GameStop Corp. Earnings: New Business Lines Power 41% Profit Jump

In a typically slow period for video-game sales, GameStop still managed to deliver strong business results. The retailer today posted second-quarter sales and profit figures that both beat Wall Street's -- and management's -- expectations. GameStop executives also raised their full-year outlook on both counts.

Second-quarter headline results. "Expected" is the average forecast of the 17 Wall Street analysts who cover the stock. Sources: Yahoo! Finance and GameStop filings.

Improving on a 22% gain Sales at existing locations rose by 8%, which was far above management's target of a 2% increase. That marks the second time this year that comps have outpaced GameStop's expectations.

A surging collectibles business helped GameStop boost sales this quarter. Source: GameStop investor presentation.

What makes the 8% sales gain so impressive is that it came on top of a 22% comp improvement in a prior-year period that included surging customer traffic from the next-generation console launches. There were also two blockbuster video game releases in 2014's second quarter, Mario Kart 8 and Watch Dogs, with no comparably large releases this year.

Still, GameStop found a way to keep sales ticking higher. The main drivers of this quarter's surprise sales improvement were (1) the consumer electronics and cell phone service businesses, (2) a spike in sales of gaming collectibles, and (3) higher video game accessory sales. Big gains in those three segments outweighed slight losses in GameStop's new hardware, new software, and digital content divisions. Meanwhile, the profitable used game business held steady at 32% of sales.

Higher profits and outlook GameStop booked a 41% profit surge and beat management's earnings guidance by 25%. It helped that the company sold fewer next-gen consoles, with their tiny profit margins, and more consumer electronics and used video games, which are much more profitable. That mix helped overall gross margin rise to 33% of sales from 32% a year ago. "Results for the second quarter again exceeded our expectations, reflecting the mix of sales in our market-leading video game business and the continuing success of our diversified segments," said CEO Paul Raines.

Raines and his executive team expect the strong first-half business momentum to carry through to the rest of 2015. Major upcoming game releases include Electronic Arts'Star Wars: Battlefront and Activision Blizzard's Call of Duty: Black Ops III. Plus, the toys-to-life category should see its biggest year yet, with newcomer Lego joining established giants Activision and Disney. Finally, GameStop expects to see more growth in its collectibles retailing business, especially as the Star Wars mania heats up around the December movie launch.

Management now sees comp sales rising by between 2% and 7% for the full year, up from the 1% to 6% range issued last quarter. The earnings target also got a boost, ticking up to as much as $3.86 per share from the prior $3.83 per share forecast. However, the company is again calling for a relative slowdown in the upcoming quarter: Comps growth for Q3 should be between 1% and 4%.

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Demitrios Kalogeropoulos owns shares of Activision Blizzard and Walt Disney. The Motley Fool owns and recommends Activision Blizzard and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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