Electronics Retailers: No End in Sight to the Bleeding

Best Buy, Conn's, hhgregg, and RadioShack may look cheap, but that doesn't mean they won't become cheaper in the future as Amazon continues gaining market share versus traditional brick-and-mortar electronics retailers.

Mar 5, 2014 at 2:00PM

Amzn Vs Electronics Retailers

Source: YCharts.

Amazon (NASDAQ:AMZN) and the online retail revolution are inflicting a lot of damage on retailers that specialize in electronics, like Best Buy (NYSE:BBY), Conn's (NASDAQ:CONN), hhgregg (NYSE:HGG), and RadioShack (NYSE:RSHCQ). Many of these companies are selling for temptingly low prices. However, things could be getting worse before they turn for the better.

Fighting an uphill battle
Best Buy reported a 1.8% decline in domestic revenue to $12.3 billion during the quarter ended on Feb. 1. Domestic comparable-store sales fell by 1.2% and comparable-store sales in international markets declined 1.7% during the period. Profit margins are under pressure due to intense promotions, and gross margin fell to 20.2% of sales versus 22.3% in the same quarter of the previous year.  

The main bright spot in the company's latest earnings report was the big increase of 25.8% in comparable online sales to $1.57 billion during the quarter. It's good to see Best Buy growing its online presence, but online is not compensating for the decline in physical stores' sales. Besides, if online is the name of the game, then Best Buy will be fighting an uphill battle against Amazon.

Conn's is doing much better on the retail side, but that's mostly because it finances the majority of its sales to customers with below-average credit scores, so Conn's is a subprime lender as much as a retailer. In fact, that strategy seems to be backfiring lately, as management has recently warned that earnings will come in materially below its previous guidance due to higher-than-expected delinquency rates and charge-offs in its loan portfolio.

Things are looking even worse for hhgregg, which reported a worrisome decline of 11.6% in sales to $707.1 million during the fourth quarter of 2013. Comparable-store sales declined 11.2% during the period, and profit margins are also moving in the wrong direction.

While sales of appliances and home products increased during the quarter at hgregg, segments like consumer electronics and computing and wireless showed big declines of 19.7% and 24.5%, respectively, in comparable-store sales.

RadioShack is no exception to the rule by any means. Total sales fell by a whopping 20% during the fourth quarter of 2013 on the back of a 19% dip in comparable-store sales. The company also reported an operating loss of $166 million versus an operating gain of $16 million in the fourth quarter of 2012, so things continue to worsen for RadioShack on the profitability front.

Online retail: It's just the beginning
The online retail revolution may be a cliche at this stage, but that doesn't make it any less significant as a factor to consider when making investment decisions. Especially in electronics, a sector that is particularly prone to showrooming and where pricing is a big competitive factor for retailers, Amazon has a big advantage over traditional brick-and-mortar stores.

Amazon's scale, efficient operations, and willingness to price products at minuscule profit margins make the online retailer a dreaded competitor in the category, and the company is clearly gaining market share versus brick-and-mortar stores at a remarkable rate.

Amazon reported a huge increase of 25% to $10.65 billion in sales of electronics and other general merchandise in the U.S. market during the fourth quarter of 2013. It also announced that more than 36.8 million items were purchased worldwide during Cyber Monday, a truly mind-blowing figure of 426 items per second.      

According to a recent report from Kantar as quoted in The Wall Street Journal, online sales still account for only 25% of sales in the computers, electronics, and appliances category, so online retail can still gain a lot of terrain versus physical stores.

Bottom line
Judging by recent financial performance from different companies in the sector, and considering that online sales still have a lot of room for growth, it seems like brick-and-mortar electronics retailers will remain under heavy competitive pressure in the coming years. Just because stock prices in the sector are looking cheap does not mean they won't become even cheaper in the future.

Profiting from a changing retail landscape
You know the retail industry is changing, but do you know how to profit from those changes?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Andrés Cardenal owns shares of Amazon.com. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers