| A
Closer Look at the Retail Consumer Electronics Industry |
Published: March 15, 2004
Industry Performance
Year-to-date through March 11th, the Retail: Consumer Electronics Index
gained +2.8% compared with a loss of -0.5% for the S&P 500. Last
year, the Consumer Electronics Index gained +62.0%, soundly thumping the
S&P, which delivered a +26.4% gain.
The Big Trend
Despite lackluster wage growth and stubbornly high unemployment rates,
recent monthly retail sales numbers confirm that consumers are still
shopping. Why? For one, household wealth has soared during the past
year, thanks in large part to low interest rate mortgage refinancings.
In addition, tax refunds and lower tax rates have put more money into
consumer's pockets. We believe those two conditions will continue at
least up until the November 2004 elections.
Tax refunds are expected to average about $2,500 per
family this year, and eight million more households will get refunds
this year relative to last year, according to tax experts. We expect a
good chunk of those refunds to find their way into the cash registers of
electronics retailers.
Electronics retailers also continue to benefit from
the shift toward more digital products in the home, as well as the
ability and willingness of consumers to spend on those products. The
average family spends about $600 a year on consumer electronics.
Other trends that bode well for consumer electronics
retailers include the growth of both telecommuting and the Internet and
the existence of cheaper and cheaper PCs. The market for
"smart" home products is expected to grow to over $1.7 billion
in 2005 from just $180 million in 2000, according to industry experts.
And by 2006, nearly three-quarters of U.S. households will be wired for
Internet access. Most homes now have some dedicated workspace. That
trend is pushing sales of PCs, telephones, fax machines and photocopiers
to mass market levels. And let's not forget our seemingly insatiable
appetite for entertainment software, including CDs, video games and
DVDs.
Not too long ago, consumer electronics retailers' main
business line was simply audio and video equipment. That's no longer the
case. Now, communications and information products represent the
largest, fastest-growing electronics segment, reflecting the home-office
boom.
Tech Driven
Technological change has helped the retail electronics industry avoid
problems by making existing products seem outdated. Consumers still feel
compelled to own the latest, greatest, jazziest new electronic gadgets.
Because of this, retailers get a big boost whenever hot new electronics
products hit the markets. And on that front, several new products with
blockbuster potential now appear ready for prime time. Some of the
best-performing products over the past year have been bigger screen TVs,
digital TV systems (both flat-panel plasma and liquid crystal display)
and wireless communication products. Other products with continuing mass
appeal include digital cameras, digital video disc (DVD) players and
high-definition TV (HDTV) sets.
Inventory Turnover -- A Key Success Driver
Retailers are turning over inventory faster and faster and are working
hard to upgrade stores to make it easier for consumers to check out the
latest in electronic wares. Store redesigns are also helping electronics
retailers to compete more effectively with wholesale clubs, office
supply superstores and mass merchants like Wal-Mart.
Consumer Confidence Dependent Industry
Consumer confidence represents one of the larger risks to electronics
retailers. When concerns grow about job security and when wage growth
slows down, consumers tend to purchase fewer and fewer high-tech
gadgets. Whenever the economy and consumer confidence turn sour, one of
the first things to go is "discretionary" spending on items
like consumer electronics.
Overall Outlook
A strong economy and low interest rates have spurred on a steady
increase in housing starts over the past few years -- homes that new
owners will want to fill with electronics and appliances. The name of
the game for successful electronic retailers is product selection, store
environment, customer service, targeted advertising, good inventory
management and low-price guarantees to boost sales. The trick for
investors is to find the company that's leading the charge in those
categories.
--------------------------------------------------------
Favored Sector Pick: Best Buy (BBY)
--------------------------------------------------------
Market Capitalization: $16.0 billion
Shares Outstanding: 325 million
30-Day Average Daily Volume: 3.7 million
2003 Revenue: $20.9 billion
2000 EPS: $1.09
2001 EPS: $1.24
2002 EPS: $1.77
2003 EPS: $1.91
2004 EPS: $2.40 (estimate)
2005 EPS: $2.80 (estimate)
2006 EPS: $3.23 (estimate)
Five-year average expected earnings growth rate: +15%
P/E on 2004 EPS estimate: 20.5
Institutions own 68% of the firm's outstanding shares
52-week range: $25.55 to $62.70
Best Buy is far and away the nation's leading retailer of consumer
electronics, consistently outperforming its peers. The company's product
mix includes digital and analog TVs, home theater systems, personal
computers, entertainment software (CDs, DVDs and video games) and
appliances. Best Buy operates roughly 700 stores throughout the United
States and Canada under the Best Buy, Future Shop and Magnolia Hi-Fi
brand names. Each of those store brands also boasts an online retailing
presence.
The company's subsidiaries include: Best Buy (and
BestBuy.com), Future Shop (and FutureShop.com), Geek Squad (GeekSquad.com),
and Magnolia Audio Video (MagnoliaAV.com).
Best Buy uses the superstore concept, or "big
box" format, for most of its stores. Its largest formats consist of
45,000 square feet of retail space with an extensive array of electronic
products. The firm also makes every effort to provide a top-notch
shopping experience. For starters, Best Buy uses interactive merchandise
displays to allow customers to experience first hand the features and
benefits of its various products. In addition, the company provides a
higher level of customer service than most other electronic retailers.
Typically, a large number of retail staffers are on hand to help
shoppers locate items and check out. What's more, Best Buy sets itself
apart from the competition by also providing staff to help consumers get
their equipment purchases up and running.
Focus on Digital Products
Best Buy's focus on digital TVs, digital cameras and camcorders has
driven its strong sales and earnings growth in recent years. As
consumers continue to scoop up these higher-margin products, Best Buy's
profits should continue to rise. Digital product revenue is growing
rapidly, accounting for 25% of sales in 2003, up from 22% in 2002.
Recently, Best Buy began offering five new High
Definition TVs to its customers. For example, its Diamond Package, which
sells for about $900, includes a special HD receiver required for HD
viewing, cable or off-air content. The package also includes a DIRECTV
HD receiver, 20-inch TripleSat dish, off-air antenna and free
installation.
Wireless Home Network Assistance
Best Buy is pushing to help consumers create a wireless, networked home.
The company offers a wide range of products and services that enable
homeowners to surf the Internet from any room in their home and to
network several computers together. Best Buy offers notebook computers,
desktop computers, routers, high-speed Internet service, computer
accessories and installation services.
Inventory Control
Best Buy has a specially designed inventory-management system that keeps
close tabs on every piece of merchandise that enters and exits the
store, enabling the company to hone in on sales, markdowns and return
trends.
The electronics retailer's improved inventory control
helps it manage its cash flow and control its expenses by leaning on
vendors to meet its needs. As the leading consumer electronics retailer,
Best Buy can dictate terms, allowing the company to be paid for its
wares before having to pay its vendors. Best Buy places the burden on
suppliers to replenish inventory, even if that means shipping products
to the company on a daily or weekly basis (instead of the traditional
monthly basis).
Acquisitions and Divestitures
In 2002, Best Buy scooped up consumer electronics retailer Future Shop,
which operates 104 stores and offers products similar to Best Buy's
lineup. In 2003, Best Buy bought Geek Squad, which provides residential
consumer computer support.
In 2003, Best Buy sold its Musicland Group, which
operates about 1,100 stores under the Sam Goody, Suncoast and Media Play
names, to an affiliate of Sun Capital. That move may have been Best
Buy's best managerial decision in recent years. Over time, Best Buy's
purchase of Musicland Stores proved a drag on earnings. Management tried
unsuccessfully to realign Musicland's offerings toward DVDs and
videogame cartridges, which have lower margins than CDs but are growing
at a much faster clip. The sale will enable Best Buy to return its
attention to its core consumer electronics operations.
Expansion
Best Buy credits much of its success to the penetration of new locations
and regional markets. The company plans to open roughly 60 new stores
annually for the rest of the decade. Looking ahead to the rest of 2004,
Best Buy plans to open 73 new stores in the United States and Canada,
including its first store in Hawaii.
Management continues to study the possibility of
expanding into Europe, where the firm believes the consumer electronics
landscape looks as fragmented as it did before Best Buy came along in
the United States.
Bottom Line
Recently, Best Buy reported a +9.7% jump in fourth-quarter same-store
sales versus a year ago. The company attributed the results to effective
advertising, promotional campaigns and increased customer service.
Top-selling items included laptop computers, plasma televisions, digital
cameras, camcorders, DVD movies and CDs. The results were two percentage
points above what most analysts had expected. HD TVs will likely be Best
Buy's largest sales driver over the next couple of years, followed
closely by increasing consumer interest in digital cameras as well as
accessories that enable the printing of digital photos at home.
Best Buy's earnings growth has been impressive in
recent years. This has helped the company keep its price/earnings (P/E)
ratio at a reasonable level relative to its earnings growth, its peers
and its own historical average (about 23). We believe the company is
well positioned to gain from the trend in digital product upgrades and
booming growth in the telecommuting market. As the economy continues to
improve, consumers should be more willing to open their wallets to
big-ticket purchases like plasma TVs, and Best Buy is certain to
benefit.
Other major players in the Retail-Consumer Electronics
industry include:
Circuit City Stores (CC)
RadioShack (RSH)
Tweeter Home Entertainment Group (TWTR)
Rex Stores (RSC)
Electronics Boutique (ELBO)
Ultimate Electronics (ULTE)
|
Please Note: The above article was merely a
small excerpt from an issue of our premium, long-term-oriented investing
newsletter -- the Market Advisor. To receive your copy of
our most recent Market Advisor newsletter, as well as other
guidance similar to this every other week, you'll need to subscribe to this
publication. To learn more, please visit the following link: https://www.StreetAuthority.com/subscribe-ma.asp |
Special
Deal for Our Web Site Visitors
