Can Bricks And Mortar Fight Back?

Investor's Business Daily

The long-anticipated launch of two new video gaming consoles planned just ahead of the holiday shopping season has pushed electronics retailers GameStop (GME) and Best Buy (BBY) into what one analyst has dubbed "the calm before the console storm.

Sony (SNE) is scheduled to release its PlayStation 4 on Nov. 15, followed by Microsoft's (MSFT) Xbox One on Nov. 22. It's been eight years since Microsoft launched a new console, and seven years since PlayStation 3.

Enthusiasm for those computer gaming units, along with the number of new games, is growing, according to Baird Research analyst Colin Sebastian.

"As such, we remain cautiously optimistic on the sector ahead of the fall platform launches," says Sebastian.

Investors have driven Best Buy's share price up more than 250% and GameStop ahead 105% so far this year. But caution is still the prevailing tone among analysts.

As a group, electronics retailers continue to wrestle through a years-long transition. The industry has worked to build e-commerce businesses alongside their brick-and-mortar stores in order to battle online challengers such as (AMZN) . The strictly online competitors don't shoulder the overhead of traditional chains, allowing the newer e-commerce group to undercut existing chains on price.

The result was a shakeout, with the electronics retail field losing nearly 700 stores in a series of failures led by Circuit City, which shut its doors in 2009, but also included regional players such as Massachusetts-based Tweeter and California's Good Guys. Best Buy, GameStop and a few others survived. At least a few members of the consumer electronics group are narrowing the price gap with e-commerce competitors, and now seem to be on the verge of growth.

IBD's consumer electronics industry group includes six companies. Best Buy, with a market capitalization of $14.62 billion and revenue expected to clear $46.2 billion this year, is the largest. GameStop, with more than 6,600 stores worldwide, and RadioShack (RSH), with almost 5,600 stores, have the largest footprints.

Collectively, the stocks have gained 133% year-to-date, holding the group in a steady top 20 ranking since April among the 197 industries tracked by IBD.

Going Toe-To-Toe On Prices

Richfield, Minn.-based Best Buy in particular has made it its mission to match and other e-commerce sites on prices, according to BB&T Capital Markets analysts Anthony Chukumba and Eric Cohen.

"With the notable exception of accessories, Best Buy's prices are largely in line with those of Amazon, and in some cases were actually lower," wrote the analysts in a recent research note.

But if you include accessories — like, say, a smartphone case or a USB cable — in the comparison, Best Buy's prices in September were an average of 3.7% higher than Amazon's. That was down, however, from a 4.4% premium in May, wrote BB&T's analysts, who rate the stock a buy with a price target set at 45.

Surely, the fight between retailers to have the lowest prices has its drawbacks.

Best Buy's management is "resolute in its determination" to compete on price, says Wedbush Equity Research analyst Michael Pachter, who rates the stock as underperform, or sell. Best Buy's efforts have cut into its profit margin, that analyst says.

"We see no end in sight and expect price competition at holiday . .. to erode margins further," says Pachter.

Best Buy's EPS rank, as calculated by IBD, is just 46 out of a possible 99.

The group collectively shows a lack of revenue growth, with each company in the group this year expected to post flat or declining revenue, according to analysts polled by Thomson Reuters.

The South Rises

The exception is Beaumont, Texas-based electronics chain Conn's (CONN), which is seen growing sales. Conn's is expected to grow its revenue by 34% to $1.16 billion, according to eight analysts polled by Reuters. All eight analysts rate the stock as a buy or equivalent.

With 70 stores spread through Texas, Louisiana, Oklahoma, New Mexico and Arizona, Conn's has a relatively small footprint compared with 1,055 U.S. Best Buy stores and 6,505 GameStop-owned stores.

It sells consumer durables such as appliances and furniture, along with electronics. And, unlike the other group members, Conn's attracts some customers with "subprime" credit with its rent-to-own market — and that's one area where it could grow in the future, according to Piper Jaffray analyst Peter Keith.

"In short, Conn's has a supremely attractive growth opportunity over many years due to a very limited market share today — we estimate 1% — and no clear competitive threats on the horizon," says Keith.

Same-store sales at Conn's climbed 18.4% in Q2, bucking another trend in the electronic retail group. Best Buy's same-store sales have fallen in each of the last 12 quarters. Year-over-year same-store sales declines have accelerated each of the last three years.

But Best Buy's trend could be turning around, says ITG Investment Research analyst John Tomlinson in an email. He sees the chain's current-quarter same-store sales growing from 3% to 5%, in part because the company's managed to sell more items priced over $1,000.

Best Buy's executives say they're taking a three-pronged approach to jump-starting sales. First is returning to online-sales growth. Second is "accelerating the multichannel customer experience," which is a way of saying that they're monitoring how customers shop and polling them after sales. Third is an attempt to boost sales per foot.

As a result, online sales growth already has started picking up, says President and CEO Hubert Joly.

"Including all of these initiatives, our domestic online channel delivered a 10.5% comparable-store-sales increase in the quarter," Joly told analysts on a fiscal Q2 conference call.

An Ode To Joysticks

The effort to boost sales at Best Buy and its competitors no doubt includes gaming console sales, which are a big business in the U.S. Both Sony's and Microsoft's gaming consoles are now in preorders.

"Including these preorders, which we do not expect to ship or recognize as revenue until Q4 of fiscal 2014, comparable online demand increased over 16% (in Q3)," said Joly.

Grapevine, Texas-headquartered GameStop says manufacturers are better prepared to deliver this year, as well.

"Allocations from both Microsoft and Sony are much stronger than last launch," GameStop President Tony Bartel has said.

Bartel said was unable to disclose launch quantities for competitive reasons. But said he expects a "significant increase in launch-day quantities vs. the last console launch.

Sterne Agee analyst Arvind Bhatia says in a research note that everything he's seen continues "to suggest strong demand" for the new consoles.

Those two new gaming consoles should boost revenue late this year, but there's another game that's already having an affect on GameStop's sales, according to SunTrust Robinson Humphrey analyst David Magee. "Grand Theft Auto 5," which went on sale Sept. 15, posted $800 million in global sales on its first day on the market.

Before the launch, Magee had expected the game to add profit of 8 cents per share in Q3 for GameStop. "However, given the success on the first day of sales, we believe this is most likely conservative," the analyst wrote, adding that the game could add "several pennies" to GameStop's per-share profit in the current quarter.


View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • The New 2015 Sonata®: A Step Above the Competition

    There's a Sonata® that's perfect for you, and this is your chance to build it! Visit the Hyundai® Official Site to customize your 2015 Sonata® today!

  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Hyundai Elantra: Features & Benefits Come Standard

    More interior space, alloy wheels standard, 145 HP. Explore all the features and benefits of the Elantra at the Hyundai Official Site.

  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Gold loses luster on Fed; Barclays cuts forecast

    Barclays cuts gold forecasts, sees increasingly bearish backdrop Bloomberg MA MB MC MD ME SAN FRANCISCO (MarketWatch) — Gold prices dipped Wednesday on concerns about a stronger dollar ahead of the Federal Reserve policy statement and in response to Barclays lowering its gold forecast.

  • Fall means cool savings at

    Save big on appliances, apparel, lawn and garden, tools and more. For fun in the sun or a project in the shade, start your search at Sears.

  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • Romney-Sized IRAs Scrutinized as Government Studies Taxes

    The preliminary report attaches data to an issue that drew attention during the 2012 presidential campaign, when Republican nominee Mitt Romney reported an IRA worth $20 million to $102 million. Senate Finance Committee Chairman Ron Wyden said many of these "massive" accounts come from deals…

  • Boeing may have outfoxed Musk, but it could have bigger problems

    Elon Musk is arguably one of the greatest entrepreneurial minds of the 21st Century, but he was outsized an old school aerospace giant. Boeing won the bulk of NASA’s contract for a space taxi.  One of the other companies vying for the deal is SpaceX, the company headed by Tesla’s Musk, will get a…

    Talking Numbers
  • 6 Things Debt Collectors Wish You Knew

    The work debt collectors do is not popular, and has become increasingly derided by those who don’t like what we do or simply don’t know the facts about debt collection. Too often, debt collection is painted with a broad brush to create a portrait that isn’t accurate, and doesn’t properly educate…
  • 5 Questions That Will Not Get You Hired

    The wrong questions can tank even the best interview. Here are five questions you should never ask in a job interview.

  • The Government Keeps Helping People Buy Failing Cold Stone Creamerys

    Would you loan someone money to buy a Cold Stone Creamery franchise if you knew that more than a quarter of those loans default? Over the last decade, franchisees in the Cold Stone Creamery ice cream chain defaulted on 29 percent of working-capital loans backed by the government, costing taxpayers…