Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Activision Blizzard, Inc. (ATVI), The Walt Disney Company (DIS): Can GameStop Corp. (GME) Keep Surging This Week?

GameStop Corp. (NYSE:GME) will announce earnings results for the second quarter on Thursday, Aug. 22. And with the stock sitting near a five-year high, a lot is riding on this week’s report. Here’s what you need to watch for in the release.

Weak expectations

GameStop Corp. (NYSE:GME)You wouldn’t guess it by looking at its recent stock returns, but Wall Street has very low expectations for the video-game retailer. Analysts are calling for earnings of just $0.04 a share, versus the $0.16 the company booked a year ago. Revenue is expected to shrink by 13%, to $1.35 billion.

GameStop Corp. (NYSE:GME) predicted back in May that comparable sales would fall hard this quarter — by as much as 16% — as it continues to plod through the late stages of the console cycle. That plunge would keep up a depressing streak that goes back for eight quarters.

Quarter Comparable Sales
Q2 2011 (9.1%)
Q3 2011 (0.6%)
Q4 2011 (3.6%)
Q1 2012 (12.5%)
Q2 2012 (9.3%)
Q3 2012 (8.9%)
Q4 2012 (4.6%)
Q1 2013 (6.7%)

Source: GameStop financial filings.

Still, GameStop Corp. (NYSE:GME) has a history of beating low earnings expectations. One simple reason is the retailer has been plowing excess cash into share repurchases. Last quarter it bought 1 million of its own shares, driving its outstanding share count down to 118 million, well below the 134 million it reported at the start of 2012. It gets easier to beat per-share earnings expectations when you’re busy shrinking your total share count.

New business

But GameStop Corp. (NYSE:GME)’s story isn’t just about managed decline. The company is making progress in a couple of new business areas even while its traditional business shrinks. Its mobile revenue grew by almost 300% last quarter, as GameStop expanded a program to accept trade-ins for smartphones and tablets and resell those devices as pre-owned merchandise. Digital sales are up, too, by 47% last quarter. The contribution from these two businesses helped GameStop actually increase profitability this year. Gross profit margin grew by one percentage point to 31% last quarter.

New games

Finally, a few major new game releases could power a boost in GameStop Corp. (NYSE:GME)’s outlook for the coming quarter. The Walt Disney Company (NYSE:DIS) just launched its Infinity title, which it plans to promote heavily this fall. Infinity is going up against Activision Blizzard, Inc. (NASDAQ:ATVI) and the Skylanders franchise that has been worth $1.5 billion in sales so far. Sure, Activision Blizzard, Inc. (NASDAQ:ATVI) created this gaming genre and has an almost two-year head start here. But The Walt Disney Company (NYSE:DIS)’s rival product has attracted strong initial reviews and boasts a deep catalog of characters that are already popular with children. Still, no matter who wins this battle, GameStop should see a sales boost from the fight.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.