 3--for which sections in 4,400-plus GameStop retail stores will be carved out in September, the company said--and the upcoming holiday season will increase the number of people buying games, said Lazard Capital Markets. After GameStop's conference call, the analyst group issued a statement recommending buying shares in the company.

"While there are still several significant risks associated with the console-transition period, we believe that positive sales trends are likely to continue through at least 2007," said Lazard analyst Colin Sebastian.

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