Wouldn't it really be a pain in the rear to get yourself all dolled up and then have the party fade away before you arrived? I'm not saying that's what's going to happen to consumer electronics retailer Circuit City (NYSE:CC), but the thought has crossed my mind lately.
For the second quarter, revenue climbed by about 8%, on top of a 5.3% company-wide comp-store increase. Although gross margins eased off by almost 100 basis points from the year-ago level, the company was able to reverse a year-ago loss with a modest profit. As analysts were expecting a small per-share loss, the outperformance was enough to send the stock up about 6% in early trading today.
Relative to Best Buy's (NYSE:BBY) recent earnings report, there wasn't much in Circuit City's sales performance that was terribly surprising. LCD TV and MP3 player sales were strong, while sales of analog TVs, desktops, and cell phones were weak. One interesting note, though, is that management stated that it would no longer be providing market share data on TV sales. While Circuit City has done a pretty decent job of improving its advanced TV business, I'm always a little nervous when management decides to stop providing a particular performance metric.
That, though, is small potatoes compared to my larger concern for Circuit City -- the ultimate health of consumer discretionary spending in general. Most readers have probably heard by now of the "housing ATM" concept -- the idea that people have used rising home values and refinancings to generate wads of cash that are then spent on frivolities like SUVs, big honkin' TVs, and other such items. If that is, in fact, what has been happening, it doesn't bode well for the future of big-ticket discretionary spending if or when housing values stop rising -- let alone begin falling.
Now, why was I mostly positive on Best Buy? Won't this situation affect that retailer, too? Yes, Best Buy stands to lose from a slowdown in consumer spending, as do Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Dell (NASDAQ:DELL), and most other consumer companies. But Best Buy is one of the lions of the trade, and if times get tough, I'm more confident in its ability to take market share from the likes of Circuit City, and thus cushion its own fall, than vice versa. Business is like life on the Serengeti: When times get tough, the strong survive and the weak struggle.
So while I believe that Circuit City has made progress in turning itself around, I'm not sure that's enough. The competition for consumer wallets is brutal even in the best of times, and there's at least a chance that the best of times are on their way into the rearview mirror.
More Foolishness on retail:
- Sony's Spin Sputters
- Beyond Cheap at Best Buy
- Best Buy Almost a Buy
- Is Electronics Boutique's Strategy Sound?
Best Buy and Dell are recommendations of Motley Fool Stock Advisor. If you're looking for great stocks at great prices, take a free trial subscription right now by clicking here.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
