GameStop (NYSE:GME) investors had been bracing for bad news from the video game retailer in its last quarterly report before the must-win holiday shopping season. However, while the company struggled with lower profitability and a surprise drop in consumer tech sales, its broader business performed well. GameStop posted healthy growth and lifted its sales outlook due to building momentum around new game console launches.

More on that optimistic forecast in a moment. First, here's how the headline numbers stacked up against the prior-year period:

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$1.99 billion

$1.96 billion

1.5%

Net income

$59.4 million

$50.8 million

17%

Earnings per share

$0.59

$0.49

20%

Data source: GameStop.

What happened this quarter?

Sales rose for the third straight quarter while reported earnings jumped thanks to a one-time tax benefit. After adjusting for that unusual rebate, GameStop's profitability worsened slightly as its mix of sales shifted toward lower-margin products like the Nintendo Switch.

Two boys play a console video game.

Image source: Getty Images.

Highlights of the quarter included:

  • Comparable-store sales growth clocked in at 1.9%, or roughly the same modest pace that GameStop accomplished in each of the past two quarters.
  • The video game segments led the way higher, with new software sales rising to $650 million from $617 million a year ago. Game hardware expanded by 9% to $310 million. GameStop benefited from strong demand for Nintendo's new gaming device and from a string of popular video game launches.
  • The consumer tech segment missed management's targets due to a later release than expected of Apple's highly sought-after iPhone X. On the other hand, GameStop's consumables division grew by 27% to stay on pace for a roughly $675 million fiscal year.
  • Gross profit margin fell to 34.7% of sales from 36.1% due to a shifting sales mix. Two of GameStop's most profitable divisions, consumer tech and preowned games, shrank while its least profitable segment, new game hardware, saw the strongest growth.
  • Net profit margin expanded to 3% of sales from 2.6% thanks to a one-time tax benefit.

What management had to say

Executives explained that new video game hardware and software made the difference for sales growth this quarter. "Our results were driven by strong software demand and continued momentum for Nintendo Switch and collectibles," interim CEO Dan Dematteo said.

Detracting from those gains were release delays, which contributed to a 23% drop in earnings from the consumer electronics segment. "Our Technology Brands AT&T Wireless business underperformed our expectations for the third quarter," executives said, due to the "later than expected release of Apple's iPhone X."  

Looking forward

Dematteo and his team believe the supply of that smartphone over the coming weeks will determine whether the tech brands segment achieves their aggressive sales goals for the year. The outlook for the core gaming segment is clearer, though, and it's improving thanks to excitement around new consoles like the Xbox One X and major game releases including Activision Blizzard's Call of Duty: WWII.

As a result of the early demand pop they're seeing heading into retail's biggest season, GameStop raised its 2017 comps outlook and now expects sales to rise in the low-to-mid-single-digit range, compared to the flat result executives predicted in late August. GameStop still believes earnings will range between $3.10 and $3.40 per share, which would leave its $1.52-per-share annual dividend commitment -- and the whopping 9% yield that it delivers -- well covered by profits.

Demitrios Kalogeropoulos owns shares of Activision Blizzard, Apple, and GameStop. The Motley Fool owns shares of and recommends Activision Blizzard and Apple. The Motley Fool owns shares of GameStop and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.