Can This Retailer Rise Further?

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

Did you know that Conn’s (NASDAQ: CONN) rose 238% in a year, adding 80% since January? The electronics retailer has shifted its focus from consumer electronics to furniture and mattresses, and this bet has clearly paid off. As one can see, this was a smart move.

However, the sole magnitude of the rise puts doubts on the prospects of the stock. The stock has performed spectacularly in an almost straight line without any significant pullback. Now, if you’ve missed this train, is there still time to get in?

Shifting away from electronics

Furniture and mattresses were a huge game-changer for Conn’s. In the first quarter of this fiscal year, same store sales for this segment rose 50.9%. Home office segment showed a 34.2% rise in same-store sales, while consumer electronics was down 0.8%.

Things are not easy in the world of electronics retail, as the field is competitive and margins are tight. Well, if we look at RadioShack (NYSE: RSH), the margins could even be negative. This retailer operates at a negative 1.33% margin. The company has a history of losses, and is projected to lose money in the next two fiscal years. More to this, the estimates have been spiraling downward in the last three months. The company is now estimated to lose $0.71 per share, 70% more than previously estimated.

The furniture move has helped Conn’s maintain a very healthy 11.29% operating margin. Let’s compare it to an electronics retailer that actually does make money -- Best Buy (NYSE: BBY). The company operates at a tiny 2.15% margin. Despite this, the shares have enjoyed a fascinating 154% rise this year.

New initiatives called Renew Blue have helped put life back in the stock. The most important move was dealing with the online part of the business which was previously in bad shape. Accepting the fact that most consumers first search online for their purchases has helped Best Buy adapt to the new reality and put funds and effort into its online business.

Going from electronics to mattresses had a big influence on margins. In its most recent report, Conn’s stated that gross margin from the consumer electronics segment was 29.2%, while the furniture and mattress segment had a 48.3% gross margin. This is a huge difference.

Is this enough to keep the stock going?

As Conn’s business operates in a healthy manner, the key question is whether the shares have gotten ahead of themselves. With a forward P/E of 16, it seems like the stock has more room to run if it can exceed earnings expectations. Best Buy trades at a 12.5 forward P/E, but it does not have the momentum that Conn’s has, so the premium is more than justified.

Conn’s puts great emphasis on selling on credit, relying on internal options. Conn’s credit generated 74% of sales, while GE Capital accounted for 11.8% of sales. All in all, 89.6% of sales were executed on credit. Given the current state of economy, such aggressive reliance on credit can help spur additional growth.

Analysts’ mean price target for Conn’s is $62.89, an upside of 14% from the current price. The target is reachable. However, as the stock moves higher, the risk of a significant pullback due to profit taking increases as well. Analysts are less optimistic about Best Buy and RadioShack, calling for 7% downside and 18% downside, respectively.

Bottom line

Conn’s can rise even more as the company reaps the benefits of its momentum. In the meantime, investors must be careful not to get caught in a pullback, which might ultimately occur as the stock has gained a lot. Best Buy is more likely to take a break at current levels after the initial optimism about company’s initiatives.

Investors would probably like to see proof that the initiatives have turned into money when the company would report during this earnings season. As for RadioShack, the company is losing money and does not seem to find a way to turn the tables. I see big downside risks in this stock.

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Vladimir Zernov 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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