Discount Electronics Retailers, Led By Wal-Mart, Launch First Christmas Sale Salvo

In most years, the fourth calendar quarter looms large for retailers, since it will often generate more than half -- and sometimes all -- of the profits for the year. This isn't just due to volume; it's also due to the fact that holiday-inspired shoppers are more likely to pay retail prices, thereby driving up margins. But of course, this only works if most retailers hold the line on Christmas sales until the last week or so before Christmas.

Well, news yesterday indicates that that line of holding out for profits may be broken this year. Sunday, Wal-Mart (WMT) started cutting prices on 100 electronics products.

The discounting move, which focuses on high definition TVs, cellphones and digital cameras, came a day after the world's largest retailer announced disappointing October sales and a lackluster November outlook.

The discounts, or what Wal-Mart Stores Inc. counts as rollbacks, are effective through Dec. 31. They include such items as Panasonic 42-inch HD plasma TVs, slashed to $1,294 from $1,794; the Polaroid LCD HDTVs, reduced to $997, from $1,297; and Cingular C139 prepaid phones, marked down to $19.97 from $29.98.

As of Sunday's circulars, both Circuit City (CC) and Best Buy (BBY), while not matching Wal-Mart's discounts, are both running promotions to get people into stores. The battle for Christmas 2006 is on.

Consumers will undoubtedly be happy about this, and the big box retailers will still have the ability to bolster their products through add-on extended warranties. But it does show just how competitive the retail market will be this Christmas. And while sales could be robust, it's now feeling like a holiday season that is up only three percent over last year instead of the currently predicted five percent. No big deal you think? With consumers expected to spend $457 billion on Christmas this year, a three percent increase over last year instead of five percent would subtract nearly $10 billion from that total. And that's the real cost of marketers getting impatient this year.

To conclude, Monday's Wall Street Journal (sub. req.) has the latest estimates from a variety of sources regarding retail sales growth this year. Our projection of three percent is at the bottom end of their published range of 2.5 to 7.5 percent.

Comments

[Jack Doueck:]

Dear Carl, Like your musings on discount electronic retailers, I was also exploring other financial thoughts and came across Benjamin Graham’s principles, and I think they apply to all aspects of investing, even in foreign stocks. Here are seven of his principles on buying stocks that I believe are worth hearing sharing:

1. The companies should be soundly managed.
2. The companies have demonstrated earning capacity with a likelihood that this will continue.
3. The companies should have consistently high returns.
4. The companies should have a prudent approach to debt.
5. The businesses of the companies should be simple and investors should have an understanding of the companies.
6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety.

These principles align with our ideals at Stillwater Capital of providing the potential for clients to preserve and grow their capital using a risk-controlled approach to investing.

Thanks for listening! -- Jack Doueck

Jack Doueck
Stillwater Asset Backed Strategies
Stillwater Capital

2006 Nov 12 08:59 PM