Game Over in Electronics Retailing

Electronics retailing is a tough business, and right now, nearly everyone seems to be getting pummeled -- except for Best Buy (NYSE: BBY  ) .

Fellow Fool Alyce Lomax recently pointed out that rivals such as CompUSA and Circuit City (NYSE: CC  ) have been forced to close numerous underperforming stores just to survive. Selling electronics carries razor-thin margins, with many suppliers offering seemingly identical phones, computers, and televisions. Low barriers to entry also mean that big-box behemoths like Wal-Mart (NYSE: WMT  ) , Costco (Nasdaq: COST  ) , or Target (NYSE: TGT  ) can quickly hop on the bandwagon, selling popular flat-panel televisions to drive store traffic.

The flat-panel stampede is flattening electronics retail's smaller players. Circuit City just posted a first-quarter loss, partially blaming plummeting TV prices for its woes. It expects weak results for at least the next six months. Smaller rival Tweeter (Nasdaq: TWTR  ) plans to shrink; it will leave the coveted New York market, close 49 stores, and lay off 20% of its employees.

So how was Best Buy able to post a 20% gain in sales and earnings for the fourth quarter, and equally stellar results for the full year? Alyce cited the company's "continued focus on putting the customer first and innovating like crazy," which management confirmed in today's conference call. Its emphasis on consumer electronics mirrors customers' interest in home theater, and plasma and LCD TVs. This "customer centricity" is also driving strong same-store sales growth in entertainment software, and respectable gains in stodgier areas such as home office equipment and appliances.

Best Buy is also focusing on service to differentiate its store base. As electronics grow more complicated, its Geek Squad assists customers in setting up computers, home-networking systems, and other services. Again, customers increasingly demand help with their electronics, which happens to be a more lucrative operation than selling the goods themselves.

In terms of innovation, Best Buy recently announced that it will add roughly 200 Apple (Nasdaq: AAPL  ) store-within-a-store concepts, capturing consumer infatuation with iPods and Mac computers. In other words, conditions may only become grimmer for the competition, now that two of the best-performing franchises in electronics have decided to join forces.

Best Buy's retailing success has allowed it to capture a 20% share of its industry, allowing it to further increase its clout with suppliers while keeping its margins more stable. At present, its returns on invested capital have averaged nearly 20% over the past five years. Even more impressively, sales and earnings have averaged double-digit growth annually over the same time frame. Circuit City, its closest competitor, hasn't even come close to matching Best Buy's long-term performance.

Profitability trends have deteriorated lately, as flat-panel TV prices continue to plummet, but the company sees a less severe drop for the coming fiscal year. Management is targeting 9% sales growth and a 14% jump in earnings for fiscal 2008. Based on forward guidance, the shares currently trade at about 15 times earnings. That's definitely a reasonable multiple for an industry leader in a hypercompetitive industry. As smaller peers continue to slide into oblivion, Best Buy may be the only decent investment alternative.

For related Foolishness:

Best Buy and Costco are Motley Fool Stock Advisor recommendations, while Wal-Mart is a Motley Fool Inside Value recommendation. Try any of our Fool newsletters free for 30 days.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.


Read/Post Comments (0) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 525093, ~/Articles/ArticleHandler.aspx, 8/28/2014 1:05:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement