GameStop Needs New Cheat Codes

You have to give GameStop (NYSE: GME  ) some credit today. After spending all of last year whacking away at its same-store sales guidance, the leading video game retailer found a way to reverse the trend by boosting the midpoint of its comps for all of fiscal 2013.

That's about the only thing that's impressive in this morning's fiscal first-quarter report.

Yes, global sales didn't fall by 8%, as analysts were expecting. GameStop's top line only slipped 7%, to $1.87 billion, for the quarter ending in April. What? Are we supposed to celebrate a decline? Hardware sales were the biggest culprit, as diehard gamers wait out new consoles coming out later this year. But let's not sugarcoat the fact that software sales, and the higher margin per-owned sales, also fell during the period.

Yes, earnings of $0.46 a share landed ahead of the $0.40 a share that Wall Street was projecting. It's still a long way down from the $0.54 a share that the retreating retailer posted a year earlier. And would this have really been a beat if GameStop hadn't been aggressively snapping back shares? Sucking out shares outstanding is a great way to pad bottom-line results on a per-share basis. Net income actually plunged 25% during the quarter, unlike the 15% reported slide on a per-share basis.

Yes, GameStop is boosting the low end of its guidance range for the current year. Instead of earning $2.75 a share to $3.15 a share this fiscal year, the 6,544-store chain is now looking to earn $2.90 a share to $3.15 a share. Is this really an increase?

"Current guidance only includes the effect of the shares purchased thus far," the gamer haven points out. In other words, the prior guidance didn't take into account the million shares that it repurchased during the quarter. By keeping the top end unchanged, isn't this actually a decrease in guidance? It probably is if we go by net income instead of net income per share.

The current quarter is going to be a disaster, by the way. GameStop's targeting comps to fall by as much as 16%, as diehard gamers save up for Sony's PS4 and Microsoft's Xbox One later this year. We still don't have price tags for either system, but they won't come cheap. Have you seen the specs? Don't expect the masses to embrace them right away.

GameStop does have a healthy balance sheet, and it remains very profitable. However, it's hard to get excited about the retailer when sales and profitability are going the wrong way. Isn't it just a matter of time before comps are revised lower again? Once jaded gamers don't turn out this holiday season for the Xbox One and PS4 -- or limit themselves to low-margin hardware purchases before slurping on digital ecosystems for both consoles that sidestep GameStop entirely -- is GameStop going to be in for a world of hurt?

But -- hey -- at least it did bump the low end of its comps range higher, and there's no way to cheat that metric the way a company can by using share buybacks to pad profitability on a per-share basis. Right? What's that? GameStop is one of the growing number of retailers that incorporate website sales in their comps? Comps isn't a true indicator of in-store traffic here?

You got me again, GameStop. Now I just need someone to explain to me why this stock has doubled over the past year, when it's clearly less of a company.

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