UPDATE: Retailer Game 1st Half Profit -60%, Upgrades Gross Margin Guidance

U.K. computer and videogames retailer Game Group PLC (GMG.LN) Wednesday posted a 60% drop in first-half profit following a lackluster game line-up, but increased its gross margin guidance for the year.

Chairman Peter Lewis said the retail environment continues to be tough but is hopeful the group, which has 1,368 stores in the U.K., Ireland, France, Iberia, Scandinavia, Australia and the Czech Republic, will do well over the key Christmas selling period.

The schedule for new game releases such as 'Call of Duty Modern', 'Warfare 2', 'Halo 3 ODST' and 'Assassins Creed 2' is "very strong" for the second half of this year and into 2010, according to Game.

Profit before tax and non-recurring costs - the key figure tracked by U.K. analysts - fell to GBP14.5 million for the six months to July 31 from a restated GBP35.8 million a year earlier as sales fell sharply. The result is within Game's guidance in July that interim profit would be between GBP13 million and GBP16 million.

Last year, Game benefited from strong sales of games including 'Wii Fit', 'Mario Kart' and 'Grand Theft Auto IV'.

In the first half of fiscal 2010, sales from stores open at least a year were down 16%.

For the 33 weeks ended Sept. 19, same-store sales were down 17% from a year ago, which reflects a continuation of slower console sales and few major game releases in the first-half, Game said.

Game booked an increase in gross margin of 190 basis points to 28.9% in the first half from a year earlier, and forecast growth of 170-220 basis points for the year from its previous guidance of 150-175 basis points. The gains are largely due to the strong performance of its pre-owned games offer, which allows customers to bring in their old games in exchange for some money towards a new game. Preowned margins were up 290 basis points to 41%.

As a sign of confidence about the new games to be released in the second half, Game increased its interim dividend to 1.88 pence a share, up from 1.79 pence a year earlier.

Finance Director Ben White said the company is "comfortable" with the wide range of analyst profit forecasts for fiscal 2010.

The range for annual profit before tax and non-recurring costs is between GBP87 million and GBP125 million for the 12 months to the end of January, compared with GBP126.2 million a year earlier.

Trading in the second half, particularly in the run up to Christmas, is crucial for the retailer.

Some analysts, including Andrew Leonard at Noble are concerned that Game will struggle to hit the top end of forecasts.

At 0833 GMT, Game shares were down 6 pence, or 3.3%, at 167 pence in a slightly higher London market. The shares have fallen 22% over the past 12 months on falling sales and earnings as well as concerns about increasing competition.

First-half net profit dropped 66% to GBP7.7 million from GBP22.9 million following a 7% fall in revenue to GBP690.8 million.

Company Web site: www.gamegroup.co.uk

-By Lilly Vitorovich, Dow Jones Newswires; 44-0-207 842 9290; lilly.vitorovich@dowjones.com

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