Three Reasons Why GameStop’s Sucky Second Quarter Doesn’t Matter

GameStop reported today that its net income fell 23 percent in the second quarter and that revenue from stores that have been open for at least a year tumbled nine percent.

The shaky results led the retailer’s shares to drop nearly seven percent in morning trading, but by the end of the day the stock had completely recovered, closing at $21.43, up 97 cents a share.

Why?

GameStop president Tony Bartel said the quarter was expected to be weak, due to poor hardware sales and a lack of major game releases. But he noted that there are several reasons to be excited about the second half of the year.

“As anticipated and forecasted, we knew the market was going to be softer than most anticipated, and sales were going to be down,” he said. “And at the same time, we are investing four cents of every quarter for strategic initiatives.”

Still, the company hit its guidance and exceeded most analysts’ expectations by earning $30.9 million, or 22 cents a share, on revenue of $1.74 billion. On average, analysts were estimating earnings of 21 cents a share on revenue of $1.81 billion, according to FactSet.

Here are three reasons for Bartel’s optimism: 

Price drops: Game hardware fell 16 percent in the second quarter, according to NPD Group, led by weak sales of Nintendo’s struggling 3DS and Sony’s PlayStation 3. Since then, both Sony and Nintendo have cut the price of those devices, which has already helped accelerate sales.

Presales: Bartel said there was a 30 percent reduction in titles being released in the second quarter compared to last year, but the pipeline of titles is very strong for the rest of the year. So far, GameStop has, over the next two quarters, more titles with a million-plus reservations than it has ever had. No word on which titles those are, but Bartel was willing to list some of the games he is “excited” about: Gears of War 3, Battlefield 3, Uncharted 3, Batman: Arkham City, Elder Scrolls and Assassin’s Creed, among others.

Digital revenues: GameStop is still on track to hit $450 million in digital revenues this year, which represents a 50 percent bump over 2010. In the second quarter it reported digital sales growth of 69 percent, and some of its latest digital initiatives haven’t even launched yet. Bartel said a survey found that 50 percent of customers who bought downloadable content at a GameStop store were buying it for the first time, and that they often paid in cash or with gift cards.