Is There Value in Big-Box Electronics Retail?

Best Buy (NYSE: BBY  ) , hhgregg (NYSE: HGG  ) , RadioShack (NYSE: RSH  ) , and Conn's (NASDAQ: CONN  ) have all significantly underperformed the broader market in 2014. The reason is due to a sluggish retail environment during the holiday season and winter months, competitive pricing, and the continued growth of e-commerce. And while many of these factors will continue to push many such stocks even lower, there might also be value following the declines.

Starting to see the effect of change
After a gain of 250% in 2013, Best Buy has begun 2014 with its stock falling by 35%. The drop occurred following the company's warning for the quarter containing the holidays,, which included an unexpected decline in comparable-store sales. Yet surprisingly, Best Buy's fourth-quarter earnings in late February propped the stock to an 11% gain in the last month, which might provide some light at the end of the tunnel.

While comparable sales did decline 1.2% in its last quarter, and the company is guiding for a slight decline in comp sales during the first half of 2014, the company posted impressive 25.8% growth in its e-commerce channel. Furthermore, the company has continued to reinvent itself, launching 1,400 Samsung and 600 Windows store-in-a-store concepts. Thus, there are improvements occurring at Best Buy.

With that said, Best Buy has a forward dividend of 2.6%. Furthermore, it trades at 10 times forward earnings, and at just 0.2 times sales. In other words, it is cheap; investors could find long-term value in shares if innovation continues.

A growing need to restructure
hhgregg is a different story: It has been unable to adjust at the rate of traffic declines. In the company's last quarter, comparable sales declined 11.2%, which was near equal to its total revenue loss. However, when comp sales decline at such a rapid rate, and the cost of goods sold remains the same, it quickly cuts into a company's margins.

In the case of hhgregg, we are seeing a drastic effect to its bottom line, as the company essentially cut its earnings-per-share forecast in half due to weak traffic. Hence, hhgregg might need to make similar store closings that we've seen throughout the space in order to limit such aggressive declines in traffic; this could slow the margin loss. Until then, it's really hard to identify any value.

An honest attempt to restructure
If you thought hhgregg's comps performance was bad, it hardly compares to the 19% decline announced by RadioShack.

Aside from losing nearly a quarter of its fundamental business during the fourth quarter, RadioShack has announced plans to close 1,100 underperforming stores. Essentially, it is shutting down the stores responsible for the decline, still leaving it with 3,000 stores.

While the stock fell more than 20% following the news, investors have to like the idea of the company downsizing to focus on its strengths. Theoretically, it should then have the opportunity to build from the ground up and without the massive quarterly losses.

The only problem is that RadioShack still has many fundamental problems remaining within its business, such as a lagging mobile-phone sales unit; consumers simply aren't buying phones at RadioShack. Therefore, RadioShack's store-closure plan is plausible, but there is still uncertainty as to how its remaining assets will perform long term.

At just about 0.1 times sales, RadioShack is cheap; and if its restructuring program is effective, then large gains will be created. However, investors might be best suited with a wait-and-see approach or to allow the dominoes to fall in place before making any investment moves. Because as of now, there is just too much uncertainty.

The one bright spot goes dull
Conn's operates a much smaller but very similar business to Best Buy. Yet, thanks to an in-house credit program with loose restrictions, sales growth has been impressive. The company's managed to produce same-store sales growth in excess of 20% for the better part of the last 16 months.

However, there are risks. If high-risk consumers stop paying, the company will feel the impact on its bottom line. Such is the case with Conn's, which lowered its fourth-quarter earnings-per-share guidance by $0.15 due to high charge-offs and delinquencies.

With that said, Conn's growth remains intact, as of now. But the company's warnings could very well be the first sign of a longer-term problem. At about 1.2 times sales and a P/E ratio of 15, Conn's is not expensive by normal market standards and has strong growth but is pricey relative to its space. Therefore, if such problems persist, and growth is ultimately sacrificed, it could have a long way to fall.

Final thoughts
Simply put, this space is cheap for a reason, as all companies face turmoil of some sort. However, companies like Best Buy have been through the ups and downs and are now starting to see fundamental consistency, or new segments arise as growth drivers.

Therefore, with hhgregg and RadioShack still yet to undergo this transition, and with Conn's impossible to predict due to uncertainty of its credit program, Best Buy looks like the best bet. For investors, Best Buy is still cheap; and if it continues to monetize its space wisely while growing its e-commerce channel, then it should remain a good long-term investment. Hopefully, its peers follow suit and next year we're talking about an industrywide recovery and not a continuation of 2014's early collapse.

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  • Report this Comment On March 11, 2014, at 2:03 PM, Patentplays wrote:

    Brian-

    I agree. Sell Conns. However you left out the most compelling reason. Every securities lawyer in the country has lached on to this Class Action for bad and deceptive guidance.

    Conns is not Best Buy. $1 billion+ in lawsuits will destroy Conns and investors NEED to know this risk. Dont you agree?

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