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GameStop boosts profit forecast on console outlook; stock jumps

By Malathi Nayak and Chandni Doulatramani

(Reuters) - GameStop Corp raised its 2013 earnings forecast on Thursday, counting on new consoles from Microsoft Corp and Sony Corp to boost holiday season spending on video games and reverse the sector's decline.

Shares of GameStop, the world largest retailer of video games, closed up 9 percent after quarterly results exceeded Wall Street's expectations.

The U.S. video game industry has shrunk for years as gamers have spent more time with free-to-play software on tablets and smartphones. The industry is counting on the November release of Sony's PlayStation 4 and Microsoft's Xbox One to re-ignite interest in big-label games.

GameStop President Tony Bartel said in an interview on Thursday that the company will turn the corner this holiday season, propelled by new consoles with higher resolutions and processing power, in addition to the use of cloud technology for easier game playing and consumption of media such as television and on-demand video.

In the current quarter, the company also will benefit from several big releases such as "Battlefield 4" from Electronic Arts and Take-Two Interactive Software's "Grand Theft Auto V," Bartel said.

Executives said on a conference call with analysts following the earnings report, that sales from the recent launch of Disney's "Infinity", a children's video game, have exceeded expectations, but they did not provide sales figures.

Bartel said the second quarter was the ninth straight quarter of declining same-store sales, "and we're putting a flag in the ground, and saying that that is the end ... for quite some time, as we see growth from this point forward."

He added: "We really believe we are at the starting line of a very long line of growth quarters."

Same-store sales dropped 10.7 percent in the second quarter, GameStop said.

The company said in its earnings report that it expects third quarter comparable store sales to range from up 10 percent to up 15 percent, after a year ago decline of 8.3 percent, and diluted earnings per share to range from 50 cents a share to 55 cents a share. That compares with a loss per share of $5.08 a year ago.

GameStop said it expects full-year earnings in the range of $3.00 to $3.20 per share, higher than its previous forecast of $2.90 to $3.15. It also gave an improved forecast for same-store sales for fiscal 2013, saying they would range between a drop of 3.5 percent and an increase of 1.5 percent. The previous range was between a drop of 5 percent to growth of 1.5 percent.

Arvind Bhatia, an analyst at Sterne Agee, said Gamestop is gaining market share and that trend will continue through the third and fourth quarters, which include the holiday season.

"They're betting big on this holiday and if anything, they're being conservative with their guidance."

"It's an excellent quarter in light of the slowdown the industry is generally experiencing today," Bhatia said. "Their cost control was particularly impressive."

CONSOLE DEMAND

Total U.S. sales of video game hardware and software fell 19 percent in July, in line with a downward trend seen since last year, according to a report by market research firm NPD.

In an environment where consumers are cautious about spending, GameStop raising its forecast ahead of the release of new consoles was a big positive, said Mike Hickey, an analyst at the Benchmark Co.

"Demand for those next gen consoles is high, and supply is better than expected," Hickey added.

On Tuesday, Sony said it was seeing strong demand for its next-generation consoles, with pre-orders for more than 1 million PlayStation 4 consoles before the product hits the shelves on November 15 in North America.

Microsoft is also expected to launch the third version of its Xbox console in November.

"Looking ahead into Q4, GameStop is receiving higher allocations of new console hardware from Microsoft and Sony," based on high demand, RW Baird analyst Colin Sebastian said in a note.

GameStop's net income fell to $10.5 million, or 9 cents per share, in the second quarter ended August 3, from $21.0 million, or 16 cents per share, a year earlier, but was higher than the average analyst estimate of 4 cents per share.

The Grapevine, Texas-based company said total sales slipped about 11 percent to $1.38 billion in the quarter ended July 31. Analysts were expecting sales of $1.36 billion, according to Thomson Reuters I/B/E/S.

Janney Capital Markets said on Thursday that it raised its price target for GameStop to $65 a share from $50 a share.

GameStop shares closed up 9 percent, to 51.91 on the New York Stock Exchange.

(Reporting by Chandni Doulatramani in Bangalore and Malathi Nayak in San Francisco; Editing by Kirti Pandey, Andrew Hay, David Gregorio and Carol Bishopric)

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