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Can GameStop Be Stopped?

The growth rampage of video game retailer GameStop (NYSE: GME  ) -- majority-owned by Barnes & Noble -- continued with solid gains in the second quarter.

GameStop reported second-quarter sales growth of 13% to $345.6 million. Accounting for almost two-thirds of retail sales, video game software sales jumped 17% on the popularity of games such as Electronic Arts' (Nasdaq: ERTS  ) NCAA Football 2005, Activision's (Nasdaq: ATVI  ) Spider-Man 2, and Sega and Take-Two Interactive's (Nasdaq: TTWO  ) ESPN NFL 2K5. The company also got an early boost in hardware sales from the price cuts on the Microsoft (Nasdaq: MSFT  ) and Sony (NYSE: SNE  ) PlayStation 2 systems, though "unanticipated shortages" in late June and July -- mostly on the PS2 -- helped lead to a decline in same-store sales of 2.4%.

Net income climbed 17% to $7.7 million, or $0.13 per share, the latter figure boosted by a $15 million share repurchase.

Looking ahead, GameStop expects same-store sales to climb 4% to 6% in the third quarter. The company forecast earnings of $0.20 to $0.21 per share, with full-year earnings clocking in at $1.20 to $1.24 per share.

In all, the numbers looked pretty good. The company opened 77 new stores in the quarter, for 180 so far this year. The stock doesn't appear unreasonable at a little more than 13 times this year's earnings.

However, the question remains how far GameStop can go.

The most discernible advantage GameStop has comes on the opening day of a super smash hit. Last Monday, I wrote the article on EA's release of Madden NFL 2005 (see Sega's Madden Challenge), then remembered from my experience last year that GameStop would probably have it in that evening, and at least a day or two before anybody else. So I drove over to the mall that afternoon, prepaid for the game, came back an hour later, and stood in line with a million other people in America.

The problem is that these games don't come along that often, though this year may be an exception with the release of Sony's Gran Turismo 4, Microsoft's Halo 2, and Take-Two's next Grand Theft Auto. In addition, GameStop faces competition not just from direct competitor Electronics Boutique (Nasdaq: ELBO  ) and electronics retailers such as Best Buy but also the likes of and eBay.

Best Buy has a couple of advantages, one being the Rewards Zone affinity card and another being that people like myself pay random visits just to see what's new. occasionally offers special deals, which are far more attractive than the full price you pay at a GameStop. And if you're into used games, you can both buy for less and sell for more on eBay than you can at either GameStop or Electronics Boutique.

The bottom line is that GameStop may look good now, but I believe the lack of a strong, sustainable competitive advantage leaves too many questions for investment consideration.

Electronic Arts, eBay, and are allMotley Fool Stock Advisorrecommendations. Find out which other companies have made the cut by signing up for six months, without risk.

Fool contributor Jeff Hwang owns shares of Electronic Arts and eBay.

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