On Monday, July 16, 2012, the Census Bureau's monthly sales report for retail and food services was released. As described here, the overall report was less than stellar but bullish investors could at least take solace in the fact that total sales for June, May, and April of 2012 were up 4.7 percent from the same period last year. Bullish investors could also take comfort in knowing that U.S. retail and food services sales for June 2012 were up 3.8 percent from June of 2011. A macro high-level view of the retail sales report can be found here and here.
Although the overall numbers that were reported left much to be desired, at least there were some positive points that investors could turn to for comfort. This cannot be said for the numbers that were reported for the "Electronics & Appliance Stores" retail category. This article explains why investors who own shares of Best Buy (BBY) and RadioShack (RSH) common stock may have cause for concern.
Adjusted Numbers Don't Lie
The adjusted numbers reported by the Census Bureau show that June, May, and April 2012 sales in the "Electronics & Appliance Stores" category declined this period compared to the same period in 2011. The source of this information can be found here and here.
More specifically, "Electronics & Appliance Stores" sales for June, May, and April of 2012 totaled an estimated $24,520 (in millions of dollars). For the same period last year, that number stood at $24,841 (in millions of dollars). This represents a drop of 1.29 percent. In June of 2012, sales for this specific category totaled $8,151 (in millions of dollars) while in June of 2011, the figure had been $8,232 ((in millions of dollars). This represents a drop of .98 percent. In May of 2012, sales for this specific category totaled $8,213 (in millions of dollars) while in May of 2011, the figure was $8,205 (in millions of dollars). This represents a slight increase of .09 percent. In April of 2012, sales for this specific category totaled $8,156 (in millions of dollars) while in April of 2011, the figure had been $8,404 (in millions of dollars). This represents a drop of 2.95 percent.
Investors who own stock in companies like Best Buy and Radio Shack should be concerned because the loss of $321 (in millions of dollars) is a significant amount of money for the overall "Electronics & Appliance Store" category of retail sales. Investors who own Best Buy stock should be even more concerned about the company's upcoming Q2 earnings report, because unlike last quarter, the company will not have the benefit of an additional week in the reporting period and it remains unclear whether the company will be able to benefit from another reduced tax rate "windfall," as described here.
E-commerce Sales and "Consumer Electronics Showrooming" Are On the Rise
Although the overall numbers are shrinking, some investors may ask why Amazon (AMZN) won't also be as negatively affected in Q2 by a drop in "Electronics & Appliance Store" sales. The answer to that question is twofold. First, although companies like Best Buy and RadioShack see Amazon as one of their biggest threats, the same cannot be said about Amazon. Amazon is more like Wal-Mart (WMT), Target (TGT), and Costco (COST), because it is a "multi-category" retailer that sells much more than just consumer electronics. The overall "total" retail figures provided by the Census Bureau paint a more accurate picture of Amazon's sales for the prior period.
Next, the "Estimated Quarterly U.S. Retail E-commerce Sales as a Percentage of Total Quarterly Retail Sales" report (that can be found here) shows a steady increase in e-commerce sales as a percentage of total quarterly sales from Q1 2003 through Q1 2012. There is little data to indicate that investors should expect anything other than more of the same in Q2 of 2012. The report does not break out which retail categories are most affected by e-commerce, but as described here, the most recent "State of the Internet in Q1 2012" report shows that "consumer electronics retailers are experiencing more showrooming than any other category by far."
Hhgregg (HGG) - The Canary In The Coal Mine:
On July 11, 2012, hhgregg cut its Q2 and full-year outlook. The shares of its common stock plunged 38.5 percent and pulled down the stock prices of many other electronics retailers in the process. As described here, some analysts had previously expressed concerns that the weakness in the early report issued by hhgregg could be a sign of a generally weak sales environment for electronics retailers. The information complied and reported by the Census Bureau help to add weight to those earlier concerns. Investors who failed to react quickly enough to the news issued by hhgregg on July 11, 2012 are now facing significant losses. Investors who are concerned that Q2 sales at physical brick and mortar "Electronics & Appliance Stores" will be dismal, and who want to avoid losses that could potentially be just as large as those experienced by owners of hhgregg stock, are now left with only a little over one and a half months to plan an exit strategy before retailers begin formally announcing Q2 earnings at the end of August.
In summary, until earning are issued by each company (unless they issue an early warning like hhgregg) it will be impossible to conclusively tell whether RadioShack or Best Buy were negatively affected by the most recent figures reported by the Census Bureau (since only overall numbers are provided). Investors who are bullish on one, or both, of these companies might hope that one of them either increased their online sales, or took a larger piece of an overall shrinking electronics and appliances "pie." Bullish investors may also hope that the Census figures reported for June are not accurate and that they will be revised upward next month. Of course as the saying goes, "hope is not a strategy."
The specialty "bricks and mortar" consumer electronics industry model seems to be in decline as evidenced by adjusted numbers reported by the Census Bureau for June, May, and April of this year, the "Estimated Quarterly U.S. Retail E-commerce Sales as a Percentage of Total Quarterly Retail Sales" report from the Census Bureau, the rise in "showrooming," and the most recent announcement by hhgregg. Additionally, increasing competition from discount and warehouse "multi-category" retailers (like Wal-Mart, Target, and Costco) are also adding pressure to these specialty retailers.
Of course, while much of the available data paints what looks to be a very disappointing Q2 for Best Buy and RadioShack, there is still a potential silver lining to every dark cloud. Owners of Best Buy stock can take solace in the fact that there is a possibility that Richard Schulze might try to take the company private. Owners of RadioShack can take solace in the fact that Richard Schulze does not own 20 percent of their company (which might be sold off at a moment's notice in one large en bloc sale).
Disclosure: I am short BBY, RSH. I have no other positions in any other stocks mentioned in this article, but may initiate a position in COST over the next 72 hours. Nothing in this article, or any subsequent comment (from the author or from any other member) should be construed as legal advice. The opinions expressed in this article are solely the personal opinions of the author. Readers are cautioned to do their own due diligence prior to opening a position in any equity.