3 Retail Stores Adapting for Success

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

Online retail giants like Amazon and eBay have encroached on the retail stores market. According to Forrester Research, U.S. online sales are expected to reach $248.7 billion in 2014 and grow at a compound annual growth rate of 10% over the next few years. In such a scenario, retail stores are attempting to adjust their strategies by developing their major segments and expanding their existing business online as well as offline. Here is the discussion of three retail stores which have adopted the above strategies to remain competitive in the market. Will it be enough to drive growth? 

Credit facility and stores expansion to drive growth 

Conns (NASDAQ: CONN) offers an in-house credit service, with this being the primary revenue-generating segment. This service differentiates Conns from other brick-and-mortar retailers, as it offers credit to those customers who have comparatively low credit worthiness. In the last fiscal year, this financing accounted for 71% of its sales. This helped it to drive customer loyalty with around 70% of Conns’ credit customers being retained customers.

This credit is offered to those customers who have low FICO scores, a measurement of an individual’s credit worthiness. Scores range between 350 - 850, and a score above 750 is considered "excellent." Conns has more than 60 million customers with low FICO scores of around 550. The credit service segment’s revenue grew by $22 million year-over-year to $149 million in 2012.

Over the past few years, Conns saw decline in its consumer electronics segment with sales decreasing from 35.1% in 2011 to 30% in 2012. This was due to the entry of online retailers into this sector. To offset this, Conns is pushing forward its furniture and mattress segment. It is expanding the floor space available to furniture and mattresses, as well as opening new stores. Its new enlarged stores offer 35,000 square feet of floor space, increasing from its historical 25,000 square feet. For the 2014 fiscal year, Conns expects its stores to grow at 11%, with the addition of 12 stores

Growth strategies in major segments 

Microsoft’s recent announcement concerning the Xbox One came as positive news for GameStop (NYSE: GME). An Internet connection will be required for the initial setup. Once this process is over, gamers can play games offline without the need of Internet connection again. Additionally, Xbox One games can be bought, sold, or lent without any restriction. 

This announcement was a positive one for GameStop, as the company is emerging as an exchange store for video games. In a GameStop store, customers can sell their old video games for cash or points. These points can be used to buy new or used video games. Xbox One is expected to sell around 300 million units over the next ten years. Stemming from Xbox One sales, GameStop expects its used video games segment revenue to increase from $573 million in the first quarter to $650 million in fourth quarter of 2013.

Sony’s PlayStation 3 also sold around 77 million units as of May 2013. Around half of these units were sold through GameStop. With the announcement of PlayStation 4, the company expects higher growth than with the previous version. The PlayStation 4 will be released by the end of this year. GameStop has already received orders from more than 1.2 million customers for PlayStation 4. Ascendiant Capital Markets expects that PlayStation 4 will sell around 10 million units next year. With the release of PlayStation 4, GameStop expects its new software segment revenue to increase from $703 million in the first quarter to $1.6 billion in fourth quarter of 2013.

Opening of new stores within existing ones and merger of two sites 

Best Buy (NYSE: BBY) announced in June that it will open Microsoft Windows shop-in-shops. Around 500 Microsoft stores will be opened within existing Best Buy stores of the U.S. and 100 in Canada. Microsoft owns only 68 stores in North America and hence, it is teaming up with Best Buy. These stores will get a floor space of 2200 square feet and will feature Windows-based smartphones, laptops, and ultrabooks. Microsoft has sold 100 million copies of Windows 8 since its launch and expects to reach 500 billion by next year.

Best Buy is also planning to merge its growing "Reward Zone" website with BestBuy.com to increase online sales. Reward Zone awards points to shoppers who write posts about their purchases on Facebook and Twitter. These points can later be used to obtain discount rates. With this, the company will be able to integrate these posts on BestBuy.com. Best Buy expects that positive posts and recommendations will influence new shoppers as well. BestBuy.com registered around 1 billion visitors in the fiscal year 2012. The merger will add 40 million visitors from Reward Zone to BestBuy.com.

From both initiatives, the company expects revenue to increase from $9.38 billion in the first quarter of 2013 to $14.7 billion in the fourth quarter of 2013.

Conclusion

Conns increased its number of stores and expanded spaces will be allocated to its growing furniture and mattress segment. It is also developing its credit services. These optimistic factors will be responsible for long term growth. 

GameStop expects growth in two of its major segments, which are its used video games segment and new software segment.

Best Buy is following the growth trends of the above two companies. The company anticipates growth from Microsoft’s shop-in-shops and the merger of its Reward zone site with BestBuy.com.

Due to strong growth factors in all the above companies, I recommend a buy for each.

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool owns shares of GameStop. 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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