If you saw this one coming, you probably got it right for the wrong reasons. GameStop
Earnings clocked in at $0.04 a share. Analysts were expecting the video game retailer to produce a profit of $0.06 per share. That wasn't the problem, though. Back out costs related to the company's acquisition of rival Electronics Boutique, and the company did earn $0.06 a share as expected. The problem here lies in the top line -- where GameStop came in a bit weak -- and in GameStop guiding Wall Street lower for the current quarter.
Everyone knows that we're in a lull in the video game console industry. Gamers are waiting for the new PS3 and Wii to roll out in a few months. However, GameStop's model isn't really feeling the pain on that front. The company is making a killing pushing used games and consoles as diehard gamers sell their soon-to-be-obsolete systems to GameStop for a pittance, who in turn sell them to thrifty enthusiasts at a generous markup.
That's a big part of GameStop's business these days. Nearly a third of GameStop's sales this past quarter came from second-hand merchandise. That's twice as much as the company rang up in hardware sales. It gets even better once you factor in the pricing flexibility that GameStop has on used gear, as it accounted for half of the company's gross profits.
So, if you were writing off GameStop based on the sector's calm between platform generations, you couldn't be more wrong. Comps continue to grow at what is now a chain of 4,592 stores. Software giants like Electronic Arts
This also isn't a complete standstill in the industry, as the portable market is smoking. Nintendo recently rolled out a sleeker version of its popular DS handheld system, and Sony
Today's downturn may spell opportunity for buyers of thisMotley Fool Stock Advisor newsletter recommendation. The company still expects to close out the fiscal year producing profits per share between $1.94 to $2.04 (estimates that are a penny higher than last quarter and that include a $0.17 a share hit for stock-based compensation). Comps should rise at a healthy 7% to 9% clip.
Paying a little more than 20 times earnings for a specialty retailer may not seem cheap, especially for a chain that has matured to canvas thousands of shopping malls and strip center locations. However, GameStop's fat margins in hand-me-down wares and selling prices that will escalate with the next-generation systems grant the company the luxury to grow faster than most of its suburban mall neighbors. That's one way to win the investing game -- making sure that you get it right next time around for all the right reasons.
GameStop, Electronic Arts, and Activision have been recommendations in the Motley Fool Stock Advisor newsletter service. For more superstar picks from Tom and David Gardner, try a subscription on for size,free for 30 days.
Longtime Fool contributor Rick Munarriz loves playing video games, but he doesn't own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. T he Fool has a disclosure policy.