Leading video game retailer GameStop (NYSE:GME) is up for a first-quarter earnings release tomorrow morning. The stock has nearly doubled in the past year, but could be primed for even better days ahead as the industry is riding the wave of a new generation of hardware platforms and related video games. Gamers are clearly giddy; investors will soon find out if they can share in the excitement.

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts currently follow GameStop. Eleven are bullish and four are on the fence with hold ratings.
  • Revenues. On average, analysts expect $1.25 billion in first-quarter sales, for year-over-year growth of 20%.
  • Earnings. Analysts project earnings are $0.16 per share, or double last year's first-quarter earnings.

What management says:
Back in March, management said it expected first-quarter diluted earnings of $0.15-$0.16 and same-store sales of 12%-14%, as Sony's (NYSE:SNE) PlayStation 3 is introduced to Europe and Australia. It also projects "continued strong demand" for Microsoft's (NASDAQ:MSFT) Xbox 360.

For the full year, GameStop expects to open 500-550 new stores, achieve 19%-21% sales growth, report store comps of 14%-16%, and end up with diluted earnings of $1.37-$1.40. It is also calling for "at least" 25% annual earnings growth in 2008 and 2009.

What management does:
GameStop is posting impressive sales and earnings gains that are only expected to accelerate over the next couple of years. Profit margins are inherently low in retailing and look to be especially low in GameStop's case, but it has been able to keep inventory turnover rapid and generate decent levels of return on invested capital, which came in at 10.5% last year. A 2005 buyout of EB Games also helped enhance its competitive position by taking out an archrival.

Margins

2001

2002

2003

2004

2005

2006

Gross

28.6%

28.2%

28.7%

29.0%

29.0%

27.7%

Operating

5.0%

6.7%

6.4%

6.1%

6.1%

6.8%

Net

2.4%

3.3%

2.8%

2.3%

2.4%

3.0%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
GameStop is firing on all cylinders right now, as the video game industry is in the early stages of releasing its latest generation of gaming consoles. Management recently stated that the current gaming hardware and software mix is as diverse as it's ever seen, with console devices from Microsoft, Sony, Nintendo, and games from Electronic Arts (NASDAQ:ERTS), Take-Two Interactive (NASDAQ:TTWO), and Activision (NASDAQ:ATVI), just to name a few.

Gaming cycles can last five years or more, and GameStop is one of the better ways to spread your bets across all device and game product offerings. I recently voiced a concern over the company's long-term potential, given the way the media distribution is migrating to cyberspace, but GameStop has at least a couple of years to operate with the wind at its back before gamers make a play for the Internet.

Shop the aisles for more related Foolishness:

Microsoft is a recommendation of Motley Fool Inside Value. Discover why with a free, no-obligation trial. Activision, Electronic Arts, and GameStop are  Motley Fool Stock Advisor recommendations.

Fool contributor Ryan Fuhrmann is long shares of Microsoft, but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.