Can GameStop Keep Surging This Week?

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GameStop (NYSE: GME  ) will announce earnings results for the second quarter on Thursday, Aug. 22. And with the stock sitting near a five-year high, a lot is riding on this week's report. Here's what you need to watch for in the release.

Weak expectations
You wouldn't guess it by looking at its recent stock returns, but Wall Street has very low expectations for the video-game retailer. Analysts are calling for earnings of just $0.04 a share, versus the $0.16 the company booked a year ago. Revenue is expected to shrink by 13%, to $1.35 billion.

GameStop predicted back in May that comparable sales would fall hard this quarter -- by as much as 16% -- as it continues to plod through the late stages of the console cycle. That plunge would keep up a depressing streak that goes back for eight quarters.


Comparable Sales

Q2 2011


Q3 2011


Q4 2011


Q1 2012


Q2 2012


Q3 2012


Q4 2012


Q1 2013


Source: GameStop financial filings.

Still, GameStop has a history of beating low earnings expectations. One simple reason is the retailer has been plowing excess cash into share repurchases. Last quarter it bought 1 million of its own shares, driving its outstanding share count down to 118 million, well below the 134 million it reported at the start of 2012. It gets easier to beat per-share earnings expectations when you're busy shrinking your total share count.

New business
But GameStop's story isn't just about managed decline. The company is making progress in a couple of new business areas even while its traditional business shrinks. Its mobile revenue grew by almost 300% last quarter, as GameStop expanded a program to accept trade-ins for smartphones and tablets and resell those devices as pre-owned merchandise. Digital sales are up, too, by 47% last quarter. The contribution from these two businesses helped GameStop actually increase profitability this year. Gross profit margin grew by one percentage point to 31% last quarter.

New games
Finally, a few major new game releases could power a boost in GameStop's outlook for the coming quarter. Disney (NYSE: DIS  ) just launched its Infinity title, which it plans to promote heavily this fall. Infinity is going up against Activision Blizzard (NASDAQ: ATVI  ) and the Skylanders franchise that has been worth $1.5 billion in sales so far. Sure, Activision created this gaming genre and has an almost two-year head start here. But Disney's rival product has attracted strong initial reviews and boasts a deep catalog of characters that are already popular with children. Still, no matter who wins this battle, GameStop should see a sales boost from the fight.

Then September will bring Take-Two's highly anticipated release of Grand Theft Auto V, which should attract an entirely different demographic into GameStop's stores. Take-Two said last quarter that it expects GTA to help the company log "one of our best years ever," and that would be welcome news for GameStop as it waits for next-generation gaming consoles to begin selling this holiday season.

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