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Should You Hunt for Investment Opportunities Among Electronics Retailers?

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Recent reports from retailers that specialize in consumer electronics like Best Buy (NYSE: BBY  ) , Conn's (NASDAQ: CONN  ) , hhgregg (NYSE: HGG  ) , and RadioShack (NYSE: RSHCQ  ) are showing that the sector is going through a remarkably challenging period due to the tremendous competitive pressure that (NASDAQ: AMZN  ) generates. The way things are going, there is no end in sight for the bleeding, and investors need to be extraordinarily careful when looking for opportunities in the sector.

A promotional environment
Best Buy crashed by a breathtaking 28.5% on Thursday as the company reported declining sales during the crucially important holiday season. Domestic comparable-store sales declined by 0.9% year over year during the nine-week period ended on Jan. 4, while total revenues fell by 2.6% and total domestic sales declined by 1.5%.

Management made numerous references to the highly promotional retail environment in the press release, so profit margins are likely to remain under pressure in the middle term. The only bright spot in the release was a 23.5% increase in comparable online sales. It's good to know that Best Buy is growing its online segment, but it also shows that e-commerce is the name of the game, and Amazon is much stronger than Best Buy in that area.

Competitor hhgregg is not doing any better at all -- the company announced a whopping decrease of 11.6% in sales during its fiscal third quarter, which ended on Dec. 31. Comparable-store sales fell by 11.2% during the period as the big increase of 36% in home products was not enough to compensate for worrisome decreases of 19.7% in consumer electronics and 24.5% in computing and wireless.

The company warned that financial performance for the full year will likely be materially below its previous guidance. Competitive pressure and big promotions on an industrywide level are the main reason for hggregg's dismal performance; CEO Dennis May said, "Our holiday sales were significantly impacted by increased promotional offerings of televisions and tablet products across a variety of retail formats."

RadioShack has not reported specific figures for the holiday season, but the company has been facing falling sales and operating losses for a considerable time now, and there is no reason to believe things are going to change anytime soon. RadioShack reported a fall of 8.4% in same-store sales during the third quarter of 2013.

Conn's seems to be a different story. The company announced a big jump of 50.6% in revenue on the back of a 35% increase in same-store sales for the quarter ended on Oct. 31. The consumer electronics segment was surprisingly strong, with an increase of 25.8% in same-store sales for the category during the quarter.

But investors should probably take these results with a grain of salt, as the company finances approximately 79.5% of its retail sales via its in-house financing program. The average customer has a credit score of between 550 and 650, according to the company, so Conn's is a subprime lender as much as a specialty retailer. This has important risk implications for investors, and it also means that Conn's may not be the most representative company to use to evaluate overall industry trends.

Amazon keeps winning
Amazon is clearly the most disruptive force the retail industry has seen over the last decade, and the consumer electronics category is especially prone to showrooming, when consumers examine products in a brick-and-mortar store only to end up buying them online.

An efficient cost structure and the willingness to operate with razor-thin profit margins in order to gain market share versus the competition make Amazon a formidable competitor in a business like consumer electronics, in which price is a major competitive factor.

Amazon has announced record sales for the holiday season. More than 36.8 million items were ordered worldwide during Cyber Monday -- this means a truly amazing figure of 426 items per second.

The company has "tens of millions" of loyal members in its Amazon Prime program, and as Amazon becomes bigger and gains scale, cost competitiveness should continue increasing over time. Far from reversing, the trend seems to be getting more favorable for Amazon as time goes by.

Bottom line
Most consumer electronics retailers are experiencing heavy setbacks lately, and their stock prices are suffering the consequences. It's only natural for value-oriented investors to take a look at a beaten-down sector in search of opportunities. On the other hand, things could be getting worse before they get any better as Amazon continues to gain market share in the category. Investors beware: It's a very tough world for those trying to compete against Amazon.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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8/28/2015 4:00 PM
AMZN $518.01 Down -0.36 -0.07% CAPS Rating: ***
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CONN $29.44 Down -0.54 -1.80%
Conn's, Inc. CAPS Rating: **
HGG $4.68 Down -0.20 -4.10%
hhgregg CAPS Rating: *
RSHCQ $0.13 Up +0.02 +0.00%
RadioShack CAPS Rating: *