This is when the game gets hard.

Shares of GameStop (NYSE:GME) opened 12% lower this morning, after the video-game retailer spooked investors with less-than-stellar guidance for the current quarter. If you can get past that, the rest of the year should get better, but Mr. Market doesn't have any cheat codes to get that far.

The company's first-quarter results were in line with expectations. Earnings rose 13%, to $0.42 a share, or $0.43 a share before costs related to retiring $50 million of the company's senior notes. Sales were up 9% to $1.98 billion, as expansion helped offset a 1.5% drop in comps. Analysts were targeting $0.42 a share in profits on $2 billion in sales, so they pretty much nailed GameStop's results for a change.

The eye-squinting moment comes with the company's second-quarter outlook. Comps are projected to fall a thunderous 8% to 11%. Earnings are projected at $0.28 to $0.33 a share, short of both the $0.34 a share GameStop earned a year ago and the $0.40 a share that Wall Street was expecting.

GameStop has bucked the retail malaise until now, delivering healthy comps, with the sale and resale of video games thriving in this crummy climate. It's the resales that have really been rocking, with sales of used games and gear growing 31.9% in the quarter and offsetting a 2.8% decrease in new software sales.

Unfortunately for GameStop, its success in buying back used wares and reselling them at juicier profit margins than new games is no longer a monopoly. (NASDAQ:AMZN), Toys "R" Us, Best Buy (NYSE:BBY), and third-party kiosks in some Wal-Mart (NYSE:WMT) locations are now angling for that lucrative market, with new initiatives since March.

GameStop isn't worried, but it should be. It is clinging to a strong recovery in the second half of the year. Its management sees flat to slightly positive same-store sales for all of fiscal 2009, but that's hard to swallow after comps fell during the first quarter and might fall even more during the current quarter. GameStop is sticking to its full-year guidance, calling for 18% to 22% in bottom-line growth. The problem there is that earnings growth for the first half of the year will come in flat to up just 4%, according to GameStop's own metrics.

Sure, GameStop was coming up against some fierce same-store-sales comparisons with the first half of fiscal 2008 because of monster hits such as Super Smash Bros. Brawl and Take-Two Interactive's (NASDAQ:TTWO) Grand Theft Auto IV. And the second half of the year offers a favorable pipeline, but I'm not convinced.

  • Can console makers offer deeper price cuts to reinvigorate interest in their systems?
  • If it has to offer trade-in customers more for their games and/or charge less for its used inventory, won't the emergence of resale competition squeeze margins at GameStop?
  • At what point will the evolution toward digital delivery of games cut out the middlemen specialty retailers?

If you buy GameStop's rosy second-half thesis, you can buy GameStop today at a huge bargain. It is trading at a single-digit earnings multiple, based on the $2.83 a share to $2.93 a share it expects to earn this year. However, I've been concerned about the chain's prospects since last year, when things were still going well. My skepticism isn't about to fade now that things are coming undone, even if the stock is trading substantially lower.

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GameStop,, and Best Buy are Motley Fool Stock Advisor picks. Take-Two Interactive is a Rule Breakers selection. Best Buy and Wal-Mart are Inside Value selections, and the Fool owns shares of Best Buy. Try any of our Foolish newsletters today, 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. The Fool has a disclosure policy.