The carnage continues for retailers trying to sell you TVs, tablets, and washing machines. Consumer electronics stocks were some of the market's biggest winners of last year, but 2014 has been an entirely different story.
Conn's (CONN +0.00%) became the latest chain to burn investors on Tuesday when its stock plunged 31% after posting quarterly results.
It's been a rough year for an industry that thrilled investors in 2013, but has been one of its biggest laggards this year. Conn's joins hhgregg (HGG +0.00%), Best Buy (BBY +2.48%), and RadioShack (RSH +0.00%) as stocks that rocked last year but have bucked 2014's buoyant market by delivering sharp declines.
| Company | 2013 | 2014 |
|---|---|---|
| Best Buy | 237% | (21%) |
| Conn's | 157% | (61%) |
| hhgregg | 99% | (49%) |
| RadioShack | 23% | (52%) |
Source: Yahoo! Finance.
Tuesday's collapse at Conn's is a combination of soft earnings and hard concerns on the creditworthiness of its customers. Sales were strong, climbing 30% on the strength of expansion and an 11.7% spike in comps. Retail gross margins improved and adjusted retail segment operating profits climbed 39%.
That's the good news. The bad news is that Conn's suffered a surprising operating loss in its credit segment. A lot of Conn's sales are going to deadbeat customers with 8.7% of its customer credit portfolio now delinquent for more than two months. This led to Conn's boosting its credit segment provision for bad debts, sending earnings lower.
Adjusted earnings clocked in at $0.50 a share, just shy of the $0.52 a share it posted a year earlier and far less than the $0.75 a share that analysts were targeting. Conn's is hosing down its guidance. The chain is now looking for adjusted earnings to clock in between $2.80 a share and $3 a share this fiscal year. That's a lot less than the $3.40 to $3.70 in per-share profitability it was forecasting just three months ago. Even after coming up short during the fiscal second quarter this implies that the second half of the year will continue to be disappointing relative to earlier expectations.
Some bulls will shake off the bad news. They'll argue that sales are booming. They're right. Conn's saw healthy double-digit sales growth in furniture, mattresses, and appliances. Even TVs and computers -- two categories that have held back many consumer electronics retailers -- came though with double-digit percentage growth this time around. The only real weakness was a sharp slide in tablet sales and the expected dive in lawn care equipment since it bowed out of that niche.
However, all of this excitement has to be tempered by the credit risks that Conn's is taking every time the register rings. The economy's gradually improving but Conn's shoppers are getting more dodgy? It doesn't make sense. If anything it could explain why Best Buy, hhgregg, and to a lesser extent RadioShack, aren't holding up as well as Conn's in recent quarters in terms of sales performance. Conn's may be attracting the credit risks that rivals have been avoiding.
After three straight years of more than doubling -- Conn's stock soared 137% in 2011 and another 171% in 2012 -- it's proving mortal in 2014. The entire consumer electronics retailing niche is coming under fire. As RadioShack tries to smoke out a savior in the form of a cash infusion and Best Buy discovers that last year's turnaround buzz is starting to fizzle in light of an actual recovery, investors need to be careful.
There's always the hope that the wave of new smartphones being announced in the coming days will turn the tide, but let the chains prove that they know who they're selling to before you decide that you're buying.
