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The Top Dog Vs. The Big Threat, In Retail Consumer Electronics

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The current earnings season has penned one more chapter in the ongoing drama portraying retail as a barren wasteland of hollowed-out malls, sliding into the inevitable nightfall of Amazon.com ( AMZN ).

But while department store and apparel retail stocks have veered into deepening losses, Best Buy shares are up 18% for the year through Thursday. That is far behind Amazon's 28% gain, and Amazon's sales are growing fast. But Best Buy continues to hold a market share advantage over its nearest competitors, Amazon and Wal-Mart ( WMT ), and not by an inconsiderable margin.

"Best Buy is far and away the (consumer electronics) market share leader right now on a revenue basis," said NPD Group's vice president of industry analysis, Stephen Baker.

In addition, the e-commerce operations of players including Best Buy and Wal-Mart have begun to win back online market share, and a couple of factors could strengthen the standing of Best Buy's physical store performance through the end of this year.

The bankruptcy of competitor HHGregg, which announced in March it would close 40% of its stores, then upped that in April to a shutdown of all 220 stores in its chain, significantly trims competition not only for Best Buy, but also for the smaller publicly-traded chains Conn's ( CONN ) and Aaron's ( AAN ). In addition, the expected roll out of new smartphone releases from Apple ( AAPL ) and Samsung is seen by at least some analysts as a direct benefit to Best Buy vs. Amazon.

Traditional Electronics Retailers Clap Back

None of that is to say that the threat of Amazon isn't very, very real.

"It's like every time a bell rings, an angel gets its wings - every time Amazon signs a Prime member, that is a person who is absolutely, 100% guaranteed to shop less frequently at Best Buy," Wedbush analyst Michael Pachter told Investor's Business Daily.

"Even if you're a Best Buy freak, and you love going in and looking at everything, you're still going to buy batteries on Amazon, because it's just so freakin' easy."

Indeed, industry data backs up the idea that the e-commerce giant could simply unhinge its jaw and devour other retailers whole.

In 2015, Amazon grew its consumer electronics sales by 28.1% from the previous year, far outstripping Apple's 4.3% gain and Best Buy's 3.8% growth, according to data provided by Deutsche Bank via Twice magazine.

"The fact is, (Best Buys) sell stuff that isn't really a growth category: mobile phones, TVs, random PC electronics, and some appliances," said Pachter. "Except for possibly appliances, none of those categories is growing."

A closer look at the numbers, however, shows that despite Amazon's rocket-ship growth in consumer electronics, Best Buy's little single-digit gain actually represents a swing from at least four prior years' worth of negative year-over-year sales declines. The company's first-quarter results, due May 25, will update that tale. But so far, it has managed to hold on to its lead, defending a nearly 23% share of the market from 2013 through 2015.

As of 2015, Amazon could boast 17% of the pie, having bypassed Wal-Mart for the No. 2 spot. (Apple and Target (TGT) rounded out the top 5 on Twice's list.)

Best Buy's turnaround story has been well documented. The company brought on Hubert Joly in 2012 to mend its wounds, and the chief executive has been credited with reviving the last major national consumer-electronics brick-and-mortar chain.

"What Best Buy did a few years ago with their new CEO and new CFO at the time was, I think, embark on a really smart and innovative strategy, which basically turned the showrooming idea on its head and embraced it," said Deutsche Bank analyst Mike Baker, checking off a list of things Best Buy tweaked to become more competitive with Amazon: price, selection, shipping ability, website functionality.

"All the things Amazon did better than they did, (Best Buy) invested in it," he said.

The company deserves "massive props" for reducing its cost structure under Joly's watch, concedes Pachter. But to focus solely on Best Buy's recent success would be to ignore "the elephant in the room," i.e. Amazon.

To its credit, Best Buy has outlived most. The recent liquidation announcement from HHGregg is a reminder to toast all the gadget chains that are no longer with us , such as Sharper Image, CompUSA and Circuit City (the latter of which is reportedly coming back from the dead to open a " prototype store" in Dallas ). The significantly downsized RadioShack filed for bankruptcy again in March.

And their demise fuels the lone survivor. Analysts interviewed for this story see the HHGregg closures delivering Best Buy a same-store-sales benefit of anywhere from 0.9% to 1.5%, a meaningful boost.

Plying the Lease-Purchase Niche

The Amazon-driven atrophy in the consumer electronics retail space has reduced IBD's Retail-Consumer Electronics industry group to a an intimate cluster of fairly diverse names. Best Buy aside, the group's five members include GameStop (GME), Appliance Recycling Centers (ARCI), Conn's and Aaron's.

Regional retailer Conn's, which has over 100 locations, doesn't just sell electronics, but also furniture, mattresses and appliances. The company also has a lending program. In its January-ended quarter, Conn's logged a 5.5% year-over-year decline in retail revenue and a 4.1% slide in its credit revenue. Nearly 95% of retail sales were channeled through in-house financing, third-party financing or a third-party rent-to-own option, the company reported.

As a business, "part of it is as a retailer, and part of it is as a credit agency, basically," said KeyBanc analyst Brad Thomas. "They have implemented a number of initiatives that we think will improve the profitability of their credit portfolio. From a stock perspective, the story is, 'Can you improve the credit side of your business?' It's less about the retail side."

Shares cleared a cup base at the end of April, after the company reported a surprise profit after three quarters of losses. Sales extended their single-digit decline, however, which analysts expect to continue through the end of this year.

Aaron's, meanwhile, sells furniture and electronics, but bills itself as an "omnichannel provider of lease-purchase solutions" - what is commonly known as rent-to-own. It has 1,860 stores in 47 states but is shifting its emphasis toward its Progressive Leasing subsidiary, which provides lease-to-own financial services to 19,000 retail locations.

"Progressive's been experiencing very strong growth and great execution as they've added incremental doors to their system and grown same-door sales," said Thomas, who calls Progressive the "exciting" side of Aaron's business.

"Some of their largest customers include Big Lots (BIG), and Mattress Firm. And they've just won the business at Conn's, actually."

Taking Share From Amazon

At NPD, Baker sounded bullish on the future of brick-and-mortar gadget stores.

"What we're starting to see in (consumer electronics is) that the retailers are beginning to successfully navigate the challenge of being both brick-and-mortar and online," he said. "What we see is retailers gaining share of online sales right now, within the overall online segment."

NPD Group research reveals that brick-and-mortar retailers with an e-commerce presence - think Best Buy, Wal-Mart, Target, Staples and others - are actually collectively growing their dollar share of the online consumer electronics market (the NPD category does not include mobile phones or video games).

Traditional retailers captured 34.8% share in 2016, up from 31.2% in 2015 and 30.6% in 2014. Contrast that to online-only players, such as Amazon, Newegg, Monoprice and Fingerhut, which remain dominant but gave up some of their share (45.2% share last year vs. 45.7% in 2015 and 45% in 2014).

Baker attributes the upswing to electronics retailers improving their omnichannel strategies and "the fact that the categories that have the biggest upside online are ones that have been traditionally much stronger in-store categories (like TV and audio)."

The question going forward is how Best Buy and others will sustain that growth, and whether they can transition from simply holding their own to etching out even greater market share gains vs. Amazon.

Analysts agree that a proper omnichannel presence, both online and offline, is essential. And that brick-and-mortar, to some degree, still matters.

"Even brands that started online would tell you that, if done properly, a physical presence can have a very high ROI and greatly improve your sales," said KeyBanc's Thomas.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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