GameStop Earnings: Why Sales and Profits are Soaring

So much for the traditional summer slowdown in the video game industry. With gamers still filing into its stores, GameStop (NYSE: GME  ) last night posted second-quarter earnings results that beat Wall Street estimates.

Revenue rose by 25% year over year, to $1.73 billion. And profit improved 144% to $0.22 a share. Analysts had expected less fantastic revenue and earnings gains of 20% and 100%, respectively. 

With its latest figures, GameStop joined the thinning ranks of retailers that are still posting strong growth. Comparable-store sales rose by a scorching 22%, which was above the high end of management's guidance. 

As it has for almost a year now, GameStop sold tons of next-generation gaming consoles, with Microsoft's (NASDAQ: MSFT  ) Xbox One and Sony's (NYSE: SNE  ) PlayStation 4 pushing hardware revenue higher by 125%. That success did have a negative effect on profitability, though. New hardware carries the lowest margin of any product that GameStop sells, and outsized success there was the reason why gross profit margin fell by 3 percentage points, to 32% of sales. 

Still, the retailer had enough success in other areas to make up for that weakness. For one, GameStop improved on its dominant share in the software market, notching a 16% sales gain in that category thanks to popular new titles like Ubisoft's Watch Dogs and Nintendo's Mario Kart 8. That healthy bounce suggests the company is having no trouble connecting with gamers even as the major game publishers post record levels of digital revenue. There's no evidence yet that GameStop is doomed to be quickly axed out of the video game sales process.

Meanwhile, the pre-owned video game business continued to crank out profits and was responsible for just under half of GameStop's earnings. But investors should be just as pleased with the new mobile and consumer electronics division, which posted an 85% sales gain and is now responsible for almost 20% of profit, meaning the retailer's diversification strategy is right on track.

As for the second half of the year, GameStop can look forward to more growth in that division thanks to popular new devices including Apple's (NASDAQ: AAPL  ) latest iPhone. But management gave what seemed like a soft forecast for the third quarter, calling for comparable-store sales growth of between 1% and 5%. Keep in mind, though, that GameStop faces a very tough comparison with the prior year. The third quarter of 2013 included the launch of Take-Two's (NASDAQ: TTWO  ) Grand Theft Auto V, which broke sales records around the world. Solid growth on top of last year's 21% bounce suggests that GameStop's businesses is, if anything, gaining momentum.

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