GameStop Corp. Has a Lot to Prove on Aug. 27

The stakes are high asGameStopgears up to post quarterly results a week from today. The chain of more than 6,6 00 stores dedicated to console and PC gaming is rolling, hitting yet another all-time high last week.

Companies hitting fresh highs heading into a quarterly report usually have momentum on their side, but that's not the case if we eye GameStop's fundamentals.

Analysts aren't holding out for much in next Thursday's report. They see net sales of $1.73 billion, flat with the prior year's quarterly showing. They do see earnings climbing from $0.22 a share a year earlier to $0.24 a share this time around, but hold on to those growth assumptions.

GameStop's been a voracious eater of its own stock. It has gone from a peak of 164.7 million shares outstanding during the third quarter of fiscal 2009 to just 108.4 million as of its latest quarter, according toS&PCapitalIQdata.

There's nothing wrong with returning money to your stakeholders through aggressive share buybacks. GameStop's lean model results in a ton of cash flow that it can use to lower its outstanding share count. However, it does blur a company's bottom-line performance if we limit ourselves to per-share results.

GameStop's share count over the previous four quarters has declined from 115.9 million to 108.4 million. It's why net income rose just 9% in the prior quarter relative to a year earlier, even though net income per share soared 19%. If GameStop does hit Wall Street's target of $0.24 a share, don't be surprised if net income is actually flat, with share buybacks creating the illusion of profit growth.

It can get worse. GameStop would routinely lean on buybacks to inflate earnings per share above analyst targets in its prime, but it has actually come up short in two of the past three quarters. GameStop may be hitting new highs this month, but it's no world beater. Either way, we're looking at what Wall Street pros see as a generally flat performance.

This doesn't mean that analysts aren't excited. Piper Jaffray's Michael Olsonraised his price target on the retailer from $52 to $56 earlier this month. New console generations tend to hit their stride after a couple of years on the market, and that's just where he sees the PS4 and Xbox One today.

The problem -- and the reason why it's hard to get overly excited about GameStop's chances to cash in on the renaissance the way it has when other console generations have peaked -- is that the push for digital delivery makes it hard for GameStop to stand out as a seller of game discs. Digital delivery also takes its toll on trade-ins, historically the chain's highest-margin business.

GameStop is not going away anytime soon. It's rich in cash, and paying low strip-mall rent for its small-box stores will continue to lock in its profitability for some time. However, it's hard to deny that there's a disconnect between the fundamentals that have stalled and the stock price that has not. It better be a pretty good report next week or else GameStop will be getting a bargain on the next batch of shares it swallows down.

The article GameStop Corp. Has a Lot to Prove on Aug. 27 originally appeared on

Rick Munarriz has no position in any stocks mentioned, and neither does The Motley Fool. 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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