BCA Research: Pressures Growing on Consumer Electronics Retailers

BCA Research today warns that there could be trouble ahead for the consumer electronics retailers. The firm notes that the group has performed far better than other shares linked to home sales, including home improvement retailers and lumber stocks. But eventually, BCA contends, the consumer electronics stocks will succumb to the pressure:

Will consumer electronic retailers be able to avoid selling pressure heading into the key holiday shopping season? A number of factors say no. Sales growth is still on track to decelerate sharply based on the lagging relationship to total home sales. Such an outcome does not look to be priced into analyst estimates: in the next 12 months, consumer electronic profits are expected to grow by nearly double the rate of overall business sector profits.

BCA sees bearish signs for the company in last week’s news that Wal-Mart (WMT) has already started discounting big-screen TVs, laptops and other electronics good far earlier in the holiday shopping season that in previous years.

The ramifications for the consumer electronics retail industry are bearish. To the extent that lower prices from competitors reduce store traffic, it will undermine an already grim sales backdrop. As a result, efforts to maintain market share are likely to intensify, which would imply a pricing response from consumer electronic retailers. Even prior to the Wal- Mart announcement, there was evidence of massive price cuts: the consumer price index for both televisions and other consumer video and audio equipment has plunged. The optimistic take is that lower selling prices may sustain volume growth at some retailers. However, that would come at the expense of profits, much like the auto industry has experienced this decade. Bottom line: the overvalued consumer electronic retailers index is a sell.

This morning:

• Best Buy (BBY) is up 94 cents at $53.61.
• Circuit City (CC) is up 34 cents at $26.59.
• Radio Shack (RSH) is up 31 cents at $17.71.