GameStop (NYSE:GME) shares are heading lower Thursday morning after following up a blowout quarter with uninspiring guidance.
The leading video game retailer had a spectacular fiscal third quarter. Sales rose 19% to $2.11 billion, fueled by a stunning 20.5% spike in comparable store sales growth. GameStop's earlier outlook had called for comps to climb by just 11%-15%.
Strong sales of software and handheld gaming systems helped propel GameStop's top-line growth. Despite a 2% decline in its high-margin sales of pre-owned products, net margin still improved during the period, with net income ultimately soaring 45% to $0.58 a share. Analysts were only targeting $0.57 a share in earnings on $1.98 billion in sales.
The situation isn't as comforting as we look to the seasonally potent holiday quarter for the 6,488-unit retail chain. Last week's arrival of the PlayStation 4 and tomorrow's debut of the Xbox One will naturally prop up sales, but selling a lot of big ticket, low-margin hardware items is apparently not going to be as beneficial to the bottom line as Wall Street forecast. GameStop sees profitability clocking in between $1.97 and $2.14 a share, just short of the $2.15 a share that analysts were targeting. The small-box retailer earned $2.16 a share during last year's holiday quarter.
Bulls who figured that GameStop would be buzzing with die-hard gamers trading in their old games and gear to pay for the new systems, or loading up on new software for the new platforms, will have to rethink their assumptions. The last level was an easy beat, but the new one will prove far more challenging.
Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.