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GameStop's disappointing outlook sinks shares

NEW YORK - GameStop Corp (GME.N: Quote, Profile, Research), the largest U.S. video game retailer, gave a disappointing profit outlook for the holiday season that overshadowed its strong third-quarter results, sending its stock down sharply on Tuesday.

GameStop said its profit in the fourth quarter would be 95 cents to 97 cents a share. That's higher than the 81 cents it earned in the same period a year ago, but short of analysts' expectation of $1.01, according to Reuters Estimates.

Shares of the company fell to as low as $47.61 before recovering to trade at $50.63, still down 4.45 percent. The stock is still up about 90 percent so far this year as the company secured its position as the last remaining major specialty chain in the $30 billion video game industry.

Stern Agee analyst Arvind Bhatia said GameStop could just be setting a low target, rather than seeing any serious weakness in holiday sales. Its per-share profit had beat Wall Street views by a wide margin of 8 cents in the third quarter, and by 5 cents and 3 cents in the two previous periods.

"Given the recent history of beating guidance handily, we would have to believe the company is being conservative," he said in a client note, in which he reiterated his buy rating.

For the third quarter, GameStop said net income more than tripled to $52 million, or 31 cents a share, from $13.6 million, or 9 cents a share, a year earlier. Wall Street was looking for profit of 23 cents a share, powered by sales of games such as Halo 3 and Madden NFL '08, and Guitar Hero II,

Revenue in the period rose to $1.61 billion from $1.01 billion. New video game software sales rose 59 percent in the quarter, while new hardware sales jumped 149 percent.

Gross margin was 26 percent, short of Bhatia's estimate of 30.5 percent and the year-ago period's 31.2 percent. He attributed the shortfall to higher sales of hardware and new video game consoles -- such as Nintendo Co Ltd's (7974.OS: Quote, Profile, Research) popular Wii and the Sony Corp's (6758.T: Quote, Profile, Research) PlayStation 3 -- which usually lead to strong software sales.

GameStop, whose rivals include mainstream retailers like Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research) and Best Buy Co Inc (BBY.N: Quote, Profile, Research), said it opened 181 new stores in the quarter and closed just 12, and now operates over 5,000 globally.

In addition, it expected to reach the upper end of its goal of opening 500 to 550 stores this year.

The Grapevine, Texas-based retailer sees comparable store sales in the fourth quarter up about 7 percent to 9 percent.

Source: Reuters

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Article publication date: 20 Pluviôse Ray80 (21 Nov 2007)

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