Foolish Face-Off: Battle of the Electronic Retailers

Having recently covered the earnings release for regional electronics retailer Rex Stores (NYSE:RSC), and mentioning that rival CircuitCity (NYSE:CC) appears to have turned itself around after a couple of disastrous years, I decided to see just how well the recovery has been going.

It's also helpful to compare the No. 2 player in an industry with the largest player, especially if they collectively dominate their market. And it just so happens that Circuit City plays second fiddle to No. 1 Best Buy (NYSE:BBY), and together they are by far the largest peddlers of everything electronic. Best Buy has a reputation for being the most efficient and disciplined operator in the space. Let's see whether that is really the case.

Growth rates

Advantage: Best Buy
Although Best Buy posted weak operating cash flow growth over the past year, it still has a much more impressive track record of sales and earnings growth. Circuit City has improved significantly as of late, but I'm a bit skeptical of the diluted earnings track record, since the company has reported numerous restructuring and discontinued operating charges in its recent past. The historical numbers favor Best Buy and are currently very close, but the future is what's important for investors. I'll stick with Best Buy because of the numbers below.

Margins

Advantage: Best Buy
Though Circuit City has similar gross margins to Best Buy and its numbers have improved markedly over the past few years, Best Buy is still the leader in terms of operating and net margins, and its numbers have also improved over time. This confirms that Best Buy is able to squeeze extra profits out of razor-thin margins inherent in the electronics retail business.

Cash conversion cycle

Advantage: Best Buy
Last year, Best Buy was superior in each of the three key areas used to calculate the cash conversion cycle (CCC), which is one of the best ways to differentiate how retailers run their stores. BBY turned over its inventory faster (DII), meaning it was better at moving merchandise off its shelves and into customers' homes, and it was slightly better at getting paid from its customers (DIR). The company also took longer to pay its bills (DPO), which is a good thing, since it leads to extra interest earned and financial flexibility. When looking at the CCC, it's best to use different time frames to confirm Circuit City as a laggard, but from what we've been seeing, the numbers make sense.

Performance

Advantage: Best Buy
This is another area where Best Buy demonstrates its dominance. Because of larger stores, better locations, and overall store efficiency, it is able to attract customers to turn over its inventory faster and push its profit margins outward. Circuit City has improved as of late, but it comes nowhere near matching Best Buy in terms of economies of scale, which drive return on equity or return on invested capital. At more than 20%, these metrics are impressive for any company.

Valuation

Advantage: Best Buy
In addition to all of the advantages listed above, Best Buy is also trading at a more compelling trailing and forward P/E multiple. Circuit City may have a higher multiple because investors expect it to grow faster over the next year or two, believing it has further room for recovery from a couple of tough years. That could very well occur, but in my opinion it's less certain than Best Buy's proven ability to grow sales at a double-digit clip and leverage that into consistent higher earnings growth.

The face-off finale
The numbers confirmed my initial belief that Best Buy was the better-run company. And although Circuit City has come a long way in improving its merchandise mix and driving customers into its stores, I'd still stick with the 800-pound gorilla. There are a few other pure electronics retailers out there, including regionally based Rex (mentioned above) and Conn's (NASDAQ:CONN), but neither comes close to matching Best Buy's size and clout. There are also other companies that sell electronics -- including Wal-Mart (NYSE:WMT), Sears (NASDAQ:SHLD), and even RadioShack (NYSE:RSH) -- but Best Buy offers the most exposure to the red-hot market for flat-panel televisions and related components, not to mention the ability to quickly sell any popular electronic product introduced into the marketplace.

Wal-Mart is an Inside Value pick, and Best Buy is a Stock Advisor recommendation.

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