Game On, Mr. Market

Business was brisk at video retailer GameStop (NYSE: GME  ) over the holidays. The chain is raising its guidance for the quarter that ended Feb. 2. GameStop is now looking to post a profit of $1.11 a share to $1.12 a share for its fiscal fourth quarter when it announces results in a few weeks, $0.02 ahead of its initial projection.

Then again, analysts have been humbled by sticking to the company's conservative guidance in the past. GameStop has trounced expectations by double-digit percentage differences in each of the first three fiscal quarters of the year.

GameStop is on a roll. Preliminary fourth-quarter same-store sales are a whopping 17.4% higher than the previous year's holiday showing. It certainly didn't hurt that Sony (NYSE: SNE  ) and Microsoft (Nasdaq: MSFT  ) systems began to sell briskly after price cuts and console upgrades. Market leader Nintendo (OTC BB:NTDOY.PK) also benefited from ramping up its production of both Wii systems and DS (dual-screen) handheld devices.

The upgrade cycle is also likely to benefit GameStop's used gear business. The company is a popular hub for buying used games and systems from gamers and then reselling them at higher margins than its firsthand gear.

The gains aren't only on the hardware front. With concert simulations becoming all the rage, Viacom's (NYSE: VIA  ) Rock Band and Activision's (Nasdaq: ATVI  ) Guitar Hero III are helping retailers by driving game prices higher. You're not just buying a $50 or $60 game anymore. Rock Band with its full ensemble of instrument controllers runs gamers roughly $160.

So it shouldn't surprise anyone to see GameStop raise the ante, even as the iffy economy trips up more conventional retailers. The real challenge now is to guess how much higher GameStop's profits will be when it reports come mid-March.