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Investing in Electronics Retailers

Along the Peaks and Valleys of the Gadget Craze

Written by Briton Ryle
Posted May 23, 2014

The consumer electronics industry has grown up. Gone are the days of “one size fits all”, when all you had to choose from was a desktop computer. Here are the days of tailor-fit electronic gadgets designed for specialized uses. And with those specialized markets come specialized marketers, giving the general, all-purpose electronics vendors a run for their money.

The stock performance of America’s top three consumer electronics chains - Best Buy Co (NYSE: BBY), Gamestop Corp (NYSE: GME) and Conns Inc (NASDAQ: CONN) – certainly reflect the turmoil the space is experiencing, with steady declines since the mid-2000s, a fantastic 2013, and back to stumbles and tumbles in 2014 thus far.

What does the maturing of the consumer electrics sector mean for these retailers? How is the space changing, and how must retailers adjust? Might investors need to do some adjusting themselves?

When an Industry Grows Up

An industry or sector of the economy is a lot like a family. When the industry is young, the number of companies within it are few, like a single family with just two to four kids. But as the industry grows over the course of a couple of decades, it starts to divide and sub-divide, much like kids growing up to have families of their own.

The same is happening to the consumer electronics space. In the 1980’s and 90’s, there were only a handful of gadgets on the market, which were available at only a handful of stores. For the longest time, all you had were desktop computers to tackle your information tasks. Even when laptops entered the market, their heavy weight and high cost didn’t put too much of a dent into the desktop market.

But walk through your local electronics shop today and you will be completely hard-pressed to make a decision on what to buy. Laptops from wide-screen to mini and multiple sizes in between; tablets from the large “almost-laptop” to the tiny “e-reader-only”; cell phones from dozens of manufacturers with an array of bells and whistles to choose from.

Since no retailer can possibly carry every model available, vendors are forced to concentrate their inventory. They either focus on a few product lines and offer almost every model available to each line, or they broaden across many brands and offer only the best model from each line.

Either way, consumers are finding a lot of holes in the selection available at each store, leaving plenty of room for competitors to open up and target those specific products that are being overlooked by the larger chains. This results in ever more fragmentation of the consumer electronics space, making it harder for a chain to survive.

Then you have the product manufacturers themselves opening up stores of their own, such as Apple and Microsoft, further reducing the traffic at multi-brand electronics retailers like Best Buy and its peers.

Further fragmentation has come from online shopping. Amazon.com continues to increase its share of the electronics market as it steals more hardware buyers from brick and mortal retailers, while software streaming and downloading from gaming hubs like Steam are diverting gamers.

This is what the maturing of the consumer electronics industry has come to… highly concentrated selections reducing a store’s market breadth, and ever increasing competition reducing a chain’s market share.

Now that the consumer electronics space has been divided and sub-divided into specialty sub-sectors, it’s getting harder and harder to find a general, all-purpose retailer that can successfully handle it all. In this mature stage of the electronics market, you can’t be all things to everyone anymore.

Waiting for Lightning to Strike

Yet even if an electronics retailer does manage to put together an inventory comprised of the best selling gadgets on the market, its success is not assured for long. After a few months of a new product’s release, almost everyone who is ever going to buy it has already done so. All a retailer can do then is wait for the next big product to be released.

Best Buy recently reported healthy gains of $461 million in profits in the quarter ended May 3rd. Yet this is just a recent up in a series of ups and downs. For its fiscal year ending February 2012, the company posted net income applicable to common shares of $1.27 billion, which turned into a net loss of $1.23 billion by February of 2013, which turned again into a net gain of $532 million by February of 2014.

As a result, BBY shares fell 54% from $26 to $12 throughout 2012, rose 267% to $44 by the end of 2013, and are now back down 41% to the $26 area. Despite posting profits in its most recent quarter, the company warned of slowing sales yet again.

“Best Buy said it expects electronics sales to continue sagging over the next six months as the industry waits for the next big thing,” reports the Wall Street Journal.

“Best Buy on Thursday maintained a dour outlook for consumer-electronics sales for the immediate future and anticipates continued soft mobile-phone sales as consumers wait for new products,” reports the Associated Press.

It’s like Benjamin Franklin flying a kite in a storm waiting to capture lightening again and again and again. Sales can be huge when a new product is launched, sending the stocks of manufacturer and retailer alike surging. But it’s those “in-between” periods that cost these companies dearly.

It’s not feast or famine, it’s feast and famine in tight succession, one after the other. It’s tough to run a business when you’re constantly switching between expansion and contraction, between hiring and firing, between store openings and store closures.

A Better Selection Elsewhere

Not only are electronics shoppers finding there is usually a better selection of gadgets at another store, but investors are learning there are better stocks to chose from in other sectors.

Oil industry large caps, for example, are sure-footed and steady investments, with production and sales undergoing very little fluctuation over time.

But that does not mean electronics retailers like Best Buy and its peers are useless to investors. If you don’t mind the volatility, you can actually make a substantial return buying when a new hot product is released and then selling a few months later. Best Buy’s 266% stock appreciation in 2013 is nothing to laugh at.

Yet such dice rolling should be limited to just a handful of dollars at a time. Even a good year like Best Buy’s fiscal year ending February 2012 saw its stock fall from 33% from $36 to $24 during the 2011 calendar year.

Joseph Cafariello

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