By Mark Potter

LONDON (Reuters) - British computer games retailer Game Group smashed first-half profit forecasts, boosted by new releases like Grand Theft Auto IV and Wii Fit, but its shares slumped on concern that demand has peaked.


Game shares, which had outperformed the UK general retailers index by about 85 percent this year, fell as much as 14 percent to a three month low of 225 pence on Thursday.

"A stunning trading update," said Shore Capital analyst John Stevenson, raising his full-year profit forecast by almost a quarter to 139.5 million pounds ($277 million).

"(But) unless we see new hardware launches into the UK market over the next 2 years, which appears unlikely at present, then we believe profits will peak this year and fall consistently over the following three years," he said, keeping a "sell" rating on the stock.

Game, which sells games, consoles and accessories from more than 1,200 shops in Britain and overseas, said profit before tax and one-off items would be at least 33 million pounds in the six months to July 31, beating analysts' forecasts of between about 15 million and 25 million pounds.

Sales at shops open at least a year were up 24.8 percent in the 22 weeks to June 28, boosted by what Chief Executive Lisa Morgan called an "unprecedented number of triple A software launches -- all in a period that would normally be a quiet time in our industry."

These releases included Mario Kart and Metal Gear Solid 4.

Morgan said the games market was "absolutely not" at a peak.

"The point to make is that we haven't seen any new console releases in the first half and we were up against the launch of Playstation 3 last year," she told reporters.

Morgan said that, unlike previous games cycles which have been driven mainly by one major console -- Sony's Playstation -- demand was now fuelled by a number of consoles, including Nintendo's Wii and Microsoft's Xbox, and that new games were appealing to bigger audiences.

"What you're seeing now is that as the installed base (of consoles) grows there's a fantastic momentum for a whole host of software titles," she said, tipping sequels for Fifa and Need for Speed games as big sellers in the run up to Christmas.

COMPETITION

Pali International analyst Nick Bubb agreed the current games cycle was different from the ones before.

"Given the much broader and deeper range of formats and consumers involved...the games market boom is likely to continue," he wrote in a research note.

"As and when things do slow down in the U.S. market, the U.S. giant GameStop is bound to look overseas for more growth and will bid for the UK market leader Game," he added.

Music and books retailer HMV said earlier this week it planned to launch a second-hand games offering to compete with a similar one run by Game and that it was taking market share in the games market.

Home Retail has also said its Argos stores are enjoying strong sales of games, sparking concerns that Game might face increased competition as rivals rush to expand in one of the few fast-growing segments of a tough retail market.

Morgan said competition in the UK was vibrant, but stable.

"We continue to have concerns about the issues facing all entertainment businesses: that of digital distribution and the potential for manufacturers to retail direct to consumers," Landsbanki analyst Mark Photiades said in a research note.

Game said like-for-like sales rose 28.1 percent in the 22 weeks to June 28 in the UK and Ireland and were up 16.9 percent in its international operations.

International sales were held back by insufficient supplies of Nintendo products, particularly in Spain. But Morgan said that situation had improved.

Game said it planned up to 60 new stores for the Christmas trading period, mostly in international markets such as Spain, France and Australia.

At 12:15 p.m. GMT (8:15 a.m. EST), Game shares were down 12.5 percent at 229.5 pence, valuing the firm at about 795 million pounds.

(Editing by Paul Bolding/Elaine Hardcastle)
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