The long-anticipated launch of two new video gaming consoles
planned just ahead of the holiday shopping season has pushed
electronics retailersGameStop (
) andBest Buy (
) into what one analyst has dubbed "the calm before the console
) is scheduled to release its PlayStation 4 on Nov. 15, followed
byMicrosoft 's (
) Xbox One on Nov. 22. It's been eight years since Microsoft
launched a new console, and seven years since PlayStation 3.
Enthusiasm for those computer gaming units, along with the
number of new games, is growing, according to Baird Research
analyst Colin Sebastian.
"As such, we remain cautiously optimistic on the sector ahead
of the fall platform launches," says Sebastian.
Investors have driven Best Buy's share price up more than 250%
and GameStop ahead 105% so far this year. But caution is still
the prevailing tone among analysts.
As a group, electronics retailers continue to wrestle through
a years-long transition. The industry has worked to build
e-commerce businesses alongside their brick-and-mortar stores in
order to battle online challengers such asAmazon.com (
) . The strictly online competitors don't shoulder the overhead
of traditional chains, allowing the newer e-commerce group to
undercut existing chains on price.
The result was a shakeout, with the electronics retail field
losing nearly 700 stores in a series of failures led by Circuit
City, which shut its doors in 2009, but also included regional
players such as Massachusetts-based Tweeter and California's Good
Guys. Best Buy, GameStop and a few others survived. At least a
few members of the consumer electronics group are narrowing the
price gap with e-commerce competitors, and now seem to be on the
verge of growth.
IBD's consumer electronics industry group includes six
companies. Best Buy, with a market capitalization of $14.62
billion and revenue expected to clear $46.2 billion this year, is
the largest. GameStop, with more than 6,600 stores worldwide,
andRadioShack (RSH), with almost 5,600 stores, have the largest
Collectively, the stocks have gained 133% year-to-date,
holding the group in a steady top 20 ranking since April among
the 197 industries tracked by IBD.
Going Toe-To-Toe On Prices
Richfield, Minn.-based Best Buy in particular has made it its
mission to match Amazon.com and other e-commerce sites on prices,
according to BB&T Capital Markets analysts Anthony Chukumba
and Eric Cohen.
"With the notable exception of accessories, Best Buy's prices
are largely in line with those of Amazon, and in some cases were
actually lower," wrote the analysts in a recent research
But if you include accessories -- like, say, a smartphone case
or a USB cable -- in the comparison, Best Buy's prices in
September were an average of 3.7% higher than Amazon's. That was
down, however, from a 4.4% premium in May, wrote BB&T's
analysts, who rate the stock a buy with a price target set at
Surely, the fight between retailers to have the lowest prices
has its drawbacks.
Best Buy's management is "resolute in its determination" to
compete on price, says Wedbush Equity Research analyst Michael
Pachter, who rates the stock as underperform, or sell. Best Buy's
efforts have cut into its profit margin, that analyst says.
"We see no end in sight and expect price competition at
holiday . .. to erode margins further," says Pachter.
Best Buy's EPS rank, as calculated by IBD, is just 46 out of a
The group collectively shows a lack of revenue growth, with
each company in the group this year expected to post flat or
declining revenue, according to analysts polled by Thomson
The South Rises
The exception is Beaumont, Texas-based electronics chainConn's
(CONN), which is seen growing sales. Conn's is expected to grow
its revenue by 34% to $1.16 billion, according to eight analysts
polled by Reuters. All eight analysts rate the stock as a buy or
With 70 stores spread through Texas, Louisiana, Oklahoma, New
Mexico and Arizona, Conn's has a relatively small footprint
compared with 1,055 U.S. Best Buy stores and 6,505 GameStop-owned
It sells consumer durables such as appliances and furniture,
along with electronics. And, unlike the other group members,
Conn's attracts some customers with "subprime" credit with its
rent-to-own market -- and that's one area where it could grow in
the future, according to Piper Jaffray analyst Peter Keith.
"In short, Conn's has a supremely attractive growth
opportunity over many years due to a very limited market share
today -- we estimate 1% -- and no clear competitive threats on
the horizon," says Keith.
Same-store sales at Conn's climbed 18.4% in Q2, bucking
another trend in the electronic retail group. Best Buy's
same-store sales have fallen in each of the last 12 quarters.
Year-over-year same-store sales declines have accelerated each of
the last three years.
But Best Buy's trend could be turning around, says ITG
Investment Research analyst John Tomlinson in an email. He sees
the chain's current-quarter same-store sales growing from 3% to
5%, in part because the company's managed to sell more items
priced over $1,000.
Best Buy's executives say they're taking a three-pronged
approach to jump-starting sales. First is returning to
online-sales growth. Second is "accelerating the multichannel
customer experience," which is a way of saying that they're
monitoring how customers shop and polling them after sales. Third
is an attempt to boost sales per foot.
As a result, online sales growth already has started picking
up, says President and CEO Hubert Joly.
"Including all of these initiatives, our domestic online
channel delivered a 10.5% comparable-store-sales increase in the
quarter," Joly told analysts on a fiscal Q2 conference call.
An Ode To Joysticks
The effort to boost sales at Best Buy and its competitors no
doubt includes gaming console sales, which are a big business in
the U.S. Both Sony's and Microsoft's gaming consoles are now in
"Including these preorders, which we do not expect to ship or
recognize as revenue until Q4 of fiscal 2014, comparable online
demand increased over 16% (in Q3)," said Joly.
Grapevine, Texas-headquartered GameStop says manufacturers are
better prepared to deliver this year, as well.
"Allocations from both Microsoft and Sony are much stronger
than last launch," GameStop President Tony Bartel has said.
Bartel said was unable to disclose launch quantities for
competitive reasons. But said he expects a "significant increase
in launch-day quantities vs. the last console launch."
Sterne Agee analyst Arvind Bhatia says in a research note that
everything he's seen continues "to suggest strong demand" for the
Those two new gaming consoles should boost revenue late this
year, but there's another game that's already having an affect on
GameStop's sales, according to SunTrust Robinson Humphrey analyst
David Magee. "Grand Theft Auto 5," which went on sale Sept. 15,
posted $800 million in global sales on its first day on the
Before the launch, Magee had expected the game to add profit
of 8 cents per share in Q3 for GameStop. "However, given the
success on the first day of sales, we believe this is most likely
conservative," the analyst wrote, adding that the game could add
"several pennies" to GameStop's per-share profit in the current