GameStop Corp, the world's largest retailer of video game products, forecast stronger 2011 profits that signaled a rebound in the traditional video game industry.

Shares of GameStop rose up more than 3 percent on Thursday after it reported a higher-than-expected profit and issued rosy profit forecasts for the current quarter and full year 2011.

The company said software video game sales would be flat to 3 percent higher in 2011, lifting sector shares such as Electronic Arts.

That positive commentary from GameStop helped publishers today, said Wedbush Securities analyst Michael Pachter.

GameStop executives cited strong demand for Nintendo Co Ltd's new handheld games device, the 3DS, even before its launch this weekend.

Reservations for the product have been so strong that the retailer was running out of supplies, GameStop President Tony Bartel said. We've literally had to go back to Nintendo and get more product.

The 3DS, which goes on sale in the United States on March 27, could help boost sales in the $60.4 billion global video game industry, which suffers from falling demand for hardware and physical games, analysts said.

GameStop forecast earnings per share of 53 cents to 55 cents in the first quarter of 2011, which was above the 51 cents average that analysts had been expecting.

The outlook is stronger than the Street's consensus and that's what driving up shares, said Sterne Agee analyst Arvind Bhatia.

GameStop shares rose 3.2 percent to $21.78 on the New York Stock Exchange late Thursday afternoon.

DIGITAL STORY?

The retailer, which has more than 6,000 stores worldwide, also revealed for the first time to investors its revenue from selling digital content -- reporting a 60 percent rise to $290 million last year. One way this revenue is gained is from customers buying downloadable content in its stores.

Digital sales should keep growing at the same pace this year, Chief Financial Officer Robert Lloyd said in an interview.

The numbers addressed concerns on Wall Street that GameStop could face the same challenges as video stores, which stopped making money as consumers increasingly bought content online and not in brick and mortar stores.

This is a positive sign and if GameStop can get their share of the digital market, they can be relevant, Sterne Agee analyst Arvind Bhatia said.

GameStop will invest $100 million in digital initiatives this year.

Pachter of Wedbush Securities said the company was overemphasizing the importance of digital sales: It contributes but it's not going to be their main driver.

GameStop, which generates the bulk of its revenue during the holiday shopping season, said net income rose to $237.8 million, or $1.56 per share, from $215.9 million, or $1.29 cents per share, a year earlier. This was higher than the $1.55 per share forecast of analysts polled by Thomson-Reuters I/B/E/S.

Sales rose 5 percent to $3.69 billion in the fourth quarter ended January 29. Analysts, on average, were expecting sales of $3.7 billion, according to Thomson-Reuters I/B/E/S.

(Reporting by Liana B. Baker; Editing by Derek Caney, Maureen Bavdek and Richard Chang)

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