2nd UPDATE: GameStop 2Q Profit Slumps On Same-Store Sales Slip

GameStop Corp.'s (GME) fiscal second-quarter earnings slumped 23% as the videogame retailer suffered a stiff decline in same-store sales and lighter demand for products such as game consoles.

Investors responded, pushing shares down 4.7% to $19.49 in early-morning trades as top-line results came in lighter than expected and the company cut its same-store sales-growth target for the year to 1% to 3% from 3.5% to 5.5%.

GameStop Chief Financial Officer Robert Lloyd said that was due in part to poor sales of videogame consoles like Microsoft Corp.'s (MSFT) Xbox 360, Sony Corp.'s (SNE, 6758.TO) PlayStation 3 and Nintendo Co.'s (NTDOY, 7974.OK) Wii, as well as a weak slate of games for the quarter.

"The hardware we sell can have a dramatic impact on our top line," Lloyd said in an interview with Dow Jones Newswires.

That should change with the growth of the company's Internet initiatives, such as its gaming website Kongregate, and Impulse, a service that allows gamers to purchase and download titles directly over the Internet. Those services are expected to help the company's sales continue to grow at a steady rate over the next three to four years.

GameStop's report comes as the videogame industry continues to struggle during an extended period of economic uncertainty. Some gamers have shifted their attention to cheaper alternatives, such as games on social networks such as Facebook Inc., and application bazaars for smartphones such as Apple Inc.'s (AAPL) iPhone.

At the same time, game distribution has shifted to the Internet from brick-and-mortar stores, putting more pressure on retailers. Last week, NPD Group reported July sales of new videogames, consoles and accessories in U.S. stores fell to their lowest levels since 2006.

GameStop executives said the company's growing digital distribution business contributed to roughly a third of the store chain's gross margin growth, which rose to a five-year high of 31.2% for the quarter, above 28.7% last year. Rising used game sales also contributed.

Sales of redemption codes for extra game maps and levels have also grown dramatically, GameStop said, and have begun contributing to pre-sales of games.

"There's a lot of activity around our digital business," Chief Executive Paul Raines said, adding that those efforts are contributing to the company's profits.

For the quarter ended July 30, GameStop reported a profit of $30.9 million, or 22 cents a share, down from $40.3 million, or 26 cents a share, a year earlier. In May, the company forecast earnings of 20 cents to 23 cents a share, including an impact of roughly four cents due to planned investments in strategic initiatives.

Sales slipped 3.1% to $1.74 billion, below the $1.81 billion expected by analysts. Same-store sales slid 9.1% due to lower hardware sales and a lighter software title slate than the prior year quarter.

Sales of used video-game products rose 12% to $633.1 million. Sales of new video-game software declined 9.6%, while sales of new video-game hardware slid 12%.

Looking to the current quarter, GameStop forecast earnings of 38 cents to 41 cents a share and affirmed its full-year earnings guidance. Analysts currently expect earnings of 38 cents a share.

GameStop executives said customer interest in upcoming games such as Activision Blizzard Inc.'s (ATVI) "Call of Duty: Modern Warfare 3" and Electronic Arts Inc.'s (ERTS) "Battlefield 3," has been high, which should translate to strong sales for the holidays.

Chief Executive Raines also said sales of Nintendo's 3DS handheld have begun to rise in response to a price cut after poor sales following its launch in March.

"Since the price cut, we've seen a tremendous uptick in 3DS sales," Raines said. "Don't count Nintendo out."

-By Ian Sherr, Dow Jones Newswires; 415-439-6455;

ian.sherr@dowjones.com

--Mia Lamar contributed to this article.

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