GameStop Is Blowin' Up

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Entertainment software retailer GameStop (NYSE: GME) is planning aggressive expansion for the coming 12 months. This is perhaps understandable following a fiscal 2004 (ended Jan. 31) that saw the company grow net profits by nearly 22% to $63.5 million.

But the growth plans of competitor Electronics Boutique (Nasdaq: ELBO) are similarly ambitious, and investors following these companies must watch closely for signs of overexpansion in a competitive market environment.

GameStop, majority owned by Barnes & Noble (NYSE: BKS), opened 300 stores in fiscal 2004 to close the year with more than 1,500. In its earnings release yesterday, the company reiterated plans to add as many as 330 more stores in the U.S. and Europe through the end of fiscal 2005. Electronics Boutique, meanwhile, also ended the year at more than 1,500 stores and is looking to add 400 more this year.

Numbers like those look like what amounts to a "land grab" in the electronics software business. The moves make sense, in a way, given that the business as a whole can be expected to grow at a solid rate for some time. (The next big boost can likely be expected within two or three years, when the next-generation Sony (NYSE: SNE) PlayStation and Microsoft (Nasdaq: MSFT) Xbox consoles are released.)

What should investors make of this rapid expansion, particularly given that these retailers must compete with each other, as well the likes of Amazon.com (Nasdaq: AMZN), category-killer Best Buy (NYSE: BBY), and even Target (NYSE: TGT) and Wal-Mart (NYSE: WMT)?

Their clean balance sheets help, but it's nevertheless a difficult question. In order to remain competitive on price and in the marketplace, they must scale their growth. The flip side? Expansion will likely be accompanied by slowing profit growth and slim same-store sales. In short, GameStop and Electronics Boutique may have no choice but to grow or go the way of the neighborhood video arcade.

Talk about the future for specialty gaming retailers on our Retail discussion board.

Motley Fool contributor Dave Marino-Nachison doesn't own any of the companies in this story.