By all accounts, 2005 wasn't a great year for gaming-oriented companies. Anticipation of the Xbox 360's advent kept gamers' dollars in their wallets before the system was released. Manufacturing and shipping delays made it tough for them to spend even after they should have been able to. How did all these kinks in the pipeline affect the fortunes of game purveyor and Motley Fool Stock Advisor recommendation GameStop (NYSE:GME)? We'll find out tomorrow, when the company announces its Q4 and full-year 2005 results.

Wall Street Wisdom:

  • General consensus. Eleven analysts follow GameStop. Of these, eight rate the stock a buy and only three a hold. No one says sell.
  • Revenues. Analysts predict that GameStop will report a 134% increase in sales tomorrow, to $1.66 billion.
  • Earnings. Meanwhile, earnings are expected to spike 54%. The consensus calls for $1.08 per share in profits.

Margin watch:
With the exception of last quarter, GameStop's rolling gross margin has been trending downwards for the past 18 months, as have its operating and net margins. The costs of its absorption of Electronics Boutique portend more of the same in coming quarters, with selling, general, and administrative costs rising 49% in the last quarter, against just a 28% rise in revenue, and a one-time charge of $19 million taken for restructuring costs in Q3 2005.

Margins %

7/04

10/04

1/05

4/05

7/05

10/05

Gross

28.1

27.9

27.6

27.3

27.4

28.6

Op.

6.5

6.3

5.5

5.4

5.3

5.2

Net

3.9

3.7

3.3

3.3

3.2

2.4
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
The slide in GameStop's margins is troubling, but not dispositive. The company sits at the crux of two trends right now. First, the introduction of a series of new gaming platforms: Microsoft's (NASDAQ:MSFT) Xbox 360, released last November; Sony's (NYSE:SNE) Playstation 3, which at last report was due out in November 2006; and Nintendo's Revolution, which should be out in a few months. Broadly speaking, the more new platforms come out, the more game sales GameStop will likely be able to capture.

But don't forget the other trend here: the company's ability to capture additional revenues from the used-game market, which it's helping to create. With new games costing as much as $60 a pop, consumers have a powerful incentive to bargain-shop for used games at GameStop. One or both of these trends have the potential to turn GameStop's margins around in a hurry.

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Microsoft is a Motley Fool Inside Value pick.

Fool contributor Rich Smith does not own shares of any company named above.