GameStop Is Playing Tricks on You

Things at GameStop (NYS: GME) aren't always as they seem.

Let's take this morning's earnings report, for example.

  • Earnings declined, though earnings per share clocked in higher.

  • Same-store sales were negative, though net sales climbed by a still softer than expected 2.5%.

  • GameStop blames "lower than expected sales of new software" for the soft showing, though new video game software actually rose by 4.8%, better than GameStop's top line and even ahead of the 3.1% uptick in its higher margin pre-owned resale business.

  • The very first bullet point in GameStop's release points to a 59% surge in digital, yet it's obviously not moving the needle if new hardware, new software, and used products all posted marginally positive results and net sales only grew by 2.5%.

GameStop's guidance may be the biggest deception of all. The video game retailer is reiterating its projection of $2.82 a share to $2.92 a share in earnings for the fiscal year ending in January, though it's talking down everything else. It now sees flat to slightly negative comps, with revenue growth checking in between 2% and 3%. Just three months ago, GameStop's outlook was for a 1%-3% uptick in same-store sales and 4.5%-6.5% in top-line growth. Three months before that, it was the same profit guidance, yet GameStop was looking for 3.5%-5.5% growth in comps and 6.4%-10.2% growth in revenue.

Holy, Dorian Gray! That bottom line never ages.

A good magician never reveals his tricks, but any astute investor knows exactly what GameStop is doing. The company has been aggressively buying back its shares, thereby reducing the number of shares outstanding that its deteriorating earnings get divided into. It's the only reason why earnings would decline, but earnings per share -- and its guidance -- hold up to market expectations. The company has swallowed millions of outstanding shares over the past year, and earlier this week committed to a new $500 million buyback.

Don't get me wrong. Share repurchases are a good thing. Shareholders just need to realize that they are buying into a company that is fundamentally crumbling with every passing quarter.

GameStop is certainly trying. Its 14.5 million member strong PowerUp Rewards program and popular trade-in program make it easy for young gamers to accept paying retail for games that (NAS: AMZN) and other online retailers are typically selling for less.

It recently began selling Android tablets in some of its stores -- and acceptingApple (NAS: AAPL) gear as trade ins.

Technically this quarter is better than GameStop's previous quarter, where comps fell by a staggering 9.1% decline. However, what does it say when Activision Blizzard (NAS: ATVI) scores a new initial sales record last week with Call of Duty: Modern Warfare 3 and even the typically thrifty THQ (NAS: THQI) is bombarding television with commercials for Saints Row: The Third, yet GameStop continues to hose down its sales outlook?

That ageless bottom line sure does look pretty, but somewhere in GameStop HQ hangs a really ugly painting of its true self.

Add GameStop to My Watchlist to see how this story plays out.

At the time thisarticle was published The Motley Fool owns shares of Activision Blizzard, GameStop, and Apple. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Apple,, and Activision Blizzard. Motley Fool newsletter services have recommended writing covered calls in GameStop. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a synthetic long position in Activision Blizzard. 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.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.