The GameStops Here

How does a company top its "best first quarter ever?" For starters, it increases forward earnings guidance. That's just what electronics retailer and Stock Advisor pick GameStop (NYSE: GME  ) has done as it capitalizes on the latest upswing in the cyclical video game market.

GameStop released first-quarter earnings this morning that slightly topped analysts' projections, on average. Total sales advanced 23%, same-store sales jumped 15.3%, and diluted reported earnings more than doubled. The bottom line would have been a couple of cents higher, if not for a debt retirement expense.

The good times aren't ending anytime soon. Management expects second-quarter comps of 16%-18%, and it also upped full-year guidance to between $1.39 and $1.42 (not including debt retirement costs), with a total sales increase of 19% to 21% and comps growth of 14% to 16%.

I can't imagine better sales trends than GameStop's current numbers. The company continued to roll out the superlatives during its earnings conference call, citing the current environment as the "most platform-diverse year ever." However, one analyst tempered management's enthusiasm, questioning whether the proliferation of next-generation systems is making choices too confusing for gamers.

Management replied that the current array of consoles benefits the market, driving overall excitement and providing choices among many products and price points. The figures appear to be supporting this assertion; systems are flying off the shelves, with continued shortages of Nintendo's (OTC: NTDOY.PK) Wii and Microsoft's (Nasdaq: MSFT  ) Xbox 360 Elite. Additionally, Sony's (NYSE: SNE  ) PS2 continues to sell well, even though the PS3 is its latest and greatest platform. In addition, used game sales grew 18% during the first quarter.

In other words, early adopter gamers can buy the newest systems to play Spider-Man 3, while more price-sensitive or nostalgic buyers can still purchase used classic versions of Electronic Arts' (Nasdaq: ERTS  ) Madden NFL or Take-Two Interactive's (Nasdaq: TTWO  ) Grand Theft Auto.  

The latest gaming cycle has definitely benefitted GameStop's shares, which have nearly doubled over the past year. On a trailing P/E basis, the stock looks expensive at 36 times earnings. The forward P/E is 26, but the company expects "at least" 25% earnings growth in 2008 and 2009, implying that it could have the growth ahead to support a richer valuation.

A higher multiple leaves less room for error; the downside is greater, should future results prove disappointing. I'm also concerned about the longer-term outlook for video game retailers. But overall, GameStop should have further room to run as it benefits from growing excitement for the latest generation of video game hardware and software.  

For related Foolishness:

Nintendo, Electronic Arts, and GameStop areMotley Fool Stock Advisor recommendations, while Microsoft is a recommendation ofMotley Fool Inside Value. Try any of our Foolish newsletters free for 30 days.

Fool contributor Ryan Fuhrmann is long shares of Microsoft, but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.


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