Retailers of consumer electronics have vastly outpaced the
general market since the start of February, signaling that the
industry's ongoing shakeout may have turned a corner.
Chains likeBest Buy (
), Circuit City, Fry's Electronics andH.H. Gregg (
) suffered or failed in the past decade as customers turned to
online shopping, and big-box names led byWal-Mart (
) andTarget (
) carved out portions of the market.
Now, with Circuit City gone and the economy improving,
remaining consumer electronics retailers are looking more svelte,
smart and attractive to investors.
"The worst is behind as consumers begin to show signs of
recovery and new product cycles hint at emerging upticks in some
categories," said B. Riley & Co. analyst Scott Tilghman. "But
ultimately companies will have to manage their cost structures
and their differentiation to effectively compete in the coming
years of these new cycles."
Shares of Best Buy spiked 16% Thursday (and are up 112% year
to date) after the company announced smartphone maker
would this month launch Samsung Experience Shops built within
Best Buy and Best Buy Mobile stores across the U.S. The program
targets 900 locations by early May, and aims for more than 1,400
sites by early summer.
The shops would leverage the brick-and-mortar advantage over
online shopping by giving customers a firsthand look at Samsung's
smartphones, tablets, laptops and connected cameras, offering
The move is the kind of thinking that has drawn several
analyst upgrades in recent weeks amid turnaround efforts by new
management and an improving market. One came from Piper Jaffrey
analyst Peter Keith, who on March 11, upgraded the stock to
overweight from neutral.
"The essence of the upgrade is a substantial upgrade in
management talent and diminished competitive head winds, both of
which should contribute to meaningful operating margin expansion
over the coming years," Keith told IBD.
Best Buy's new management is headed by turnaround wiz Hubert
Joly, who took the chief executive spot in September. He's
looking to jump-start growth through a restructuring aimed at
upping online sales, escalating the multi-channel customer
experience and cutting costs.
But not all funds are buying. At the end of 2012, Cubic Asset
Management owned 318,340 shares of Best Buy, then sold them off
in the first quarter. Frank Lombardi, portfolio manager at the
Boston-based firm, said the stock had reached a fair
Why did Cubic buy Best Buy to begin with? "I think there's
space for one big box consumer electronics retailer out there,
and Best Buy has the brand equity to remain viable," Lombardi
said. "Also, the valuation was attractive, particularly at $12 a
share, given the free cash flow the business produces."
Lombardi was also impressed with the "intelligent thought"
Joly has put into his restructuring efforts, including shrinking
the store size and lowering the cost structure.
Investors have responded by driving the small, six-stock group
to a No. 2 ranking among the
197 industries tracked by IBD
, up from No. 150 at the start of the third quarter.
Part of the reason could be the recovering housing market,
which could benefit the group by spurring demand for appliances.
Keith says that should help players like H.H.Gregg, a specialty
retailer that sees a large share of its revenue from appliance
Another beneficiary, Beaumont, Texas-basedConn's (CONN,),
specializes in consumer durables like appliances and furniture as
well as electronic devices. It has logged four straight quarters
of strong growth. In the fourth quarter, earnings jumped 59%. For
the full year, earnings spiked 136%.
The performance sent the stock up 22% for the week, and to a
43% gain so far this year.
Best Buy has, by far, the group's biggest footprint, with
4,379 stores in the U.S., Canada, China, Europe and Mexico. More
than 1,500 of those stores are in the U.S. It has 2,876 stores
overseas, primarily in Europe.
Keith describes the Richfield, Minn.-based chain as being in
the early stages of a "powerful" turnaround. Holiday season sales
strengthened vs. the prior couple of quarters. The quarter showed
some "stabilization" in U.S. same-store sales growth and gross
margins, he said.
For the fourth-quarter, earnings slid 25%, but still easily
topped analysts consensus views. Analysts polled by Thomson
Reuters don't see profit growing until 2014, and then only by 8%.
They forecast a 9% rise in 2015.
But management is launching a growing number of initiatives to
battle online rivals. A key challenge is "showrooming," where
shoppers use brick-and-mortar stores to test and experience a
device, then turn around and purchase throughAmazon.com (
)and other online retailers.
On March 3 Best Buy also launched its low-price guarantee. It
pledges to match the price of any local rival retailers as well
as 19 top online venues. The promise covers all product
categories and nearly all in-stock products.
Conn's has been the group's top performer, measured in
financial fundamentals, turning in strong gains the past four
quarters. In the most recent fourth quarter reported April 3,
that 59% earnings climb was built upon a 10.4% sales gain.
Same-store sales rose 7% vs. a year earlier.
Unlike many rivals, its 68 retail locations across the
Southwest and Texas offer in-house credit options for customers.
In the last three years, it's financed roughly 61% of its retail
sales through internal credit programs.
Its target audience is low-income customers who are
"under-banked" and don't have what Tilghman calls
"credit-worthiness," making Conn's alternative credit a big
Tilghman says customers tend to buy a little at a time -- and
then pay their bills in the store. So they may buy a TV and come
back to the store to pay it off and then buy more while they're
there. That leads to a nice repeat business, he says.
The company also does a strong business in higher-ticket,
deliverable items like home appliances, which shoppers typically
don't buy online or at mass market chains, says Tilghman.
H.H. Gregg, which has 228 stores in the Midwest, East and
South, gets about 40% of sales from appliances. Its
commissioned-based sales force offers a more "service-oriented"
experience compared to other big-box retailers, Keith says.
It's seen earnings decline the past few quarters, including
what Keith calls a "challenging" holiday season. Analysts polled
by Thomson Reuters expect a decline in profits in 2013, followed
by a 7% rise in 2014.
The company is slowing its store growth, focusing instead on
making existing stores more productive, Keith says.
If there's a "solid multiyear" appliance replacement cycle,
the company will benefit. But year-to-date, he hasn't seen
evidence appliance replacement has picked up dramatically, he
Wholesale revenue for the consumer electronics industry rose
4.7% in 2012. The Consumer Electronics Association expects this
year's growth to slow to about 3% to $209.6 billion.
Consumer spending on consumer electronics is rising, says
Koenig, director of industry analysis at the CEA. Spending on
consumer electronics in 2012 -- among households that spend on
these products -- measured about $1,300 per household, up 36%
Koenig attributes the rise to the huge popularity of mobile
connective devices -- tablets, laptops and smartphones.
"This trend of mobility and connectivity is increasing in
importance, and we're expecting continued growth in a lot of
these categories," he said.
The CEA sees tablet shipments climbing 45% this year to 116
million units in the U.S. market. Wholesale sales of tablets are
forecast to pop 21% to $37.2 billion this year.
Smartphones continue to be a key revenue driver for the
industry. The CEA sees smartphone unit sales up 12% to 129.9
million. Smartphone shipment revenue is expected to climb 12% to
The CEA expects laptop/notebook computer sales will continue
to rise as 26 million units are projected to be sold in 2013,
accounting for $17 billion in wholesale revenue.
A Bite Of The Apple
Apple (AAPL), which operates its own stores, has taken a lot
of consumer electronics share over the last couple of years with
introduction of the iPhone and iPad, says Keith. While many
retailers in the space sell Apple products, the allocations
certain retailers get from Apple are quite small, he adds,
because Apple has its own strong self-distribution
But the playing field is leveling out a bit. In recent months
more "legitimate" competition has come to the market in
smartphones and tablets from companies like Samsung, which uses
the Android platform and has had some recent success in both
these product categories.
Best Buy stands to gain a nice competitive boost from its deal
Another plus for consumer electronics chains: Amazon's
competitive stance has weakened a bit, says Keith. The reason:
Amazon will be starting to charge sales tax across various states
by the end of 2013, he says, resulting in about 50% of the U.S.
population paying sales tax on Amazon purchases.
Following Best Buy's lead, H.H. Gregg has implemented a price
match guarantee. The chain pledges to match competitors' lowest
advertised prices on in-stock merchandise of the same make and
model up to 30 days after a purchase.
A Cautious Bull
Tilghman is "cautiously optimistic" that Best Buy can make the
right moves to succeed.
"For the time being, I remain focused on company specific
opportunities that offer unique investing opportunities," he
adds. "For instance, Conn's has a unique customer focus and H.H.
Gregg is going after the appliance and delivery markets."
Keith also takes a company-specific approach.
"We're very bullish on Best Buy," he said. "We think there's a
very company-specific multiyear turnaround in the early stages of
beginning. We think we can see a very nice improvement in
operating margins over a couple of years."
He's less optimistic and still neutral on H.H. Gregg. He says
it's more dependent on the industry backdrop with appliances and
TVs and less on company-specific drivers.
Koenig says brick-and-mortar retailers can't simply compete on
They have to add more to the mix, including building
relationships through social media and other ways and taking a
more consultative selling approach.