Two Losers and an Unlikely Winner in Big Box Retail Electronics

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

These days, it’s tough being a brick-and-mortar electronics retailer. Customers are still using their stores as showrooms to fuel e-commerce purchases for Amazon or eBay, and margins have contracted from matching online deals dollar for dollar to remain competitive. Superstores like Wal-Mart and Target also remain major threats, with their cheaper prices and more diversified product offerings.

Facing all these headwinds, companies like Best Buy (NYSE: BBY) and RadioShack (NYSE: RSH) have struggled to find new ways to keep customers coming in and opening up their wallets, but it’s been an expensive uphill battle.

Best Buy’s sluggish turnaround

Last quarter, Best Buy’s earnings declined 57.9% year-on-year to $0.32 per share, but still topped analyst expectations. Revenue slid 9.6% to $9.38 billion, missing the consensus estimate, and same-store sales declined 1.3%.

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Best Buy attributed its steep bottom-line decline to the shift of the Super Bowl into the fourth quarter of 2013, which resulted in lower television sales, and a quarter that was a week shorter than the prior year quarter. Best Buy also had to match Amazon’s prices, which caused its gross margin to decline from 24.9% to 23.1%. New investments in increasing its multi-channel presence, the renovation of its website’s functionality to address mobile users, and the closure of several big-box locations also caused the operating margin to decline from 3.9% to 2.0%. On the bright side, domestic online sales climbed 7.1%, currently accounting for 5.3% of the company’s total sales.

Best Buy made two major moves during the quarter. First, it added “Samsung Experience Shops” to its stores, in an effort to capitalize on the popularity of Samsung’s smartphones and tablets. These boutique-style “store-in-stores” showcase a wide variety of Samsung products and are staffed with Samsung consultants.

Second, it reduced its international exposure by divesting its 50% stake in Best Buy Europe to London-based Carphone Warehouse Group, its joint venture partner. Many analysts also expect that Best Buy will divest from its FiveStar electronics retail chain in China. These divestments could generate $600 to $900 million in additional revenue for Best Buy, according to Jefferies analyst Daniel Binder. Best Buy’s international revenue declined 9.6% last quarter, accounting for 15% of the company’s top line. Its international gross profit slumped 14.8% to $299 million, as gross margin declined from 22.6% to 21.3%, indicating a loss of pricing power. In other words, it would be wise for Best Buy to exit these international businesses to focus on competing domestically with Amazon and Wal-Mart.

Although Best Buy has shown some positive signs of a turnaround, the company acknowledged that many of its investments and divestments would not become earnings accretive until fiscal 2015.

RadioShack’s 100 days of nothing

However, Best Buy is faring slightly better than RadioShack, which is often jokingly referred to as the electronics retailer that’s “too small to showroom.” The company has been on a steady decline over the past five years, shedding nearly 80% of its market value.

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Last quarter was a continuation of that decline, as the company reported a loss of $0.43 per share, compared with a profit of $0.08 per share in the prior year quarter - the company’s fifth consecutive quarterly loss. $0.08 per share of that loss was attributed to RadioShack’s termination of its Target Mobile business. Revenue declined 7% to $849 million, and same-store sales slid 5.7%. Both its top and bottom lines broadly missed analyst estimates.

CEO Joseph Magnacca, who joined RadioShack in February, instituted a 100-day turnaround plan, which added new concept stores to its mix of traditional smaller format retail locations. RadioShack recently opened a new concept store in Manhattan’s Upper West Side to highlight popular smartphones, tablets, and other devices, with an emphasis on hands-on testing. It is also testing several new formats in New York, New Jersey and Texas, to gather an appropriate response to reconfigure the remainder of its 4,300 domestic locations.

Unfortunately, this response is simply too little, too late, and the company is on track to report an expected annual loss of $0.76 per share in fiscal 2013 and a loss of $0.51 in 2014. Besides offering vague promises for new concept stores that look like an eleventh hour attempt to mimic Apple Stores, there’s not much else that Magnacca has offered shareholders in his “dramatic” 100-day turnaround plan.

Conn’s cashes in on the housing boom

The only real winner in the big box electronics retailer sector is Conn’s (NASDAQ: CONN). Conn’s has a cleverly diversified portfolio of products that not only focuses on home electronics, but also beds, furniture and large appliances. That diversified product line, which has reaped the benefits from the housing boom over the past year, boosted Conn’s earnings 74.3% year-on-year to $0.61 per share, while revenue rose 25% to $251.1 million. Same-store sales surged 16.5%. Those are figures that Best Buy and RadioShack can only dream of.

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The reasoning behind those gains is quite simple - people are less likely to purchase massive items such as sofas, beds, and large appliances online, due to shipping costs. Customers also like to test out furniture before they buy it - one of the few things that you can’t do on Amazon. By attracting customers to its stores with furniture sales, customers are also more likely to buy a few consumer electronics items as well. In other words, it provides an all-in-one home furnishings solution for new homeowners.

During the quarter, furniture and mattress sales rose 70% year-on-year, accounting for 26% of the company’s total product sales. By comparison, sales of consumer electronics edged up 4%. Conn’s strong furniture sales were a reflection of strength across the industry. Last quarter, Haverty Furniture Companies reported 236.2% and 13.8% growth in earnings and revenue, respectively. Mattress Firm, which has been busy consolidating the mattress market, reported 23.3% earnings growth on a 31.4% gain in revenue.

The Foolish Bottom Line

In closing, investors should remember that Best Buy and RadioShack are unprofitable, and will likely stay that way for some time. Even though Best Buy has shown improvement in its e-commerce channel and has tightened up its operations by reducing its overseas exposure, it still has a long way to go before it can be considered a stable investment. RadioShack, on the other hand, looks confused and lost with its experimental concept stores.

The only winner in this industry is Conn’s, which ironically beat its competitors with old-fashioned bed and furniture sales. Therefore, Best Buy and RadioShack might want to rethink their product lines, instead of fighting an impossible pricing war against e-commerce sites like Amazon and superstores like Wal-Mart, if they wish to survive.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of RadioShack. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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