Last week was a rough one for consumer electronics retailers. One of the market's biggest losers was hhgregg (NASDAQOTH:HGGGQ), tumbling 26% after posting uninspiring financials. Conn's (NASDAQ:CONN) and Best Buy (NYSE:BBY) tumbled 13% and 6%, respectively, in sympathy.
RadioShack (NASDAQOTH:RSHCQ) bucked the trend by closing slightly higher, but consumer electronics was a disaster for investors in January. This may have been a hot retailing niche for investors in 2013, but it's been a different story for these chains in 2014.
The contrast is huge. The four stocks that average a gain of 129% last year are off by an average of 28% through just the first month of 2014. The difference becomes even more pronounced if you eliminate RadioShack from the mix.
Last week's downdraft was the handiwork of hhgregg's disappointing quarterly results, and it was pretty bad. Posting an 11.2% plunge in comps -- with its consumer electronics, computing, and wireless categories falling even harder -- is naturally not going to wind up as a victory for the bulls. It doesn't even seem to matter that hhgregg had already warned about falling short earlier in the month. Investors still weren't prepared for the negative implications, and that became clear when Standpoint Research upgraded the stock -- from hold to buy -- a week earlier.
That's bad timing, but it wasn't just hhgregg that tipped the market off on the retailing niche's woes. Best Buy also took a big hit earlier in the month when it posted results for the holiday quarter that exposed the superstore chain's margin-squeezing strategy. Best Buy's sales may have held up better than hhgregg, but it came at the expense of profit margins as it was forced to price its wares aggressively to close sales.
Last year was full of promise. The housing boom was helping Best Buy, Conn's, and hhgregg with brisk appliance and furniture sales. However, Best Buy in particular is a concept built around loyal customers making several repeat purchases. That just doesn't happen with a fridge or a sofa that will last for years. Best Buy relies on low-priced media sales to keep customers coming back, and those items are migrating to digital delivery.
The stocks ran too high last year, and a cruel reality adjustment is taking place at the moment. The market will need to see fundamentals improve, and the January reports don't seem to suggest that salvation on that front is coming anytime soon.