Video-game retailer GameStop (NYSE:GME) definitely isn't playing around; a recent investment in the stock would have yielded serious money for shareholders. GameStop's buyout of an archrival two years ago helped boost the firm's competitive position, but a new generation of gaming consoles is the primary reason why gamers and more casual players are busting down GameStop's doors. Second-quarter earnings, expected tomorrow, should show just how strong demand is. 

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts follow GameStop. Fifteen rate the stock a buy, while one lonely analyst recommends that you simply hold on to it.
  • Revenue. Analysts are projecting $1.2 billion in second-quarter sales, or about 24% above last year's second-quarter amount. 
  • Earnings. Analysts are expecting a bottom-line number of $0.09 per share.

What management says:
Back when GameStop released first-quarter results, management said it expected second-quarter same-store sales growth of 16% to 18% and diluted earnings of $0.07 to $0.08. For the full year, it's calling for total sales growth of 19% to 21% and earnings of $1.39 to $1.42, which doesn't include any costs for retiring debt.

What management does:
Back in 2005, GameStop acquired Electronics Boutique, effectively taking out the only other pure-play video game retailer. Since that time, it has worked to integrate the two firms, and it just recently managed to boost net margins back above 3%. As you can see, the business operates with razor-thin margins, but rapid inventory turns keep returns on invested capital greater than 10%.

Margins

01/06

04/06

07/06

10/06

02/07

05/07

Gross

28.2%

28.7%

29.0%

29.0%

27.7%

27.3%

Operating

6.7%

6.4%

6.1%

6.1%

6.8%

6.9%

Net*

3.3%

2.8%

2.3%

2.4%

3.0%

3.1%

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:
The market for selling video games and hardware from the likes of Nintendo, Sony (NYSE:SNY), and Microsoft (NASDAQ:MSFT) is insanely crowded. Beside the numerous online purchase options, giant-box retailers such as Best Buy (NYSE:BBY), Wal-Mart (NYSE:WMT), and Target (NYSE:TGT) all sell software and hardware at bargain-basement prices to drive customer traffic.

Despite the competition, GameStop's gangbusters growth should continue, because we're still in the early innings of new-console releases of the PlayStation 3, Xbox 360, and Nintendo Wii. Perhaps it's the focus on gaming that brings consumers into GameStop stores, or the ability to buy and sell used games that shoppers find appealing. Also, big-box retailers tend to carry a handful of products that promise high volume, leaving a wider selection to smaller retailers. Whatever the reason, GameStop is doing well, and the company fully expects to play it forward.   

For related Foolishness:

GameStop and Nintendo are Stock Advisor picks, while Microsoft and Wal-Mart are Inside Value picks. Best Buy is recommended in both Stock Advisor and Inside Value. Check out any newsletter free for 30 days.

Fool contributor Ryan Fuhrmann is long shares of Microsoft, but he 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.